This virtual event examined current national security issues, including relations with China, as well as coordination with allies, utilization of available legal tools, and whether those tools might be effective.
- Hon. Nazak Nikakhtar, Partner, Wiley Rein LLP
Nazak served as Assistant Secretary for Industry and Analysis at the U.S. Department of Commerce’s International Trade Administration. She also served as the U.S. government’s top official for export controls on dual-use items and technologies, performing the non-exclusive functions and duties as Under Secretary for the Bureau of Industry and Security.
- Adam J. Szubin, Of Counsel, Sullivan & Cromwell LLP
Mr. Szubin served for two years as Acting Treasury Department Under Secretary for Terrorism and Financial Intelligence. During his nearly 13 year tenure at the Treasury, Mr. Szubin served as the Director of Treasury’s Office of Foreign Assets Control (OFAC) for nine years and Senior Advisor to the Under Secretary for Terrorism and Financial Intelligence.
- Moderator: Eric J. Kadel, Jr., Partner, Sullivan & Cromwell LLP
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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Dean Reuter: Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.
Guy DeSanctis: Welcome to The Federalist Society’s webinar call. Today, July 28th, we discuss “Foreign Policy in the Biden Administration.” My name is Guy DeSanctis, and I’m Assistant Director 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.
Today, we are fortunate to have with us our moderator, Eric Kadel, Partner Sullivan & Cromwell LLP. Throughout the panel if you have any questions, please submit them through the question and answer feature so that our speakers will have access to them for when we get to that portion of the webinar. With that, thank you for being with us today. Eric, the floor is yours.
Eric J. Kadel: Thank you very much and thank you everyone out there in the audience today for joining us for this panel discussion of where we see sort of what you might call economic sanctions and trade policy headed in the Biden administration based on clues that we’ve seen throughout the campaign and then the initial actions that have been taken over the past six months as President Biden has come into office and started to round out his team in these areas.
Joining me today are two lawyers, the Honorable Nikakhtar and Adam Szubin. Nazak is at Wiley Rein, and she spent years as the Assistant Secretary for Industry and Analysis at the Department of Commerce’s International Trade Administration. Adam is at Sullivan & Cromwell, and he spent a number of years in the Office of Foreign Assets Control in the Department of the Treasury. So we’ve got some great speakers here today joining us, and with that let’s get started.
I think, Nazak, I’ll start with you and just a brief question -- or brief introduction to a question. We saw in the news reports over the past week or so some details of a meeting that took place in China with State Department official Wendy Sherman and reports of maybe some I think it’s fair to say more aggressive messaging from China in that meeting. That’s indicative of a broader trend that’s been accelerating I think it’s fair to say over the past six to eight years, including the four years of the Trump administration. What was your reaction to those news reports, and what do you think we might see in respect of developments in China policy?
Hon. Nazak Nikakhtar: Eric, thanks for that question. It’s a pleasure and privilege to be here today, and what could be a more timely topic than what we’re discussing right now with a perfect lead in question, Eric, so thank you. I want to offer my vantage points or my perspectives as both Assistant Secretary and both Undersecretary of the Commerce Department for Export Controls and just being a trade national security lawyer and economist for 20 years in D.C., just being on the front lines of this issue with China.
Back in 2004, we actually set up the China office at the Department of Commerce during my first tour of duty there. So it has been an issue that has been building and building and building over time, I think oftentimes ignored by the U.S. government -- by really governments around the world, which is why we’re in the situation that we are in today. So as you guys know -- well, I should preface what I’m going to say with a friend of mine in academics were debating this very topic today.
And my position was look, China has gotten more aggressive in its tactics and its rhetoric and its threats because it actually has the goods to back it up. We shouldn’t make any mistake that this is kind of wolf warrior techniques without anything to back it up. China is not only getting aggressive in its rhetoric, but it’s actually backing it up with action in the ways that I’m going to describe below.
And that’s really to say when they met with Deputy Secretary of State Wendy Sherman and they gave her a list of demands, those demands, I think, were very serious. While they weren’t disclosed, we know that some of it had to do with the extradition of Meng Wanzhou, the Huawei CFO; the sanctions that the U.S. imposed on U.S. officials; probably Huawei entity listing -- various other entity listings are in play. But look, the rhetoric with China has intensified. On day one of -- Biden’s inauguration -- President Biden’s inauguration, China started putting its money where its mouth is.
It started sanctioning U.S. and EU officials to follow up aggressive actions on Hong Kong. It’s continuing not only with its human rights abuses but very sort of unapologetically not even denying that they’re existing anymore -- pretty much saying “Look, this is in our internal affairs. Stay out of it.”
