In One Sentence

• The Chinese embassy in the U.S. said that China opposes using “competition” to define the China-U.S. relationship, arguing that “going all-out to ‘compete and win’” is “detrimental on both sides.”
• Members of the U.S. House Select Committee on China have called for a number of measures to further tighten restrictions on U.S. outbound investment in China. 
• The U.S. Trade Representative has extended two exclusion processes related to Section 301 tariffs on Chinese goods to allow for “further consideration” on whether to extend the Section 301 tariffs in general. 
• Responding to Huawei’s release of a new smartphone model, a number of Republican lawmakers have questioned the effectiveness of the Biden administration’s technology restrictions and called for tighter implementation of sanctions.

Mark the Essentials

• Noting the “transformative impact” of generative artificial intelligence (AI) on “free expression and economic opportunities,” a coalition of global think tanks are calling on “democratic countries” to commit to “free and open” AI and to avoid restrictions on the export of AI models and training data “beyond those necessary for legitimate security concerns.” At the same time, senior U.S. and EU officials have also highlighted the need to address the risks and benefits of AI and to “join forces” with allies and partners to coordinate AI policy through transatlantic partnerships or at the G7. 
• In a report released on September 11, the U.S.-based Information Technology and Innovation Foundation (ITIF) argued for an expansion of the Information Technology Agreement (ITA) under the World Trade Organization framework. According to ITIF, if ITA-III further liberalizes global trade in leading and emerging technologies such as 3D printers, industrial robots, commercial-use drones, lithium-ion batteries and solar cells, the change could boost the global economy by $766 billion and grow U.S. GDP by $208 billion over the next decade. 
• The latest model of Huawei’s smartphone, Mate 60 Pro, is believed to contain a chip that supports 5G functions and is manufactured by China’s Semiconductor Manufacturing International Corporation (SMIC) under a 7 nanometer process. The breakthrough has sparked calls for even tighter export controls on China so as to prevent SMIC and Huawei from being able to design, manufacture and utilize advanced chips. Huawei is reportedly planning to launch a 5G version of its mid-ranged model Nova in October or November. 
• The Office of the U.S. Trade Representative has also extended the deadline for public comments to help inform the administration’s development of an “inclusive” “trade and investment policy” that would “expand the benefits of trade to underserved and marginalized communities in the United States and trading partners that share concerns about rising inequality.”

Keeping an Eye On…

• On August 17, 2020, the Commerce Department’s Bureau of Industry and Security (BIS) kneecapped Huawei—or so it thought—by extending its draconian foreign direct product (FDP) rule to the firm. Any ‘essential’ U.S. technology embodied in equipment related to any production stage of a Huawei product—even if that equipment was sold to Huawei by a foreign manufacturer—was to be denied to the firm. At that time, Huawei’s CFO Wanzhou Meng was also facing U.S. Justice Department-initiated bank fraud charges and detained in Canadian custody. Fast forward three years later and HiSilicon, Huawei’s in-house chip design unit, has designed an advanced chip for one of Huawei’s topline smartphones that features central processing units and graphics processing units that are indigenously designed or adapted from Arm’s chip architecture. Apple, too, had polished its edge by building on Arm’s architecture for its iPhone and Macs. China’s Semiconductor Manufacturing International Corporation (SMIC), the chip’s fabricator and Huawei’s compatriot in BIS’ Entity List, has meanwhile replicated the chip’s miniaturization at the 7-nanometer node, which effectively is also Intel’s best process technology in the marketplace today (Intel is due to release a 4nm chip later this year). And as for Wanzhou Meng, her indictment was dismissed with prejudice in December 2022, meaning it cannot be brought again by the Justice Department (she admitted to making false statements only). Clearly, matters have transpired in ways not entirely foreseen, much less desired, by the United States. Washington was forewarned that choking China’s access to advanced chip technology would force China to get off the lazy path of purchasing these technologies off-the-top-shelf at a premium and incentivize it to recreate them in-house; even if they were recreated a technological generation or two behind. This is, in fact, what has come to pass. Huawei has essentially leapfrogged the export controls by replicating and replacing in-house or in-country the most vulnerable aspects that were the subject of the controls. And in the process, it has ‘designed out’ multi-billion dollars’ worth of U.S. inputs as well as future license payments. The United States and other select countries continue to remain major players for China’s semiconductor ecosystem, be it in terms of key gasses, chemicals, or chip producing tools which are sold as licensed exceptions to Chinese end-users. Going forward, the dilemma for policymakers in the United States and select Western countries is therefore this: do they wish to enable their manufacturers to hold on to the handsome profits that they earn in the Chinese market for a few more years before their Chinese counterparts reinvent these inputs and tools in-country (which they will over time with unremitting government backing)? Or do they wish to kiss goodbye to the fat bottom lines enjoyed by these manufacturers tomorrow by denying their license applications to sell into the Chinese market—in a bid to temporarily steepen the learning curve for the Chinese. In retrospect, keeping China’s technology incubation ecosystem lazy by providing top-shelf technologies at a premium  (except those clearly intended for military end uses), might have been the smartest way forward. When Huawei builds the computing backbone for China’s AI companies during this “decisive decade,” as described by National Security Advisor Jake Sullivan, ahead, future administrations will come to rue the Trump and Biden administrations’ punitive technology denial actions against the company and the incarceration of its top executive under flimsy pretexts.

Expanded Reading

• China’s Huawei set to re-enter mid-range 5G phone market -report, Reuters, September 19, 2023
• Huawei’s chip breakthrough poses new threat to Apple in China — and questions for Washington, CNBC, September 19, 2023
• Rubio Calls for Tougher Sanctions on Huawei, Office of U.S. Senator for Florida Marco Rubio, September 14, 2023
• A Global Declaration on Free and Open AI, Information Technology & Innovation Foundation, September 13, 2023
• NYC FIELD HEARING: Systemic Risk: The Chinese Communist Party’s Threat to U.S. Financial Stability, The Select Committee on the CCP, September 12, 2023 [Video]
• How Expanding the Information Technology Agreement to an “ITA-3” Would Bolster Nations’ Economic Growth, Information Technology & Innovation Foundation, September 11, 2023
• China: Competition should not define relationship with the U.S., Inside U.S. Trade, September 6, 2023 [Paywall]