Much of global economic competition today centers around gaining market share in the semiconductor industry. Over the past decade, the Chinese Government has attempted to expand its market share across the semiconductor value chain through a complex regime of subsidies and state-owned enterprises.
Beginning in the Trump Administration, the United States launched targeted export controls to restrict certain Chinese firms - like Huawei - from obtaining American semiconductor technology. Over the past two years, the Biden Administration has built on and broadened these efforts. In the Fall of 2022, the Commerce Department announced two new rules that restricted the sale of advanced semiconductors, semiconductor manufacturing equipment, and related software or technical assistance to China. Earlier this January, U.S. officials announced the existence of a deal with Japan and the Netherlands to craft broad, multinational export controls on semiconductor exports to China.
Can the Chinese semiconductor industry survive these new restrictions? How will they impact U.S. firms and researchers in this sector? Do they form a blueprint for new export control restrictions on other technology exports to China? Join us for a panel with two leading experts on strategic technology and trade controls as they discuss these and other questions.
- Hon. Nazak Nikakhtar, Partner, Wiley Rein LLP
Chair of the National Security Practice and Co-Chair of the CFIUS practice at Wiley Rein LLP. Nazak served as Assistant Secretary for Industry and Analysis at the U.S. Department of Commerce’s International Trade Administration, as well as Under Secretary for the Bureau of Industry and Security at the Commerce Department. She is a former Georgetown University adjunct law professor, an international trade and supply chain economist, and has been working on trade, national security, customs, and supply chain issues for over two decades
- Thomas Krueger, Senior Policy Advisor, Akin Gump LLP; Adjunct Senior Fellow, Center for a New American Security
Mr. Krueger served as the Director of Strategic Trade and Nonproliferation on the National Security Council from 2020-2022 where he was responsible for advising the President and National Security Advisor on export controls and coordinating related interagency processes. During his time at the White House, he helped formulate policies related to the exports of emerging technologies, such as Artificial Intelligence, quantum computing, and semiconductor equipment policies as well as export controls on Russia and its allies in response to Russia's war in Ukraine. Prior to his work on the NSC, he served as a foreign affairs officer in the U.S. Department of State's Bureau of International Security and Nonproliferation.
- Moderator: Trevor Jones, JD Candidate, Harvard Law School
As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Jack Capizzi: Welcome to today's Federalist Society virtual event. This afternoon, February 28, 2023, we are discussing "America's Expanding Semiconductor Export Controls." My name is Jack Capizzi, and I'm an Assistant Professor of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's call.
After our speakers have given their remarks, we will turn to you, the audience, for any questions that you might have. If you do have a question, please type it into the Q&A feature at the bottom of your screen, and we will handle questions as we can, towards the end of today's program.
With that, I will introduce our moderator for today. That is Trevor Jones. Trevor is a student at Harvard Law School, and is the student liaison for our International and National Security Practice Group Executive Committee. Trevor, with that, the floor is yours.
Trevor Jones: Perfect. Well, thank you Jack, for the introduction. And welcome to everyone joining us today. I think we're going to be in for a good discussion about these new semiconductor export controls. And there are honestly no better people to talk about this than our two panelists today. So let me give them a brief introduction, and then I'm going to get into some Q&A I've prepared. But if you have any questions, feel free to send them in. We'll see them. I'll either ask them when they're relevant -- and I've reserved some time at the end for getting into all the Q&A questions that people do ask.
So, our first panelist is Nazak Nikakhtar. Nazak is a partner at Wiley Rein, where she's the chair of their national security practice, and the co-chair of their CFIUS Practice. And, prior to joining Wiley, she was the Assistant Secretary of Commerce for Industry and Analysis at the International Trade Administration, and the Acting Undersecretary of Commerce for the Bureau of Industry and Security. So, a lot. She handled export control policy, and is one of the leading experts on this field.
And our other panelist is Mr. Thomas Krueger, who is a Senior Policy Advisor at Akin Gump, where he handles export control policy, amongst other things. And, prior to joining Akin, he was an official at the White House from 2020 to 2022, in both the Trump and Biden administrations, on the National Security Council, where he was one of the lead officials there organizing the interagency export control policy. And, prior to that, he had been in a similar capacity at the State Department.
So, with those introductions established, I would like to get into a little bit of the details about our export control regime towards semiconductors. So, Nazak, the first question is for you. You were there in the Trump administration, as we're waking up to this threat posed by China, posed by China's military, and also the strategic technology sector that supports it. So could you outline for us some of the steps that you helped us take to combat China's strategic development, and the development of their technology sector, as it relates to export control, semiconductors, but more broadly, as well?
Hon. Nazak Nikakhtar: Yeah. Thank you. And really good to be with you and my dear friend Thomas Krueger as well, who we collaborated quite a bit with. It's a really important question, because it kind of takes us through, "Why are we here now?" So we were dealing with, literally — and I will tell you this from having been on the front lines of the U.S./China economic battle for 20-plus years — that we were witnessing this consistent sort of hollowing out of our industries.
And hollowing out of our industries enabled by tech transfer. And then China throwing not only its enormous workforce and enormous capacity, but enormous subsidies at stealing our technology and then capitalizing on it through its resources, in many respects, in better ways than we are able to, and then just racing ahead of us with the ultimate goal that the idea isn't for China to kind of always compete with us. It's basically to hold our supply chains hostage, hold technology that they acquire and not share it with the rest of the world, or share it under the terms and conditions that China wanted.
