As the stakes rise in the geopolitical poker game playing out on Ukraine’s border, the United States just flashed an ace. Russian President Vladimir Putin will want to reassess the strength of his own hand. The rest of us — including China’s leader, cryptocurrency traders, and global investors — will need to start making contingency plans that include this powerful new tool of American policy.
Measures to block sales of broad categories of advanced technology that the White House detailed in a briefing last week will disrupt large sections of Russia’s economy. In extreme form, Washington could end all iPhone sales to the country or stop semiconductors headed to the Russian telecommunications industry. Together with sanctions to restrict financial flows, these moves are intended to “undercut Putin’s aspirations to exert influence on the world stage,” in the words of one senior American.
The Foreign Direct Product Rule that has been unsheathed marks a significant expansion of U.S. muscle by allowing the Department of Commerce to block the international sale of a wide range of advanced technologies — whether manufactured in the U.S. or abroad with U.S. equipment and designs. First deployed by the Trump administration in 2020 to tighten the screws on China’s telecom giant Huawei, the measure eliminated loopholes in earlier restrictions that were imposed on the firm amid allegations of espionage. Without access to U.S. semiconductors and other parts, Huawei’s smartphone sales reportedly tumbled 30 percent last year.
Just how much these specific measures might tilt Putin’s calculus may never be clear. Even amid the heightened rhetoric, a full-scale invasion still looks unlikely. Moscow would be left running a country of 43 million people who have turned decidedly anti-Russian since the 2014 annexation of Crimea, but perhaps the full package of potential Western responses will help limit the risks Putin might take as he tries to keep Ukraine weak and off balance.
In any case, leveraging America’s leading position in the technologies that shape the 21st century on behalf of its foreign policy interest marks something at least as powerful as its current quiver of financial sanctions. Export bans are difficult to enforce on foreign firms and, over time, may simply force targeted countries to seek other suppliers. Russia’s embrace of Chinese technology, for example, will undoubtedly accelerate. But no nation can ignore the potential threat to its future growth and critical infrastructure that might follow interruptions in its tech supply chain.
If nothing else, it’s a warning shot to Chinese officials that such measures will be on the table in any future confrontation with Washington. China is perhaps the one country that might one day match or surpass America’s edge in semiconductors, artificial intelligence, and aerospace. It’s also working hard every day to depend less on key U.S. supplies.
Still, in a standoff over Taiwanese independence or navigation rights in the South China Sea, how could any future president refuse to consider such measures? If another Chinese national champion is deemed a threat to U.S. security interests, how can tech sales proceed as usual? Any thoughtful policymaker in Beijing would be planning for such scenarios.
Sponsors and traders of cryptocurrencies are now on notice, too. U.S. regulators say all the right things about supporting innovation in financial and payments technology, but they are hardly ready to cede the tenuous control they have over financial markets. Indeed, a Treasury report last month argues stablecoin alternatives should be regulated as insured depository institutions.
Export controls are typically deployed in response to a national security threat. But why would a future administration allow any distributed ledgers designed to evade financial controls to have unfettered access to the most advanced technology? If financial sanctions prove to be less effective on activities that bypass traditional financial channels altogether, tech sanctions may prove to be a regulator’s most persuasive tool.
Financial markets will need to start pricing in risks from these disruptions, too. Firms that depend on U.S. technology or designs are more vulnerable than ever to being caught in the crossfire between Washington and its targets. The Semiconductor Industry Association has already warned that “restrictions on our ability to sell commercial products in major markets will erode the competitiveness of the U.S. semiconductor industry.” Investors will want to ask all their portfolio firms that sell — or buy — tech about contingency plans to diversify their suppliers or customers.
While the administration’s threats last week are aimed at an audience of one, it’s clear that the rest of us should be paying close attention, too, and bracing for broader disruptions to global commerce.
Christopher Smart is managing director, chief global strategist and head of the Barings Investment Institute. Under President Obama, he spent four years as deputy assistant secretary of the Treasury and two years as special assistant to the president for international economics, trade and investment. Follow him on Twitter @csmart.