By Katrina Northrop

How the Commerce Department became central to the U.S.’s China policy.

Last May, Secretary of State Antony Blinken delivered a highly-anticipated speech that finally outlined the Biden administration’s China policy. Amidst talk of ‘decoupling’ and the ‘death of engagement,’ Blinken described the administration’s approach to China succinctly: invest in America, align with allies, and compete with China when necessary.

It was a well-received speech, but Gina Raimondo, the Secretary of Commerce, still sensed there was something missing.

According to Elizabeth Economy, a China scholar who is serving as senior advisor on China in the Commerce Department, Raimondo felt that “there was a need for the administration to lay out more clearly its economic and its competitiveness strategy with regard to China.” So, with Economy’s help, Raimondo gave a speech at MIT last November outlining her department’s approach towards China policy and showing explicitly what invest, align and compete looks like in action.

The Commerce Department, after all, plays a crucial role in implementing a significant portion of the Biden administration’s China policy. Its responsibilities range from incentivizing domestic manufacturing of advanced semiconductors to working with allies to ensure the strength and resilience of supply chains and enacting export controls against Chinese telecommunications companies on national security grounds. Commerce, in other words, is tasked with overseeing one of the most important challenges today: the holistic reconsideration of America’s economic relationship with China.

Raimondo, the former governor of Rhode Island, has virtually no China experience and does not neatly fit into the hawk-dove continuum prevailing in Washington’s policy circles. But while the Biden administration’s diplomatic overtures have not been fruitful, Raimondo has been able to flex her department’s muscle and boasts tangible results that have proven elusive for other parts of the Biden administration. In a significant development, Raimondo met on Thursday with Wang Wentao, the Chinese Commerce Minister. It was the first cabinet-level encounter between the U.S. and China in Washington during the Biden administration and a signal of the Commerce Department’s central role in the current U.S.-China relationship.

Usually, the Commerce Department is far from the center of anything. Officially tasked with creating “conditions for economic growth” and serving as the voice of business in the federal government, the agency’s 13 bureaus cover a strange hodgepodge of responsibilities, including oversight of the national census, patents and weather monitoring. Moreover, the Commerce Secretary has traditionally been relatively low profile compared to the Secretaries of Treasury, Defense and State. Wilbur Ross, for instance, who held the top Commerce job during the Trump administration, was a 79-year-old private equity executive with no prior experience in government at the time of his appointment.

But Raimondo’s arrival has given the department a boost. A Yale and Harvard educated lawyer who studied at Oxford as a Rhodes Scholar, she worked in venture capital for a decade before becoming treasurer of Rhode Island — where she rose to prominence with a controversial pension reform plan — and was eventually elected governor in 2014. Along the way, the 52-year-old gained the reputation as a pragmatic and energetic rising star, and perhaps most importantly, trusted by both President Biden and the business community.

“Raimondo is an up-and-coming force within the Democratic Party,” says Matthew Turpin, former senior advisor on China to the secretary of commerce during the Trump administration. “That is an important distinction [between her and previous Commerce Secretaries]. There is policy power and political power. She has political power, and that is key to understanding her position. She has more political insight than Commerce Secretaries in the past.”

Increasingly inherent to her position, meanwhile, is policy power. While other parts of the federal government, including the National Security Council (NSC) and the State Department, are key to formulating big picture China policy, the Commerce Department is often where the rubber meets the road because of its statutory authorities. Some of those responsibilities seem to conflict with one another — such as promoting trade and enacting export controls — but observers note that this can be useful when it comes to China policy. The Department has to consider both economic and national security together, forcing it to pursue policies that reflect the economic integration between the U.S. and China.

“Whether Commerce wants to be or not, it is fundamentally going to be a critical player in U.S. national and economic security going forward,” says Jonathan Panikoff, a former career intelligence officer who now works at the Atlantic Council. “They’re playing a central role because, frankly, nobody else in the U.S. government can.”

