HARD ON THE heels of the World Trade Organization (WTO$ ruling against the Trump-era US tariffs on steel and aluminium from China and other countries. China has filed a complaint about US export controls on sales of advanced semiconductors and the equipment to make them.
Beijing is alleging that these are protectionist, an overreach of national security arguments for trade measures and undermine the international economic and trade order.
To this Bystander, China seems to be scrambling to attain the high ground rather than escalating the trade and technology confrontation between the two countries.
With Japan and the Netherlands, the two other significant players in advanced chip making, falling into line with the US strategy of denying China the technology, a complaint to the WTO is likely to have little practical impact, especially in the short and medium terms.
Chinese companies’ efforts to find loopholes in and workarounds to the US sanctions are likely to be more productive.
Mainly, filing a WTO complaint will let Beijing portray Washington as a unilateralist willing to build coalitions of its allies outside multilateral institutions, a message mostly directed at developing nations.
THE FIRST RESTRICTIONS on Chinese telecom equipment being used in US networks because of security concerns came from the Obama administration. The Trump administration stepped them up dramatically, particularly against kit made by Huawei and ZTE. The Biden administration has now widened the restrictions further.
On November 26, the US Federal Communications Commission (FCC) said no equipment produced by Huawei, ZTE, two companies that make video surveillance equipment, Hikvision and Dahua, and two-way radio systems supplier, Hytera, would be authorised for use in the United States, citing national security grounds.
The ban is not retroactive, so the five firms can still sell their products and services previously approved for sale in the United States. However, the FCC is seeking comment on future revisions to the rules regarding equipment already authorised to be imported or sold. To this Bystander, that appears to be a step down the path towards future revocation of existing approvals.
The FCC specifically mentioned a threat to US citizens’ data security. The five companies have previously all denied supplying data to Chinese authorities.
Hikvision is the only one of the five to respond publicly so far, saying the ruling will
make it more harmful and more expensive for US small businesses, local authorities, school districts, and individual consumers to protect themselves, their homes, businesses and property.
Its security cameras, like those made by Dahua, are widely used by US government agencies. Many police departments in the United States use Hytera radios.
The latest bans fit a broader pattern of containing the development of China’s indigenous tech industry. The Biden administration has also expanded US export controls to prevent the sale of advanced US hardware and software to China, especially that for making cutting-edge semiconductors.
It is also pressuring US tech companies to move their supply chains out of China. The reported decision by the Taiwanese contract manufacturer Foxconn to move half its global iPhone production for Apple from China to India would be a significant win for the Biden administration; it would also disrupt the huge networks of sub-contractors and component makers and assemblers that feed into Foxconn’s Chinese supply chains. That would diminish the economies of scale benefiting the smaller Chinese companies, which also supply indigenous brands.
US officials and the US arm of ByeDance’s short-form video platform, TikTok, are also discussing how TikTok can assuage concerns that the data it collects on its US users will not be shared with Chinese authorities. Calls for the app to be banned in the United States are increasing, particularly from Republican lawmakers.
However, the politics of banning a popular consumer app, especially among younger US citizens who vote 2-1 Democrat rather than Republican, complicate any decision the Biden administration might take, including following through on a Trump administration proposal that TikTok be forcibly divested to a US owner.
ONE-HALF OF CHINA’S nearly $150 billion of loans to Sub-Saharan African countries since 2000 are hidden, according to a recently published AidData working paper written by Kathleen Brown of Leiden University.
Africa is heavily indebted to China. One of every five dollars borrowed by African governments is owed to a Chinese lender. Hidden debt potentially puts the region more in hock — and thus obligated to Beijing — than realised, as well as posing a threat to global financial stability.
The AidData research lab at William and Mary university in the United States maintains a comprehensive database on China’s global financing activity through government institutions and state-owned entities.
Middle- and low-income economies are notorious for keeping debt off the books and out of sight so that international lenders do not penalise them for being over-indebted or breaking loan conditionalities. Mozambique, for example, concealed $2.2 billion in private bank loans to avoid hitting its internal public debt limits, although it is the World Bank’s debt-to-GDP thresholds that are most relevant.
Beijing is far from forthcoming about the credit it extends internationally. It considers external finance information state secrets and does not report its credit activity to the World Bank’s Debtor Reporting System (DRS), which acts as the global clearing house for such information.
Thus, recipient governments can hide their Chinese borrowings from international view by simply omitting them from their reporting to the DRS. Brown concludes that while some of this is accidental, most is intentional.
She suggests that publically undisclosed Chinese lending in Sub-Saharan Africa is intended to enable recipient governments to keep up payments on foreign debt, continue to buy Chinese imports and keep any threat of a balance of payments crisis at bay.
