Former US Official: US Should Respond to New China Export Controls With More Chip Curbs

Chris McGuire, former deputy senior director for technology and national security with the Biden administration’s National Security Council, said the U.S. must respond to the new Chinese controls to show that it’s not ceding “escalation dominance” to Beijing. Earlier this year, Trump administration officials agreed to loosen certain controls as China threatened to withhold exports of crucial rare earths and magnets (see 2506270009).

“It’s incumbent on the United States to show that they not only have tools to respond, but they’re also willing to use them,” McGuire said on the China Talk podcast last week. “Our lack of willingness to respond forcefully to some of this stuff before is why we’re in the situation we’re in, where the Chinese feel empowered to ratchet back up on rare earths.”

The new Chinese restrictions are similar to licensing requirements under the Bureau of Industry and Security's powerful Foreign Direct Product rule, which places export license restrictions on certain foreign-made items that are made with certain U.S.-origin software or technology (see 2410210042).

McGuire noted that the new Chinese rules impose licensing requirements on overseas exports of 14-nanometer or below logic chips made with certain Chinese rare earths, among other exports. The U.S. should mirror the new Chinese controls by requiring a U.S. export license to ship any 14-nanometer chip to China, he said, adding that would have a “pretty dramatic impact” on the Chinese economy.

“That means no iPhones, no computers -- and not just those chips, but any products containing those chips,” McGuire said. “It’s not to say that all those would be banned, but the U.S. would be saying, ‘Hey, we need a license,’ just as the Chinese are saying they need a license. That’s actually a pretty tit-for-tat move, but it’s a pretty high pain point on the Chinese economy. That would have big ripple effects.”

McGuire said the U.S. could escalate even further if China retaliates to those new controls, including potentially through financial sanctions on banks. “Even expanding the space a little broader than just semiconductors, there are places where we … overestimate the amount of pain that the Chinese would be willing to tolerate,” he said. “It actually might be more painful [on China] than people think.”

But he said starting with new chip controls would be the most reasonable response from the U.S., partly because those restrictions would be viewed as an “equivalent” measure to those announced by China. The Trump administration wouldn’t be “expanding the box that much,” McGuire said. “If they’re going to be targeting the advanced chip sector, then you respond with reciprocal measures. Then any move that targets things outside of that means the other side is escalating, not you. It’s actually pretty easy to justify as a reciprocal move.”

He added that if China is “going to require a license, we’re going to require a license. But that license requirement would potentially pose more pain on the Chinese side than on the U.S. side.”

Chris Miller, a nonresident senior fellow at the American Enterprise Institute think tank, said he’s less sure new U.S. controls on more mature logic chips are the right response. That could hurt the U.S. by “implicating smartphone supply chains and much else,” he said on the podcast. I wonder whether the U.S. eventually says, ‘Actually, we’re better off retaliating or threatening retaliation in a sphere that’s not in manufacturing supply chains -- it’s in a political or military or financial domain.’”

McGuire also said the two sides could get to a place where no new controls are implemented before the new Chinese measures take effect Dec. 1. If the U.S. chooses to have its retaliatory chips controls also take effect Dec. 1, “it’s very likely that we get to December 1 and both of those go away,” he said. “It’s pretty similar to the massive tariff escalation that never actually went into effect.”

Miller said China’s Dec. 1 effective date shows its rules are “clearly intended to be a move in advance” of trade negotiations. “The question is, does the U.S. have a countermove that’s credible?”

Jordan Schneider, a Center for a New American Security technology and national security researcher who hosts the podcast, said that even if the new Chinese rules get “negotiated out” during trade talks, the fact that they were even considered should “wake a lot of folks inside Washington and in the broader financial startup investment community to the reality that this is a need that is going to come back at some point.” McGuire agreed, saying it’s “really funny” that China is “literally mirroring” parts of the Export Administration Regulations that outline its de minimis and foreign direct product rule restrictions.

Beijing is “obviously reading” U.S. regulations “really closely and then just putting them back on us,” he said. “Credit to them -- we spend all the time thinking about it, and then they’re fast followers on the same thing.”

Both Miller and McGuire also questioned how Beijing will enforce the new controls overseas. They were asked whether China’s Ministry of Commerce will begin sending export compliance officers to Indonesia and other countries in the region to check that the controls aren’t being violated, similar to how the Bureau of Industry and Security performs end-use checks.

McGuire said he can’t envision China being allowed, for example, to send a government official to inspect TSMC’s facility in Taiwan. “I don’t think that would go over too well,” he said.

Instead, Beijing could conclude that TSMC is “clearly violating” its rules because the company needs Chinese rare earths to produce chips, but McGuire said it’s unclear how China would penalize TSMC.

“What’s the leverage that they have over those companies?” he said. “Are they going to say, ‘Sorry, TSMC, your products are no longer welcome in China?’ I don’t really think so. That’s a very empty threat, and obviously, that would cause more pain.”

Miller also said it’s “really unclear how strong of a position China has here,” partly because companies will likely try to evade the new rules by sourcing them “secretly in ways that China can’t detect.” McGuire said there are “big questions about the practical reality and enforcement -- whether they can actually enforce this, whether they intend to, and what their ability is to actually get firms to comply.”