This, observers note, is a testament to how the U.S.-China relationship has changed. In the early 2000s, Commerce’s involvement in China policy was primarily aimed at bolstering U.S. business opportunities in China and advocating for economic engagement. That element persists, but as the broader national strategy has changed — largely souring on China during the last administration — parts of Commerce Department became “the tip of the spear when it came to national security and economic security,” according to Michael Walsh, the former chief of staff for the Commerce Department during the Trump administration. “Commerce was where the big moves were being made.”

Under Raimondo’s leadership, Commerce has grown even bolder. The department is in charge of administering the CHIPS and Science Act, a $52 billion flagship program that aims to incentivize domestic production of semiconductors, largely in response to fears about the concentration of chip factories in China and Taiwan. The department also oversees the Entity List, which has emerged as the front line for responding to China’s perceived military buildup and human rights abuses. After a Chinese spy balloon floated over the U.S., for instance, the U.S. government responded swiftly by placing six Chinese companies linked to surveillance activities on the Entity List, which bars U.S. firms from exporting to the sanctioned companies without a license.

The list of China-related responsibilities goes on: the department has an office overseeing patents, which deals with intellectual property theft issues from Chinese companies; it has also been tasked, alongside Treasury, with scoping a potential outbound investment review process, a key China-related policy priority for the administration. Newly proposed China-related legislation, meanwhile, would only add to Commerce’s duties: for example, the RESTRICT Act — which would set up new processes for mitigating risks from foreign technology firms, including Chinese companies — lays the duties of implementation at the feet of Commerce.

Given the nature of the U.S.-China relationship today, the increasing importance of the often-overlooked 44,000-person federal agency is only logical.

“When you are talking about the two largest economies in the world,” says Cordell Hull, who served as the acting under secretary of commerce for industry and security during the Trump Administration, “and you want to avoid kinetic war, and diplomacy is not that reliable, then you turn to economic statecraft.”

A TOOL FOR THE NEW COLD WAR

The first bureau in Commerce to see its mission radically altered due to China was the Bureau of Industry and Security (BIS), which oversees the Entity List. Originally, the Entity List was focused on stopping the proliferation of nuclear weapons, and it was populated mostly by companies from India and Pakistan.

This was an important mandate, but BIS was not a power player.

“BIS was well known to export controls folks,” says Hull. “But if I had my job ten years earlier, even standing outside the Commerce Department, people would ask me, what is BIS?”

During the Obama administration, the Bureau of Industry and Security (BIS) ventured into China policy by adding more Chinese companies to the Entity List. Among them was the Chinese telecommunications giant, ZTE, which was added to the list several months prior to the 2016 election for violating U.S. sanctions against Iran.

However, ZTE’s time on the Entity List was short-lived. A year later, the Trump administration, which swept into power hoping to land a trade deal with China, brokered a settlement agreement with ZTE, which removed the company from the Entity List in exchange for a large fine and agreement to strict compliance measures.

In 2018, however, the Commerce Department found that the company was not adhering to the terms of the agreement and sanctioned the firm once again. Then, a month later, an unexpected twist unfolded. Following a conversation with Chinese President Xi Jinping, President Trump intervened and overrode the Commerce Department’s decision. Trump took to Twitter to announce the shift in approach, stating, “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast.” Inside the bureau, the move was met with what one former BIS official says was “stunned stupefaction.”

If the ZTE saga first hinted at the centrality of BIS to China policy, it was another campaign against a Chinese telecom company that would really show what Commerce was capable of — namely, crushing Huawei, a major multinational. Up to that point, most of the companies on the Entity List were small firms or front companies. The Commerce Department’s decision to go after Huawei represented a “step change,” according to Turpin, and it wasn’t taken lightly.

By early 2019, discussions about potential actions against Huawei, including adding the company to the Entity List, were swirling at BIS. In May 2018, the Pentagon banned the sale of Huawei equipment on military bases, and in January of the next year, the Justice Department unveiled two indictments against Huawei, charging the company with bank fraud and obstructing justice in relation to the company’s business in Iran. Concerns about the company’s potential to tap into or otherwise handicap U.S. networks were growing.

