Panel flags China risks in biotechs, quantum, legacy chips, Taiwan

That was one of 28 recommendations the U.S.-China Security & Economic Commission made to Congress to better navigate the intensifying rivalry between the two countries. The report follows a fragile truce between the two geopolitical rivals after the U.S. withheld from China the computer chips used for artificial intelligence and Beijing cut exports to the U.S. of rare-earth minerals critical to autos, semiconductors and military equipment.

Over the last five years, China has intensified its efforts to both become more self-reliant and establish its dominance in critical areas. “The U.S. is just starting to get its act together because of the shock of critical minerals and rare-earths [leverage China used]. There are other supply chains Beijing has leverage over that we aren’t paying attention too,” says Leland Miller, co-founder of the China Beige Book and a member of the commission.

The past year demonstrated that Beijing has a strong position for now; it controls 99% of heavy rare earths needed for technology, industrials and defense equipment. The report took the spotlight to other areas Beijing where could flex its leverage, including biotech and pharmaceuticals where China has been making rapid gains, printed circuit boards crucial to all electronics, foundational or legacy semiconductors and quantum computing. China, for example, controls 80% of the basic ingredients that go into antibiotics and fever reducers and controls roughly half of global production of printed circuit boards. Another risk: China’s heavy investment into its manufacturing industry is resulting in a flood of low-cost, more advanced exports, creating what some describe as a China Shock 2.0″ that threatens other countries’ domestic industries.

“Without bold action to strengthen domestic production, derisk from potential adversaries, and co- ordinate more closely with allies and partners, the U.S. will become ever more dependent on Chinese supply chains while Beijing in turn strengthens its ability to exert leverage via those supply chains by imposing either targeted controls or larger-scale embargoes on critical exports to the U.S.,” the panel warns.

Among the commission’s recommendations to Congress to address these risks: Create a consolidated “economic statecraft” entity to crack down on Beijing’s evasion of export controls and sanctions and bolster the Commerce Department’s Bureau of Industry and Security, the source of many of the export restrictions limiting China’s access to advanced U.S. technologies.

It also wants Congress to strengthen the biotech pharma supply chain by reducing dependence on Chinese active pharmaceutical ingredients, to increase protection of the U.S. power grid from threats posed by Chinese-made components and to increase funds for U.S. space initiatives.

The panel also wants Congress to push a “Quantum First” by 2030 national goal to gain advantage in cryptography, drug discovery, and materials science. “Whoever leads in quantum—and artificial intelligence—will control the encryption of the digital economy; enable breakthroughs in materials, energy, and medicine; and gain asymmetric and likely persistent advantage in intelligence and targeting,” the commission wrote.

The report also raised concerns about Beijing’s moves geopolitically, including more “coercive tactics” such as live-fire-military exercises without notice in the Tasman Sea. “These actions are designed not only to intimidate neighbors but also to test allied resolve, normalize Chinese coercion, and fragment collective response,” the commission said in the report. It said China is wielding its economic leverage—through ports, logistics hubs and surveillance outposts—for greater military access and security influence. The panel warns China could be testing these tactics to use them elsewhere in the world—including Africa, Latin America and Central Asia.

The panel also flagged Beijing’s intensified military activities around Taiwan, a warning to investors who have brushed worries about the island democracy Beijing considers its own.

“China’s domestic propaganda has stated that Taiwan’s ‘provocations’ could justify military action in the near future,” the panel wrote in the report. “While there is no indication that China is planning an imminent invasion—and Beijing still hopes to pressure Taiwan to surrender without a fight—the U.S. and its allies and partners can no longer assume that a Taiwan contingency is a distant possibility for which they would have ample time to prepare.”

Write to Reshma Kapadia at reshma.kapadia@barrons.com