A New Cold War
Like the Korean War of 1950, Russia’s war in Ukraine today appears to be the hot opening salvo in a new Cold War pitting the United States and our allies against a bloc of revisionist dictatorships whose actions are increasingly coordinated. Unlike in 1950, however, today the Russian and Chinese roles are reversed, with Russia the junior partner doing the fighting and China the senior partner supporting from behind. Also unlike in 1950, the United States today has avoided direct military engagement in the Ukraine war, relying instead on arming Ukraine’s military and using unprecedented economic warfare tools against Moscow.
This emphasis on economic warfare, both in support of and in place of military power, carries important lessons—and poses difficult challenges—for U.S. and allied thinking about the New Cold War broadly, far beyond the immediate circumstances of Ukraine.
A vital aspect of this New Cold War will be whether the United States can reverse the advantages that adversaries have gained from open access to international trade. Washington has partially proven its economic-warfare mettle during the Ukraine war, with powerful measures taken (with allies) against Russia’s central bank, oligarchs, and other targets. Yet there remain significant gaps in U.S. and allied sanctions, especially on Russia’s energy exports and leading banks. More fundamentally, U.S. and allied threats of economic warfare failed to deter Vladimir Putin’s invasion in the first place, partly because Putin had built trade-based relationships of dependence in Europe that apparently convinced him that Washington, Berlin, and other allies lacked the will to defeat his neo-imperial ambitions.
Now we risk making similar mistakes vis-à-vis China, which has global revisionist ambitions and economic leverage greater than Putin could dream of. Far more than Russia, China has benefited from international trade and used its trade links to create relationships of leverage over the United States and our allies.
To address this more daunting China challenge, the United States and our allies must undertake two economic statecraft missions of great and urgent importance: (1) strengthening our ability to deter a Chinese invasion of Taiwan by means of economic, financial and technological coercion, to augment our military deterrent; and (2) resetting the terms of our normal economic relations with China to protect against national-security risks posed by insufficiently controlled flows of technology, capital, and data between the United States and China.
The Taiwan Risk
Xi Jinping’s goal to “solve” the “Taiwan question” echoes Putin’s designs on Ukraine, but the stakes are far higher. Were China to subjugate Taiwan, the consequences could be catastrophic, even decisive, for this New Cold War. China could control (or at least take offline) more than 90 percent of the world’s advanced semiconductor production, taking Americans economically hostage or sparking a global economic crisis that would take years to remedy. The loss of Taiwan could make the defense of Japan, the world’s third largest economy and perhaps our most important ally in the world, nearly impossible. It could shatter the credibility of American alliance commitments worldwide.
The dilemmas the United States has faced in convincing allies and partners to apply strict sanctions on Russia would be far more severe in the case of a war with China over Taiwan. This is especially true if U.S. policymakers fail to prepare for this contingency. It is an urgent imperative to sharpen the tools needed to convince Xi that China’s economy would face catastrophic consequences if he moved on Taiwan.
Part of this requires work inside the U.S. government. Enhanced coordination between the Defense Department and others responsible for enhancing deterrence, preparing for crises and planning for war is essential. It is dangerous for the Defense Secretary to be the only Cabinet member reliably equipped with flexible response options on any given morning. Strengthening the Commerce Department’s Bureau of Industry and Security would enhance the credibility of any prospective sanctions against Beijing. Same for the Treasury Department and its Office of Foreign Assets Control, which has traditionally lacked Mandarin linguists and other China-focused personnel.
We must also enhance coordination with allies. This work would not only advance preparations for imposing Ukraine-related secondary sanctions on Beijing, as necessary, but also mature U.S. and allied thinking on using economic tools to deter an invasion of Taiwan. Such preparations are likely to highlight, among other lessons, the importance of reducing U.S. and allied financial exposure to Chinese banks and other entities that might be targets of future U.S. sanctions.
The Case for Selective Decoupling
After the end of the Cold War, U.S. policymakers coalesced around the view that deep trade ties with China would weaken Beijing’s communist regime and/or socialize it to support the U.S.-led liberal international order. Beijing exploited this open economic environment to enormous advantage, without pursuing (or succumbing to) any political liberalization at home. Beijing reaped immense economic gains, acquired Western technologies with enormous strategic and military benefits, and established leverage over trading partners, including the United States, who grew dependent on China for everything from rare earth minerals to consumer electronics and pharmaceutical drugs.
Since the Trump Administration, the United States has generally pursued a new approach of selective decoupling, recognizing that certain facets of U.S.-China economic engagement had to be halted, whether for reasons of national security, fair trade or human rights. But Washington has mostly failed to establish what constitutes the right amount, or the right type, of selective decoupling.
A good place to start would be ending Beijing’s overwhelmingly open access to U.S. technology, capital, and data.
Over the past six years, semiconductors have justifiably received more and more attention as the single most important technology in our China competition. Semiconductors are both a major advantage of the United States (because we lead the world in key semiconductor design technologies) and a major vulnerability of ours (because the vast majority of semiconductors are manufactured within 100 miles of China, either in Taiwan, South Korea, or China itself).
