Trade takes a back seat to national security in Beijing and Washington

Kiran

National security fears in Washington and Beijing threaten to eclipse the prospect of greater commercial cooperation between the United States and China, leaving company executives worried about becoming casualties in the great power clash.

After forty years of weaving a profitable partnership, both countries are now emphasizing greater self-sufficiency. Supply chain snarls during the pandemic have led some companies to back up Chinese factories and factories in countries such as Vietnam while rising geopolitical tensions have highlighted for both sides the risks inherent in trade with strategic adversaries.

In Beijing this month, Chinese President Xi Jinping opened the Landmark Communist Party Congress with a speech that stressed security and Marxist ideology. China’s leader broke precedent by securing a third term as party general secretary and appointing a hard-line loyalist to the top job over economic reformers.

The move comes two weeks after Biden effectively banned sales to China of the most advanced US computer chips and chip-making technology. In the works for more than a year, the new export controls reflect the president’s determination to limit Beijing’s development of advanced technology that could be used to improve its military or monitor its own citizens.

The pivot from business-as-usual began more than four years ago under former president Donald Trump, who levied heavy import tariffs on goods from China and restricted Chinese technology companies from buying some critical US components. But this month’s Communist Party conclave and Biden’s tough export limits mark a significant widening of the US-China divide.

“It is a complete shift. We just have to realize that the old notion of putting a premium on the economy – today is gone,” said Joerg Wuttke, president of the European Union Chamber of Commerce in China, who has lived in China for the last 32 years. “The agenda is independence. We have entered a new era.”

The new US-China dynamic could be on display next month during a possible meeting between Biden and Xi at the Group of 20 summit in Bali, Indonesia. The two men, who have not met in person since Biden entered the White House, have much to discuss, including their $655 billion trade relationship with Taiwan, a self-governing island that Beijing claims as its own.

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Investors have taken note of the tense new atmosphere. After the party congress, Hong Kong’s Hang Seng Index this week fell more than 8 percent.

Meanwhile, in the United States, the chair and co-chair of the Congressional-Executive Commission on China on Thursday called on top executives from Wall Street banks including Goldman Sachs, Morgan Stanley, Citigroup and JPMorgan Chase to withdraw from their planned appearance on the investment. summit in Hong Kong next week.

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Senator Jeff Merkley (Ore.) and Rep. Jim McGovern (Mass.), both Democrats, said the US executives should “reconsider” their decision to speak with Hong Kong Chief Executive John Lee, who was ordered by the United States for two years. in the past for their role in the anti-democratic crackdown there, adding that they would be said to be “complicit” in human rights abuses.

Citi chief executive Jane Fraser stepped down on Friday, citing a positive coronavirus test. Goldman Sachs, JPMorgan and Morgan Stanley declined to comment.

What may have seemed like a temporary cold during the US-China trade war has become a definite break with the past. For years, the United States and China have prioritized economic ties in their relationship, with some even warning that the two countries are destined for conflict. But now, though two-way trade volume running at a record pace last year, the balance has been tilted definitively towards competition and contention.

“Up to a degree, everyone is willing to set aside security issues and other issues in pursuit of good economic benefits for both sides and the idea that it will lead to better relations,” said Michael Schuman, a senior fellow at the Atlantic Council. in Beijing. “What is happening in Beijing and Washington now is a willingness to sacrifice some economic benefits for security reasons.”

Xi’s strong approach is dragging down China’s economy, which grew at an annual rate of 3 percent for the first nine months of this year, down from more than 8 percent last year. His signature “zero covid” policy has depressed consumer spending and industrial production repeatedly, including one this week that affected Apple suppliers in Zhengzhou.

Only 55 percent of American companies said they were optimistic about China’s five-year outlook, the lowest number ever, and down 23 percentage points from last year, according to a survey released Thursday by the American Chamber of Commerce in Shanghai. One-third of responding companies said they had shifted their planned China investments to other markets, nearly doubling the share they did in 2021.

Budweiser told investors this week that it is adjusting its spending in the Chinese market specifically, depending on the covid case load. Caterpillar said sales of 10-ton excavators were experiencing construction slowdowns. And Boeing recently cut its forecast for China’s aircraft needs over the next two decades.

“Trade volume can be said otherwise, but the growing tension in political relations has spilled over into the worsening commercial environment for many US companies,” said Myron Brilliant, executive vice president of the US Chamber of Commerce. “It’s more sand on the side. It’s going to be tougher.”

