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The Trade Guys
Talking Export Control Alignment, New 232s, and Trump's Budget Request with Kate Koren
00:35:32
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- [00:01]
A
I'm Scott.
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B
I'm Bill and we're the Trade Guys.
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C
You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm Alex Kisling and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys.
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A
Thanks for listening to the Trade Guys. This is Trade Guy Scott. On this week's episode, we're joined by Kate Coren, deputy Director of the CSIS Economics Program and the Scholl Chair, International Business. Kate's a veteran of the Commerce Department's Bureau of Industry and Security, and we're going to talk with her about all things export controls. Join us for this and more on today's episode of the Trade Guys.
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B
Well, welcome everybody back to another episode of Trade Guys. It's Trade Guy Bill here along with Scott and a special guest today, we have Kate Coren with us. Kate is the new deputy director of the Economics Program and Shoal Chair in International Business at csis. She arrived in January after three years at the Department of Commerce Bureau of Industry and Security. She was the acting director for the Office of Technology Evaluation, which meant she led research and analysis to inform policy development and monitor effectiveness of our export controls. She has an educational background in computer science and computer engineering and worked in the intelligence community before joining the Island. She is with us because one of the topics today is you might figure out from her bio export controls, which we haven't talked about in a while and there's a lot going on in that field. And we'll probably be talking about it again from time to time as the administration takes new actions. And I want to begin with talking with Kate about actually two pieces of legislation that have been introduced, one recently and one a little less recently. The big thing in Congress, as everybody knows, is coming up with acronyms that are pronounceable. So we have the MATCH Act, M A, T, C, H, and the STRIDE act, both of which are designed to deal with how we can better get allied coordination on export controls. So, Kate, maybe you can start us off by talking about the legislation and your views on it.
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D
Thank you both Bill and Scott, for having me on. It's a pleasure to be here. As you mentioned, there's multiple export control legislation sort of work kicking around Congress. Just saw an article in the Washington Post that says the House Foreign Affairs Committee is planning to mark up both the Match act and the Stride act on April 22, along with maybe up to eight other pieces of export control legislation. So a lot happening I'm going to start with the Match act, which is the newer and the more interesting in some ways of the two bills, it's certainly the more stringent. So what the Match act is fundamentally trying to do is trying to solve two overarching problems. The first being the unleveled playing field for U.S. and allied companies on semiconductor manufacturing equipment. This has been an issue since the first wave of semiconductor controls in 2022 because U.S. firms are fully blocked from selling to entity listed Chinese fabs. So they can't sell any type of equipment. They can't sell them a pencil. But allied firms can sell older, less sensitive equipment to those. So that's an area that's an unintentional misalignment that causes the policy to not function as intended. Because instead of the these unlisted firms that the US Government believes are directly contributing to China's military modernization, instead of those firms not dating the equipment, they just get them from a non US firm. The other unlevel playing field issue that the Match act seeks to resolve is on servicing. US firms can't provide servicing to existing equipment inside entity listed fabs, but ally firms, mainly Netherlands and Japan can and do.
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B
So why is servicing an important part of this?
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D
So servicing is a huge interest to really all of the firms across the board. It's a lot of money. I think there's estimates it's up to about a billion dollars worth of current income for ASML, the Netherlands company that makes lithography equipment for U.S. firms. It basically meant they were essentially forced to abandon their equipment in those fabs because they could no longer service service them. They can only come. So there's certainly a large business interest in it on the US side. The security aspect of it is if the assessment is that these particular fabs, these facilities are producing ships, they're producing items that are directly supporting, you know, the People's Liberation army and things that the US Government does not want to be supported. That by allowing the existing equipment there to be maintained is in further support of that and should not be allowed in practice. There's definitely been indications that as a way of hitting around it because the way this is enacted is through US persons restriction that Chinese repair services recruit from the trained U.S. service providers and then recruit them, have them become Chinese citizens and continue to do servicing.