We’re seeing incredibly aggressive financial restrictions on capital markets; the national security laws that it’s promulgated with extraterritorial application; essentially claiming rights over sensitive information, even non-Chinese companies or Chinese companies operating abroad; continued aggressive FDI flows to acquire critical technology; aligning itself more with the Taliban; filling the vacuum in the Middle East where they are perceiving the U.S. retreating; threatening a tax on Australia and Japan, for example; threatening our ally New Zealand; pushing back on the origin of their coronavirus probe; the cyberattacks that the Biden administration just released a reporting finding that China was behind a considerable number of cyberattacks. And so then the question for us as a country, certainly for this administration is well, where do we go from here?
Let’s not underestimate China. And the reason I want us to not underestimate China is for the following reasons. We are enormously, enormously dependent on China in really unimaginable ways. 80 percent of our critical minerals that we need for our defense capabilities and other capabilities China controls. China controls 90 percent of the global rare earth supply. Semiconductors, 80 percent of our import dependence are on Taiwan and China and 100 percent of our leading edge semiconductor reliance is based in southeast Asia, mainly Taiwan and lithium ion battery cells where 80 percent of the cells we need, again, are coming from China.
These are the supply chains that are actually an incredible national security emergency at the moment because if we don’t have access to these supply chains that work their way through China, if there is actually a conflict, our strike capabilities are very limited because we’re only going to be able to rely on what we currently have without access to further semiconductors, lithium ion battery cells, critical minerals.
So the final point I wanted to state to underscore sort of the severity of this is that as the Biden administration and, I think, as America, we have to philosophically determine where we are. We’ve traditionally taken the approach of, well, we’ve got to just run faster because we’re smarter. And so if we just have access to the capital that flow from the Chinese markets, we’re always going to be able to stay ahead.
I would actually posit that maybe history has shown us that these two premises are -- they may be incorrect. I don’t think we’ve been running faster. I think China was farther behind. But we’ve seen for the last 20 years where we’ve exported critical technologies, offshore production, IP, etc., to China -- we’ve seen them catch up very, very -- in essentially unprecedented break-neck speed. So I would posit that China’s always been running faster. They were just further behind.
And I actually wouldn’t be so arrogant as to assume that we, as America, are always going to be smarter. China has raced either in parallel or ahead of us by many measures in AI and biogenetics and robotics and a lot of critical technologies. So I think the existential question is and the very timely question for us today is what is our philosophy, and how does the philosophy guide our engagement with China?
And from my perspective laying all these things out, I think we need to do two things, do our very best to shore up our critical vulnerabilities -- I’m sorry, supply chain vulnerabilities and really do our utmost to restrict access to critical technologies to China if we really have any hope of guarding ourselves and protecting ourselves in terms of some serious national security threats that exist.
Eric J. Kadel: Nazak, thank you. That’s a great introduction and statement of a challenge that we’re facing from a policy perspective today. Before we sort of circle back to that and maybe get into a little bit of detail of what the Commerce Department has done and what maybe it could do to further some of the goals that you talked about, let’s turn over to Adam and talk a little bit about maybe a little bit of a more traditional use of economic power, and that’s through economic sanctions that are administered largely by the Treasury Department.
One thing we know, Adam, from early days of the Biden administration is that they have undertaken a review from top to bottom of sanctions policy. We know that there have been meetings with experts, including yourself on some of these topics. And I think, though, we have not really seen anything public yet that’s come from those reviews.
Of course, we have seen the Treasury Department take certain actions with respect to sanctions since January, including in June the refinement of the Chinese military industrial complex sanctions that restrict trading in securities of companies that have been identified as being in the military industrial complex in China. But let’s consider the question where we think this policy review might be headed and where we think sanctions policy overall might be headed in a Biden administration both based on what we’ve seen so far and also based on where we think challenges may arise and the tendencies of the Biden administration personnel in responding to those sorts of trends.
Adam J. Szubin: Sure. Happy to take that on, Eric. It’s a real pleasure to be here, so thank you for having me. I mean, one of the very first things that the Biden team announced was this sanctions policy review. It’s clearly something that was high on their priority list, and it reflects something. It reflects, I think, concern typically expressed from two constituencies, concern from U.S. companies and concern from U.S. allies and partners abroad that the U.S. has overused the economic sanctions toolkit.
That includes the financial sanctions that Treasury administers. It includes trade controls on imports and exports. It includes CFIUS restrictions on investment to the U.S. and would include the tariffs that we saw under the Trump administration.
So there’s sort of a mounting concern not related to any one administration— this goes back into my years in government in the Bush and Obama administrations— but a steadily mounting level of concern that the U.S. is overusing these instruments. And what overuse means is very typically in the eye of the beholder. But just to give you one example of it, when the U.S. unilaterally restored sanctions with respect to Iran after the Trump presidency with removal from the Iran nuclear deal, you had this kind of ugly transatlantic situation where our closest allies were still adhering to the deal and adhering to trade that was authorized under the deal. And the U.S. was saying, “No, if you go ahead with that -- if you, for example, sell cars into Iran or other commercial goods into Iran, we’re going to sanction you.”
