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Businesses caught in the crosshairs amid U.S., China tensions

As the U.S. and China continue to target each other with restrictive export controls, businesses are caught in the middle of an increasingly tense conflict.

As the U.S. and China continue engaging in restrictive trade measures against each other, tech companies are walking a tightrope between the two markets.

The U.S. in October implemented export controls limiting the sale of advanced semiconductor and artificial intelligence technologies to China and is considering future restrictions for the technologies that could impact large chipmakers like U.S.-based Nvidia. In response, China banned chipmaker Micron Technology from selling to the Chinese market and recently placed export controls on rare earth metals gallium and germanium used to make semiconductor chips and solar panels.

With both the U.S. and China attempting to leverage control over the advanced technology race, tech businesses are caught in the middle and could be facing the possibility of further diversifying their operations and supply chains outside of China to maintain revenue and scale, said Chris Meserole, director of the artificial intelligence and emerging technology initiative at the Brookings Institution.

"The biggest firms will be able to navigate some of the tumultuousness ahead. But it's going to be costly, and it's going to introduce a lot of challenges in their operating environment," he said.

Adjusting to U.S., China tensions

Businesses have spent the last several years adjusting to increasingly difficult relations between the U.S. and China, which began under the Trump administration with numerous trade and export controls.

The semiconductor industry is likely more concerned than other industries, given that it's one of the key technologies targeted in the restrictions, said Riley Walters, senior fellow at the Hudson Institute.

Yet China is moving forward with rules Walters described as "anti-export control regulations" that could be even more problematic for businesses. Under the umbrella of national security concerns, the rules open the door for Chinese authorities to target foreign companies operating in China adhering to their parent companies' restrictions.

"For companies in general, they're trying to navigate this. And it goes beyond the rules and restrictions specific to the semiconductor or technology space," he said.

China's export controls on gallium, germanium a warning

China's export controls on gallium and germanium send a different message to the U.S. than its earlier Micron ban.

It targets the U.S., Japan, Netherlands and other countries that have placed restrictions on China. It demonstrates China's significant control over rare earth materials -- something its government is willing to use to disrupt the global economy, Meserole said.

That's a shot across the bow of both the U.S. government and other governments around the world.
Chris MeseroleDirector, artificial intelligence and emerging technology initiative, Brookings Institution

"That's a shot across the bow of both the U.S. government and other governments around the world: 'Be careful of being too restrictive in what you're going to cut off from China, because we have ways of hitting back,'" Meserole said.

Meserole said there's concern China may target rare earth materials used to make electric vehicle batteries. He said China doesn't have a monopoly over these rare minerals and metals but has worked globally to get mining and processing rights to gain control over the supply.

"Some of those they do have a fair amount of leverage over," he said.

China's goal is likely to preempt new restrictions by demonstrating its strength in controlling access to rare earth metals and materials, Walters said. Yet it might not work as China hopes. The Biden administration is already considering the next set of restrictions, he said.

"I don't necessarily see it stopping new restrictions," Walters said.

U.S., China relations remain fraught for foreseeable future

The U.S. will continue aggressively denying China access to advanced technologies like AI and semiconductors, but the administration doesn't want to decouple from China in other aspects of the economy, Meserole said.

The U.S. wants to narrow their trade restrictions "to keep the peace on other sectors of the economy they don't want to disrupt," he said.

However, China's response to the U.S.'s restrictions with its export controls on rare earth metals indicates the country is willing to come after the U.S. in economic areas outside of the narrow scope the U.S. wants to set with specific advanced technologies. Meserole said it will be difficult for the Biden administration to navigate in the future.

Walters said Washington has made it clear it can separate national security issues from the diplomatic relationship with China despite the new restrictions. Multiple U.S. officials, including Secretary of State Anthony Blinken and Treasury Secretary Janet Yellen, have visited China and expressed the desire to continue economic relations.

"They're saying we can have these national security exemptions, but we can still have a professional relationship," Walters said. "But from the Beijing side, I don't know if they agree with that at all. From their point of view, they link all these together. National security is diplomacy; it is politics. It's hard for them to think of this in the same way the U.S. does."

An added complication is the recent Microsoft attack by Chinese hackers, which led to the email accounts of government agencies and other organizations being compromised, Walters said. It will continue to keep the U.S.-China relationship on rocky ground.

"It's not insignificant," Walters said. "The Biden administration might be forced to respond to that with a criminal investigation or sanctions against officials."

Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.

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