Joe Biden’s administration is being confronted with tough decisions about the technology cold war with China that took off under his predecessor. A lawsuit brought by Xiaomi Corp. presents a catalyst that his team could use to craft a new strategy that’s more effective and pragmatic for the U.S. and allies and businesses in Asia.
Xiaomi, which makes electronic gadgets including smartphones, is among dozens of names added to the various lists of sanctioned Chinese firms that grew under Donald Trump. Its offense: being among “Communist Chinese military companies,” a term defined by the Defense Department as it sees fit.
Within days of the new president taking office, Xiaomi filed a lawsuit against Defense and the Treasury Department, alleging the move was unconstitutional.
Penalties for being on these lists — compiled by departments including Defense, Treasury, State and Commerce — include not being allowed to do business in the U.S., getting cut off from technology, having shares delisted from exchanges, or a ban on U.S. companies from owning a stake. The most ham-fisted was an attempt to force a sale of streaming service TikTok’s American businesses — a transaction that was never likely to happen. (And didn’t.)
The Xiaomi lawsuit — possibly the first of many — could be the perfect chance to bring clarity to the issue of national security threats and bolster U.S. policies aimed at reining in an increasingly expansionist China led by Xi Jinping. Political and business leaders in Asia, while generally supportive of a tougher line, would still welcome a more refined approach that makes clear what is and isn’t allowed, and why. From my discussions with people concerned about this relationship, any ambiguities involved in dealing with a Chinese entity that might fall afoul of Washington causes uncertainty, even among allies.
For an example of the ripple effect, one need only look at the sudden and arbitrarily enforced ban on Taiwan Semiconductor Manufacturing Co. from supplying chips to Huawei Technologies Co., the most prominent target of U.S. ire. With a halt in shipments looming last September, the Chinese telecoms equipment supplier put in a raft of orders to TSMC in an attempt to build up inventory, which meant the chip foundry pushing back some production of components used in phones and games consoles.
And since automakers were especially slow in planning their needs, chips used in vehicles went to the back of the line. One result is that global car manufacturers, including General Motors Co., are complaining that a shortage will impact vehicle output this year. The supply constraint can’t be blamed entirely on the Huawei sanctions, but was exacerbated by it.
Instead of merely banning a company for working with the Chinese military, U.S. interests may be better served by honing in on those with crucial technology that Beijing truly needs, such as semiconductor-design software or advanced materials technology. Washington should also scrutinize firms that offer products or services deployed to assist in human rights violations, another plank in U.S. foreign policy.
Take Xiaomi. It may be that the Shenzhen-based company provides equipment and services used by the People’s Liberation Army. But many products can have a military purpose — at a stretch, even a bag of rice that feeds a platoon. One implication of this blacklist may be to ban U.S. entities from investing in Hong Kong-listed Xiaomi. That would be an annoyance for all involved, but it won’t hobble the company — only U.S. fund managers faced with fewer opportunities.
The Defense Department’s strategy in building its list is “to counter the People’s Republic of China’s Military-Civil Fusion development strategy.” A targeted approach would be more effective and appear less arbitrary. If Xiaomi truly provides a specific service or infrastructure that helps Chinese military development, then the U.S. should say so and focus on that.
Shining a light on precise breaches would not only bring transparency and clarity, but offer companies a choice of continuing down that path or staying in Washington’s good graces. A blanket accusation merely forces alleged offenders deeper into the sphere of the Chinese military. That would be self-defeating for the U.S.
Being more focused still means that many existing bans would stay in place. Huawei is unlikely to receive a reprieve given the multiple layers of threat the telecommunications supplier is deemed to pose to U.S. interests. ZTE Corp., which offers a similar product catalog, probably won’t escape, either.
Gina Raimondo, Biden’s pick for commerce secretary, seems ready to continue the hawkish tone set under Trump. She told senators at her confirmation hearing that she’d “use the bold toolkit at my disposal to the fullest extent possible to protect Americans and our network from Chinese interference or any kind of backdoor influence,” including from Huawei and ZTE.
Yet there are dozens of other companies that ought to be let off with a warning. TikTok is one. It’s likely true that the app collects reams of data on American consumers (as do Facebook Inc., Alphabet Inc. and Apple Inc.) and claims by owner ByteDance Ltd. that there’s a wall between its U.S. service and China operations ring hollow. Robust and rigorously enforced data protection laws would ameliorate the problem. An attempt to prohibit Tencent Holdings Ltd.’s WeChat service looks similarly misguided and counter-productive.
It may be warranted to crack down on Chinese companies that help build military bases in disputed waters or continue the repression of the Uighur minority. But a ban on selling a phone to a soldier or providing an app that lets kids dance and lip-sync to Childish Gambino may be a stretch.
By differentiating and clarifying the threats, Biden’s continuation of the tech cold war can have more impact and substance than the one waged by the previous commander in chief.
The initial law allowing for this determination was passed more than 20 years ago, but largely lay dormant until recently.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Patrick McDowell at email@example.com