And those tensions lead to the Europeans trying to set up a trade mechanism to clear trade with Iran that would bypass or circumvent the need for the dollar. Now, whatever your views are on the Iran nuclear deal, it is not a good thing when France and Germany at the highest levels are designing financial instruments to work around the dependency on the dollar. So that’s part of this sort of mounting level of concern that I think the Biden administration is hearing and is reflected in this announced policy review.
Now, what’s going on with the policy review I only have limited insight. As you say, Eric, I participated in calls with the Deputy Secretary, but I’m not behind the scenes anymore. What I do believe they’re aiming at, though, is not a review of U.S. foreign policy with respect to any of the countries we’ve sanctioned: Russia, China, Iran, Cuba. I think that would fall more broadly into State Department, DOD, White House reviews.
I think this is a review of the instrument itself, the economic toolkit, and what would doctrine look like to use it wisely, to use it effectively and to preserve its power for future administrations and for generations to come. That’s, I think, the focus. And here, I can just speculate.
I think what we’re likely to see is at least two principles enshrined in the results: one that we need to be strategic in how we use the tool. And that means we need to be linking the use of these tools to our overall strategies and priorities. We can’t sanction everything we don’t like in the world. We can’t sanction every foreign government that is upsetting us over failure to uphold civil or human rights. We have to be judicious, and we have to be prioritized.
So even to pick up on Nazak’s comments on China where there’s a tremendous range of activity that’s of concern, I think what you’re going to hear the Biden administration say is we need to be disciplined and focused on the key concerns. And I’m happy to speak to that later when we come back to China.
I think the second sort of principle that I think will emerge is multilateralism. And that is really for two reasons. One is the obvious. We’re at our most effective if we’re trying to put pressure on a foreign regime or on a subnational group when we’re acting in concert with our allies. But also by definition it is reducing the frictions.
So those frictions I talked about that we saw over the U.S. withdraw from the Iran deal, well, if we’re mounting a coalition to respond to whatever the threat is— let’s say Russian hacking or Russian interfering in Western elections —then we’re not only going to be more effective, but we’re going to be preserving the credibility of the U.S. use of the tool. And hopefully that contributes to preserving the hegemony that the U.S. dollar and U.S. banking system has enjoyed basically since World War II.
Hon. Nazak Nikakhtar: I wanted to add, if I may, on some really important points that Adam made. I agree that, you know, sanctions, you have to consider them in a fact specific way. Sanctions maybe that work on one country may not work on another and how you fashion them, right? All of these are fact specific. So I would really hope that the administration doesn’t take sort of a one size fits all approach.
But I also think sort of this issue of what else do we have? Part of the reason that we find ourselves resorting to sanctions authorities over and over again is because our international tools fall short. We either don’t have international laws that deal with really important catastrophic things that are happening. Or our trading partners are just defying the international rules or not adhering to the international rules that have been established.
ITIF just came out with a brilliant report about China not adhering to its WTO commitments. Like, duh, we didn’t know that? Of course we did. But at least somebody’s calling it out on it. So then I would actually caution everybody to really start thinking about the great points that Adam made, but also, as you pointed out, extend this further and say what else do we have? Do we need to create new tools? But we don’t -- certainly as he said, we don’t want to overuse one. But then what else? And the what else is something that we should all be thinking about.
Eric J. Kadel: And maybe that leads to an opportunity to talk about new tools. And I think it’s fair to say that in the Trump administration and particularly dealing with the China situation the Trump administration really did look to a whole of government approach and looked to tools beyond sanctions. Some of those tools were employed by the Defense Department and in Congress that through legislation that created new rules for supply chain that applied to government contractors that are subject to the FAR or otherwise providing services to the government.
Other tools were developed, I think it’s far to say, in the Commerce Department with regard to new lists that were created and new sets of export controls. And maybe, Nazak, I can ask you to say a little bit about that and maybe comment on whether you think the Commerce Department under President Biden will utilize those tools, enhance them, and continue to develop them or not.
Hon. Nazak Nikakhtar: Yes, that’s an important question. So I actually think I’m administration agnostic. And in an administration agnostic view, I just don’t think any administration has done enough. I was part of the Trump administration. I certainly don’t think we did enough. We went heavy on the entity listings.
But as everybody knows, it’s easily circumventable; right? You set up a new sort of supply chain scheme, and you can get around this. And so we don’t have great tools, so we’ve got to keep pressing forward.
But what I would encourage everybody to really start thinking about, because we have a lot of really smart people in the audience too, is start marrying up what are some predatory activities by trading partners, whether it’s economic activities, whether it’s sort of military human rights activities, and then marry it up against the tools that we have. And whether they match, think about whether our tools are effect. And where they don’t meet up, just figure out how do we rectify our lack of tools.