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B
The reason I, I asked the question is because, you know, these are large, very, very complicated and very delicate machines that need constant tlc and if they don't get them, they stop functioning. And so when companies Whether they're in China or anywhere buy them, they usually come along with a maintenance and service package. Sometimes for the most sophisticated machines, with a team that is actually co located at the destination, it just moves with the machine and their job is to make sure it keeps running. Controlling services is an important element of any kind of a control program because if you don't permit the services to be rided, basically, the machines eventually will sooner or later, and in some cases sooner will break down. So it's an important tool that the United States has, which hasn't always been exercised very much. But this bill, I guess, would address that. Talk to us a little bit about obtaining multilateral cooperation. How hard or easy is that and is this bill going about it the right way?
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D
Yes, you make an excellent point on the servicing controls and the effort. The US is controlling the servicing to those enemy list of fabs and has been trying very hard for a while to get that cooperation for allied firms to do the same. Because exactly like you said, very sophisticated equipment that without that servicing will eventually break down. The way that the MATCH act tries to solve these problems is the US Government has been trying basically since the first wave of controls came out in 2022 to get alignment on both of these issues and others. But it is very difficult. There are different legislative frameworks and authorities, you know, in different countries that make some things, you know, much easier or, you know, in some cases nearly impossible to enact than others. And there's also large business interests. Something like 33% of ASML sales in 2025 were to China. It is proven very tricky to get this alignment. There's been ongoing new diplomatic negotiations. Really, I think since this kicked off, there has been a lot of very quiet but very substantial alignment that was achieved, but these gaps removed. So the way the MATCH act seeks to do that, it's is very prescriptive. It directs state and commerce to first try and get allies. Doesn't name Netherlands in Japan, but that's primarily what it's talking about to adopt these new roles.
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B
Those are really the only two, aren't they? The Netherlands in Japan, or are there others?
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D
There are others. They're just much less down. So for dub, it's only them, but for other subcomponents there are others. So it's to get them to adapt these matching controls and new controls. That was the second problem the bills tried to solve. Tries to get these countries to also control duv equipment, which they make. It's primarily made by the Netherlands.
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A
Now for our listeners in Rio Lindo DUV is Deep Ultraviolet Immersion Lithography. Right. And that's, that's highly specialized technology and it's what the Dutch firm ASML does better than anyone else.
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D
Yes. Thank you, Scott. Yes. So EUV Extreme Ultraviolet Light Lithography is the most advanced version of that equipment that only ASML makes and that is currently controlled. That was part of the initial negotiations. Initially the US asserted extra territorial authority in 2022 over it and eventually then the Netherlands agreed to enact assault controls and now controls that. But DV is sort of one step down, but still highly sophisticated, is made primarily by asml, but also by some Japanese firms, not by any US firms. But the US strongly wants that DUV technology equipment to be controlled as well on the basis that China could use it as a workaround for the controls on equipment through some sophisticated engineering techniques and also just by mass amounts of production.
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B
It seems to me that the important thing, or maybe the controversial thing, if that's the right word that the Match act does, is it wants to assert extraterritorial control over DUV equipment, the deep ultraviolet equipment, even though we have not always previously controlled all of that. And in fact, ASML for years has had substantial sales of precisely that equipment to China and other customers. So in other words, we're clawing back and expanding controls on things that previously had been permitted to be sold. Two questions. Is that a good idea and is that even viable?
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D
Yeah, those are both very good questions. You're exactly right. It is seeking to both matching those entity based controls and the servicing controls, but then also expanding the controls to lower level technology. DV is a step down, whether that's advisable. There is a valid rationale in terms of what China can do with the equipment. I don't want to undermine that argument because it is a real argument. There's things like multi patterning techniques and other kind of known ways to use the equipment to two ends that we have an interest in preventing. On the other hand, they already have a lot of it. There's been a lot of sales. There's been a lot of sales, especially since 2022, you know, of DUV equipment. They have. Whether that's stockpiling or whether that's for actual capacity is hard to tell, but they have a whole heck of a lot of it already and they are able to make their own. They have demonstrated the machines exist, they're in production, they're not as good as the ASML machines and they are not able to make enough of them. Now but it's a question of time, really, of how long it will take to get there. And basically how much are you getting for this? And because of the way that this bill recommends going about getting it, you're paying a fairly high cost in the sense of what you're risking in terms of the partnership, the multilateral agreements, but also the risk of strong retaliation from China if this were to go into effect. If this were to happen, it's pretty much a guarantee that you would get an extreme reaction from China and it would go not just against the US but they would take presumably strong action against the Netherlands for doing this, which would then even further strain their relationship. And something that concerns me is designing out US technology from ASML dub equipment to the extent where the US Couldn't assert jurisdiction would be extremely complex and expensive, incredibly difficult. But where is that tipping point?
