How politically hard it is to implement in practice, has been immediately demonstrated with two examples: ZTE and Huawei. ZTE, China’s second major telecom supplier, has first been placed on the Department of Commerce "entity list" under the Obama administration in 2016, removed from that list in 2017, added to it again in 2018, and removed again the same year after a high-profile plea by Xi Jinping to Donald Trump. Some of its affiliates were again placed on the entity list in October 2019. Even more telling is the ambiguity surrounding the placement of Huawei on the same entity list in 2019. It has almost immediately been tempered by exemptions allowing US component makers to keep supplying Huawei with what amounts to an 11 billion dollar per year market for chip manufacturers. In February 2020, even as new revelations on alleged Huawei spying were made public, and charges against the company for long-standing Intellectual Property theft were raised to charges of racketeering, these exemptions were extended again for 45 days. Generally, placement of a company on the entity list prevents any sale to it of components by American firms. The same prohibition of component sale only applies to third-country companies if these exported American components represent more than 25 % of the final product, a rather high bar.
The growing halo around the national security clause
Perhaps a more serious element, is the possibility of market denials by the United States to international companies which do not follow these restrictions: the IT industry – as well as the aerospace industry if it was one day included – are so integrated that almost all companies supply both China and the United States. An effort is underway from the US to relocalize chip production for military purposes. TSMC, the Taiwanese chip foundry, is particularly concerned because it is a huge exporter to mainland China and also has production sites there. In fact, it had already been 16 years since a Rand report concluded that the close ties between Taiwan’s silicon industry and the mainland made it impossible to prevent the transfer of critical technologies.
Another potential aspect of decoupling is the oversight and limitation of direct investment or Mergers and Acquisitions (M&A) activity by Chinese companies – or by their proxies, as offshore capital centers from Hong Kong to the Caribbean provide a convenient opacity to the ultimate investors. With varying speed, scope and strength, the United States, the European Union and Japan all strive towards the same goal: preventing technology leakage in critical sectors. In fact, they have started cooperating in an unprecedented effort to prevent forced technology transfer and to fight state subsidies. The EU framework for investment screening of foreign investment due for introduction in October 2020 will potentially have the widest scope. It cites "public order" as a cause for screening, but it is also non-binding to Member States in most cases. The revised Japanese Foreign Exchange and Foreign Trade Act enacted in November 2019 are the most demanding. The threshold for prior notification and oversight is set at 1 % of capital in a broad list of activities and services.