So it really started — the last administration's efforts — it really started with this fundamental understanding that we were trying to make sure that everybody else kind of got. So we started becoming more aggressive with policies, including export controls. Now, by the time I went to the Bureau of Industry and Security, we still had more Russian entities on the entity list. Now, for those who don't know, the entity list is essentially, in layman's terms, a U.S. government blacklist. But it essentially regulates exports to these foreign entities that are deemed to be problematic, in terms of either U.S. national security interests, or foreign policy interests.
So that was the state of affairs in late 2018. And so, by 2019, we made an effort to change that trend. China was becoming the real technology acquisition threat, so we needed to make sure that we got ahead of that problem. So we started designating more Chinese entities on the entity list. A PLA company and its affiliate, Hygon and Sugon -- we put them on the entity list because of their acquisition of critical microprocessor technologies that were enabling China's weapons of mass destruction, simulation capabilities, and their hypersonic capabilities.
And remember, because of China's putting resources in, China stole and misappropriated — and acquired, because we voluntarily gave them — a lot of the technology that enabled them to race against the United States, two years ahead of the United States in hypersonic capabilities. So we needed to do that. We, for the first time in history, took the effort, in terms of moving companies on the entity list for their enabling of the forced labor atrocities in China. We started developing new rules in terms of military end-users, military intelligence end-users, to better clamp down on exports that go to those entities.
And, of course, the Huawei entity list. It was a big punch to -- other than ZTE, it was the sort of second-biggest punch to a major, major Chinese company that controls much of the global trade and revenue stream in telecom. And, because of the company's violation of the U.S. financial sanctions against Iran, we had a couple of choices: impose secondary sanctions or put them on the entity list. And, because of their size and scale and potential impact to the U.S. economy and the economy of our allies, we put them on the entity list, which really started restricting exports to them.
And what was really remarkable and fascinating was that in the early days of us putting Huawei on the entity list, we reached out to allies. We were always reaching out to allies. Contrary to how the press depicts it, we were constantly working with allies and sharing information to make sure that the right hand knows what the left hand is doing. And, with Huawei, our allies' initial reactions were either "We can manage the risk," or "We know Huawei is a problem, but they're so big, and China's so big, that we're kind of afraid of doing anything."
And what happened was, with us moving ahead first, other countries started kind of going back and saying, "Wait a second, can we really manage this risk? If the United States couldn't manage it, can we really manage it?" And then they started retreating from Huawei. They didn't have to do it the exact same way we did it. But they started retreating from Huawei through their own regulations from their own policies.
And so now you see this sort of international community coming to a realization that there are threats with doing business with China. There are surveillance capabilities, all of these things that are kind of being embedded, and the technologies that they've developed through the acquisition of our technology. And maybe we need to be less reliant on them.
And all of that really began with this, one, understanding of the threat that China poses, and, two, this problem of we're giving too much technology to China and allowing them to grow too much. And, remember, if we give it to them, they're going to run faster, in many instances, because of the resources they're putting in. And we really need to scale back. But, with that, I'll hand it back over to you.
Trevor Jones: Perfect. Thank you. Now, I do want to get into the Biden administration regulations, Thomas. But first, you were there at the end of the Trump administration. You saw a lot of these things going on. You saw the transition. Anything you want to add?
Thomas Krueger: Yeah, just to compliment what Nazak has said, and just thank you for having me on today, of course. This is really great. I love discussing export controls and broad policies around export controls. It's also interesting. I'm the non-attorney that always gets invited to all the attorney groups. So I feel like there's a lot of scrutiny when I talk to really smart people about these issues.
So I just want to kind of just step back just a little bit, and really just complementing what Nazak just said. We became really aware, at the staff level, of the China threat, kind of in the late Obama administration. Nazak had mentioned ZTE. And there was already growing concern about — and questioning, quite frankly — the sort of view, I think, that had kind of been around from the, quite frankly, for a very long time, that somehow, economic liberalization in the PRC would lead to political change. And so, therefore, export control seemed to be, from a policy perspective, the idea was let's bring China and their economy closer to the West.
And therefore, there was always suspicion, ever since, obviously, from Tiananmen Square, about China's authoritarianism. But there was still this general open sense of "We really only are going to deny those exports that really can make a material contribution to military use as an end-user," so the standard by which to deny dual-use exports, and dual-use items, was heavily scrutinized against a different policy backdrop.
Late in the Obama administration, going into the Trump administration, there became more concern, this sort of idea that somehow the Chinese Communist Party was going to reform itself. Especially after Xi took leadership, it became more apparent that this was not going to happen, and there was much more concern. What happened in the Trump administration, though, was, just as Nazak explained, there was just more tension put to this issue.
And it was very much like, it was almost an awakening, I should say, with the Belt and Road Initiative that became more prominent, in terms of the considerations, as well as this new concept called Mil-Civ Fusion, which is a program by the Chinese Communist Party that became really like a way of taking U.S. advance technology and integrating it into its military systems.
This really challenged the export control system, which was predicated on very narrow non-proliferation sorts of ideas that, basically, export control is used to stop certain technologies from going into weapons of mass destruction or advanced conventional arms. So, this idea that it was starting to broaden out to actually being used, like, for example, to confront or prohibit U.S. technology going to ShinJong, and the human rights atrocities that were happening there was kind of using the export controls in different ways and broadening out the use of export controls to address different threats.