But there were worries inside the department about the unintended consequences of placing export controls on one of the largest telecommunications firms in the world, according to former Commerce officials. Huge swaths of telecommunications networks, both in the U.S. and in allied countries, relied on Huawei, and it would be costly and time consuming to replace the equipment with Western alternatives.

“It’s not like we could say, ‘Okay, here’s $20 billion, redo your networks,’” says Mira Ricardel, who served as under secretary of commerce for export administration at BIS from 2017 until spring of 2018, when she moved to the NSC. “That was the challenge, because they can’t have no telecom equipment,” she says, referring specifically to fire departments or first responders in rural areas, where Huawei was frequently used.

Nazak Nikakhtar, who assumed the position of under secretary of commerce for industry and security at BIS in February 2019, says that during her first few months in office she had multiple conversations with Commerce Secretary Ross about putting Huawei on the Entity List. Although he was always supportive of the idea, it wasn’t until May when he called her — she was home sick that day with a 103 degree fever — to tell her he got approval from the White House to make the move, she says.

The next year, BIS tightened the screws on Huawei further: using the Foreign Direct Product Rule — a measure that allows BIS to control some foreign-made goods if their production involves U.S. technology, software or equipment— the bureau expanded its reach and prohibited foreign companies from exporting certain technology to Huawei without a license. This was an innovative use of the rule, and it would later become the playbook for how the U.S. formulated sanctions policy in response to Russia’s invasion of Ukraine.

In a July 2020 filing by Huawei’s lawyers to the Commerce Department, the Chinese company sought to challenge the new, expansive restrictions, calling them “unprecedented” and saying it was “improper for [Commerce] to adopt a purportedly general amendment to the Export Administration Regulations (‘EAR’) in order to take policy-driven action against a single major international company.”

The Commerce Department was not deterred. In the years after the restrictions, Huawei’s profit plunged — in 2022, it reported a 70 percent decline. And over the course of the Trump administration, in a steady drumbeat of announcements, about 250 Chinese companies or individuals were added to the Entity List. Among other things, the list was used to aggressively target companies that BIS claimed were involved in human rights abuses in Xinjiang. And in the last days of the administration, BIS released a new ‘military end user’ list, which sought to address China’s military-civil fusion efforts by creating a list of military-affiliated companies that would become subject to special export requirements.

Ricardel, the former Commerce official, says that BIS now “punches above its weight” partly because of the increased importance of ‘dual use’ technology.

“As the military has become much more dependent on commercially developed technologies that can be used for commercial and/or military purposes, BIS’s role has just expanded,” she says.

Nevertheless, when the Biden administration came into power, it was unclear whether Commerce and BIS would use its powers against Chinese companies in the same way. Huawei, for one, was hoping it could reset the relationship.

A few months into the administration, in a letter from a Huawei vice president to the deputy commerce secretary, which was reviewed by The Wire, the telecommunications company requested a meeting “in the hope of finding ways so Huawei can effectively listen and understand your department’s concerns about the company.”

But Huawei didn’t see that a more fundamental shift had taken place in Washington. By the time Biden took office, it was the assumption in Washington that the U.S. was in a strategic competition — or even a new Cold War — with China, and BIS had proven that it had some useful tricks up its sleeve.

“In an interconnected economy, BIS is the tool we are trying to use,” says Turpin, who served in the NSC and as an advisor to the secretary of commerce during the Trump administration. “It wasn’t useful during the Cold War — Russia did not have an electronics industry. But Commerce plays a more critical role during this new cold war.”

Hired in this context, Raimondo’s mandate was clear. When she was asked about her position on Huawei supplying equipment for U.S. telecom networks at her Senate confirmation hearing, Raimondo said, “National security has to come first… I would use the full toolkit at my disposal to the fullest extent possible to protect Americans and our networks from Chinese interference.”

