I hope people enjoyed the “big game” yesterday on Superb Owl Sunday. I wouldn’t want to use any intellectual property of the NFL without express written consent so instead I’ll just include this picture of a superb owl from my backyard a few years ago.
Last week we continued to see developments in China and Iran related trade and sanctions policies, along with talk of sanctions in Myanmar and Russia. And in true inside the Beltway gossip fashion, people are getting energized by the question of who will be the Undersecretary of Commerce for Industry and Security. For export control nerds, this is the big kahuna of positions to be filled.
I originally intended to include some coverage of President Biden’s interview CBS aired yesterday, but it was more news-free than I anticipated. Apart from reinforcing that the US expects Iran to make the first move in returning to negotiations, there was not very much new in the interview. I think we all may have to get accustomed to the new world where we don’t have to look to random tweets and musings that pass for policy announcements, and instead government officials from the President on down will be more considered and thoughtful in public. Refreshing, isn’t it?
China Relations: “Team of Rivals” Cliché Alert
The lazy headline cliché of the year from the first Obama Administration is back, as the “team of rivals” phrase is aired out again to describe the various Biden Administration members with their hands in China policy. The Wall Street Journal last week highlighted the different experience and viewpoints among Jake Sullivan, Anthony Blinken, John Kerry, Kurt Campbell, Katherine Tai, Gina Raimondo, Janet Yellen, and Susan Rice.
Every Cabinet and White House staff starts out as a team of rivals. But the real question is whether it stays that way or descends into a pit of vipers working at cross purposes. As the article points out, the Chinese government ably manipulated the different players in the previous administration. I think the person to keep an eye on here is John Kerry. Because he’s a ‘Three Time Former’ — former Secretary of State, former senior US Senator, and former presidential candidate — he may be the most likely to freelance and get ahead of policy. Regardless of to whom he reports to on an organizational chart, his relationship with Biden will be key.
Commerce Department: Who Will Get the BIS Nomination?
As some inside the Beltway have speculated that former Commerce Assistant Secretary Kevin Wolf will be nominated as Undersecretary for Industry and Security, potential opponents to Wolf have mobilized against him for alleged softness on China. As someone who has seen Wolf speak on China matters multiple times while in his prior position, that claim is seriously misguided. During his time in the Obama Administration, Wolf was rather candid in public forums about Chinese attempts to secure US technology illicitly and otherwise compete with the United States.
Whatever China policy emerges from the Biden Administration, it will be necessary to have Wolf or someone like him at BIS to effectively implement what will hopefully be a more sophisticated export control policy than we’ve seen recently.
From the FT article linked above:
One former Trump official, who believes Wolf would be a smart choice for the job, said that while the Trump administration had been good at identifying the China threat, it had been bad at addressing the challenge partly because of the chaotic application of export controls. “We didn’t do a good enough job with the tools in our toolbox,” the former official said. “You need someone at BIS who really understands how the tools work to more effectively tackle Huawei and other Chinese companies.”
As export control lawyers have been aware for the past four years, the barely controlled regulatory anarchy of the prior administration’s attempts to deal with China placed significant burdens on US exporters trying to interpret the administration’s amateurish efforts. With an experienced hand like Wolf in charge, fewer exporters and their lawyers will be scratching their heads in confusion. Count me as in favor of Wolf taking the reins at BIS.
Iran Sanctions: New Biden Administration Envoy and Iran-Saudi Arabia Relations
Managing the triangular relationship among the United States, Saudi Arabia, and Iran will be one of the major foreign policy challenges of the new administration. As noted in last week’s issue of the newsletter, it appears that with the naming of a new US special envoy to Iran (Robert Malley) the administration will be starting or has already started to reengage with Iran. A Financial Times analysis applauds Malley’s appointment as a return to thoughtful policy based on, you know, facts and reality. It’s still unclear who will move first and step toward a return to the Iran nuclear deal but at least there are signs of potential action. President Biden yesterday said that Iran must stop enriching uranium first while Iran has, at least publicly, said it would not do so.
Simultaneously, the US will also be moving away from its full embrace of Saudi Arabia under the prior administration. In the Guardian, two well-connected analysts of the region – one Saudi and one Iranian – propose a framework for ameliorating Iran-Saudi tensions that US policymakers would be well advised to consider.
Trade Sanctions: Do They Even Work or Just Make Us Feel Better?
In the context of the Myanmar coup and continued harassment of Alexei Navalny in Russia, trade sanctions as a form of punishment and policy reaction are once again on the agenda. A New York Times analysis last week pointed out, however, that “sanctions fatigue” is real and American leverage is limited in both contexts. For years, I’ve seen in my professional life that especially unilateral sanctions are of marginal utility in changing the behavior of “international bad guys” and instead mostly impose costs on US companies trying in good faith to comply with sometimes vague regulations that US agencies inconsistently and opaquely enforce.
For example, the generals in charge of the coup in Myanmar were already under US sanctions, which does not seem to have affected their decisions. Analysts of the situation in Myanmar have already warned that new sanctions are unlikely to have an effect and the US will need to work with the generals, as noted in this Financial Times article. And seven years of sanctions on Russia have had no appreciable impact on either Russian behavior generally or the situation in Crimea and Ukraine specifically – the original impetus for sanctions in 2014.