And the Trump administration really was very quick to recognize this and jump into it. And export controls prior, really, to the Trump administration, because it was so focused on non-proliferation, it was almost like a second-tier tool. The big tool was always sanctions. The Treasury had the big tool, and then, the Treasury, sanctions in the military, then export controls was kind of sitting over here. It was used very carefully. So, the Trump administration really, really kind of opened up and broadened the political willingness to use export controls for more than just these narrow non-proliferation uses.
Moving on into the Biden administration, the Biden administration came in and, in a lot of ways, just kind of picked up where the Trump administration left off. They did come in with some differences. And one thing that they did — and I think this exemplified, especially in ways we just discussed semiconductors — is they worked really hard to put together a very cohesive policy around what they were trying to do.
In a lot of ways, it wasn't that the Trump administration didn't, it's just that there was almost a sense of urgency, and they were trying to stop. Think about a ship that was going, I won't say sinking, but things were going. They were very quickly trying to fix things that were broken, very quickly. And it seemed very haphazard, though there was an agenda. It appeared haphazard, but there was an agenda behind it. This administration kind of took their time and kind of created a comprehensive policy and they stated it publicly.
I think we can go back to Jake Sullivan's -- just last year in September, when he gave this speech on identifying three, what he called "force multiplying technologies." The first was advanced compute, which include AI, quantum, advanced semiconductor manufacturing, bio, as in -- an interesting area is clean energy technologies. And he also stated at the time that the administration was going to freeze Chinese indigenous semiconductor manufacturing at a particular level, instead of the old way of thinking that we were going to stay just so many generations ahead, which had been sort of the idea. As long as the U.S. stayed ahead a couple of generations, it didn't really matter if the PCR lagged behind us in some sort of way.
So these are some of the big -- that was a big shift. That speech kind of laid out the premise for what you're asking about the October 7th rule, and the way I like to think about the October 7th rule. And sometimes there's a lot of legal analysis. And, to plug Akin, there's a great final [inaudible 00:14:37]. You better read through it. But, for the layman, I think it's a lot easier to kind of work backwards, and, going to build on what Nazak said about identifying a threat. So let's just begin, like, what kind of threat were they trying to address with the October 7th rule?
And I think the first thing you do is you kind of look at the threat, as it laid out in the preamble, is the use of advanced semiconductor for enabling WMD-type delivery systems. And so, you might ask yourself, "Well, could possibly a chip be used to do that? How does that apply?" Well, when you think about some of the modeling, and some of the advanced computers, supercomputers, that is done, you think in terms of, "Okay, this requires high-end chips."
The other thing that has a line in preamble is addressing human rights. And we all, now, at this point, due to a lot of the work that has been done on Chinese surveillance, understand that, really, one of the biggest threats out there, in terms of human rights, is AI-enabled Chinese surveillance technologies. And so, basically, from there you kind of think through, like, "Okay, well, how do we address that threat, to ensure, from an indigenous perspective, that we're able to cut off those sort of chips from going to that. Well, you have to kind of look at the production equipment.
So, you think about the production equipment. Then say, "Okay, what kind of tools are necessary, in order to make these, and what kind of parameters are required that we really care about?" So, what the administration did is they laid out three technical parameters that they felt were the key areas in semiconductor tooling. And they set a 14-nanometer envelope for logic, 128-layer NAND for memory, and D Ram at 18 nanometers and below. So, they said, "Okay, here are the parameters." So, what kind of tools are used to make that?
And so, the rule kind of identifies certain kinds of tools. They're specially made to kind of focus on those sort of higher-level chips sets. And, also, they said, "Okay, but then how do we capture any other things and other tools that actually make those chips? Well, then they added this catch-all control, which, if you don't know if this tool is actually going to a facility, and you don't know what kind of chip that they're making, then you have to come in for a license and, therefore, that kind of, like, imposes licensing requirements.
It's a broad catch-all across anything, that could fit almost anything, that could address that. Then it went even further and said, "Well, how about U.S. person expertise? That might be helping with identifying or supporting these sorts of covered technologies for things that are not even subject to the export administration regulation. So, they impose with a novel -- and this is a novel thing that the Biden administration did, was this novel, broadened, U.S. person control.
So, therefore, they capture the ecosystem. Well, if you read the preamble to the rule it also has a line, in terms of human rights. And, geared to export, we kind of look over into the AI chip area, even though those AI chips also can be used for, perhaps, maybe, weapons manufacturing and modeling, and so forth. It also goes after the surveillance issue. And so, they impose building on what they did with the Russia sanctions and the export control measures, and, prior to that, the Huawei Foreign-Produced Direct Product Rule.
They added the Foreign Direct-Product Rule for the AI chips. And then they added the Foreign-Produced Product Rule, targeting the supercomputer companies that were already on the entity list for the same reason. So, this is just a very high-level kind of explaining what this rule did. But I think the key takeaway here is the administration was very, very careful not to touch legacy semiconductors. And it was supposed to be, by design, very narrowly focused. And it was focused within the framework of WMD sort of delivery systems, and those sort of applications, if you will, as the threat that they were working to mitigate.
And that was critical, because the other countries' export controls systems are predicated, in part, on their traditional non-proliferation. They're traditionally set up to actually impose controls on things that can enable WMD delivery systems and invest in conventional weapons. So, in a lot of ways, I think the preamble of the rule was sort of a signal, if you will, to partners and allies, that we are not doing this for broad, "economic security" reasons. We are keeping this really, really focused.