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A
Since you're an insider, Kate, let me ask you a couple or former insider. There's a couple of questions come to mind because I looked at the legislation as it is in draft form and it's a typical early congressional product. It has a great name and a wonderful press release and a somewhat disappointing draft bill that is referred to at least the most. The current bill is not even has a bill number. It has, it's called a discussion draft and it's about 16 pages long. So given the formative stages that we seem to be at and your knowledge of how these negotiations might proceed, what do you think that the administration actually needs in terms of statutory authority and what kinds of changes would you advise that would make it more effective in the result that everyone seems to want?
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D
It's a great question. So with the quick timeline on this, with, you know, purportedly this going to be, you know, marked up on the 22nd, I expect that the intent is to get this into the NDAA Navy Defense Authorization Bill, which is, you know, must pass bill as a way to get it through. So there will be, you know, changes presumably in that markup. It'll be interesting to see if Geoquin leadership pushes back on this as they have with the A Overwatch act and other ship legislation that somewhat goes in a different direction than the office of the President has taken on ship sales and ship exports. My approach to this would be to as opposed to going in with the stated threat, basically that, that you were going into a negotiation, but if you don't agree to our terms, we are going to take authority and assert authority and, you know, if you won't control it, we will control it for You, I think there's a different approach you could take to get what you really need in terms of the alignment on the existing controls as they are. You could use the sort of this that you now have, you know, publicly put out in a draft form threat about dub equipment as a, you know, we will drop that if you will meet us here. There's the stronger national security argument to my mind on the sales and the servicing to the end uses fabs than there is on extending the controls further to older equipment. So that would be how I would approach it.
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A
Well, great. Sounds like a fine mess that he controls. People who've got themselves in. Fortunately, you have broad underlying authorities and you have some multilateral fora in which to discuss this. Are any of the existing discussion forums useful in this regard or they all have actors like Russia or people who we don't want at the table involved in the discussion?
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D
Well, another sort of aspect of this that we haven't discussed yet is this is an interesting approach to export controls in that the draft bill reads a lot almost like a draft bill regulation, which is a little unusual. So it's very prescriptive on what the regulation should be, which is not the typical order of things. Generally you would see something like this. The idea, these things coming from the Commerce Department directly and not coming through legislation directing the Commerce Department to do so.
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A
Well, it sounds like we've got a lot of things to watch and we thank you for giving us the really knowledgeable experts view of what seems incredibly complicated to anybody who's a casual observer of export controls very much. Bill, you've been in this business for a long time. You think this will work?
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B
I'm skeptical. Basically putting under control things that have been released in the past is always a difficult exercise. The economic stake is significant. ASML in particular has made a lot of money selling these things. The United States government in the past has let them sell these things. So to kind of take a step backwards now is going to be difficult diplomatically. It was hard enough in the beginning, as Kate well knows, in 2022 to get the degree of cooperation that the Biden administration was able to get. The Trump administration, as we've talked about in other contexts, tends to be more stick oriented than carrot oriented and will be inclined, I think, to use its extra territorial reach and the foreign direct product rule to try to cut these things off if the, the Dutch and the Japanese don't cooperate. And that will then produce, I think, the two things that Kate was talking about, which is retaliation from China and also acceleration of their own efforts to develop their own technology that excludes anything that is US Based. Maybe I can ask one last question on this for Kate. We do seem to be in an odd position where despite the acrimony, the Chinese and the United States are actually in some respects, pursuing similar policies. We are trying to prevent them from getting our stuff, and they are trying to pressure their companies not to use our stuff and to develop their own. So in an odd way, aren't our
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D
policies kind of aligned when you pose it that way? Aligned is not exactly how I would have phrased it, but they are converging.
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B
Yeah. I think the flaw in that argument is that, and you noted that, is that they're not producing now at the scale that they need to meet their own domestic needs, and they'll need to continue to rely on Western sources, at least in the short run. What could they do in retaliation that would be serious?
