US National Security’s Impact on Trade with China

The following alert is included in Insights 2023, a collection of articles and videos addressing important emerging legal issues in the year ahead.

With the geopolitical rivalry between the US and China escalating, President Biden toured Taiwanese chipmaker TSMC’s future manufacturing plant in Arizona late last year, touting the company’s plans to invest US$40 billion on upgrades and expansion—one of the largest foreign direct investments in US history. Greeting Biden at the event, TSMC’s chairman thanked him personally for the US government’s “continual collaboration.”

The US government’s support for TSMC exemplifies the extent to which national security concerns about China have driven successive US administrations to pursue industrial incentives, novel regulatory regimes, and impose heightened restrictions related to technology and infrastructure.

These cumulative actions are having profound impacts on the technology development strategies of companies that operate in both the United States and China, as well as their ability to offer products and services in those markets. As noted in the Biden Administration’s recent National Security Strategy, China’s emergence as both the “most consequential competitor” and “one of the largest trading partners” will require approaches that “fall outside the bounds of existing rules and regulations.”

As the Administration pursues “responsible competition” with China, companies should anticipate that US national security strategy will continue to shape how the government regulates domestic and foreign technology, particularly if there is a nexus to China or other countries of concern, such as Russia. The following developments illustrate how US policy will impact decisions on both domestic and outbound investment, supply chain, exports, and imports:

Commerce

The Department of Commerce has begun implementing the CHIPS Act, which appropriated US$52.7 billion to support the American semiconductor industry. That funding aims to not just buoy manufacturers, but incentivize the development of the semiconductor ecosystem, which includes suppliers, workforce development, and research and development. It also comes with strings attached. In addition to limitations on investing in and doing business with China, Commerce will prioritize projects that follow information security standards, supply chain security, and cybersecurity best practices. These conditions are designed to simultaneously grow and safeguard the domestic semiconductor industry—a direct intervention by the United States in the market that represents a marked shift in industrial policy. 

Wielding another regulatory stick, Commerce is in the final stages of implementing its information and communications technology supply chain regulations to address threats posed by the use of certain foreign technology and software applications in the United States. The regulations will establish a regime for reviewing and potentially prohibiting the use of certain foreign technology, particularly where it creates a risk that adversaries could exploit Americans’ sensitive data.

Industry & Security

In October 2022, the Biden Administration took another step toward undermining Chinese advances in high tech by implementing new restrictions on China’s access to US semiconductor technologies. Commerce’s Bureau of Industry and Security imposed a series of controls on the export of advanced computing and semiconductor manufacturing items to China as well as transactions related to supercomputer end-uses in China. Aimed at addressing US national security and foreign policy concerns over China’s strategic and military goals, these measures seek to restrict China’s “ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors.” They supplement prior rule- makings designed to restrict exports for military use and to firms that further Chinese strategic interests, as well as economic sanctions and import restrictions designed to counter perceived systematic Chinese government human rights violations.

FCC

In November 2022, the Federal Communications Commission issued a Report and Order that will severely restrict the import and use of certain foreign technology perceived to be a national security threat—namely, telecommunications and video surveillance technology produced by Huawei, ZTE, Hytera, Dahua, and Hikvision. The order builds on Trump- era restrictions that prohibit the use of these technologies by the US government and federal contractors. It would effectively prohibit the American public from using this technology based on national security concerns, an approach that is markedly broader than the existing restrictions. 

The National Security Strategy asserts that the United States “must invest in our innovation and industrial strength, and build our resilience, at home.” Between semiconductor restrictions, export controls and economic sanctions, CHIPS Act implementation, and supply-chain restrictions, national security concerns are increasingly driving US economic policy. As businesses evaluate their risk and commercial growth strategies, they should consider how national security issues—particularly those related to technology—will shape the regulatory and competitive environment.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, Sid Mody, an O’Melveny partner licensed to practice law in Texas, and John Dermody, an O'Melveny counsel licensed to practice law in the District of Columbia and California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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