Trevor Jones: Thank you for that. So it's kind of like there's four buckets. One is there's this expansion of the foreign direct-product, Huawei-style rule to certain entities. The second is the U.S. persons control. And then you have, for the super-high-tech American manufacturing equipment and software that can be used only to produce these leading-edge chips, that's purely banned, correct?
Thomas Krueger: They're restricted.
Trevor Jones: They're restricted?
Thomas Krueger: I don't like the word "banned." There are presumptions of denial, and there are presumptions of denial. So it's up to the iteration to make the decision whether or not something gets approved or not.
Trevor Jones: But then you have this fourth category which is like the node-agnostic equipment and software that can be used at the high-end. Or it could be used to make these legacy semiconductor chips. And what determines whether you get a license to export those to China is the end use. I guess that's where I want to ask you something, Nazak. Or Thomas, feel free to jump in, as well. How do you, actually -- in a country like China with an opaque political system, we have limited intelligence capabilities to get in and say, "What is this factory actually producing?"
And, on top of that, we don't know if maybe we're sending equipment to a factory that's not producing high-end chips, but then they sell it to one that is. For Nazak, as an attorney advising American companies in this space, how are you screening for this? What do companies need to look for when they're trying to comply with these end-use restrictions?
Hon. Nazak Nikakhtar: Yeah. So let me sort of step back here and make sure that we're all maybe on the same page, in terms of the rules, before going into the end use. So I hugely commend the Biden administration for -- we teed up the China thing, in many important respects. Now, the world is kind of on pretty much the page with China's problem, which kind of laid out the groundwork for the Biden administration.
But I also do want to say, dealing with China for 20 years, dealing with circumvention from China for 20 years — which, Trevor, kind of goes to your question, but I want to preface it — if you promulgate rules that allow China to get past the more stringent license-streaming mechanisms by incorporating outside China, or if machines that make the lower NAND, the more leading-edge chips, are the same machines that make them more advanced, or mature chips. Or maybe you just need to reconfigure the machines just a bit. And so their use could go to the prohibited, or the highly restricted end-uses.
Or, if you are restricting, highly restricting, through license reviews, items produced abroad from U.S. technology to the October 7th rules list of 28 Chinese companies that have a presumption of denial if foreign direct-produced items go to them, but they can go to all the other companies on the entity list. Even though U.S. laws prohibit the re-exports of items, you're going into an opaque country with -- there is just no rule of law. Of the thousands and thousands of licenses that we're approving in China, there is literally no capacity — not of our BIS, not of any other BIS-equivalent in the world — to conduct adequate end-use checks in a country where circumvention is so prevalent.
And so, what I don't love about the rules is that they still have room for circumvention, which is what China does. If you do not do things that are very black and white, you will be assured that there's circumvention opportunities. And entities have been built to trade with China. These companies have developed scale to export to China. And so they're going to say, "What do you mean, I can't export to China anymore? I have built, I have invested billions of dollars in capacity to export to China." Well, they're going to look at the rules. They're going to work with their lawyers.
And they're going to figure out where the rules don't stretch, and then work with their Chinese suppliers. "Okay, well, maybe if you reincorporate here, or whatever, we can kind of get around the rules." And now you're legally getting around the rules, right? And so I just want to be clear about that. The other thing I really want to be clear about is that you've got to understand industry to regulate industry.
And if you think about any industry, in terms of a triangle, where the commodity is at the bottom rung, and then the higher-tech stuff goes at the very top, well, we're not going to be able to stay generations ahead of China if we are restricting them to have access to the high-generation stuff, because where does the revenue come from to invest in next gen from commodity? And if you give up the commodity to China — and they already have it, granted — but they are engaging in over-capacity on the advanced chips, on the leading-edge chips.
And if they capture the global market there, which is 99.5 percent of the global market, 99.5. I will repeat that one more time, 99.5% of the global IC market is the advanced and the mature legacy. And if you control that revenue stream, guess what? You have the revenue stream to invest in next-gen technology. And then we don't have the revenue stream to invest in next-gen technology. That is another part of the fundamental problem, in addition to circumvention, with the new rules. So I think, as much as I respect Jake Sullivan and everybody in the administration, being a purist, I'm going to call anything out that I think is incomplete. So I think this is incomplete.
Now, going to your question, how do you advise clients? So, one: I, personally, am a fan of interoperability with allies. And I really don't like dangerous things to fall into the hands of dangerous countries. So, if something is not prohibited and it's permissible through licensing and I don't have a presumption of denial or anything like that, I'm actually going to look to see what this technology is capable of. And I could very much get assurances. My clients could get a lot of assurances from the Chinese entity that's receiving it, saying, "I am only going to use it for X, Y, and Z."
Okay, well, what's the technology that we're exporting capable of doing, regardless of what the attestation says? And if it's capable of doing more, then the advice to clients is as follows. "You will be compliant. You're going to request a license. The government may grant the license. But if that item that you're exporting, one, enables dangerous capabilities, how do you, as a company, feel about that, just in terms of company values and ethics? And second, how do you feel about it if your technology goes into things that are happening in a third country that are oppressing people, that are being now shipped to Russia to enable or continue the aggression that's happening in Ukraine?
Or how would you feel if your technology was used by the PLA, or used by companies that are perpetuating the forced labor, the genocide atrocities? So those are the questions that we pose to clients, saying, "Look, this is what's permissible, this is what's really highly regulated. And, also, because of your technology, it's capable of doing X, Y, and Z. Here are the enormous amounts of reputational risks. And even if it's going outside to China, to a third country, what is that country's regulatory system? What's the U.S.'s relationship with that country? And what's the corruption level in that country" so that they can make the best-informed decision.