Upon assuming office, she made good on her threat. In April, BIS imposed a $300 million fine — the largest administrative penalty in BIS history — on Seagate Technology, a California-based data storage firm, for selling millions of hard drives to Huawei in violation of export controls.

RAIMONDO’S BIS

From his commanding corner office on the third floor of the Herbert C. Hoover Building, a boxy structure that offers a view of the White House South Lawn, Alan F. Estevez candidly admits that he never sought out the position of overseeing the Bureau of Industry and Security (BIS).

With a background in acquisition and logistics at the Pentagon, Estevez was also not an obvious choice for the role, which is usually filled by an export control lawyer. But with the new — and more assertive — role of BIS, Raimondo seemed to be seeking out a different profile.

When Raimondo first called Estevez about the job, he was working at Deloitte Consulting. “I told her I was not an export control maven, but I am a national security professional,” he says. “I do understand the whole weapon systems programs around that and military modernization and how to think about China.”

She told him that was exactly what she was looking for, and she was persuasive in getting him to take the job. She even had the late Ash Carter, the former Secretary of Defense and Estevez’s previous boss, call him on her behalf.

At the Pentagon, Estevez was charged with ensuring that the U.S. had access to emerging weapon technology and world class weapon systems, a job that made him uniquely focused on long-term defense priorities. Now, from his office at BIS, he is looking at “the flip side of that coin” by working to ensure that it is hard for China to get access to those same future technologies.

This, Estevez says, was part of the rationale behind BIS’s sweeping export controls on advanced chips issued on October 7th, 2022. The rules restrict not only the sale of advanced chips and semiconductor manufacturing equipment to China, but also some U.S. persons working for Chinese semiconductor companies.

“It was comprehensive,” says Chris Miller, author of Chip War: The Fight for the World’s Most Critical Technology. “Before, export controls were targeting specific companies; this was the entire country. The other new thing was the extent to which these controls impacted both military relevance and civilian relevance. This was a willingness to wade deeper into civilian technologies.”

There will be slight adjustments on the October 7th rule coming out shortly, according to Estevez, but BIS is considering putting out similar wide-ranging rules to holistically target different sectors, specifically referencing the possibility for controls on biotechnology and quantum computing.

“I think we got it pretty close to right,” Estevez says. “It’s the right methodology for future protection.”

In the lead up to the semiconductor announcement, Estevez says that Raimondo brought her “investment banking, Rhode Scholar-type demanding direction” and asked a lot of “hard questions” of his staff about what the impact of the controls would be and whether the bureau had adequately engaged with industry.

If the model is used again on other industries, Estevez says BIS needs to be similarly thoughtful, considering, for instance, whether China would be able to obtain technology from other countries — rendering the U.S. restrictions less meaningful — and what the right technologies to protect are.

“In the biotech area, for example, I’m not trying to stop China from curing cancer, or providing healthcare to its citizens, because that’s not the goal here,” he says. “The goal is to stop growth in military capability that can be used against us.”

William Zarit, who advises Western companies on the Chinese market at the Cohen Group, says that while the business community largely likes Raimondo, there are criticisms of BIS and Estevez’s expanded use of export controls as a foreign policy tool. The view, he says, is that Estevez is taking a “yi dao qie” approach — the Chinese idiom meaning the use of one solution for a diverse range of problems.

Hawkish voices in Congress, meanwhile, rail against BIS for not imposing more export controls and not enforcing the existing controls vigorously enough. “Commerce needs to do a lot more to walk the walk when it comes to protecting our national security interests,” says Representative Michael Gallagher, who chairs the Select Committee on China.

Estevez, for his part, doesn’t seem too worried about the criticism. “I have a certain wing of Congress saying I’m too lax, and I have industry saying I’m too tough,” he says. “Well, then, I must be like Goldilocks.”

‘RUN FASTER’

Commerce officials describe the department’s approach to China as a balance between “promoting and protecting.” And while BIS, which is in charge of ‘protecting,’ was already expanding its power in previous administrations, many observers say that Raimondo deserves credit for focusing on the ‘promoting’ side of the equation — which includes both enhancing U.S. technological competitiveness and enabling U.S. companies to do business, including in China, in ways that do not threaten U.S. national security.