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D
So we've reached sort of a place of detente and we'll see what happens at the next Trump and G Summit on this in May. But their ability to cut off our access to critical minerals is very real and has a very large impact. They're using the same playbook with Japan, and there's no reason to think they wouldn't do the same with Netherlands. And they've built the infrastructure to do this. And while there's a lot of really good and solid efforts going on to develop alternate supply chains for these minerals, it's going to take time. As long as we're in that place, we are very vulnerable to this retaliation. And they've shown themselves very capable and willing and ready to adapt and really meet us tit for tat.
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A
Well, for those of you who followed the Supreme Court arguments and thought we were done with tariffs for a while, we're sorry to disappoint you, but there are more tariff announcements from elsewhere in the Commerce Department this week, including Section 232 national security tariffs on metals, I.e. steel, aluminum and copper, and pharmaceuticals. Now, this is one where the more I researched this, the more confused I got. But there were already tariffs on metals based on the the amount of. And these are products made with. With steel, aluminum and copper, as well as steel, aluminum and copper. As if this weren't complicated enough, there is now a plan to take an entire product where steel, aluminum or copper makes up more than 15% by weight and charge a flat 25% tariff on the entire value of the product, which seems like it covers a lot and may make things even More complicated. So on the steel side, we're fortunate to have Bill on the podcast because of his long years with the Steel Caucus, as the Congressional staffer to the Steel Caucus in Congress, and the deep knowledge of all the myriad twists and turns of the steel business. Are we really protecting anything, Bill? Are we just making life difficult for users of things, not just steel, but users of products that happen to be constructed with steel, copper, or aluminum?
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B
Well, the ostensible goal of this change is to make things simpler. It probably does make things simpler, but it doesn't necessarily make them better for anybody. Really simple is because of the most famous example that came up is in the dental floss example, because the previous dental floss. Yes, the previous rule was that if you were importing a product that contains steel, you had to pay the 50% tariff on that portion of the product that was steel. And that turned out to be extraordinarily complex because most people don't think about how much steel is in their product. And sometimes it's de minimis, dental floss being the case. For those of you that floss know that floss is not a steel product. On each little container of floss, there's just tiny little steel thing at the top that you use to cut the floss. Under the previous system, they would have had to pay a 50% tariff on the value of that piece, irrespective of the value of the rest of the item. That is a calculation nightmare trying to figure out and multiply that by many different cases. This was designed to simplify that because it just says if your metal content is under 15%, which it would be in the case of dental floss. There's no steel tariff, period. You just pay what that country is paying. If it's more than 15%, then the new thing is instead of paying a percentage based on the value of the steel content, you're just going to pay a flat 25%. Depending on the product, and depending on the permanent steel content, there may or may not be an increase in what you had been paying. It would be a simplification. So I guess if you're concerned about paperwork that gets you something, what it's doing, I think, is probably not having the intended effect. The domestic steel industry, I'm reasonably confident, is happy they're making more money. Whether they're hiring more workers is a different story. Steel work employment has been declining for years, largely as a product of technology, not for other reasons. But the industry is there. I think that the issue that has had the biggest Negative impact on the economy has been the downstream tariffs. Tariffs on basic steel are not new and there's been a whole network of anti dumping and countervailing duty tariffs on Steel for 40 years in various permutations, various countries, various levels. The new Trump wrinkle is downstream products. So things that contain steel suddenly are having 50% or depending on the country, because if you've cut deals lies in the UK and the EU do. It's supposed to be down to 10% in the case of UK or 15% in the case of the EU, but it's still substantial compared to the past. And this is awkward because a lot of what those things are are parts and components that go into end products. The most obvious one being automobiles.
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A
Right.
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B
So what we have done is make making cars more expensive. To the extent that people are importing car parts from overseas now, there' special treatment for Canadian and Mexican car parts. So it's not a huge thing. But the point of it is to persuade companies to reshore and do their manufacturing here.
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A
Sure.
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B
Buy their steel here and make their steel parts and components out of American steel. There are ironies to this though, if you just noticed. Today's report was that apparently Trump's Ballroom is going to be using foreign steel.
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A
Well, that's nice.