Thomas Krueger: Yeah, just to maybe build a little bit on what Nazak said, I think what's interesting about this rule is that it's not good enough that it used to be this thing that, when you're exporting a thingy, how does that thingy actually enable the military? Now, applicants have to think about, "How does my thingy go into a thingy that goes into a thingy." That thing goes into a thingy to enable the problem of concern.
And that puts a lot of burden — just what I've noticed in my observation — it seems like that puts a lot of burden on companies, in order to do that level of due diligence. And Nazak just mentioned this idea of, like, at what point do companies have to understand, let's say, the Malaysian export control system, or the Turkish export control system to do those sort of value judgments, in terms of reputational risk?
I think it puts a lot of burden on companies to actually be able to not only comply with the rule, but to kind of stay out of hot water with some of the reputational risk issues that Nazak is advising clients on as well. But it kind of shows now where we are on export controls, from the late Obama administration where the vast majority of it was export control reform, getting stuff off the United States munitions list — which is our high-level munitions items moving into the commerce control list, the lower level-stuff — to now we're talking about the thing that goes into the thing that goes into the thing that goes in the thing is controlled because you have to find out where that thingy is ultimately going. And at least you have to do your best. You have to do your best to figure that out.
So, also, this has created, I think, a change in supply chains. It's also caused, I think, a psychological impact. I think that it's not so much just a legal issue. It's a psychological impact that U.S. companies have, and also companies overseas have, in terms of our export control system. And, also, the rules and the way these rules have been rolled out has kind of also introduced unpredictability into the system. I mean, yes, we did this. Like I say, we at the Trump administration got out of normal rulemaking in a lot of ways to address some of these threats.
But that is a legacy that's kind of carried on, where we're not going through regular rulemaking. And so, there's not -- like, some of these rules that came out, arguably, you can make the argument, could have gone out before notice-and-comment, and did not have to come out the way they did, and still meet the same effect on certain issues. So I think there is a diligence issue. There's challenges for U.S. companies, in terms of compliance to these rules.
Trevor Jones: And I want to also mention, a couple months ago there was an international agreement announced between Japan, the United States, and the Netherlands, in regard to semiconductor export controls. And we don't know the exact details of the deal yet. That's to be determined, to be announced. But I guess my question for both of you is what would a deal with our allies — who also produce this kind of equipment, and this kind of software — what would our allies need to agree to do to solve the risk of backfilling, or the risk that, basically, the Chinese are just going to get this technology from someone else?
Hon. Nazak Nikakhtar: I think the answer kind of dovetails with one of the audience questions, which is, Japan and the Netherlands are really going to just kind of be looking at these. They're going to have very different concerns. I think Japan's going to be looking at it as like, "China is a big neighbor. And I am very vulnerable, in terms of any sort of aggressive action if China decides to retaliate against me." We saw what happened in critical minerals. Japan is not of the size and scale that the United States is that it can make everything it needs. It relies on international partners.
So, for Japan, the calculus is like, "China is there. I rely on upstream materials for China, the things that go into making semiconductors, the gallium, the germanium, outside Ukraine, the Nuon gas. So if I join the United States in these types of restrictions, not only do I not have access to China's supply chains, but there could be a blockade. There could be something that can actually prohibit me from getting goods.” Those are Japan's concerns.
I think the Dutch, their concern is, like, "Look, our company, our ASML that makes the ultraviolet lithography tools that make those very, very small chips, those low-node chips, they’ve invested literally billions of dollars over 20 years to develop this technology. And the rest of the world isn't gobbling it up, in terms of the speed that China does. And we've got to make a return on our investment. So what do you mean, we can't sell this stuff to China?"
Now, they have been restricting exports to China because we've been asking them to. They did recently announce that the Chinese had stolen a lot of their technology. I think they hired about 200 Chinese last year. So they're kind of going through these dynamics where they're not sold one way or another. They're kind of soul-searching. And so, for these countries that have vulnerabilities in very different ways, I think what's ultimately going to happen is that they're going to generate rules that feel, in spirit, like what the U.S. rules are. But they're going to — very similar to the U.S. rules — they're going to have deliberate loopholes that allow the business transactions with China to continue, maybe regulated to some very minimal extent, but the business transactions to continue, because there are these enormous other problems that they really haven't figured out yet.
And I should also mention that there's been a lot of chatter in the semiconductor community about some of these companies abroad that have choke point technologies maybe thinking about designing out U.S. technology so that if any exports to China would come from their own government, it wouldn't be because of the reach of our export controls, the reach of our jurisdiction, in terms of containing U.S. content. So, at the end of the day, a great talking point. I really doubt that they're going to do anything more significant than what we did. I doubt that they're going to walk in lockstep with what they did, because, I think, for them, the vulnerabilities are too great.
And we've really got to help them solve those vulnerabilities, in terms that, "If I can't have access to supply chains that I need if China retaliates, U.S., how are you going to me resolve those, so I can actually, ultimately walk in lockstep with you?" Because Japan, first and foremost, is right there where we are, in terms of understanding the Chinese threats, but they don't have the kind of flexibility that we do. So, we should partner with them a little bit more, and help them a little bit more to implement rules, in a way that we deem appropriate, that protect both of our national security interests or all of our national security interests.
