ASIA OUTLOOK

by Christine Casati

THE CHALLENGE OF USCHINA TRADE RELATIONS: COUNTERING PREDATORY INFLUENCES WHILE MANAGING HEALTHY TRADE TIES

Is China’s economic growth, and all it implies for stable supply chains and global trade, incompatible with U.S economic leadership? Has Washington’s rhetoric around tariffs, sanctions, and advanced semiconductor export controls triggered an unnecessary strategic showdown with China? Or were these actions too long in coming? Is economic decoupling really the right answer to guarantee our national security interests? Or should the goal be to “de-risk,” as E.U. Commission President Ursula von der Leyen puts it, not to “decouple”? Which companies or technology will the U.S. or China ban next? These are the current questions dominating global economic discussions.

Economic statecraft is never easy, but not doing the work can lead to peril. China’s recent strides in military development, defense manufacturing, A.I., and signal intelligence used for spying, not to mention medical supply chain shortages in the U.S. during the pandemic, make it imperative that the U.S. map out a blueprint for a healthy and comprehensive trade policy with China, without the war rhetoric, while countering predatory influences.

Tensions need to be defused by both sides. Otherwise, both manufacturers and consumers face ongoing uncertainty, which can result in damaging and costly decisions. At the same time, U.S. policymaking must not sabotage the profitable and mutually beneficial manufacturing investments of the U.S. and its allies in China nor make our citizens less welcome. Uncertainty and weaponizing trade policy may already have driven some multinationals, like Apple, Sony, and Adidas, to expansion elsewhere in Southeast Asia or India.

In its latest effort to define (redefine?) its economic approach toward China and to assuage its European allies who fear Washington may have grown too hawkish, the U.S. National Security Advisor Jake Sullivan, on April 27th, delivered a speech clarifying that the U.S. does not want to decouple from China. It wants to “de-risk and diversify its relationship.” While there is no doubt that the U.S. wants to reduce its reliance on China in vulnerable areas such as sourcing minerals critical to advanced manufacturing, solar energy, and electric vehicle batteries, among others, it does not want to call it “decoupling.” Janet Yellen, Secretary of the Treasury, made similar remarks in an earlier, more conciliatory speech.

Efforts to Counter China’s Influence

In line with China’s continued push to influence developing countries in Africa, the Middle East, and Latin America by peddling loans, investments, and diplomacy, the U.S. has launched new counter initiatives, including a U.S.-Africa Leaders Summit in Washington in December, where Biden committed $55 billion for Africa’s development over three years. In January, Janet Yellen conducted a ten-day trip to Africa and advanced plans to expand partnerships on conservation, climate adaptation, and access to clean energy, while announcing President Biden’s pledge of $1 billion to lead climate resilience efforts. Other U.S. leaders have visited Africa, paving the way, including Secretary of State Blinken and Climate Czar John Kerry. More recently, Vice President Kamala Harris visited three African nations in key follow-up meetings. But the U.S. is getting a late start after China began investing billions in infrastructure development, including manpower, mostly after 2010.

At the same time, the U.S. is doubling down on countering China’s dangerous influences at home. We all know about shooting down the China spy balloon after it drifted over the U.S., analyzing the balloon’s military intelligence collection capabilities. Also, the April arrest on federal charges of Chinese individuals conducting unauthorized surveillance on Chinese U.S. residents via a secret police outpost in New York City has been in the news. According to the American Enterprise Institute, this is just the “tip of the iceberg.” (4/27). The Chinese Communist Party (CCP) runs over a hundred such secret outpost overseas through national and local public security bureaus without the knowledge of their host countries. Their job is to help PRC citizens living abroad with renewing documents. Still, they also conduct unauthorized secret police operations to track down and deport dissidents, hack websites, commit telephone fraud, and stage protests against China’s perceived enemies.

The CCP also engages in stealthy soft power influence ops across the U.S. and has the ability, through apps like TikTok, to track keystrokes, use your phone as a surveillance device, and collect biometric data. They have also established language schools, cultural associations, local newspapers and TV programs to saturate communities with the regime‘s narratives. Both the White House and Congress have teams to investigate these pervasive activities. We also know through recently leaked documents that the U.S. is conducting extensive intelligence gathering on China’s weapons development and naval activity, including an intermediate-range ballistic missile hypersonic glide vehicle, which is suspected to be able to penetrate U.S. missile defense systems.

China’s Response: Greater Risks for Foreign Businesses in China

China is showing the world that it can push back against perceived efforts by nations led by the U.S. to counter its development. The current President Xi Jinping, now in his third term, has never trusted capitalist forces and has taken steps to exert more control over the operations of foreign firms, even while his Premier Li Qiang, a close ally, warmly welcomes foreign investors into the Chinese ‘family’. Recent incidents bely Xi’s intentions. Chinese authorities recently raided the Beijing office of Mintz Group, a U.S. due diligence firm, searching for information related to suspected theft of state secrets. In April, the Shanghai office of Bain & Co., a U.S. consulting firm, was also treated to a surprise visit by authorities to question staff. The U.S. chip maker Micron has been subjected to a cybersecurity review of its imports, threatening to ban Micron altogether on national security grounds.