The reality of the global economy is that as the dominance of the United States economy decreases, and the strength of currencies other than the US dollar increases, unilateral sanctions cutting foreign actors from the US financial system and economy will have less impact. Yes, sanctions will impose costs on their targets but the availability of alternatives has turned sanctions into a cost of doing business rather than a freeze on their economic activity. As only one example, Arkady Rotenberg, under US sanctions since 2014, came to Vladimir Putin’s rescue when he claimed that “Putin’s Palace,” a massive $1.3 billion compound allegedly owned by Putin personally, was actually Rotenberg’s property. Rotenberg’s status as an SDN doesn’t seem to have cramped his style too much in recent years.
International Shipping: Calmer Seas Ahead?
Unless you have flown into a major airport near a global port, like Singapore’s Changi Airport, it is easy to forget how many enormous container ships and oil tankers are constantly sailing the world’s oceans. Businesses owning those fleets are hoping for decreases in the amount of trade-related drama in the form of abrupt sanctions applied to entire fleets, as happened with the Chinese Cosco Shipping Energy Transportation Company in late 2019 due to its alleged shipment of Iranian oil. The Wall Street Journal reported on the need for these companies to have some regulatory certainty in order to respond nimbly to changes in shipping demand. As one executive said, these “truck drivers of the sea” hope that Biden’s “America is back” message translates to a calmer shipping environment.
Somewhat relatedly, a few container ships recently have lost parts of their shipments due to bad weather around the world. If you’re interested to know why these giant vessels sometimes lose containers but mostly don’t, take a look at the WSJ’s interactive explanation of “parametric rolling.” Then, when the containers go overboard you have things like thousands of rubber ducks traveling the seas for years or IKEA furniture and flat screen televisions washing up on Dutch shores.
Scary Pathogen Export Controls: Princeton Settlement for Export Violations
Nutty conspiracy theorists all riled up about secret virus laboratories in China may want to look a little closer to home for some real world unauthorized exports of seriously scary pathogens by none other than Princeton University. BIS released a settlement agreement related to Princeton’s export of pathogens classified under ECCNs 1C351, 1C352 (since 2015 subsumed into 1C351), and 1C353. The university sent “various strains and recombinants of an animal pathogen” to 15 different countries 37 times between November 2013 and March 2018.
Princeton University – don’t ask to see the virus research lab on your campus tour.
The agreement does not provide any additional detail about the exported pathogens, but a look at the items controlled under 1C351 reveals some very creepy sounding items. A couple examples include lumpy skin disease virus (eww – it looks just like it sounds), and Omsk hemorrhagic fever virus (I don’t recommend swinging through Omsk anytime soon, as the average February temperature is 13 degrees Fahrenheit).
The university voluntarily disclosed the violations, so the penalties were much smaller than they certainly could have been. Princeton must pay a $54,000 fine and undertake two different audits of its export control function – one by an internal office at Princeton, and one by an unaffiliated third party.
Sideshow Bob’s dim view of Princeton will be reinforced by this news.
Cuba Sanctions: Authorization of Private Businesses in Cuba
The Cuban government has expanded the list of authorized private businesses in the country, a decision that may make it politically easier for the Biden Administration to ease some of the sanctions that the prior administration tightened. From an original list of 127 authorized private occupations, the government now permits more than 2000 private business types in the economy. Certain subsidies to state-owned companies will also end.
With tourism having fallen precipitously because of the pandemic, the Cuban government hopes that this effort will provide impetus for additional economic activity. Increasing ties between the US and Cuba from sanctions relief would also boost the economy, of course, so watch this space for the US government’s reaction to these moves.
Supply Chain Vulnerability: Biden Administration Review
The Financial Times reported that the Biden Administration will soon issue an executive order requiring a full-scope review of supply chain vulnerabilities with respect to critical technologies and materials. The review will consider not only government procurement practices but also those in the private sector. Naturally, China is a focus of concern but even places like the European Union will be part of the review as the EU pursues a more autonomous industrial policy.
This type of organized review is likely to be one of many for the Biden Administration as it moves away from the chaotic, ad hoc nature of the prior administration with respect to trade issues but keeps in place some of the basic features: primarily suspicion of China and its motives and a focus on US manufacturing vulnerabilities.
China Sanctions: Semiconductor Manufacturing International Corporation (SMIC) Reports Impact of Export Restrictions
When it announced its first earnings report since being added to various US export control restrictions, SMIC of China warned investors it was likely to start feeling the impact of those restrictions going forward in the form of slowing growth. SMIC was alleged to be linked to the Chinese military, a claim SMIC denies.
The details of the restrictions themselves may be less than meets the eye, according to some analysts. SMIC is prevented from receiving US exports that would help it make chips at a 10 nanometer level or smaller. But SMIC’s chips mostly are larger than that standard, and even the export control restrictions themselves do not cover tools that can produce both high-end and simpler chips.
As an aside here, I had to look up how small 10 nanometers really is. The best comparison I saw is that fingernails grow at about 1 nanometer per second – a nanometer is a billionth of a meter. So in the time it’s taken you to read this paragraph, your fingernails have grown about ten nanometers. And you’ve also probably looked down at your fingernails. You’re welcome.
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