Thomas Krueger: Yeah, I'll just maybe just build a little bit on what Nazak said. I agree. I don't think that the Japanese and the Dutch are going to come to the same level of restrictions as the U.S. did, particularly in the areas of, like, the U.S. person control. I'd be very surprised to see a Dutch person control, or Japanese person control. Not that it won't happen, but I'd be surprised to see it. I'd also be very surprised to see broad catch-all controls, the same kind of controls that have been historically used for, like, weapons of mass destruction that would be imposed on these ecosystems.
I do think that even the Dutch and a lot of European countries, perhaps, are also vulnerable to Chinese influence and Chinese investment in other areas. And so there is this question, this sensitivity about retaliation. And I think that the U.S., the Biden administration, is mindful of a lot of these considerations as well. I think the one thing, though, that we sometimes do is we think that other countries can do the same things that we can do: hit hard in our export control system.
We've got massive "extra-territorial" reach in our export control systems that other countries are just now beginning to kind of explore. Things as simple as control over simple re-exports of certain goods that are not weapons, for instance. It could be something that a lot of our partners and allies -- we may be asked, and we should be asking them to do that, so we would not have to impose some of our Foreign Direct-Product Rule or use our de minimis thresholds in order to control our partners and allies by them.
So, I think there are structural differences. And even if we do agree on the kind of technical items that need to be controlled, I think the question is "Well, okay, then how are you controlling them?" And so I think this raises a whole different level of discussion amongst a lot of regulatory nerds on export controls in very, very confusing spaces, with a lot of different language and the differences of just how the systems and how the [inaudible 00:37:20] works, versus how the Parliament works and how rulemaking is done. It gets into a really weedy conversation. And with that comes time.
And as you start thinking about how fast our allies and partners can actually impose these controls, we can go look back at the Russia sanctions that were imposed. A lot of the Europeans that I spoke to at the time, they saw the invasion of Russia into Ukraine as an existential threat to Europe. And, therefore, there was a different kind of level of political will to move in that direction. The question that I have is do they see the threat coming from the PRC? And I'm not just talking about the Dutch and the Japanese.
I'm just talking about, generally speaking, do our partisan allies see this threat from the PRC that we do? And, if not, are we doing enough to actually articulate that threat clearly with our partners and allies, in order for them to actually develop that kind of will, if you'd say, to actually impose like controls, or develop mechanisms vis-à-vis the People's Republic of China. So that, I think, is something that is a challenge for the administration, or for any administration, for that matter, to be able to undertake.
Hon. Nazak Nikakhtar: Trevor, you're on mute.
Trevor Jones: Thank you. All right, so, at this point, I want to ask some audience questions to you guys. I have one last question I want to ask. But everyone out there in the audience, feel free to send in more questions, because we're going to do some Q&A now.
My last question is, so we've outlined what these regulations are, we've outlined what the potential contours of an international deal would have to look like if it could even work, which is questionable, and there's been a lot of agreement between you two on a lot of things, but I'm going to ask a question where maybe there might be some friendly disagreement, which is, how do you think the Biden administration's semiconductor export control is going? Where is it going right? Where is it going wrong? And where does it need to go farther, and how much farther?
Hon. Nazak Nikakhtar: I can try to take that first. So, again, I want to underscore the respect for the Biden administration. They really are, in many ways, picking up where we left off, meaning they're seeing the threat and they see that it's their responsibility to continue addressing these threats. But I do have to say that we have to cut off these exports of dangerous capabilities to China. Any exports to China — let's make no mistake, this is coming from an expert having been on the front lines of China for 20-plus years — any exports of technology to China means China wins.
We can't have it both ways. You can't have the revenue stream and give up the technology to China, because China is a non-market economy. The government determines the prices of raw materials, land, labor, electricity, everything. So they're always going to underprice us. You export to them, they figure out how to do it. They underprice you. And they wipe you out from the competitive landscape. And China can do this, rest assured, because of its massive size, scale, and resources.
And so, I would like any administration who goes in next to understand that you can't have it both ways. You can't make everybody happy. If you're going to be serious about curbing China's technological growth that — as Thomas mentioned, going straight to the PLA — went through this Civ-Mil Fusion strategy. And they are. They expressly said it. We should also listen to exactly what China is saying, whereas it is building up military capabilities to destroy us and our allies.
So, when you think of it in that context, does it make sense to export any critical technologies to China? So what I say is for China and countries of concern you do away with the entity list. You do away with all of that stuff. And you really just start prohibiting exports of critical items to them. Otherwise, we are sure to lose.
And I should also say, 20 years ago, before China entered the WTO, before we had this mad rush to export technology to them, they were way behind. And in 20 years, they caught up to the United States and are surpassing the United States in things where we had 40, 50, 60, to 80 years advantage, lead time. That shows you that China has been running faster. So, if we give more to them, they're going to continue to run faster. We've got to do a more aggressive approach.
Thomas Krueger: So, I'm going to start with a kind of side-step of the debate a little bit, and just kind of talk about, I think, where the real debate is now. And it's interesting to see the China Select Committee just start their hearings today. And it's going to be interesting to see where this debate goes. Right now, I think there are, kind of, two camps. One is, I think, where the administration is, is what I call the technological decoupling camp, where they really want to see, they want to ensure our highest level of technologies, particularly on emerging tech, is kind of walled off from the PRC. And they see that as being the threats, the technologies, that will enable the future.