Additionally, China recently expanded its espionage laws to include, among other things, allowing for the search of the luggage and electronic devices of anyone suspected of espionage. (WSJ 4/28) These actions smack of Russian practices. Perhaps

Xi has been emboldened by advice from his ‘friend’ President Putin to take such steps to push back at Western Powers. Unfortunately for China, these behaviors are resulting in greater perceived risk for foreign businesses in China, with more foreign investors souring on Chinese stocks.

Emerging U.S.-China Rivalry in Emerging Technologies

On the commercial side, Chinese companies have launched their own offensives to compete with the U.S. In April, Alibaba demonstrated its new software to compete with Microsoft’s ChatGPT, called Tongyi Qianwen, which will be embedded in its smart devices and workplace messaging platform DingTalk. Such platforms like ChatGPT and DingTalk are underpinned by what is called “generative A.I. technology” and cloud computing. Many Chinese tech companies are rushing to release their versions, according to Michelle Toh of CNN. Also in April, SenseTome, the widely-respected A.I. company, launched a new suite of services in its chatbot called “SenseChat.” In March, Baidu launched its own ChatGPT-style service using a chatbot called ERNIE.

The Commercial Downside for U.S. Allies of U.S. Security Campaigns against China

There are conflicts between U.S. efforts to slow down semiconductor manufacturing in China, for example, and the trading interests of its allies. To achieve effective decoupling and build self-reliance at home re- quires support from key Asia-Pacific trading partners, such as Japan, South Korea, and Taiwan, who are also China’s major trading partners. These allies participated greatly in developing China’s “ Factory to the World” by relocating thousands of electronic components and assembly factories to China and training the labor force. So for the U.S. to decouple from China also involves decoupling from some of these China-based operations of our allies, as well.

Impact on South Korea

After the U.S. imposed export controls on trade in chips and related equipment to China, the U.S. issued waivers to Korean companies whose operations would have been deeply affected. This year, the U.S. threatens to let those waivers expire if South Korea doesn’t align with U.S. export controls. The President of South Korea, Yoon Suk Yoel, was recently hosted by the White House for a six-day state visit the week of April 24th. The main focus of the talks was reaching a security agreement, called the Washington Agreement, which allows continued Korean reliance on U.S. nuclear forces to provide a deterrent to North Korea’s threats, rather than South Korea developing its own nuclear arsenal. There was also significant U.S. trade pressure on S.K.’s semiconductor manufacturers, mainly Samsung and S.K. Hynix, not to fill any gap in supply to China if the U.S. chips company is excluded from Chinese markets on national security grounds. While Yoon is somewhat hawkish on China, he must consider the broader picture for S.K. commercial interests. China is, after all, S.K.’s largest trading partner by far.

The U.S. has many tools in its trade kit to pressure Seoul to do its bidding.

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The Inflation Reduction Act has made it very difficult for Korean carmakers Hyundai and Kia to become eligible for U.S. tax credits for E.V.s. Even though Hyundai has built its own car plant in Georgia, creating hundreds of jobs for U.S. citizens, it still assembles cars using a majority of parts manufactured in South Korea. So far, it has failed to qualify for E.V. subsidies for sales in the U.S. If U.S. officials want Seoul to comply with its export restrictions on semiconductors to China at the expense of its own enterprises, they should perhaps think about paving the road a bit more in favor of South Korean sales here in the U.S. to gain their cooperation against China. We know they need us. But, coercion is bad for business.

Japan has acceded to U.S. demands. In response, they have decided to invest billions in their own semiconductor manufacturing equipment industry. But they face increasing retaliation from China for not selling their equipment to China. They have also decided to go against precedent set after World War II and start investing in their own defense. They have joined AUKUS, a security pact among Australia, the U.K., and the U.S. to promote security and stability in East Asia and the Indo-Pacific.

Putting our trade allies on the spot has generated a great deal of open but often uncomfortable dialogue when the U.S. increasingly asks for their support at the expense of their own industries. As Alan Beattie of the Financial Times puts it, “ Being a U.S. ally at a time when geopolitics is leaning heavily on trade policy certainly keeps you on your toes.”

Let’s hope we don’t step on China’s toes so much that they will all end up doing what we do.

Author profile: Christine is co-founder and President of China Human Resources Group, Inc, a management consulting firm based in Princeton NJ. She has provided U.S. companies with strategic development and project implementation services for projects in China since 1986 n