And I want to give two pretty extreme examples. One is this overcapacity. So people go oh, my gosh, Trump has imposed 232 tariffs on steel and aluminum and maybe autos, and what’s next? The problem is you have really global -- significant global issues. And in steel in aluminum you have overcapacity. You have that in optical fiber cables -- the pre-form that go into making these cables, which are odd.
The infrastructure of 5G, China is running over capacity, running the Western competitors or other non-Chinese competitors out of the market. The reason it hasn’t decimated U.S. industry is because incidentally we have the 301 tariffs in place to kind of protect what we have here. But you’ve got that.
And I image that once China really ramps up semiconductor production and has a lot of really high tech labs in China, it’s going to engage in overcapacity. Oh, we don’t have WTO rules that deal with overcapacity. So what do we do? Are we always going to resort to 232s?
Well, our allies hate it. We’re really not addressing the problem because the overcapacity is still impacting enterprising prices around the world. So that’s one example where can we please just think outside the box.
The other one is genocide. As everybody’s saying that it’s genocide, genocide’s happing, the genocide convention puts an obligation of countries to do something about it. And nobody’s doing anything about it. So then what’s our -- collectively our and allies’ will to kind of get serious about this? How much are we going to -- this has been going on for well over a decade, what’s been happening in human rights abuses. How much more time do we need to study the problem and get our act together to do something?
So I really think that the Biden administration has inherited a lot of the fact that these important issues have been ignored over time. I think the Trump administration, we tried to start cracking away at this. And now we’ve handed the torch over to the Biden administration to continue. But I think unless collectively as a country, regardless of politics, we address these really significant questions that I’ve posed, at least from my perspective, I don’t think we’re going to make progress.
Eric J. Kadel: Yeah. Thanks for that perspective. I guess one just follow up question. One of the remarks you made in your initial set of responses to the question about China and the meeting this past weekend related to supply chain and potentially some vulnerabilities that we could have due to the fact that we are reliant on China or China controlled materials or territories to produce some very technologically important -- or maybe the better way to say it is materials that are very important to our technology. President Biden did issue an Executive Order regarding supply chain recently and with the goal of having greater production capacity in the United States on many of these materials and areas. But how realistic is that, and how fast can we actually achieve those goals? And is there a role for the Commerce Department in doing that?
Hon. Nazak Nikakhtar: Thank you for that question, too. Let me preface the answer with this. I’m a stakeholder in the Biden administration succeeding because I’m a mom, and I need this country to succeed for my kid. So I don’t really have an opinion on administration. I just need people to step up and help solve the problem.
So with that really important caveat, look, I think the Biden administration went out and said the right thing. We’re going to focus on critical minerals, on semiconductors, API certainly, but also lithium ion batteries and figure out what to do about it. Let me give you an example of how enormously complex this is and really the disconnect between the Hill.
There are literally thousands and thousands and thousands of semiconductor skews that we need. And there’s various types of semiconductors, and all of the different skews enable different things. And it has taken decades for Taiwan to become the powerhouse that it is. It’s taken 10 plus years for China to build up the fab capabilities that it does.
We produce very little semiconductors in the United States. A lot of it is in Taiwan. So realistically with 52 -- $50 billion from the Senate, this isn’t going to happen overnight. If we were really going to not really restore, but if we’re going to grow our semiconductor supply chain— and everybody knows how important semiconductors are for just commercial and military capabilities— this is going to take 10 plus years for us to get all the critical skews that we need and billions and billions and billions of dollar in recurring spending. So let’s not kid ourselves that this is something we can solve overnight. And if we come to terms with the fact that this is a problem that’s going to take probably a decade or more to solve, what do we do in the interim because we are vulnerable?
So that’s sort of the first question. I think in terms of lithium ion batteries, we certainly -- it’s a part of the energy mix. I think we have lead bare. I think we can restore lithium ion batteries in short order. I’d really like people to focus on that as well. I think that could take two to five years for us to be able to build a resilient manufacturing base in the United States.
So I think that’s the easier piece of the puzzle. Semiconductors for all the reasons I said was difficult. And then critical minerals, you know, we can do an Operation Warp Speed on clean processing, clean technology with our allies, develop the technology. But, ah, what do I do with all the mines that China owns around the world?
Well, I wouldn’t mind if the State Department started calling up allies and said, “Hey, you’ve got some ions that we need. China owns them, but if you commit to always exercising the right of eminent domain over those mines, we’ll do some strategic MOUs with you on healthcare vaccine sharing, military defense agreements, things like that, so we can shore up those supply chains.” So some are easy. We should really move forward aggressively on those. Semiconductors is a problem. So as we solve for plan A, we really need to have a plan B because we really need to be honest about how long this will take to I should say grow our supply chains.