Then you have another camp that kind of sees more of that, listen, the problem isn't just the military. It's the entire PRC system. Dual circulation is a global threat in itself. So, therefore, there needs to be more strategic decoupling. And so, there are these two camps, I think, in Washington that view the threat differently. And I think this kind of comes to the broader sort of -- I think what the U.S. needs to do as a whole, is we have to be able to come to an agreement on exactly what the threat is that we're trying to solve.
Is it this narrow focus, where we're looking at technological decoupling as really a -- and I did borrow that from a CSIS paper, so I can't take ownership of that. And former Ambassador Lighthizer, in an op-ed a couple of months ago, he used the words "strategic decoupling," so I borrowed that too. None of these terms are mine. But the idea here is that we have to start thinking a little bit broadly about exactly what threat we're trying to address.
And I think one of the things I am unclear this administration, the Biden administration, as well thought-out as some of their broader policies are, have really been able to articulate the threat of the PRC cohesively to not only domestic audiences. There was a political argument today, where it just made this point where the Biden administration likes to use the word "competition, competition." They don't use the word "conflict." And "competition" almost sounds friendly, like, "We’re in a competition with these guys."
But, as Nazak brought out, well, yeah, except they're taking our technology and they’re putting it into military systems. That's kind of a little bit more than competition. And even Secretary Raimondo, a couple months ago she came very close to saying economic security — which is pretty much a banned word in this administration — when she started talking about all the things that the Chinese Communist Party is doing to undermine global norms within the economy. So, it seems like she came very close to saying "economic security" without saying "economic security."
So, I think, as a country, we need to actually be able to identify what threat China is. And then, once we know that, we've got to be able to get out there diplomatically and explain that clearly to our partners and allies. Because, otherwise, we're sending confused messaging. On one hand, we're sending messaging that, well, these export control measures perhaps are protectionist. We're trying to protect our own industry.
And if you combine that with the Inflation Reduction Act and with the CHIPS Act, putting them all together, it looks like all our expert control measures have nothing to do with national security. If we can't explain the national security threat that comes out of the system that is the PRC, I think we're going to struggle in meeting some of the -- in convincing partners and allies and even some domestic audiences of exactly what we're doing on China.
Hon. Nazak Nikakhtar: And Trevor, since Thomas was good about going into decoupling, then maybe we could sort of tackle that first audience question.
Trevor Jones: That was exactly where I was going.
Hon. Nazak Nikakhtar: Because I wanted to weave those points together. Look, I've looked at -- and I will preface this by saying I've had a prominent member of Congress ask me, "So you want a full decoupling? You don't want strategic decoupling, or high-tech decoupling?" And my answer was as follows: so, when I was in the government I did a study on -- you know, people seem to be really worried about just talking about decoupling, generally. So, what's the economic impact of decoupling, just overall?
The United States' services, goods, financial, clothes, all of it: one percent of GDP. Let me repeat that. One percent of U.S. GDP in three to five years, and then, after three to five years, our GDP, we get better entangled with our allies. If our allies do it the same, we actually have better GDP growth than if we continued our dependence on China. So that's full decoupling again. Just one percent of GDP, three to five years, and then we grow better. And I think that's even overstated, because it's not considering the intangible effects of not having your IP stolen.
And then I responded to the question of, like, "Why are you a full decoupler?" And I said, "Look, I don't want to buy Tupperware from China. I don't want to do trade even on non-tech stuff, because every dollar -- and Michael Pettis, who's an economist, he does beautiful work on this. You've got to read between the lines, but he basically illustrates that every dollar you give to the Chinese, it doesn't go to the workers. It doesn't go to the corporations. It pretty much just goes to the CCP. And I don't want to buy Tupperware from China for a dollar, because every dollar I give them, it goes to the government, who is building up its army, or it's funding massive genocide of one, two, three million people.
So, what kind of country have we become in America, or as Americans and our allies, where we're looking at it in terms of we still need to do business with a country, without realizing that who is this country, and do they stand for the values that America does? And if they don't, then we really need to think, move away from this, "Where do we stand to profit?" and really think about, "Do we want this country to profit in any way, in any respect, from what we're giving them?" So, I would like these considerations to go into more of the policy debate, and move away from tech transfer. Certainly, that's an important component. We'll move past tech transfer to any transfer to China that's enabling these really dangerous capabilities.
Trevor Jones: Thomas, is there anything you want to add? Or if you're -- go ahead and ask the next audience question.
Thomas Krueger: Just really quickly, I think, obviously, I hear what Nazak is saying. But even one of the challenges of strategic decoupling, and decoupling from Tupperware or having decoupling that does have actual -- that one percent does have impact. And it isn't just pure one percent. It’s the psychological impact. And I don't know exactly what the secondary and tertiary consequences of that would be, if we would move into that position. This is why I think the vast majority of the administration, they keep on saying -- even just under Secretary Esteves today, he was very clear about the fact that they are not promoting economic decoupling from the PRC.
So I think there is a sensitivity towards those sort of impacts, and even the talk around decoupling, from the administration perspective. That said, I also think I agree with Nazak in the sense that if we're not willing to open up to even have the conversation, we're not really going to be able to have a real conversation about the real threat coming from the system itself. And it's the CCP under Xi.
I mean, this is not normal -- this is even an anomaly for the Chinese Communist Party, at this point, to have, kind of, one-man rule with no checks and balances within the Chinese Communist Party at all. We’re just in a different territory here. And so I think there is room for debate. And I am hopeful that the China Select Committee gives that opportunity to have some of these views kind of aired, and looking forward to hearing smarter people than me speak to some of the impacts and these ideas.
