US tech restrictions leave China's aviation advances up in the air as decoupling trumps trade

China's ambitions of becoming a key player in the global aviation supply chain will face more hurdles as Washington moves away from a growth-based trade policy and steps up efforts to slow Beijing's technological and military advances, according to analysts.

Last week, the US Department of Commerce introduced sweeping rules aimed at cutting China off from obtaining or manufacturing key chips and components for supercomputers.

When it comes to economic decoupling, semiconductors and aerospace are the two most noteworthy sectors, said Richard Aboulafia, managing director at AeroDynamic Advisory.

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"Unless the People's Republic of China changes its aggressive course, decoupling will continue, at least as far as key strategic sectors are concerned," said Aboulafia, an expert in aerospace industry trends.

"The biggest consequence would be the impact on China's own aircraft-development programmes. The biggest risk is to the trade in the technologies and systems that are necessary to make them functioning products."

Beijing has repeatedly said it is committed to a path of peaceful development, reforms and opening up, regardless of changes in the international landscape. And leaders have also vowed that China will not cut itself off from the outside world, even as it supports domestic innovation.

But there are growing concerns in the West that China is actually moving away from economic growth and integration into the global economy, and towards authoritarian rule, centralisation, and regional militarism under President Xi Jinping, said Aboulafia.

There is also rising uncertainty over the US' export of dual-use goods - those that can be used for both civilian and military applications. Such goods include aerospace-related technology. Official US trade figures show that China was the biggest export market for US aerospace products from 2012-18, but its imports have since declined amid a deterioration in relations.

Chip manufacturing and telecoms also fall under the dual-use classification.

The US banned the export of dual-use goods to Russia following its invasion of Ukraine.

US Secretary of Commerce Gina Raimondo has since said that the US could also deny exports of equipment and software to Chinese manufacturers found to be supplying chips and other items to Russia. She had previously provoked the ire of Beijing by saying Washington should work with Europe to slow China's innovation.

Thea Kendler, assistant secretary of commerce for export administration at the Bureau of Industry and Security under the US Department of Commerce, said that export control of dual-use items is a "constantly evolving tool to match the national security and foreign policy landscape".

More broadly, the US' significant changes in trade policy have complicated its trade relations immensely, potentially dissuading some countries from engaging more deeply with the US, according to Stephen Olson, senior research fellow at the Hinrich Foundation and a former trade negotiator with the Office of the US Trade Representative.

"It's clear that a host of other considerations - labour, environment, inclusivity, resilience, sustainability, and geopolitics - will be accorded a much higher priority than at any time previously," Olson said.

While US businesses have enjoyed significant influence on trade policy in the past, now their interests are more likely to be accommodated when they align with the administration's broader objectives on sustainability, resilience and US workers, Olson said.

In New York last month, state councilor and foreign minister Wang Yi urged US business executives to be "defenders of mutually beneficial cooperation, advocates of peaceful coexistence and promoters of friendship and mutual trust between China and the US".

He also asked the companies to "play a positive role" in getting US-China relations back on a path toward "sound and stable development".

Although US companies are facing increasing difficulties in doing business in China, along with an overall feeling of being less welcome, a fair number of US firms are striving to maintain a "don't rock the boat" mantra, making them strong candidates - at least from Beijing's perspective - in helping to mend US-China relations, Olson said.

"The impact of these companies has probably diminished, at least in relative terms, but Beijing is playing the best card it has available to exert influence in Washington," Olson added.

To counter foreign restrictions and sanctions on key technology, President Xi has stressed that China needs to focus on self-reliance in the development of critical technologies such as semiconductors and aviation equipment.

China's own single-aisle passenger jet, the C919, finally received a "type certificate" last month after 14 years of development.

However, the plane, which is designed to compete with Boeing's 737 and Airbus' A320, relies heavily on imported components, especially from US suppliers.

The US has already placed a number of Chinese aerospace companies on its sanction lists. These include the Aviation Industry Corporation of China, a major supplier of components for China's ARJ21 small regional jet and the C919.

China has said that the development of its own aviation industry, including manufacturing the C919, will help to drive technological advances in other industries such as material sciences, avionics and aerodynamics, while also ensuring that it meets the rising demand for air travel in the country.

Aboulafia expects that the Chinese government will have to work hard to reassure countries that their exports will not be used for military purposes.

Jacob Gunter, a senior analyst with the Mercator Institute for China Studies (Merics), said Xi's self-reliance strategy underestimates the complexity of the supply chains in relevant sectors.

"The risk of losing access to those [foreign] technologies makes it not only difficult to innovate and to close the gap, but also difficult to achieve other goals like raising productivity," Gunter said.

"In that sense, maybe this time Xi might have bitten off more than he can chew. But again, if any single country can do it alone, it's probably China."

If China presses on with its strategy to achieve self-reliance in aviation, it would need to create an entire supply chain for its own systems, Aboulafia said.

"Creating this China-centric supply chain will take 10 to 15 years and cost tens of billions of dollars," he said. "It's hard to see a third option, unless somehow relations are mended and decoupling is reversed."

Meanwhile, the Chinese market is simply not as impressive as it once was, Aboulafia said, pointing to a slump in air-travel growth rates that began before the pandemic, as demand waned.

"I don't think Western industry executives either realise, or want to admit, that things aren't going back to how they were before with the China market," Aboulafia said.

And with US trade policy on China being a fairly bipartisan issue among lawmakers, economic efficiencies are not the key drivers any more, Olson said. Companies need to recognise that geopolitical considerations will have to figure prominently in their sourcing, production and trade strategies.

"Over time, this will almost inevitably lead to some degree of decoupling with countries like China and Russia, but the extent of the decoupling remains to be seen. Globalisation might slow, but it won't be stopped dead in its tracks," Olson said.

This article originally appeared on the South China Morning Post (SCMP).

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