Why strategic industry policy against China could be Biden’s major legacy

The Biden administration has struck another blow at Chinese manufacturing, announcing yesterday that severe restrictions would be imposed to prevent the export of computer chips to China, and to limit the capacity of companies outside America that use US technology to sell to China.

It represents a significant ramping up of longer-term controls designed to limit Chinese access to advanced semiconductors. The new rules will also restrict massive subsidies recently announced by the Biden administration to companies that do not manufacture chips in China.

China has long struggled to escape its reliance on foreign manufacturing of advanced computer chips, but its expensive efforts to catch up with the West and Taiwan have so far failed. This year one of the key companies in China’s chip-production plans, Tsinghua Unigroup, had to be bailed out by the government after facing bankruptcy.

The Chinese regime has also cracked down on the sector in an effort to establish why it has so far failed to recover ground with the West. Biden’s new restrictions will put further pressure on China’s efforts and its ability to manufacture complex armaments.

At the same time as the new restrictions were being announced, Biden was welcoming a US$20 billion investment by IBM in chip manufacturing in Poughkeepsie, New York. Other chip manufacturers have also announced investment plans, all using tens of billions in subsidies announced by Biden as part of the CHIPS Act which, along with the Inflation Reduction Act (IRA), represents Biden’s signature economic policies centred on high-tech manufacturing and renewables.

Money available under the IRA is also tied to US strategic goals: renewables technology manufacturing qualifies for subsidies as it uses minerals, like lithium, sourced from either the US or from countries with a free trade agreement with the US (which includes Australia). Chinese-manufactured technology won’t qualify for IRA subsidies.

These are policies that come with price tags in the tens of billions of dollars, but are justified by the US on the basis of strategic rivalry with China, curbing any technological relationship or supply chain reliance on China, and onshoring high-end manufacturing. The Trump administration tried to pursue similar policy goals, but did so using even clumsier tools like tariffs on Chinese goods that made American consumers pay more.

America has long used defence spending as a form of industry policy, pumping trillions into domestic manufacturing of weaponry. Advanced semiconductors occupy a border area of defence policy, given they are required for combat and transport systems and most weapons above the level of a rifle. But China’s inability to match Western advances in chip production has created a strategic opportunity for the US that perfectly suits American politicians’ domestic interests.

And it’s happened at a time when the core philosophies of manufacturing in developed countries — long, complex global supply chains, and just-in-time delivery — have been replaced by the pursuit of resilient supplies and “strategic” or “sovereign” production capability. Out with globalisation, in with onshoring.

The result is Biden gets to preside over the growth of high-end manufacturing in the US while crimping Chinese technological ambitions — all thanks to American taxpayers.