But then also I’m a little bit discouraged with the WRO. The administration came out with a WRO about restricting imports of anything that contains silica from the Hoshine Mine. If you actual do all the math, Hoshine accounts for 50 percent of the global silica output. The silica that Hoshine produces goes into both polysilicon for solar products, as well as semiconductors. So if Hoshine really accounts for 50 percent of the global silica output with all these downstream applications, why hasn’t customs gone after any of the imports yet?
So now, I think I’m really left in this position of I like what the administration is saying, but are they actually going to move in a meaningful way? And is Congress going to stop tripping over itself and really get some meaningful proposals in place where we can catalyze the growth of not only semiconductors but really call the government to action on how to deal with the critical mineral vulnerabilities and also the lithium ion battery cell issues as well.
Eric J. Kadel: Great. Thank you, Nazak. One thing as moderator I’ll take the opportunity now to remind the audience that we do have the chat function available for questions. And we have received a few of those from Louis Precatsky (sp). And Adam has graciously answered those in the chat as well. So you may actually receive not only a live answer but a typed answer in the chat if you ask a question.
But, Adam, I’m going to take the opportunity to follow up on one of these questions, and I’m going to ask about the Nord Stream 2 matter and in particular the announcement today -- not that it’s a huge surprise. I think we had all heard inklings of this. But the Senate banking Republicans sending a letter to Secretary Yellen indicating that they will be opposing Bryan Nelson and Elizabeth Rosenberg’s nomination because of the failure to sanction Nord Stream II under Section 228 of CATSA.
I know that this is breaking news, and you may not have fully delved into all of the details of the letter and what’s been going on. But maybe we can take an opportunity of jumping off of Louis’ question and talking a little bit about how we see the Biden administration and the Congress interacting over this administration, at least in the current Senate where you’ve got a 50/50 divide and you may need to deal with the Republicans in a way that isn’t exactly in line with how the administration would be inclined to handle a matter.
Adam J. Szubin: Yeah. Well, I mean, as a general overarching matter -- and this probably won’t surprise the audience given that I was submitted for Senate confirmation. My confirmation was blocked because of political objections from the Senate. My views on this pre-date that.
I really think it’s a poor tool, blocking confirmations. And I say that with the full knowledge that both parties use it and that it goes back generations -- a poor tool because it doesn’t stop the administration from pursuing their announced policy with respect to Nord Stream 2. The U.S. and Germany have come out with a joint statement saying Russia better beware and that any attempts to -- by Russia to use its gas supplies as a cudgel to intimidate, threaten, or to actual cut off gas and punish Eastern European or other European countries will be greeted by a tough Germany and U.S. response and I think we could expect given Germany’s prominence a tough EU response.
So the U.S. and Germany have staked out their position. I don’t think that’s going to change because two nominations are being held. What’s more, the real effect of holding those nominations is Treasury is short staffed at key positions to be able to actually prosecute its financial sanctions campaign against Russia, against China, and against all of these other regimes that the administration is taking on. So I think this tool is not very effective and can be highly counterproductive. That said, it’s also a fact of America political life, so I will move on.
In terms of Nord Stream 2, the Biden administration came in and inherited a pretty tough hand here. The pipeline was 98 percent completed. And to start sanctioning wouldn’t necessarily have impeded those last few hundred miles of pipeline from being laid or the project from coming online. But what they would have done is start the U.S. on a collision course with Germany, Germany being, of course, a key partner that the U.S. needs on a whole range of both national security, economic, climate issues going right down the line.
And so we saw the choices that the Biden administration made. You can agree or disagree with them, but that’s where we are. And I think there really wasn’t much of a choice, I would say, left for them, given the state of the pipeline when they came in.
Eric J. Kadel: And at least according to news reports that I’ve seen it does appear as if the Biden administration was able to get some sort of commitment. I’m not sure how firm a commitment it was but some kind of commitment that in the event that Russia is found to be using energy as a weapon vis a vis Ukraine that there would be some sort of consequence, although I don’t know that that’s been spelled out in any detail.
Adam J. Szubin: Yes, exactly. That’s that joint Germany-U.S. statement that I was reference. And I think you’re right. The details aren’t clear. They’re sort of saying to Russia you better not do this or there’ll be consequences. It could be those consequences have been spelled out quietly behind the scenes to Russia through diplomatic channels. But it is certainly the case that this is farther than Germany’s been willing to ever go with respect to Russia’s, I would say, weaponization of energy and was notable for sort of the strength and clarity of the statement, even if it’s not a detailed statement.
Eric J. Kadel: Yeah. Great. Well, we did have one other question, and it was an interesting one. Maybe, Nazak, if you hadn’t had a chance to take a look at it yet, the question from before was about the capabilities of China. Can China really afford a larger trade conflict with the United States and other western nations as China is heavily dependent on exports?