The late Obama Administration blocked a would-be Chinese acquisition of Aixtron, a German semiconductor firm with assets in the United States, and in January 2017 published a useful white paper on the importance of controlling semiconductor exports while maintaining global leadership in the field. The Trump Administration placed Huawei and the Semiconductor Manufacturing International Corp. (SMIC) on the export-control Entity List, discouraged allies (such as the Netherlands and Japan) from selling advanced semiconductor technologies to China, and promoted the domestic construction of semiconductor fabrication facilities. The Biden Administration identified semiconductor supply chains as a key priority in its first weeks and has since promoted the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act to subsidize such manufacturing to the tune of $52 billion.
And yet U.S. semiconductor technology still flows almost entirely unrestricted to China. As Congressional investigators discovered, despite Huawei and SMIC being on the Entity List, just 1% of would-be U.S. exports to those firms were denied by the Commerce Department’s lax licensing regime.
Under current rules, Commerce bans Huawei and SMIC from receiving U.S. technology only if it is exclusively for the production of the most cutting-edge chips (10 nanometers and below). Sanctioned Chinese firms can still buy components for manufacturing chips at 10 nanometers and above. This gives a green light for the vast majority of U.S. semiconductor technology to still flow into China, where Chinese firms are now approaching and possibly even exceeding the manufacturing capacity of U.S. giants such as Intel. Congressional Republicans including Representative Mike McCaul and Senator Marco Rubio have called on Commerce to limit China’s chip manufacturing capability by denying all U.S. exports to Entity Listed firms such as SMIC and Huawei.
The United States and our allies need technology controls that match the demands of the China competition. Sanctions and nonproliferation regimes that were designed in the Soviet era, or during the Global War on Terrorism, are inadequate to address the technology threat from China. Recent years’ efforts to tighten technology controls have been slow and partial at best. The Export Control and Reform Act of 2018, for example, required the Commerce Department to begin modernizing export controls by publishing new lists of foundational and emerging technologies, but four years later, Commerce has still not published those lists.
Meanwhile China’s “Military-Civil Fusion” strategy increasingly renders meaningless the traditional difference between military and commercial technologies. There are acute and growing national security worries stemming from China’s efforts to copy – or simply outperform – American efforts in telecommunications, artificial intelligence, automation, biotech and quantum technology, among others.
Despite several new laws and regulations, U.S. capital is still flowing into China in enormous volumes. This is a huge advantage for China, because U.S. capital markets are deeper, more liquid, and more sophisticated than any in the world. Few successful Chinese technology companies exist that were not launched with money and expertise from Silicon Valley venture capital firms.
Congress and the Trump Administration made waves in 2020 by blocking the federal employee pension fund from investing in China. But this was more a rounding error than a landmark in financial decoupling. The whole fight was over some $4.5 billion. Meanwhile state and local pensions have potentially hundreds of billions invested in Chinese companies.
The Trump Administration created a blacklist to block U.S. investment in companies associated with the Chinese military. The Biden Administration kept this list and expanded it to block investment in companies associated with Chinese state surveillance. But the administration has narrowed its application so that only 60 or so companies are on the list and restrictions do not apply to their subsidiaries. Whereas more than 1,100 subsidiaries were listed at the end of the Trump Administration, the number now is fewer than a dozen.
Then there is the Holding Foreign Companies Accountable Act, which passed Congress unanimously in 2020. The law was designed to de-list Chinese companies from U.S. stock exchanges because they do not follow U.S. audit rules under the Sarbanes-Oxley Act of 2002. But the law provided for a three-year implementation period, which the Securities and Exchange Commission (SEC) may now be using to negotiate a deal with Beijing that would allow Chinese companies to remain listed even when they provide no trustworthy audit data.
There is also the larger problem that, even if the SEC goes through with the de-listings, should Washington allow some $1.5 trillion in U.S. investments to follow Chinese companies back to home markets, where American investors would be completely at the mercy of Beijing’s rules?
There is some movement toward prudent expansion of investment restrictions, though.
As the House and Senate conference bills to address China competition this summer, the House bill includes a provision that would for the first time create a regulatory regime to scrutinize and restrict U.S. outbound investment into China. With some improvements, the provision could become a landmark in beginning to block U.S. investors from continuing to invest, wittingly or unwittingly, in China’s military, human rights abuses, and global ambitions to dominate future technologies.
For nearly a decade, Chinese leader Xi Jinping has spoken of data as the oil of the 21st century—the indispensable input that will fuel economic strength and national power. In 2013, he told his state-run Chinese Academy of Sciences: “The vast ocean of data, just like oil resources during industrialization, contains immense productive power and opportunities. Whoever controls big data technologies will control the resources for development and have the upper hand.”
The analogy between data and oil later became something of a cliché in certain circles. But U.S. policy never adjusted to recognize its logic. China’s did.
The Chinese Communist Party developed a comprehensive strategy to control, accumulate, and exploit data, including personal health records, personal genetic sequences, and personal online browsing habits. This also includes corporate trade secrets, photos, voice recordings, and the mapping imagery pulsing through phones, computers, drones, and smart cars all around the world.
