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The Commerce Department Clips Russian And Chinese Wings

President Kagame and President Xi Jinping of China Joint Press Conference | Kigali, 23 July 2018
President Kagame and President Xi Jinping of China Joint Press Conference | Kigali, 23 July 2018

Long considered a Beltway backwater, the Commerce Department has become one of the central stages of national security policymaking. Not coincidentally, the Department’s growing clout has tracked with lawmakers’ changing views about an aggressive, authoritarian China that is growing in power. 

Foreign or Domestic

The Trump administration’s use of export controls awakened many to the way America’s technological leadership, and the global nature of supply chains, provides the United States with the ability to keep certain countries and companies from acquiring critical technologies, such as semiconductors. These technologies are the foundation of nearly every conceivable commercial and military innovation. As such, the Commerce Department’s efforts to regulate who can access them are moving to the center of U.S. national security policy.

In 2019, the Commerce Department placed Huawei — China’s 5G champion — on its Entity List, a once-obscure regulatory move in which export controls are leveled at specific companies. The action caught the attention of Washington’s national security community for reasons that had to do with more than Huawei itself.

The surprise was that the Commerce Department essentially made the export control on Huawei extraterritorial. Not only were U.S. companies prohibited from selling products to Huawei that could advance the Chinese company’s 5G business, but foreign companies were compelled by U.S. law to cut ties with Huawei as well.

The Commerce Department did this by using what is called the Foreign Direct Product Rule, or FDPR. This rule treats foreign-made products that have U.S. content in them as if they were made in America and thus subject to U.S. law.

Thanks to the success of the FDPR in crippling Huawei’s 5G business, export controls are increasingly viewed in Washington as a primary tool in national security policy. When Russia invaded Ukraine, the Commerce Department swiftly imposed controls on all dual-use technology exports going to Russia, ranging from critical aerospace parts to semiconductors to telecommunications networking equipment. At the heart of the sanctions was the FDPR. 

These controls have already impacted the battlefield, with Russia leaning on the North Koreans and Iranians for key technology needed to continue its war. Like poison that accumulates over time, the effect of these controls will compound the longer that they are in place.

Big Impact, Real Risk

The Biden administration has increased the frequency and scope of export controls towards China. Credit here is owed to Commerce Secretary Gina Raimondo, as well as Under Secretary Alan Estevez, who leads the department’s export control operation, the Bureau of Industry and Security (BIS).

More than 150 Chinese companies and organizations have been added to BIS’ Entity List over the past two years. More significantly, the Commerce Department imposed significant semiconductor export controls on China last October, an action that will have lasting consequences.

Given that the preponderance of leading semiconductor companies are American or located in democracies allied to the United States, the October export controls will impact China’s aspirations to create an indigenous semiconductor manufacturing base. The Commerce Department’s use of the FDPR enhances the regulations’ potency. 

However, the Commerce Department’s use of export controls is not without risk. Repeated use of the FDPR incentivizes companies to manufacture outside the United States and reduce the amount of American content in their supply chains. Furthermore, controls imposed by the United States alone will be of little benefit if their target can simply buy the item from a non-American source.

Such unilateral controls unfairly harm U.S. companies by allowing their competitors to take market share. Under Secretary Estevez has repeatedly acknowledged the risk of poorly implemented export controls and expressed a preference for using export controls in coordination with other countries.

Using Industrial Policy

With the Commerce Department’s announcement that it would begin accepting applications for $52 billion in semiconductor subsidies that Congress approved last year as part of the bipartisan CHIPS Act, the department’s weight as a major player in American national security is growing.

Commerce Secretary Raimondo says the CHIPS Act is “a historic opportunity to unleash the next generation of American innovation, protect our national security, and preserve our global economic competitiveness. The CHIPS Act is intended to dramatically grow the United States’ manufacturing base for semiconductors.” Prominent companies like Lockheed Martin and GlobalFoundries have already begun efforts to secure domestic supply chains for semiconductor manufacturing. 

There is a significant risk that the program fails to achieve its goals, because industrial policy is not something the United States does often or particularly well. But few can deny the CHIPS Act has the potential to reshape global semiconductor supply chains for decades to come.

Combined with the power that BIS already wields to oversee the United States’ dual-use export control regime, the Commerce Department is emerging as a consequential national security player.  

Merrick Carey is Chief Executive Officer and founder of the Lexington Institute, a public policy think tank in Arlington, Virginia.

Written By

Merrick Carey is Chief Executive Officer and founder of the Lexington Institute, a public policy think tank in Arlington, Virginia.