And Adam’s typed response here was that the dependencies run both ways, that European countries, for example, are highly reliant on the Chinese imports. And I think he could have said similar things about the U.S. and Chinese imports. But in some cases the supply chains can be rerouted and others they can’t. And China is exporting to the world beyond the U.S. and the EU and the UK.
What are your thoughts on the question that Louis posed about this interdependency and actually whether more specifically China can afford a trade conflict with the U.S. and other western nations given its dependence on exports?
Hon. Nazak Nikakhtar: Yeah. I actually was delighted to see the question because it was a really smart question. I think it was Louis something -- B, the last name B who posed it. So I appreciate the question.
So I was listening earlier today to a Yale economist who very correctly pointed out there isn’t one really element of the global supply chain of really pretty much any product that doesn’t touch in some material way on China. And so when you think about it in that context, China really holds the keys to our supply chain. And so with those keys, it actually has the ability to direct how we behave. And so if China -- for example, I really want to go back to our semiconductor and critical mineral vulnerabilities because without those we cannot deploy defense capabilities. Without those, we can’t operate our commercial sectors.
And so if China really credibly threatened to withhold those from us we wouldn’t have any choice but to buy from China what it wanted us to buy or behave in the manner that it wanted us to behave. And that threat is right now. And so we really, really have to figure out how to solve those problems. And like I said, in semiconductors I imagine it’s going to take at a minimum 10 years and billions if not trillions of dollars of spending.
But I actually think that it’s a question that was worth posing. And I think the element of that answer that I really wanted to underscore is that I think China holds more of the cards than we do, not if you just look at the value of the traded goods because then you can say well, you know, we’re dependent; they’re dependent -- but actually the nature of the goods and the nature of the supply chain and then the calculus changes. We’re much more vulnerable, and we’re dependent. And China can exercise that dependency or leverage that dependency to get us to behave in the ways it needs to, again, including buying their goods as much as they want us to.
Eric J. Kadel: Great. Thank you, Nazak. So I’m going to take the opportunity to circle back, Adam, to you, and one thing that you had reserved on earlier in the program following Nazak’s remarks on China was how the Biden administration may take China on on a go-forward basis. And maybe I can turn to you and ask you to elaborate on what you think we might see in the coming months and years.
Adam J. Szubin: Yes, happy to come back to that and thank you. So I think overall you’re going to see a lot of continuity from what we saw under the Trump administration. In particular when I say that, I’m referencing one of Nazak’s comments about drawing on the full toolkit rather than look at CFIUS as its own pipeline where you’ve got CFIUS experts in our government working and reviewing cases and then export controls and then tariffs and then financial sanctions.
I think what you saw under the Trump administration was let’s take a wholistic approach. What are our tools? Where do we have leverage, and where can we get asymmetric advantage? I think that will continue.
I think where you’ll see departure— and I referenced this earlier— is a major effort to be multilateral, not to be America goes it alone when it comes to confronting China. And we’ve already seen that pay some dividends in the EU announcing sanctions with respect to Chinese abuses in Xinjiang as well as the EU calling out hacking behavior and other sort of malicious behavior coming out of China. And then I mentioned this in my kind of topline opening comments but an attempt to be strategic.
And what that means with respect to China is if there are 14 different things that China’s doing that are inherent to the U.S., let’s prioritize. As I’m reading the administration so far, they’re prioritizing human rights, whether that’s the abuses we’re seeing in Xinjiang or the civil rights abuses in Hong Kong. They’re prioritizing aggressive acting, and they’re certainly focusing on Taiwan and any threat to Taiwan, which of course taps into all of Nazak’s comments about semiconductors where you’ve got this global center of excellence in production in Taiwan. Taiwan is a close U.S. ally, but we need to keep it that way.
So that has been, I think, what we’ve seen the administration focus on. What’s getting less attention, well, intellectual property theft, an issue I worked on some when I was in the Obama administration. China is a repeat offender in that lane. But it’s not that I think this team doesn’t care about it or wouldn’t raise it in the proper channels. I think what they’re saying is let’s focus on our leading issues with respect to China and let’s mount concerted leverage when it comes to finding our best tools but also getting this global coalition together.
And I’ve mentioned Europe, and I should add the UK to that. But it’s not just European allies. It’s Australia. It’s South Korea. It’s Japan as well. It’s Canada. So I think that’s where you’ll see departure from kind of a unilateralist approach. And we sort of have yet to see what the dividends will be and if they can pull it off.
Hon. Nazak Nikakhtar: Adam raises good points that always makes me think about points that I want to add, so I want to mention two things. One is— I’ll start with this— the notion that’s held us, I think, back so much and has certainly held Europe back in terms of dealing with China. 2017 some trade lawyers, we did a trip to Europe to talk about China’s nonmarket economy status. And this resounding thing we heard was oh, I need to sell Mercedes. I need to sell blah, blah, blah to China. Okay.
