The Calm before the Storm?
From Zhongnanhai: This week in Chinese Politics
Preparing for Trump
The CCP is moving to insulate China’s economy from possible shocks stemming from the incoming Trump Administration, including learning from Russia how to minimize potential US sanctions.
Analysis:
The CCP continues to make economic and foreign policy decisions designed to insulate it from a potentially more punitive Trump Administration. With the Chinese economy spluttering amid promises of stimulus, CCP officials are rightly concerned that US sanctions, export controls, or tariffs might further damage attempts to revive high growth levels that China has enjoyed for the past few decades. A recent surge in transborder shipments in anticipation of potential new tariffs under Trump, for example, highlights how Beijing is anticipating and mitigating risks to trade that might arise with the new administration. The key question for economic policymakers in Beijing is therefore how to proactively anticipate a famously unpredictable President Trump?
China is seeking alternative global relationships to mitigate decoupling from the US. China is also looking for ways to increase the cost to the US for imposing sanctions and export controls that harm China’s economy. As detailed below in “Business Matters,” sanctions and export controls go both ways; China is also capable of retaliatory measures that will increase prices for US consumers and pressure the incoming administration to negotiate. Beijing and Washington will both increase pressure on global partners to choose sides, particularly in sensitive industries like tech. US businesses in China should prepare to respond if Beijing decides to punish them as a bargaining chip against the Trump Administration.
In signs of the growing importance of Russo-China friendship, Chinese officials also traveled to Moscow to study how US sanctions have affected the Russian economy, and therefore how China might insulate its own systems against similar economic levers. US sanctions are particularly concerning for the Chinese economy, which still relies heavily on the US for trade and sales of manufactured goods and tech innovation. As China faces the dual problems of slowing economic growth and increasingly vocal demands from party hardliners to “reunify” Taiwan, senior CCP officials are therefore keen to develop strategies that will mitigate the economic fallout from an invasion of Taiwan.
This means that US policy makers will need to get smarter about how to use sanctions to effectively pressure China’s economy despite likely weaker effects than have been felt in Russia. (China’s economy is far larger and more diverse than Russia’s and thus China is far less susceptible to sanctions.) Moreover, for businesses with ties to Hong Kong and Europe, these developments could mean that the reactions to China’s aggression felt in the US may well also be spreading to Europe, which looks set to become much less friendly as Beijing continues to buddy up to Moscow.
On the Hill: Developments in US China policy
What to look for in Biden’s final weeks
China remains a priority for the outgoing Biden Administration, and several recent policy changes will likely continue under Trump.
Analysis:
The Trump Administration will need to move quickly to face America’s “China Challenge.” In the build up to January’s inauguration, the new administration appears intent on making China a priority through its proposed appointments of key figures, including Marco Rubio as Secretary of State. Before January, businesses should pay close attention to interim moves by the outgoing administration for a sign of what will likely be more continuation than rupture with Washington’s current hawkishness towards Beijing.
As a swan song, the Biden Administration announced new export controls on advanced computing and semiconductors to China. These are explicitly designed to inhibit the technical capabilities of the People’s Liberation Army. The Trump Administration should tread cautiously, however, as export controls under Biden arguably had unforeseen consequences in spurring China’s domestic development in key industries. Despite this, these targeted export controls are likely to expand under Trump to other areas, including AI and chip manufacturing, which will expand the number of sectors and companies implicated in the bans. Tech firms should expect expanded federal oversight of deals, trade, and business partners. It would be wise for managers of affected industries and companies to take steps now to avoid fines, political retribution, and reputational damage that will ultimately harm revenue or share value.
At the same time, businesses in Hong Kong should pay close attention to debates in the US and the EU about stripping the Special Economic Region of its trade status in response to Beijing’s erosion of the city’s unique legal circumstances. In particular, US and EU lawmakers are considering expanding sanctions against China to also include Hong Kong businesses and individuals, which will dramatically reshape how global businesses use Hong Kong as a proximate, but separate, entity for access to the Chinese market. Hong Kong should therefore be considered as effectively part of the PRC in terms of risk portfolio, with the added confounder that US sanctions may punish US companies that continue to operate there or engage with high-risk local entities.