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B
Which is a little bit inconsistent with the spirit of the thing, I would say. It's being supplied by ArcelorMittal, which actually has been for a long time was an American company. They bought Bethlehem Steel as I recall. But over the last few years they not entirely, but more or less gotten out of the US business and are really a global company. And I think the Ballroom steel is going to be imported. No one has yet asked or gotten out of the Trump administration explanation of why they feel the need to do that, as opposed to buy it from US Steel or Cleveland Cliffs or other producers. So I don't think it's having the desired reshoring effect. On the other hand, too soon to say.
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A
Yeah, most of these things don't wind up working.
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B
Yeah, exactly.
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A
Yes, that's right. And they certainly by making things more complicated, you make it more expensive to manufacture in the United States. So congratulations on that. Your Dettolfloss example reminded me of the famous Lacey act extensions. The Lacey act prevented sort of illegally harvested wildlife, animals and birds in particular. And there was a concern raised about illegal logging. And so some excited member of Congress decided, well, let's just extend the Lacey act to the plant kingdom as well as the animal kingdom. And they did. And then they figured out that the plants are in everything like paper. So all of a sudden there was Lacey act compliance for cars because of the owner's manual and the air filter, both of which were paper products. So they stopped themselves before they legislated again. But I guess we can repent at leisure for some of this.
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B
It's an axiom. You mess with the market and there are unintended downstream consequences every single time.
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A
Most definitely.
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B
Can you talk about the pharma, the pharmaceutical thing for a couple of minutes? Just so.
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A
Yes, yes. I think that's an interesting one because, well, you can understand the concern about the need to have production capacity on pharmaceuticals. The United States was always a good place to do fine chemistry. I think with today's plentiful hydrocarbons in the market, it's an even more attractive place to do fine chemistry. But the drug section 232, it appears to me that while it's on the surface quite punitive for foreign manufacturers, the exceptions seem to swallow the rule by the time you get through with it. Because there's 100% tariff on imported drugs made by companies that refuse to have U.S. production or refuse to commit to U.S. production. In terms of pharmaceutical producers, there are a number of bilateral agreements and the so called most favored nation clause because the Trump administration, as well as trying to reshore or have US Production of pharmaceuticals, they are trying to match global pricing and reduce costs to the consumer. So these goals obviously collide and I think with the number of exceptions of if you have a bilateral, if you've accepted the most favored nation, if you've made a plan to have capacity in the United States, and keep in mind it probably takes seven to 10 years to build a full scale pharmaceutical plant to FDA compliance standards. So it's a commitment is a long time away from a factory producing the product. Having said all that, it's a very high tariff on probably no. 1 by the time we get done with it. But I don't know. Do you have another view, Bill?
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B
I don't think the exceptions in 100% swallow the rule, but it's an illustration of what Trump has been trying to do in a lot of areas, which is reshoring.
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A
Yes.
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B
And in the pharma case it's explicit. You know, if you commit to building a factory here, you get a deal and a lot of companies are doing that. And as Scott said, it's probably going to take a while to bring that to fruition. But the unknown I think at this point is is that going to raise or Lower drug prices. I mean, this is also part of a campaign. A big priority for actually both parties has been to lower the price of drugs. The American public thinks drug prices are too high. If you look at the data, drug prices here are really are than in many other countries. There are reasons for that, one being other countries have national health programs that subsidize them. But we do have high drug prices. It's clearly a politically sensitive issue. Both parties are competing to say that they are the better ones most likely to reduce drug prices. And now we have a policy that is designed to force companies to produce here, which will almost certainly be more
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A
expensive, is very likely.
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B
And you can make the argument, then you switch to the security argument. We need to have our own production capabilities of this stuff. We don't want to rely on the Chinese for medicine. I get that. That's legitimate. But what we've got, as we've seen in other cases, is multiple conflicting goals. If you don't want to rely on the Chinese and you want to have low prices, it's hard to achieve both of those things at the same time.
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A
Yes, but fortunately, we're talking about Washington, where talking out of both sides of your mouth is a basic employment skill. So we have plenty of practitioners.
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B
I used to do that a lot. I know.