But here’s the thing, right? Sales to China -- the danger in terms of becoming more and more economically dependent on China I think is one thing. But in terms of sort of critical supply chain semiconductors, etc., I would probably posit to say that we shouldn’t necessarily where we’re dealing with critical technologies be building up the supply chain of our adversary -- maybe not adversary 20 years ago, maybe adversary today. We shouldn’t be building up the supply chains of our adversary.
Ah, but when the industries say but I’m going to lose revenue, well, actually shouldn’t we be building up the supply chains of our allies? Shouldn’t we be building, in addition to the United States, semiconductor, lithium ion cell manufacturing plants in maybe Canada and maybe Mexico and South America and European partners? That helps our allies, our neighbors with their economy, and then it creates redundancies in our supply chains with allies rather than maybe a dangerous country. And where you lose revenue from not selling to one country, then you’re able to regain by tying up -- by fortifying your supply chains and your economic dependence with your allies rather than an adversary. That’s the first point.
And then the second point that I wanted to make is that when I was in the government I had asked my team to do an economic analysis. We had all these cool economic modeling tools. This can all be replicated through publicly available data, which is why I feel comfortable saying it. I just wanted to say just notionally, what is the economic impact if we actually just decoupled from China? Goods, services, financial, clothes, etc.
Well, the result was astounding. 1 percent of GDP in the short term, just about five years, and after that it’s positive gains going forward. Ah, but if we actually did this with our allies, with Europe, with Japan, then the economic impact on us collectively is so much less. But then it better integrates our supply chains with our allies.
Well, that’s kind of self-evident; right? And so why aren’t we exploring policies to really build up the supply chains with our allies, to build up the manufacturing capabilities of our allies rather than really racing to a market where the writing is on the wall? If we’re selling Mercedes for example, we will be displaced from the market because our IP is being stolen. And then they will shut Mercedes down like they were trying to shut Tesla down, etc. And then, of course, the dangers of continuing to sell a critical technology to, again, a country that is today an adversary.
Eric J. Kadel: Yeah. Those are great points, Nazak. Thank you very much. There’s one other question that’s come into the Q&A, and it is a little bit out of scope. So I’m going to throw it out to the floor and see if we do have any reactions. I mean, the topic for today was sanctions and trade policy in the Biden administration and where we think that might be headed. But we’ve got an interesting question which is what about the -- and the question says the negative influence of China in Africa and other regions? And how do we address that?
Presumably the questioner means to say by means other than sanctions and trade policy while not also preventing positive economic development. So I take it the question is saying look, maybe there is some good for China to be in Africa because it’s developing those nations, helping address some issues of poverty or other developmental issues that we want to see. But at the same time, maybe there’s some concern that by doing that even though there’s some positive social good there’s also some negative influence effects that China is achieving. I don’t know if you have any thoughts on that question, but I thought I’d pose it to the floor.
Hon. Nazak Nikakhtar: Let me -- if I may, I’ll start only because it follows from what I just recently was saying which is I think we need to be present in Africa in a big way. And I think remember 20, 30 years ago— some of us are old enough to remember— we built up China’s economy by taking our supply chains there and availing ourselves of the lower cost structure, lower manufacturing costs, etc., because it was, quote, developing; right?
Why wouldn’t we replicate that model where countries are really economically hurting and they could really use the benefit of a revamped, regenerated manufacturing base? So just in the same way that we flocked to China for the lower labor items, I think we could be doing that with trusted countries, including African nations. And by virtue of building up their economies, building up their supply chains, again, that point about resiliency in supply chains, redundancy in supply chains with trusted countries, I think a precondition there would be to have mutual agreements that we will always sort of coordinate and act in each other’s best interest so whatever technology capabilities a country acquires won’t be weaponized against us.
But if we can do that, by all means it makes sense to push back on China’s influence by -- and I think African countries are starting to realize that China’s influence comes with a whole bunch of strings attached. And I think generally still in the world the U.S. is viewed as not wanting to acquire other territories in the world. But really it’s still trying to be a fair and honest player. There’s some disputes on maybe our military activities, but I think generally that’s still the perception. And if that’s the case, then why don’t we help build out the economies, again, of our allies, especially when I think the world is waking up to the problems that may come with China’s investment.
Eric J. Kadel: So if I could take the opportunity to characterize that -- and disagree with me if I’m getting it wrong. But it sounds like your response would be -- to the question your response would be well, the way we counteract this is we start doing more of it ourselves. We go to Africa, and we use some of this investment and development work there, just like we did in China 20 or 30 years ago and help. As we try to develop alternatives to the supply chain issues that we’re facing from China and develop alternatives, maybe we look to Africa and other developing countries as alternatives to China.