Business Matters
Brace for supply chain headwinds as trade war intensifies
The trade war continues as the US and China swap a new round of export controls, catching major corporations in the cross-fire. Preparing now for how to continue to operate businesses in China while opening new markets is the most prudent course of action.
Analysis:
A month since the election, we are gradually gaining clarity about what the new Trump administration may entail. After threatening up to 60% tariffs on all Chinese goods entering the US, Trump in a recent TruthSocial post declared that he will impose “an additional 10% tariff, above any additional tariffs” and end China’s most-favored-nation trading status (in addition to 25% tariffs on Canada and Mexico on day one). Whether this means in addition to the previously threatened 60% tariffs or is calculated otherwise remains unclear. Chinese media are also trying to parse Trump’s statements but to no avail; the only conclusion they have drawn is that tariffs appear to be Trump’s new “universal weapon.”
As speculation rages on about what Trump’s first hundred days will look like, the final days of the Biden administration are clearly raising tensions with Beijing. In what is both a final rebuke to Biden for further tightening US export controls (see story above) and a warning to the incoming Trump administration, China has banned shipments of several rare-earth metals and key minerals used in the production of semiconductors, batteries, as well as telecommunications and military equipment from being exported to the US. Gallium, germanium, and graphite, specifically, were already subjected to increased regulation over the past two years, but now have been labelled as “dual-use” and their export fully banned.
We have previously reported on China’s near-monopoly in both rare-earth mining and refining. While complete bans are difficult to enforce, they can significantly reduce and slow access to supplies, and drive up costs. Keenly aware of China’s advantage, President Biden visited Angola last week, which is completing a railroad line Biden hopes will increase US access to African rare earths, as well as other metals and minerals. The visit is a clear indicator that the US realizes it needs to help companies to China-proof their supply chains.
Major corporations have already gotten into trouble trying to navigate supply restrictions. The CEO of Japanese clothing company UNIQLO recently announced that the company does not use Xinjiang cotton to manufacture its clothes. In 2022, the United States began requiring companies to prove they do not use cotton sources from Xinjiang due to forced labor conditions, although China continues to deny such accusations. The response in China was immediate and resulted in several patch-work attempts to organize a boycott of UNIQLO, as well as a sharp drop in UNIQLO’s share price.
As companies work to manage their presence inside China with US restrictions, they are also continuing to look for new markets. To this end, Apple has reportedly offered to pay the government of Indonesia US$1B to lift its ban on the sale of iPhones in an attempt to access the world’s fourth-largest country. The Indonesian government has indicated that this would have to be the first of several rounds of support for it to consider the proposition, but it appears that the two sides are making progress. The takeaway from such stories, however, is that companies have a demonstrated need to both manage their presence in China and explore new markets as early as possible so as to navigate potential trade obstacles.
Tech Futures
A Reckoning in Tech?
Chinese tech recruitment from Silicon Valley is a growing national security concern in DC. Tech companies should take note.
Analysis:
Chinese tech companies are aggressively recruiting Silicon Valley talent, particularly PRC nationals, to leave US tech companies and join Chinese counterparts. In many cases, these Chinese recruiters are themselves based in Silicon Valley, offering the benefits of Bay Area lifestyles with grossly above-market-rate salaries, while others are encouraged to return to China and bring their knowledge of US corporations with them (which is itself a form of economic espionage.)
Chinese talent recruitment is not new, but Chinese tech giants are employing new tactics in their moves to Silicon Valley and more aggressive attempts to poach talent. Tech companies need to prepare for how to insulate themselves against potential IP transfer by employees moving to Chinese competitors, as well as how to underscore the risks of hiring individuals who are part of Chinese-backed talent programs.
This pressure on tech workers–particularly, although not exclusively, PRC nationals–to move from US to Chinese Silicon Valley entities will likely increase with the Chinese government’s growing emphasis on critical tech. Fields like semiconductor manufacturing, generative AI, robotics, new materials, and dual-use technologies will see a spike in recruitment efforts, with offers of inflated salaries and bonus incentive potentially backed by Chinese government capital as a way to outcompete US private sector competitors.
As Washington becomes increasingly hawkish on Chinese tech and related national security concerns, the tech industry will face stricter US government oversight and political attention on international connections. The private sector will therefore have to become increasingly attentive to geopolitics and political debates about the nexus of technology and national security. This means that technology firms will have to show they are taking specific steps to protect themselves against IP theft and to prevent Chinese competitors from exploiting critical employees.
