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Joe Biden’s Chinese tech sanctions risk backfiring

Biden's banning of US investment into China suggests an attempt to hobble its economic progress. Credit: Getty

August 11, 2023 - 4:15pm

This week, Joe Biden’s hawkish China policy went a step further. According to a new executive order, the administration will ban US investment into China’s quantum computing, advanced chips and artificial intelligence sectors as part of its plans to prevent the country from accessing American technology.

At a minimum, Biden’s actions imply containment. More ominously, they suggest an increasingly aggressive attempt to isolate China and to hobble its economic progress. That might buy Washington time to protect its industry advantages, but the downstream effects of such an approach could be deleterious. Indeed, there are increasing signs of China’s own economic weakness, with the economy slipping into deflation and consumer prices falling for the first time in more than two years amid weakening demand

China may be a “strategic competitor”, but it is also an increasing source of global demand, so a recession in China will have serious consequences for the entire global economy. If that recession is accompanied by a Chinese banking crisis, that too would have knock-on effects globally, something that should also concern the US, given its own recent banking crisis.

While hawks on both sides of the aisle may laud Biden for prioritising national security considerations over untrammelled foreign investment flows, these are not the actions of a confident superpower. There is nothing wrong with the President’s efforts to re-shore, but Washington needs a well-designed industrial policy that focuses on the creation of quality private sector jobs capable of profitably supporting workers with solid middle-class incomes. These must be accompanied by social policies on immigration, environmentalism and trade that do not simply treat worker displacement as an unfortunate by-product (“negative externality” in econ-speak), cast on the scrap heap of “progress”. 

By the same token, workers should not be viewed as “deplorables” if and when they understandably object to disproportionately bearing the restructuring costs as the economy moves toward greater environmental sustainability. De-growth is an indulgence for the rich, not a solution for working class Americans, let alone a formidable competitor across the Pacific, now struggling with deflation and higher unemployment.

As far as alliance-building to counter China goes, a country at “war” needs a strategy, and the US cannot win a new great-power contest by itself. Although Washington would appear to have natural allies in Europe and the other developed democracies around the world, the corrosion of America’s own democracy, along with an economic nationalism that works against Europe’s own interests, undermines the prospects of a stable alliance of democracies. 

Far from supporting “friendshoring”, America’s Inflation Reduction Act puts Washington in direct competition with Brussels. And if we do get a recession, that “every man for itself” mentality could well overcome the stated strategic goal of a united Western liberal democratic alliance.

For now, recession appears unlikely in the US, largely because the interest rate tool used to slow down economic activity (and hence inflation) is diffuse: for every borrower hurt by rising rates, there are savers who benefit from the additional income derived from said higher rates. That paradox could well encourage the US Federal Reserve to raise rates further, which will increase costs for businesses (which they in turn will try to pass on to consumers), and discourage the domestic investment required to engender more reshoring as part of a new industrial policy.

The once dominant view that Beijing would over time become more democratic and therefore follow a model like South Korea or Taiwan now appears quaint. But even as the awareness that China’s geopolitical interests are dramatically diverging from the West have grown, policies in both Washington and Beijing are exacerbating conflict rather than alleviating it. 


Marshall Auerback is a market commentator and a research associate for the Levy Institute at Bard College.

Mauerback

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Billy Bob
Billy Bob
11 months ago

I’m no fan of Biden but I fail to understand the criticism towards his approach to China. The Chinese have been stealing intellectual property for years now, and have made themselves a potential rival to the States by undercutting foreign manufacturing thanks to heavy government subsidies.
Whilst attempting to isolate the Chinese may well cause some short term pain and economic disruption, allowing them to continue doing what they have been doing up until now would surely be far worse

Will K
Will K
11 months ago
Reply to  Billy Bob

I believe Mr Biden’s antagonistic actions will just make relations worse. They don’t appear to solve any of the supposed problems you mention.

Last edited 11 months ago by Will K
Will K
Will K
11 months ago
Reply to  Billy Bob

I believe Mr Biden’s antagonistic actions will just make relations worse. They don’t appear to solve any of the supposed problems you mention.

Last edited 11 months ago by Will K
Billy Bob
Billy Bob
11 months ago

I’m no fan of Biden but I fail to understand the criticism towards his approach to China. The Chinese have been stealing intellectual property for years now, and have made themselves a potential rival to the States by undercutting foreign manufacturing thanks to heavy government subsidies.
Whilst attempting to isolate the Chinese may well cause some short term pain and economic disruption, allowing them to continue doing what they have been doing up until now would surely be far worse

J Bryant
J Bryant
11 months ago

I agree with everything in this article, but my question is what do we do about China? It is unquestionably an enemy superpower; they no longer pretend to be otherwise. We have to push back meaningfully (and should have done so twenty years ago).
What economic policies will push back on Beijing’s expansionism without tipping the world into global recession? Perhaps the author will write an article on that question.

