A China Reset?

U.S.-China relations

are sour, with President Xi Jinping escalating military threats against Taiwan, walling off basic economic data on the Chinese economy, and doubling down on predatory development strategies. China views U.S. export controls as a deliberate scheme to maintain U.S. “technological hegemony.”

The Xi-Biden summit in Bali last November was quickly overtaken by the spy balloon fiasco, which led to a cancellation of a longplanned fence-mending visit by Secretary of State Antony Blinken.

Innumerable commentators have called for a reset, to break the cycle of escalation and counter-escalation, reduce military tensions, and achieve an economic truce. As Treasury Secretary Janet Yellen put it in a somewhat wishful speech April 20, “We believe that the world is big enough for both of us.” That, of course, is axiomatic. The difficult question is who defines the terms.

A reset is the plea of the U.S. business and financial elite that profits from trading with China, outsourcing production to China, and investing in China. That sanguine view is shared by free-market economists who are appalled by the Biden administration’s turn to industrial policy, yet think that China’s state-led capitalism is somehow consistent with free trade.

But given the fundamental differences in national interests and strategies, is a symmetrical reset even possible? Under Xi’s increasingly authoritarian regime, China’s determination to displace the U.S. has only intensified. Would gestures to reduce conflict and seek a peaceful economic coexistence be reciprocated—or just treated as a sign of weakness?

While Biden is going full speed ahead with domestic industrial policy, the U.S. has already pulled back on policies to contain China. In many ways, the get-tough approach to China’s predatory mercantilism peaked last year.

Two emblematic cases are China’s access to U.S. capital markets, and the long-pending revision of strategic export controls. In 2020, Congress passed by voice vote the Holding Foreign Companies Accountable Act. The law required Chinese companies to comply with SEC disclosure and audit requirements, or they would be delisted from U.S. exchanges. The bipartisan lead sponsors included Republican John Kennedy of Louisiana in the Senate and Democrat Brad Sherman of California in the House.

Biden’s SEC , under Gary Gensler, was strongly supportive. In 2021, Gensler went after shell companies of China-based corporations, incorporated in offshore regulatory havens such as the Cayman Islands. Their affiliates are listed on U.S. stock exchanges with little if any accurate financial information.

Gensler directed SEC staff to “take a pause” from listing Chinese shell companies and warned investors about the risks. “I’ve asked the SEC staff to ensure that the companies provide full and fair disclosure that what [shareholders are] investing in is actually a shell company in the Caymans,” Gensler said in a video posted at the SEC YouTube channel.

In August 2022, the Public Company Accounting Oversight Board, a self-governing nonprofit created by Congress to oversee accounting standards, made a deal with Chinese financial authorities that gives PCAOB access to the audits of Chinese companies performed by Chinese accounting firms. In return, a China-based company can use a Chinese accountant to satisfy the requirements of U.S. law. In December 2022, based on field work in China and Hong Kong reviewing audits by two large accounting firms, the PCAOB retracted its earlier finding that Chinese authorities were blocking audits. This then freed Chinese companies to list on U.S. stock exchanges.

Gensler noted that PCAOB inspectors had found “numerous deficiencies at audit firms in China and Hong Kong,” and warned that if the Chinese do not deliver full access, the SEC would prohibit trading in these companies’ securities. But as Gensler also pointed out, the law gives China three years (recently reduced to two) to comply before sanctions can be imposed.

In February 2023, the Chinese government began a pressure campaign on Chinese companies to drop Western auditors in favor of Chinese accounting firms that are themselves subject to pressure from the Chinese regime. The PCAOB acknowledges that its review of audits has found multiple and serious deficiencies. It does have the power to bring enforcement actions against auditors, including fines, publicizing the deficiencies, and even barring auditors from practice. But no matter how many deficiencies it finds, the ultimate sanction—delisting from U.S. exchanges—cannot take effect for two more years.

A few Chinese companies have preemptively delisted from U.S. stock exchanges and relisted in Hong Kong or Shanghai, where they can still get U.S. capital investment. But according to the U.S.-China Economic and Security Review Commission, as of January 2023 there were 252 Chinese companies listed on U.S. exchanges, with a total market capitalization of $1.03 trillion, up from a market value of $775.6 billion in the third quarter of 2022.

In addition, there is nothing in the law to prevent U.S. investors from putting money into exchange-traded funds or other mutual funds that invest in China. These are huge moneymakers for U.S. financial companies, which in turn lobby for little or no limits on U.S. capital flows to China. So, despite the burst of hawkishness on capital flows late in the Trump administration and early in Biden’s, China’s state-led capitalism can get all the U.S. capital it wants.

The Biden administration also seems to be tempering a more confrontational stance in its long-awaited revised executive order on strategic export controls. In October 2022, the administration stunned Beijing with a dramatic increase in prohibited exports. These rules ban the export of advanced semiconductors, software for chip design, as well as chip manufacturing equipment. They also apply to any foreign-owned company that relies on U.S. technology.