Hon. Nazak Nikakhtar: Yeah. And I think Adam will have points to this too because I’m going to go off a recent Treasury model. In the last administration the Treasury Department launched this American Crese initiative with Latin America and Caribbean where we were helping those governments sort of improve the regulatory framework so that foreign investment in infrastructure would be incentivized to go there. And so it’s a nice framework that we can replicate through the rest of the world by working with, again, countries that could be our partners.
We had a Prosper Africa initiative and really working with them hand in glove to improve their regulatory framework so that businesses will want to invest there. They’ll gravitate there, and they’ll see it as a transparent, safe environment to invest. And then we could offer incentives for businesses to go there and invest. But I’m sure Adam with his expertise with Treasury would want to weigh in as well.
Adam J. Szubin: I agree with everything that Nazak is observing. I would say the roadblock here is appropriations. I mean, I think when you talk to national security experts, when you talk to people like Nazak and to me who have been in these seats, they often say the exact same thing. We need to be there. These countries in Africa and Latin America aren’t eager necessarily for China to have such a foothold in their ports, in their telecommunication industry. They’ve all heard horror stories about getting into debt with China and what happens then, as well as concerns about quality of Chinese goods.
So they’re going into this with a lot of concern, but what is their alternative? The U.S. is not showing up in anything like the numbers that China is when it comes to development assistance. And that comes back to Congress.
Congress knows that development assistance can be unpopular politically when it comes to the voters. And so our level of development assistance are pretty low, certainly very low compared to what China’s willing to spend. And so there is no competition.
I agree with all the strengths that Nazak talked about that the U.S. offers. I think countries would love to have U.S. investment, but it’s just been a brick wall when it comes to getting that foreign assistance, development assistance appropriated.
Eric J. Kadel: Great. Well, thank you. So we don’t have any additional questions. We don’t have much time left on our schedule, so maybe I’ll just ask if there’s any concluding remarks from either Adam or Nazak before we wrap up. And if any last questions come in, I will certainly flag those, and we’ll answer them on the 30 second rule, the sort of lightening round type questions.
Hon. Nazak Nikakhtar: Well, I’ll just make a quick closing remark which is we’re all stakeholders in this country, and those of us who are parents are invested in the next generation and the safety of the kids in the next generation. And so the problems we’ve discussed today are so enormously complex that I don’t think we should just wait for a select few to try to solve them. I really think this world needs thinkers who are thinking outside the box from all of the different angles. And so everybody who has a stake and who has an idea I think should be writing op eds and writing things on LinkedIn or whatever social media platform, putting forward what they perceive might be credible solutions because you just don’t know when somebody in the administration is going to get an idea from.
And there’s probably a lot of good idea, and those ideas need to really come to the surface because as we just talked about today, these problems are enormously complex. And we need to move from admiring the problem to solving them. And I think solving is where everybody is going to have a really important voice and important perspectives that they need to bring forward to the public.
Adam J. Szubin: I agree with what Nazak just said. My closing thoughts are in a little bit of a different direction. But I would say the audience -- and we all should be realistic about what the economic toolkit, the topic for today, can yield in terms of changing the behavior of other countries, especially when we’re talking about changing China’s conduct over, let’s say, Xinjiang or Hong Kong, two issues that China very clearly views as its own domestic security issues. I think regardless of how this toolkit is used over the next few years China’s going to continue to do what it’s been doing regardless of who’s in the White House, regardless of who’s in Congress, regardless of what sanctions we pass.
So then what’s the point of all this? I think there is a point. I think that if we can get a multilateral group of countries to say X behavior by China is outside the bounds of acceptable behavior -- and sanctions can be a concrete way of demonstrating that. And what we’re doing is really shaping the international environment and bringing norms or strengthening norms and saying China needs to abide by those norms. Until it’s willing to do so, it pays certain penalties. It sits outside the international community.
So I think that’s, you know, both a kind of measured or more modest observation about the benefits that sanctions can yield. But I also am not at all dismissive of those benefits. I think that’s quite real, and I think that those norms need to be very, very clear.
Eric J. Kadel: All right. Well, on behalf of The Federalist Society let me thank both of our speakers today, Adam Szubin and Nazak Nikakhtar. And Guy, let me turn it back to you for any sort of wrap up. And thank you again to all of you who sat with us for the hour, and I hope you enjoyed it.
Guy DeSanctis: Thank you. Yeah. On behalf of The Federalist Society I want to thank our experts for the benefit of their valuable time and expertise today, and I want to thank our audience for joining and participating. We also welcome listener feedback by email at email@example.com. As always, keep an eye on our website and your emails for announcements about upcoming teleforum calls and virtual events. Thank you all for joining us today. We are adjourned.
Dean Reuter: Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.