Steve Jolly
Steve Jolly
11 months ago
Reply to  J Bryant

Indeed. Reading the article I was asking myself well then what’s the alternative? When we had unrestricted free trade and investment with China, they used it to steal technology, manipulate their currency, flood markets to push out competition, and exert their political influence on the private markets and media of other countries. Everything that is happening is a reaction to what the Chinese were doing. Nobody picked this particular fight and in fact the US and others put up with China’s bad behavior far longer than was probably wise. The response, however belated it is, had to come at some point. Will partial economic decoupling and a full tech split be costly? Yes, it absolutely will cost a lot. Could it cause a recession? Definitely? Defeating the Nazis cost a lot too and forced America to ration a lot of things for several years. The Cold War arms race cost a lot and forced us to basically cordon off half the world. War is expensive. When has that ever not been the case? Spending money and enduring economic hardship to constrain a Chinese state that has gone farther down the road of dystopian totalitarianism than any in history is not something we do because we want to. It’s something we don’t want to do but feel we must because of the threat from the other side.

Steve Jolly
Steve Jolly
11 months ago
Reply to  J Bryant

Indeed. Reading the article I was asking myself well then what’s the alternative? When we had unrestricted free trade and investment with China, they used it to steal technology, manipulate their currency, flood markets to push out competition, and exert their political influence on the private markets and media of other countries. Everything that is happening is a reaction to what the Chinese were doing. Nobody picked this particular fight and in fact the US and others put up with China’s bad behavior far longer than was probably wise. The response, however belated it is, had to come at some point. Will partial economic decoupling and a full tech split be costly? Yes, it absolutely will cost a lot. Could it cause a recession? Definitely? Defeating the Nazis cost a lot too and forced America to ration a lot of things for several years. The Cold War arms race cost a lot and forced us to basically cordon off half the world. War is expensive. When has that ever not been the case? Spending money and enduring economic hardship to constrain a Chinese state that has gone farther down the road of dystopian totalitarianism than any in history is not something we do because we want to. It’s something we don’t want to do but feel we must because of the threat from the other side.

J Bryant
J Bryant
11 months ago

I agree with everything in this article, but my question is what do we do about China? It is unquestionably an enemy superpower; they no longer pretend to be otherwise. We have to push back meaningfully (and should have done so twenty years ago).
What economic policies will push back on Beijing’s expansionism without tipping the world into global recession? Perhaps the author will write an article on that question.

Jim Veenbaas
Jim Veenbaas
11 months ago

I agree with much of what the author states here. The Inflation Reduction Act is a sinkhole of wasted govt spending that will result in a bunch of failed renewables businesses that won’t create lasting jobs. It’s also a financial assault on friendly countries that can’t afford to compete with the ridiculous subsidies splashed around by Washington. Canada is spending $25 billion to bring in a couple battery manufacturers because our intellectually-compromised PM thought it was necessary to match subsidies from the US.

However, chip manufacturing is different IMO because it’s a strategically vital industry. China and Taiwan have a stranglehold on the production of chips and the US needs a secure source of supply. I’m not sure if the Biden approach is the best way to do it, but they need to do something.

Jim Veenbaas
Jim Veenbaas
11 months ago

I agree with much of what the author states here. The Inflation Reduction Act is a sinkhole of wasted govt spending that will result in a bunch of failed renewables businesses that won’t create lasting jobs. It’s also a financial assault on friendly countries that can’t afford to compete with the ridiculous subsidies splashed around by Washington. Canada is spending $25 billion to bring in a couple battery manufacturers because our intellectually-compromised PM thought it was necessary to match subsidies from the US.

However, chip manufacturing is different IMO because it’s a strategically vital industry. China and Taiwan have a stranglehold on the production of chips and the US needs a secure source of supply. I’m not sure if the Biden approach is the best way to do it, but they need to do something.

Gerald Arcuri
Gerald Arcuri
11 months ago

This article has a needlessly wordy title. I would edit it to read: “Joe Biden is backfiring”.

Gerald Arcuri
Gerald Arcuri
11 months ago

This article has a needlessly wordy title. I would edit it to read: “Joe Biden is backfiring”.

Max Price
Max Price
11 months ago

I think Biden has been very good on China.

Terry M
Terry M
11 months ago
Reply to  Max Price

You think he earned the million$ they gave him? I do.

Terry M
Terry M
11 months ago
Reply to  Max Price

You think he earned the million$ they gave him? I do.

Max Price
Max Price
11 months ago

I think Biden has been very good on China.