Ballooning U.S.-China Tensions

Balloons and other objects entering U.S. airspace have reignited speculation about China’s capabilities and intentions. The sightings have prompted another round of trade friction.

Technology is the latest in a long list of arenas where tensions have strained relations between the world’s two largest economies. Building on measures imposed by the previous administration, the Biden government has steadily restricted Beijing’s access to advanced technologies. The bans are keeping cutting-edge components out of China.

In December, 36 Chinese high-tech firms were added to the restricted entity list over security concerns. The roster includes manufacturers of aviation equipment and computer chips. The administration is planning to ban outright some technology investments by American firms in China.

The impact of U.S. measures is becoming more apparent. The latest data shows a significant move of manufacturing to other Asian economies, like Vietnam and the Philippines. Chinese firms imported $2.3 billion worth of machines used in semiconductor manufacturing in November, the lowest level since May 2020. The U.S. administration is in talks with Japan and the Netherlands to get them to join the sanctions. Such a move will further cripple the advancement of Beijing’s semiconductor industry, including in areas of artificial intelligence and self-driving vehicles.

In response, Beijing has launched a trade dispute at the World Trade Organization (WTO); unfortunately for them, the appellate body of the WTO is practically dysfunctional. To retaliate, Beijing has come out with its own export control list covering technologies essential to solar energy and rare earth processing. But further options for direct reprisal are limited.