Espionage Alert
Prisoner swap releases Chinese spies
A prisoner swap and downgrade in the US’s travel advisory for citizens visiting the PRC should be a cautionary signal for businesses about the growing risk of Chinese espionage, rather than a signal of improved US-China relations.
Analysis:
The US and China agreed to a prisoner swap that resulted in the release of three US citizens jailed in China in return for four PRC citizens imprisoned in the US. Chinese espionage recruitment efforts often target PRC citizens, but they are increasingly recruiting US citizens, and often those with Chinese heritage. At the same time, PRC nationals with ties to the US similarly face accusations of espionage to disincentivize constructive collaboration with US partners. This heightens the risk of state-sponsored industrial espionage against US companies and emphasizes the growing importance of China’s intelligence agencies–the Ministry of State Security (MSS), Military Intelligence (2PLA), and the quasi intelligence agency, the United Front Work Department (UFWD) in conducting targeted information gathering by agents, proxies, and recruits.
As part of the prisoner swap, the US also agreed to lower the State Department’s travel advisory level for China to Level 2: Exercise increased caution for mainland China. The previously higher travel advisory irked CCP officials for dissuading business and tourist travel to China. Remain cautious. The lowering of the advisory level should not be a signal that US-China relations are improving, or indeed that China is now safer for US citizens, but US travelers to China will find some improvements, including easier access to travel insurance. This lowering of China’s advisory level repositions the PRC from a similar rank to countries like Pakistan, to the same level as much of Western Europe. This advisory may not last long, as GOP lawmakers have signaled their opposition to the downgrade and will almost certainly reverse the decision after January.
Where this move highlights the importance of foreign travelers to China’s plans to boost its economy through trade and tourism, it also underscores the importance of espionage cases in negotiations. It also arguably incentivizes China to detain US citizens as bargaining chips for additional future concessions. The prisoner swap and decreased travel advisory demonstrates the increasing centrality of espionage to US-China relations, rather than any thaw or improvement.
On more thing…
Taiwan says Mahalo while China fumes
A Pacific tour by Taiwan’s president underscores growing US military attention on Hawaii and Guam as frontlines in a potential US-China conflict over Taiwan. Businesses should note China’s maritime activity in the Pacific as potential indicators of an invasion of Taiwan.
Analysis:
Taiwan’s President Lai Ching-te traveled to Hawaii and Guam as part of a “transit visit” through the state before heading onwards to Taiwan’s Pacific island allies. These stops triggered a strong verbal response from Beijing that may precipitate further cross strait military tensions. As with any US visit by a sitting President of the Republic of China (Taiwan), Lai’s stopovers in Honolulu and Guam were called transits, rather than official visits. The attempt at diplomatic terminology did not stop Hawaiian officials from rolling out the red carpet. Moreover, Lai made the most out of Taiwan and Hawaii’s shared Austronesian heritage. In a show of how Taiwan remains important for both Democrats and Republicans, US House Speak Mike Johnson spoke with President Lai via telephone during his visit to Guam.
Hawaii and Guam are vital in the US’s strategic defenses against China’s growing military assertiveness in East Asia, and are particularly important for US military preparedness in case of China’s invasion of Taiwan. For example, the US is renovating World War II-era airbases in Tinian in Guam’s neighboring Northern Mariana Islands to prepare them for a return of US combat aircraft. This action is part of the US’s “agile combat employment” (ACE) strategy, which aims to disperse aircraft fleets across multiple bases to prevent excessive damage through an attack on any one location. Hawaii and Guam are also central to subsea cable infrastructure that span the Pacific from the US to Taiwan, which will be essential if China blockades the island in lieu of invasion.
For businesses with interests in Hawaii or the Pacific, Lai’s visit highlights how national security will likely dominate decisions about infrastructure construction and land purchases, with ties to China or PRC citizens especially toxic. Moreover, it highlights how Taiwan is increasingly looking outwards towards the Pacific to guard against Chinese military advances in the Taiwan Straits. For those monitoring potential Chinese moves against Taiwan, PLA activity around Hawaii and Guam will therefore be a strong indicator that Beijing is considering an invasion.