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A
Well, yes, we're all. We're sort of recovering in that category. At least Bill and I are. Since we have Kate with us, a recent veteran in the Commerce Department, we decided to close with a Commerce Department story, and that's about the President's budget for various Commerce functions in the coming year. It's interesting only because there's an overall 10% reduction in non defense discretionary spending implied in the President's budget. And that slices a number of different ways in the Commerce Department, in part because the Commerce Department is the Department of Miscellaneous in a lot of respects. There are many, many, many functions in there, but also because certain functions like information security, which manages export controls, is a vital defense function. So there's a lot of business that is non defense in the Commerce Department. So, Kate, could you give us an overall look at what you think the President's trying to accomplish in the budget he just presented?
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B
I just say, while she's getting ready, Scott's comment about the Department of Everything reminds me. When I was in the Commerce Department, we went through two years of the Republicans trying to eliminate it, which is a fascinating story in and of itself. But one of their prime quotes came from George H.W. bush's Secretary of Commerce, Bob Mossbacher, who refer to it as the hall closet of government. Everything you didn't know where to put, you put it at the Commerce Department.
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A
It wound up there somehow.
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B
And one of the things that I was tasked with doing by the secretary in the Clinton administration was trying to demonstrate how everything is related to everything else inside the building. So we had to figure out how the Minority Business Development Administration and the National Oceanographic Atmospheric Administration and the Bureau of Industry and Security and the National Institute of Standards of Technology all related to each other. Not an easy task.
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A
How'd you do on that?
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D
I would like to know the answer.
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B
Let's just say it was a bit of a stretch, but we prevailed at the end of the day. And I won't go through the whole story, but it was a masterpiece of watching the Hill work, because in the end, there was going to be a vote in Congress about this, and the House voted to eliminate the department. And it got over the Senate. And reasons we can talk about another time. The amendment came up on the floor to abolish the department. And the majority leader at the time, who was Bob Dole, who did one of his masterful leadership moves where he got up and said, this is a good amendment. I support this amendment. It's a very thoughtful amendment. Unfortunately, we're not going to be able to have a vote on it. And that was the end of that.
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A
And, you know. I know. And the American people, doll.
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B
And it went away. And I think it went away for a lot of reasons. But the main reason it went away, I think, is because Ron Brown had a chat with Bob Dole about this. And I think they came to understand that the department does an awful lot of essential things.
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A
Yes.
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B
And that moving them around, rearranging the deck chairs, not exactly on the Titanic, but on some movable vessel, probably wasn't going to accomplish anything except waste a lot of money. So, sorry. Kate, back to you. Can you talk about the BIS budget a little bit?
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D
Yes. Thank you. So while, as you noted, some other parts of the Department of Commerce would get a budget cut, the Bureau of Industry and security would get $250 million plus up, which is really a huge amount for a tiny, chronically underfunded agency. It's a, I believe, a 91% increase compared to the previous year. It's the skinny budget. So your details are very light. But what it says is that this would go on the enforcement side to hundreds of new special agents for enforcing our export controls, and then on the other side, or to Section 232 investigations, which is one of those niche things that is done by the Bureau of Industry and Security is actually doing all the analysis and the assessments and those investigations and taking that recommendation up to the secretary of Commerce. So it would be massive increase in funding for the agency, which both bipartisan. There's been agreement for a long time that the agency is extremely underfunded and needs a lot more. With this level of detail, it's hard to know exactly how it would be doled out, how much wiggle room there is under those two broad categories that are listed. My concern would be whenever you're adding support to your enforcement, you're adding agents. If you're not adding alongside that analytics support, then you're run into issues. And if you're adding support to Section 232 analysis investigations, which is great, what about additional support on all of the other research analysis tasks that are done? Project Bureau Sure.
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A
Well, thank you. Because the president's budget is basically a declaration of priorities, it doesn't mean much to the appropriators. It's a starting point. But at least this budget has made a declaration about what it thinks it's important. And BIS is one of the things that is important to the country. So in any case, that's all we have time for today. But Kate, thanks for joining us. You are a big help to our audience understanding these very complicated but vital issues. We'll hope to have you back on another time.
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D
Thanks so much for having me.
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A
Thanks again, Bill. See you soon.
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C
You've been listening to the Tray Guys, a CSIS podcast. For more audio content, visit csis.orgpodcasts thanks for tuning in.