A separate report in the Financial Times, which reports similar undeclared lending to Asian and Latin American countries, suggests the hidden loans are also intended to prevent defaults on other Chinese Belt and Road infrastructure lending. (This Bystander has previously noted AidData’s analysis of Beijing’s BRI lending.)
China has had plenty of scope to extend its sway in Africa through hidden lending. So far this century, every country on the continent has experienced IMF and World Bank debt stability programs limiting external borrowing and sovereign debt levels.
Brown finds that governments hide an additional 2 percentage points of their Chinese loans as external debt to GDP moves 3.25 percentage points closer to Word Bank thresholds. The exception is when a country is under an IMF programme. Governments then hide less debt because they are more likely to be caught out by the Fund’s rigorous auditing of national accounts.
One implication is that Beijing’s loan recipients see China as a means to keep the IMF at arm’s length. However, that does nothing to reduce a country’s debt-crisis risk. Sri Lanka offers an extreme example of the consequences of the political and economic meltdown that a debt crisis can unleash.
For China, supplying unreported credit provides a way to undermine the influence and reach of the IMF and World Bank as Beijing develops an alternative international financial architecture. Other research has shown that it is common for Chinese lenders to put ‘no reporting’ clauses into loan agreements with middle- and low-income countries,
That the Global South is an active manager of international credit markets by strategically hiding its debt from international financial institutions suggests Beijing is achieving some modest success in that goal.
However, increased exposure to countries borrowing too far beyond their capacity to repay is the price that Chinese financial institutions and state-owned entities are paying. Given the headwinds buffeting the Chinese economy, that looks like an unsustainably high price, as Beijing is starting to acknowledge.
AUGUST’S SLOWER THAN expected growth in China’s exports is another sign that the economy’s recovery is losing what little traction it had.
More policy support is likely as a consequence.
Exports grew by 7.1% last month year-on-year in US dollar terms, according to the General Administration of Customs, the slowest since April and almost half the expectation of private economists.
As much as half the growth was accounted for by higher prices, on some estimates, implying the growth in the volume of exports was even weaker than the headline number.
Imports grew 0.3% in value, down from an increase of 2.3% in July, also well below expectations.
Domestic factory output in August also contracted for a second consecutive month due to power cuts and lockdowns in response to worsening Covid outbreaks.
At the same time, weakening global demand is lessening the demand for China’s exports in most of its major markets, except Russia (up 26.5% in August, year on year).
Weaker exports will weigh on the yuan, which is close to breaching seven to the dollar, despite intervention by the People’s Bank of China.
A depreciating currency would be a boon to struggling exporters but not to domestic consumer businesses such as food and retail companies that have to bear the cost of rising commodity imports.
President Xi Jinping will be well aware of the impact on Chinese citizens as he prepares for an unprecedented third term. That implies further currency intervention as well as other measures to stimulate the economy.
THE LATEST PACKAGE of US military kit that the Biden administration has approved for sale to Taiwan has drawn predictable condemnation from China.
The $1.1 billion deal includes a radar warning system to track incoming strikes and Harpoon anti-ship and Sidewinder anti-aircraft missiles, Taipei’s need for which was demonstrated by the People’s Liberation Army’s live-fire exercises following the visit to the island last month by US House Speaker Nancy Pelosi.
A further round of live-fire drills followed the mid-month visit to the island by a separate group of US lawmakers.
The Chinese embassy in Washington told the United States to rip up a deal that it said ‘severely jeopardises’ relations and promised ‘necessary countermeasures.
The US arms sale still has to be approved by the US Congress, but the votes are sure to be there. US legislators have become increasingly pro-Taiwan and anti-Beijing.
The US administration says the deal is part of continuing efforts to modernise Taiwan’s armed forces, as it is presenting most of its Taiwan policy as routine in counterpoint to Beijing’s belligerence.
Similarly, US officials say they will soon start discussions on a US-Taiwan trade agreement to be concluded by next year. That has already drawn warnings from Beijing not to include anything that implies Taiwanese sovereignty.
The missile sales appear to be catch-up, fulfilling orders placed by Taiwan in the past that went unfulfilled as the United States sent weaponry to Ukraine. Nonetheless, there is no masking that ‘a new normal’ now applies to US-China relations.
With Beijing increasing its ‘grey zone’ activity — somewhere between civilian and military operations — the risks of escalation are growing.
Last week, Taiwan shot down a Chinese drone in Taiwanese airspace for the first time. The downed quadcopter (of the sort that anyone can buy on Alibaba; it was not an unmanned military aircraft) was one of several that have been flying over the Taiwan-controlled islands a few kilometres off the mainland coast for the past month.
These have likely been on intelligence-gathering missions. An ulterior motive may have been to have one shot down to allow Beijing to portray itself as the victim of aggression by foreign forces.
