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

Comment

National security fears in Washington and Beijing threaten to eclipse prospects for greater commercial cooperation between the United States and China, leaving corporate executives worried about becoming casualties in a great power conflict.

After four decades of forging a profitable partnership, both countries are now emphasizing greater self-sufficiency. Supply chain snarls during the pandemic prompted some companies to supplement their Chinese factories with plants in countries such as Vietnam while rising geopolitical tensions highlighted on both sides the risks associated with trading with a strategic adversary.

In Beijing this month, Chinese President Xi Jinping opened the landmark Communist Party Congress with a speech emphasizing security and Marxist ideology. China’s leader broke with precedent by securing a third term as party general secretary and promoting hard-line loyalists to top jobs instead of economic reformers.

The moves came two weeks after Biden effectively banned the sale of US computer chips and the most advanced chip-making technology to China. In the works for more than a year, the new export controls reflect the president’s decision to limit Beijing’s development of sophisticated technologies that could be used to upgrade its military or to surveil its own citizens.

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

“It’s a complete shift. We have to realize that the old idea of ​​putting a premium on the economy – these days has disappeared,” said Joerg Wuttke, president of the European Union Chamber of Commerce in China, who has lived in China for the past 32 years. “The agenda is self-reliance. 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 and Taiwan, the self-governing island that Beijing claims that she is her own.

The Truss implosion shows a major change in the financial climate

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

Meanwhile, in the US, the chairman and co-chairman of the Congressional Executive Commission on China called on Thursday for the chief executives of Wall Street banks including Goldman Sachs, Morgan Stanley, Citigroup and JPMorgan Chase to withdraw from planned appearances in investment. summit in Hong Kong next week.

Also Read :  US Pays to Clean Up Agent Orange Used in Vietnam War

Sen. Jeff Merkley (Ore.) and Rep. Jim McGovern (Mass.), both Democrats, said US executives should “reconsider” their decision to speak alongside Hong Kong Chief Executive John Lee , which was approved by the United States for two years. back for his role in the anti-democracy campaign there, adding that they would otherwise be “complicated” in the abuse of human rights.

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

What may have appeared to be a temporary lull in the US-China trade war has become a decisive break with the past. For decades, the United States and China had prioritized economic ties in their relationship, even as some warned that the two countries were destined for conflict. But now, though two-way trade volumes are running above last year’s record pace, the balance has tipped decidedly towards competition and contention.

“To some extent, everyone has been willing to put security concerns and other concerns aside in pursuit of an economic benefit that was good for both sides and the idea that it would lead to better relations,” he said. Michael Schuman, senior fellow at the Atlantic Council. in Beijing. “What is happening in Beijing and Washington is that there is now a willingness to sacrifice some of that economic benefit for security reasons.”

Xi’s strongman 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. Its signature “zero covid” policy has depressed consumer spending and industrial production with repeated shutdowns, including one this week that affected one of Apple’s suppliers in Zhengzhou.

Only 55 percent of American companies said they were optimistic about the five-year outlook in China, a record low and down 23 percentage points from last year, according to a survey released Thursday by the American Chamber of Commerce in Shanghai. . A third of responding companies said they had redirected planned Chinese investments to other markets, almost double the proportion that did in 2021.

Budweiser told investors this week it was adjusting its spending in certain Chinese markets, depending on covid caseloads. Caterpillar said its sales of 10-tonne excavators were suffering from a slowdown in construction. And Boeing recently cut its forecast of China’s expected aircraft needs over the next two decades.

“Trade volumes may say otherwise, but rising tensions in the political relationship have spilled over into a worsening commercial environment for many US companies,” said Myron Brilliant, executive vice president of the US Chamber of Commerce states “It’s more sand in the gears. It’s going to get harder.”

Also Read :  First on CNN: US accuses North Korea of trying to hide shipments of ammunition to Russia

Exacerbating the relationship, the export controls introduced by the White House this month represent the most forceful demonstration yet of the administration’s evolving strategy of high-tech containment. The Commerce Department’s regulations are intended to freeze China’s chip-making capabilities and hinder Beijing’s efforts to build cutting-edge semiconductors to modernize its military.

The advanced chips and supercomputing capabilities that will be unlimited can be used to build nuclear weapons, hypersonic missiles, autonomous systems and mass surveillance systems. Some of the same technologies will also have lucrative commercial applications, analysts say.

On Thursday, Alan Estevez, Commerce’s undersecretary 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, said the Center for a New American Security. He also suggested that officials consider additional technology-focused controls on quantum computing, biotechnology and artificial intelligence.

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

Expect more China-related tech crises, US official says

But Estevez said the permit requirements were not intended to stop China’s economic development. Chinese customers would retain “robust 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 of producing 70 percent of the nation’s semiconductors by 2025, up from 10 percent.

Halfway through the 10-year period, its domestic production had risen to just 16 percent, according to Andrew Collier, an economist with GlobalSource Partners in Hong Kong.

The Senate race in Ohio is ground zero for hopes for more manufacturing jobs

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

The administration’s insistence on a single-minded security rationale for the export controls has done little to ease the concerns of business leaders. While toy and clothing companies in China probably have little cause for concern, other manufacturers worry that narrowly tailored technology curbs could widen.

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

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

Also Read :  Turkey stops oil not under Russian sanction, upping energy supply fear

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

“The political and regulatory risk is definitely up,” 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 figure out where this is going and what your risks are.”

Still, China remains a lucrative market for leading US companies such as General Motors, Apple and Yum Brands, the owner of Kentucky Fried Chicken. And some investors remain bullish.

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

Biden’s Save America Plan made inflation worse, but the economy improved

However, Xi is expected to reduce trade ties with the US. The success of the Biden administration this year in securing the support of allies to impose financial sanctions on Russia, following its invasion of Ukraine on February 24, has left Beijing worried about being hit with similar measures in any future conflict over the status of Taiwan.

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

Xi stacked the seven-man Politburo Standing Committee with loyalists and high-ranking representatives from the hardline state security and public safety ministries.

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

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

Diplomats from both countries participate in far fewer meetings than in recent years, leaving room for misinterpretation and misunderstanding. Isolation fostered by strict covid quarantine protocols has eroded practices that brought top American and Chinese officials together several times a year.

“That also means diplomacy is probably more important than ever,” the official said. “And given Xi’s uncontested powers, the only diplomacy that really matters now is the diplomacy with him.”

Jeanne Whalen contributed to this report.

Source

Leave a Reply

Your email address will not be published.

Related Articles

Back to top button