Hon. Nazak Nikakhtar: Let me remind the audience real quickly that slightly over 20 years ago, before China's entry to the WTO, we didn't really have that much dependence on China. And so we lived in a world where you can actually go and get stuff. And we had industries that weren't completely beholden to China, and would freak out every time we tried to do something, because they would say, "Oh, my gosh. My industry is going to collapse." So, again, twenty years ago wasn't that long ago.
We should really, to Thomas' clever point, we should be having these conversations so that we can start planning for what other options we have. Because, long-term, having those relationships away from China, and in South America and in Mexico and in Canada and Europe, it stands to go far better, in terms of our mutual prosperity and also preventing our allies in those countries from economic collapse, giving rise to corrupt governments.
The entire ecosystem does better, which is, to Thomas' point, not that the rest -- I don't want to put words in Thomas' mouth, but having those conversations so we can solve these critical problems. But to stay away from it and say, "I don't want to move all our supply chains out of China, just some of them," ignores some of the other problems that we're going to have to solve. Because they're still funding dangerous capabilities that's to our detriment.
Trevor Jones: So, for the second audience question, I'm going to rephrase a little bit. It asks why the PRC didn't respond more aggressively to the aftermath of these export controls. I'm just going to change that, not just to why didn't they respond? But also what are they trying to do domestically, to respond internally to overcome the impact of these export controls on their industry? And what is that impact even going to be?
Thomas Krueger: So maybe I can just kind of take this one. I think one of the things that we became aware of, and I think there's still a lot of dependency the PRC, the Chinese Communist Party has, specifically. I use the word "Chinese Communist Party" here. And I use this and a lot of my friends say, "Why use 'Chinese Communist Party'? Why not just say 'China'?" Because it really is the Chinese Communist Party. It's not the Chinese people. It is the party. And they are directing. So, I use that deliberately.
But the Chinese Communist Party here, they know that they are still very much dependent on U.S. companies. They don't want to spook U.S. companies from leaving the country. That's part of the problem. And they understand that dependency. They also know that, and they hope, I believe -- and this is what I've come to understand, is that they kind of hope that their best advocates in the United States are U.S. companies that are functioning within the PRC. So that's why you don't see tit for tat.
That said, there's a couple of developments that the Chinese Communist Party has done that I think is worth noting. Number two, there's this -- I'm sure everyone is following this – is they have been kind of thinking about and developing export control measures on certain kinds of solar panel technology. This is a choke point for the United States. A lot of people don't realize that we depend an awful lot on China for a lot of the clean tech, in Chinese companies for a lot of the clean technologies. And so, the fact that the Chinese Communist Party is considering export control measures here, that's something to pay attention to.
The second thing is, I think a couple weeks ago -- the Chinese have a tool called "the unreliable entities list." It has never been used. I believe it was a week ago or a couple weeks ago, a couple of U.S. companies were added to that. Now, it's questionable how much this impacts those companies, or if they were just symbolic. But the fact that the Chinese Communist Party was willing to actually now start using the list says that, like any other bureaucracy, just like the entity list, just like anything else, it makes it easier the second time, the third time, because it gets into the rotation of the bureaucratic tools and policy tools.
So, it's something to keep an eye out on and start seeing what the Chinese Communist Party does in reaction to some of these measures. And, not to mention, they did file a complaint in the World Trade Organization against the October 7th rules. And if you look at the arguments, they're kind of in line with a lot of what I think European allies, even our closest allies, how they view them.
The combination of the CHIPS Act, Inflation Reduction Act, combined with these extra measures, looks like less national security, more protectionism. And so, I think you're seeing the Chinese Communist Party doing things diplomatically. You see them start messing around and playing with, and start maybe pulling the trigger on, some of their own domestic controls. And so, we'll see if there's any more to come.
Hon. Nazak Nikakhtar: And then I'll just add a few quick points. I think the zero-COVID policy was sort of a tough case for China. How does the world react with less supply chains from China? And it saw that it was very effective. It's a really good question that was posed by the audience. China has already started to severely restrict access to some of the strategic materials that we need to make semiconductors, the machine, the machinery to make drilling equipment, to make military supplies. And we're seeing major spikes in the prices in the market there. And then, fundamentally, remember, when the world starts turning on China, it kind of redoes its charm offensive, which is what it's doing now.
That should signal to us that it's sort of lying in wait. It wants to complete its tech transfer, its acquisition to build its strength. So then it can really do something dramatic. If we start pulling supply chains back right now, it doesn't fit within China's grand strategy of taking Taiwan and taking more regions, etc. So it's very much in their interest to keep acquiring technology, just stay quiet, play the long game. And once you're fully equipped with what you need, that's when you go big. And this comes from 20-plus years of observing China and trade, from the time that China started really trading with the global ecosystem by entering into the WTF.
Trevor Jones: Well, thank you both so much. Thank you to everyone that joined us. And this was a great panel. It was great to be able to moderate this. And I'll turn it back over to Jack.
Jack Capizzi: Thanks a lot Trevor. And absolutely, of course, on behalf of The Federalist Society I want to thank both of our panelists for their valuable time and expertise today on this issue. And, of course, thank you to our audience for joining us and participating. As always, keep an eye on our website for upcoming events. We have another webinar later today about the student loans cases. And we do welcome listener feedback by email at email@example.com. That is all for today. Thank you for joining us. We are adjourned.