The protect and promote dynamic is most obvious in the department’s policy towards semiconductors — which have become a flashpoint between the U.S. and China.

“It’s impediments over here,” says Estevez of BIS’s role slowing down China’s semiconductor industry, “and run faster over there. And the CHIPS Act — and the $52 billion associated with it — is the oil and machinery to make us run faster.”

It wasn’t a done deal that Commerce would be able to pump that oil into the system. Raimondo, along with others, worked for over a year with lawmakers to shepard the CHIPS Act — the largest American industrial policy program in decades — to the finish line.

“When you talk to Republicans on Capitol Hill, they all love Gina Raimondo,” says a semiconductor executive. “She had meeting after meeting, and she basically became the Secretary of Semiconductors for two years. Her leaning into this made a big difference.”

But the job is far from complete for the Commerce Department, which is now in charge of doling out $39 billion in incentives to semiconductor companies, like Intel and TSMC, to build U.S. manufacturing facilities. After releasing the first funding opportunity in February, the CHIPS team, which is staffed with investment professionals and semiconductor specialists, announced that they received 200 statements of interest across 35 states.

Michael Schmidt, a former Treasury official tasked with running the program at the Commerce Department, says that the success of the program rests on whether it creates a “robust semiconductor ecosystem with self-sustaining dynamics” — it’s unlikely, afterall, that Commerce will receive another $52 billion check. In part, this means ensuring the companies that receive money do not expand semiconductor manufacturing in China.

The flow of money to semiconductor companies has attracted most of the attention when it comes to CHIPS, but the legislation also puts Commerce in charge of administering $11 billion for a semiconductor research program, the centerpiece of which is a new National Semiconductor Technology Center (NSTC).

In a speech at Georgetown University in February that outlined her vision for the CHIPS Act and the NSTC, Raimondo mentioned China just once — “China has produced more than 80 percent of new global capacity for certain mature chips, and their market share is growing,” she said — but the competition with China over who will lead the semiconductor innovation of the future was the backdrop of her remarks.

“She is clearly thinking years and decades ahead,” says Kevin Wolf, a former BIS official in the Obama administration. Raimondo’s centrality in China policy, he says, is a “function of personality, statutory authority and $52 billion.”

Beyond ‘promoting’ and ‘protecting’, the last part of Secretary Raimondo’s China impact may end up being communicating directly with her Chinese counterparts.

Raimondo’s meeting on Thursday with Wang Wentao, the Chinese Commerce minister, was the first U.S.-China cabinet-level exchange in months and represented a fragile opportunity for Raimondo to establish some trust and communicate concerns. According to the readout from the meeting, which was part of ongoing efforts to “responsibly manage the relationship,” Raimondo broached the “recent spate of PRC actions taken against U.S. companies operating in the PRC.” (On Friday, United States Trade Representative Katherine Tai met with Wang in Detroit.)

So far, there has been relatively limited engagement between the Biden administration and Beijing to “manage the relationship.” Secretary Blinken was scheduled to visit China in February but, after the balloon fiasco, he “postponed” the trip and has yet to reschedule. Now there is an open question of which cabinet secretary will be the first to travel to China.

In April, Elizabeth Economy traveled to China, partly to assess the potential for a trip by Raimondo. Economy, along with Scott Tatlock, the Commerce Department’s deputy assistant secretary for China, attended 28 meetings in four and a half days with Chinese officials from the Ministry of Commerce and the Ministry of Ecology and Environment, as well as U.S. business executives in China, Chinese economists, and U.S. embassy staff.

Economy says that Raimondo is not “going to go to China for the sake of going to China,” and a lot is dependent on the broader relationship. But if she does make the trip, “we’re interested in supporting U.S. companies and basically explaining our policies and helping the Chinese understand how their actions are influencing U.S. government positions.”

Positions, of course, that are increasingly defined and implemented by Raimondo’s department.