Making relations worse, export control that the White House rolled out this month a number of the most powerful displays in the administration’s evolution strategy for the containment of high technology. The Commerce Department’s regulations are intended to free up China’s chip-making capabilities and thwart Beijing’s efforts to build advanced semiconductors to modernize its military.

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The advanced chips and supercomputing capabilities that will be out of bounds can be used to build nuclear weapons, hypersonic missiles, autonomous systems and mass surveillance systems. Some of the same technology will have considerable commercial applications as well, analysts say.

On Thursday, Alan Estevez, undersecretary of Commerce for industry and security, said the administration had consulted with US allies before announcing the move. The United States expects key trading partners to adopt similar measures soon, the Center for New American Security said. He also suggested officials consider additional controls centered on technologies in quantum computing, biotechnology and artificial intelligence.

“We don’t balance trade and national security,” said Estevez. “When I see action that needs to be taken for national security, I have top-down coverage to take care of it regardless of the impact.”

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But Estevez said the licensing requirements are not intended to hold back China’s economic development. Chinese consumers will retain “a strong ability to make semiconductors that are going to go into car airbags, which I have no problem with,” he said.

That probably understates the economic impact. In 2015, the Chinese government set a goal to produce 70 percent of the nation’s semiconductors by 2025, up from 10 percent.

Halfway through the 10-year period, domestic production has risen to only 16 percent, according to Andrew Collier, an economist with GlobalSource Mitra in Hong Kong.

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“Biden’s semiconductor sanctions will drive a stake into the heart of China’s global ambitions. Xi Jinping has bet his reputation on creating a high-tech economy, but without western semiconductor equipment, he will have a tough time achieving this,” said Collier, author of “China’s Technology War. “

The administration’s insistence on a single security rationale for export controls has done little to ease the concerns of business leaders. Although companies that make toys and clothing in China seem to have no reason to be concerned, other manufacturers are worried that the curve of suitable and narrow technology may widen.

Already, Google and Apple have moved some of their smartphone production to Vietnam and India, respectively. Many companies, in other industries, are establishing alternative production sites outside of China or drawing up contingency plans to relocate operations.

“Look at consulting companies. Ten years ago, they were all about, ‘How do I get into China?’ “Said Patrick Chovanec, economic advisor for Silvercrest Asset Management in New York. “Now, it’s all, ‘How do I limit my China exposure?’ “

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While the Chinese government may not directly retaliate for US export controls, analysts warn that the technology fight may develop its own logic. If the two countries continue to trade blows, other businesses worry they will be caught in the crossfire.

“Political and regulatory risks are definitely on the rise,” said Craig Allen, president of the US-China Business Council. “If you’re the head of a company or a CEO, it’s very difficult to calculate where this is going and what your risks are.”

Still, China remains a profitable market for flagship US companies such as General Motors, Apple and Yum Brands, which owns Kentucky Fried Chicken. And some investors remain bullish.

“We see significant opportunities in China despite some investors’ geopolitical concerns,” Richard Bernstein, a New York investment manager, wrote in a client note this week.

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Xi is expected, however, to reduce commercial ties with the United States. The success of the Biden administration this year in securing the support of allies to impose financial sanctions on Russia, after the February 24 invasion of Ukraine, has led Beijing to worry about being hit by similar measures in the upcoming conflict over the status of Taiwan.

The once-every-five-years CCP Congress, which concludes on October 22, reinforces Xi’s vision of a threatening international climate. Congress is predicting “a very dark international environment with the United States at the core of it,” said a senior administration official, speaking on condition of anonymity to discuss the sensitive issue.

Xi stacked the seven-member Politburo Standing Committee with loyalists and appointed representatives of hard-line state security and public security ministers.

The party’s report uses the word “security” at least 80 times, including in reference to “independence around food and energy and all these things that could be a problem if there is a war around Taiwan,” said David Shullman, a former US intelligence officer now with the Atlantic Council.

Where Xi at the last party congress in 2017 said that “peace and development remain the call of our day,” this year he warned the party faithful to prepare for “high winds, rough waters and dangerous storms.”

Diplomats from the two countries are involved in far fewer meetings than last year, leaving room for misinterpretation and misunderstanding. Isolation exacerbated by strict covid quarantine protocols has derailed the routine that brings together top American and Chinese officials several times each year.

“It also means that diplomacy is probably more important than ever,” the official said. “And given Xi’s undisputed power, the only diplomacy that matters now is diplomacy with him.”

Jeanne Whalen contributed to this report.

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