The White House reportedly plans revisions of the export control order, to further restrict China’s access to advanced technology, AI, and quantum computing. But the order has been delayed for several months.

Advocates of a tougher policy have called for a “reverse CFIUS.” The existing Committee on Foreign Investment in the United States, based in the Treasury Department, screens proposed foreign investments in U.S. companies or technologies, and vetoes investments or corporate takeovers deemed inconsistent with the national security. A reverse CFIUS would screen proposed outgoing investments in China by American individuals and firms, and veto ones that could help either the Chinese military or its acquisition of advanced technology. But my sources tell me that the pending order will stop far short of comprehensive screening.

In the meantime, China keeps finding ways to circumvent existing export controls. The Financial Times reported that Chinese AI surveillance groups targeted by U.S. sanctions have obtained restricted technology by using cloud providers and rental arrangements with third parties, as well as purchasing chips through subsidiary companies in China. iFLYTEK , a U.S.-blacklisted, state-backed voice recognition company, has been renting access to Nvidia’s A100 chips, which are subject to sanctions.

In the view of the China hawks, we need the opposite sort of reset, with much more aggressive limits on U.S. investment in China and more stringent export controls. The hawks include many in Congress, most commissioners of the U.S.-China Commission, scholars such as Clyde Prestowitz and James Mann (who also serves as a commissioner), and critics such as Michael Stumo of the bipartisan Coalition for a Prosperous America. “The only thing that slows China down is concrete leverage and obstacles,” says Prestowitz. “We have all the leverage, access to our export market and financial markets,” adds Stumo. “Their domestic consumption is too weak and their export surplus keeps rising. We are the biggest absorber of all that surplus.”

On May 3, Senate Majority Leader Chuck Schumer proposed an omnibus China bill that toughens both export and capital controls and creates a U.S.-led rival to the Belt and Road project, whereby China partners on infrastructure projects in emerging markets around the world. The bill, which restores some measures that were dumped from what became the CHIPS and Science Act, has the support of key Democratic committee chairs. This would represent a substantial decoupling of the sort that Secretary Yellen explicitly disavowed.

A broad analogy is the containment policy that defined U.S. strategy toward Soviet Rus- in early May. “Our view is that we need to play in that market.”

Prestowitz has called this outrageous. “Having just been gifted $50 billion or more by the U.S. government to help them stay technologically ahead of China,” he writes, “are these rich darlings of Silicon Valley truly saying they won’t cooperate with U.S. government China policy?” sia during the Cold War. But China is a much tougher adversary than the USSR ever was. The Soviet Union suffered from deep internal rot. Its system was an economic failure. China’s is mostly an economic success. And while Soviet Russia had an extensive spy network, China has a much more potent Trojan horse: U.S. business. Domestically speaking, the China lobby is corporate America.

In fairness to Biden, he has resisted pressure to cut tariffs on Chinese exports first imposed by Donald Trump. He has appointed several people who understand how China plays the game, most notably U.S. trade representative Katherine Tai and China expert Rush Doshi.

Biden also needs to keep China from giving any more support to Putin’s war on Ukraine. Biden is further hobbled by the lack of support of U.S. allies in Europe. French President Macron and German Chancellor Scholz have sought to increase their countries’ economic ties with China, and Macron has spoken of a China policy independent of the United States.

The U.S. solar industry, which depends on Chinese components, functions as part of that lobby. Last June, the Solar Energy Industries Association succeeded in getting the White House to block a Commerce Department investigation of illegal transshipments of Chinese solar products.

The U.S. semiconductor industry is lobbying against any restrictions on its ability to do business in or with China. “It’s our biggest market and we’re not the only industry that lays claim to that,” John Neuffer, president and chief executive officer of the Semiconductor Industry Association, said

Even as national-security adviser Jake Sullivan has embraced a salutary economic nationalism, the China hawks are less influential inside the administration. John Kerry, Biden’s special climate ambassador and a leading advocate of rapprochement with China, reports directly to Biden, going around Secretary of State Blinken. Tai is an outlier among senior Biden officials. Doshi, author of the pathbreaking book The Long Game: China’s Grand Strategy to Displace American Order, has the title of Director for China of the National Security Council. But it’s not clear how much influence he has on policymaking.

If his colleagues have read Doshi’s book, they would know that the Chinese Communist Party is unlikely to change its goals or tactics. The Biden administration has been pursuing modest confidence-building measures, such as ending restrictions on flights to and from China. But there is no sign that China is reciprocating.

“I’m skeptical of the possibility of a fundamental reset,” says James Mann. “The strategic differences are too great, unless the reset would be overwhelmingly on China’s terms.” Unless Biden stops splitting the difference, U.S. policy could be just strong enough to annoy the Chinese leadership and lead to more political and military countermoves, but not strong enough to make much difference in China’s geopolitical behavior or its economic grand strategy.