Beijing recognizes that winning the New Cold War will require protecting and harnessing this data to achieve commercial, technological, military, and intelligence advantages. That is what it is doing. Beijing’s approach to data is nakedly non-reciprocal, absorbing data from foreign countries while denying foreigners access to Chinese data.
The U.S. government has historically had no mechanism for limiting cross-border data flows, even on national security grounds. Traditional national security restrictions on commerce are designed to address other issues, and they have historically been narrowly scoped, consistent with important American traditions of limited government. But vast areas of economic life are untouched by those tools—including almost all cross-border exchange of data by private companies, individuals, academic institutions, and state and local governments.
Washington has begun to address this gap only recently, through the creation—at least on paper—of a new regulatory regime for reviewing cross-border data flows. Known as the Information and Communications Technology and Services (ICTS) process, this regime was established in the waning days of the Trump Administration and maintained by the Biden Administration through a June 2021 executive order.
Under the ICTS process, an interagency panel, led by the Commerce Secretary, has broad discretion to investigate, modify, block, or unwind data-related commercial transactions believed to present “undue or unacceptable risks” to U.S. national security. But the ICTS process has not yet been put to use—not against Chinese access to U.S. data centers or biotech labs, not against Chinese drones with eyes on U.S. critical infrastructure, and not against other channels through which large volumes of sensitive U.S. data can flow to China.
Apart from ICTS, the Congress could of course consider legislative approaches. Various bills have been proposed limiting the ability of Chinese social media apps to operate and collect data in the United States, but without success. Another idea is to create a new export control regime that would restrict bulk personal data from going to adversary countries. So far, however, such measures have not garnered much support. The issue of Beijing’s data mercantilism is absent from the China bill that has been pending this year in Congress.
A Future of “Rebuttable Presumptions”?
As policy evolves on technology, capital, and data flows with China, another piece of legislation may come to loom especially large: the Uyghur Forced Labor Prevention Act of 2021. The law creates a presumption that any imports from Xinjiang, or tied to Uyghur labor outside of Xinjiang, are tainted by forced labor and therefore banned. Imports are allowed only if would-be importers can prove to the Department of Homeland Security that their supply chains are free of slave labor. Furnishing such proof should be all but impossible given the Chinese government’s aggressive policies of Uyghur forced labor in Xinjiang and beyond.
Implementation of the Uyghur law is important in its own right. It is also important because lawmakers may come to see it as a model for addressing broader challenges – such as flows of technology, capital and data that prove difficult to rein in by more-surgical means.
With respect to U.S. outbound investment, for example, a future Congress or White House could impose a rebuttable presumption on national-security grounds: Investment in China is possible, but only provided investors can demonstrate that it does not fund Chinese military modernization or the like. Similar restrictions could be imposed on U.S.-China high-tech academic exchanges.
These would be dramatic, disruptive changes to U.S. policy. But if political and strategic concern over U.S. economic and technological exposure to China continues to outpace effective policy restrictions on such exposure, lawmakers and national-security officials may decide that more categorical, blunt and restrictive means are necessary.
 “Foreign Affairs Committee Republicans,” Foreign Affairs Committee Republicans (House Foreign Affairs Committee GOP, December 22, 2020), https://gop-foreignaffairs.house.gov/press-release/mccaul-and-rubio-call-for-strengthening-of-entity-list-rules-for-smic/.
 Thomas Franck, “White House Directs Federal Pension Fund to Halt Investments in Chinese Stocks,” CNBC (CNBC, May 12, 2020), https://www.cnbc.com/2020/05/12/white-house-directs-federal-pension-fund-to-halt-investments-in-chinese-stocks.html.
 Shivam Patel, David Kurton, and Andrew Galbraith, “U.S. to Add More Chinese Firms to Investment, Export Blacklists - Ft,” ed. Michael Perry, Reuters (Thomson Reuters, December 15, 2021), https://www.reuters.com/business/us-blacklist-8-more-chinese-companies-including-dji-over-uyghur-surveillance-ft-2021-12-15/.
 “Communist Chinese Military Companies Listed Under E.O. 13959 Have More Than 1,100 Subsidiaries,” Department of State, 2021, https://2017-2021.state.gov/communist-chinese-military-companies-listed-under-e-o-13959-have-more-than-1100-subsidiaries/index.html.
 “Non-SDN Chinese Military-Industrial Complex Companies List,” Department of Treasury: Office of Foreign Assets Control, 2021, https://www.treasury.gov/ofac/downloads/ccmc/nscmiclist.pdf.
 Congress.gov. "H.R.4521 - 117th Congress (2021-2022): United States Innovation and Competition Act of 2021," May 5, 2022. https://www.congress.gov/bill/117th-congress/house-bill/4521.
 Matt Pottinger and David Feith, “The Most Powerful Data Broker in the World Is Winning the War against the U.S.,” The New York Times (The New York Times, November 30, 2021), https://www.nytimes.com/2021/11/30/opinion/xi-jinping-china-us-data-war.html?auth=login-google1tap&login=google1tap.