The sturm and drang over the arms deal have let another Biden administration decision announced at the end of the week fly under the radar. The United States will keep in place Trump-era tariffs on Chinese imports.
TAIPEI AND WASHINGTON have agreed to start the formal trade talks anticipated by the US-Taiwan Initiative on 21st Century Trade announced in June.
Unsurprisingly, given the fractious state of China-US relations over the island in the wake of the Pelosi visit, Beijing is opposed to the talks, seeing them as part of an effort by the United States to deepen its ties with Taiwan and further distance itself from the ‘One China’ policy. The Ministry of Foreign Affairs warned Washington not to conclude any arrangements that could imply Taiwanese sovereignty.
The discussions will start in early autumn and include agricultural trade and expanded access for small and medium-sized Taiwanese enterprises to US markets, according to a statement from Taipei’s Office of Trade Negotiations. The Office of the US Trade Representative says the talks will also cover trade facilitation, digital trade and anti-corruption standards, all touchpoints of US President Joe Biden’s approach to trade.
A Washington-Taipei trade agreement will partially plug one of the most prominent gaps in the Indo-Pacific Economic Framework that the Biden administration announced in May as part of its strategy to counter China’s growing regional influence. Pressure from the US Congress, which has become increasingly forceful in its support for the island, preceded the June announcement of the separate trade initiative with Taipei.
Both the framework and the initiative are more symbols of US economic engagement in the region than committed pushes for free trade through traditional means such as lowering tariffs and opening market access; expanding free trade is not the tenor of the times in Washington.
Nonetheless, Taipei will be hoping to increase the share of its exports sold to the United States, around 30%, to bring it into better balance with the 40% that go to the mainland and Hong Kong. It has for some years been trying to diversify its markets and has signed free trade agreements with Singapore and New Zealand.
Taipei also hopes that a trade deal with Washington will bolster its application to join the region’s largest operational trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, or TPP11), the successor to the Trans-Pacific Partnership from which former President Donald Trump withdrew the United States in 2017. However, this Bystander sees little immediate prospect of Taipei’s application advancing, especially with Beijing also wanting in.
CHINA’S EXPORTS CONTINUE to grow strongly, for now, but imports have almost flatlined in comparison, suggesting a refilling of supply chains after Covid-19 lockdowns but not a commensurate pick up in pent-up domestic demand.
However, imports grew by 2.3% year-on-year in July, the fifth month of sub-4% growth.
Exports to ASEAN rose by 33.5% year-on-year, and to the EU, by 23.5%, more than offsetting a slowdown in exports to the United States, up by 11% year-on-year, having grown by closer to 20% in May and June.
Exports to Russia increased significantly, up 22.2% in the month, reversing a drop of 17% in June.
The headwinds in the global economy will likely slow the progress of China’s exporters in the second half. But with domestic demand’s recovery remaining sluggish and downside risks from the property market and Covid-19 lockdowns persisting, overall GDP growth will be fragile.
The virtual talks, led by Vice Premier Liu He and US Treasury Secretary Janet Yellen, covered the well-rehearsed litany of US tariffs and sanctions on China, what Beijing holds is the unfair treatment of Chinese companies by the United States, what Washington describes as China’s unfair and non-market practices and the war in Ukraine.
At least, the two sides agreed to ‘maintain dialogue and communication’, according to China’s readout, while Yellen ‘noted’ that she looks forward to future discussion with Liu. In the context of the low ebb of China-US relations, that represents progress of a sort between two countries that see each other as their primary geostrategic rival.
Our man in Washington tells us that US President Joe Biden is leaning towards lifting some of the Trump-era tariffs. However, his administration remains divided over the issue, the China hawks not wanting to yield any possible leverage. Undoubtedly, some of the tariffs make little strategic sense, and easing them would help battle domestic US inflation, albeit on the margins.
Biden will have to make up his mind soon. The tariffs start to expire this month, although the administration said in May that it had initiated the review process needed to roll them over.
His decision may come after the administration’s debriefing on today’s talks.
Any rollback of the tariffs is likely to be accompanied by a new US investigation into China’s industrial subsidies, our man in Washington says. That could lead to more duties in strategic areas like technology.
US LEGISLATION BANNING the import of products made in Xinjiang unless the importer can prove the product was not created with forced labour went into effect today.
The Uyghur Forced Labour Prevention Act was passed last December and presumes that goods from Xinjiang are made with forced labour. That flips on its head the burden of proof required under existing US bans on importing products made with forced labour.
The act has been roundly condemned by Beijing.
Given the near impossibility of US importers verifying their Xinjiang supply chains on the ground as independent auditors are being denied access, the law will become as good as a blanket ban. How it is implemented, particularly the rigour with which US authorities pursue the diffusion of Xinjiang products throughout supply chains in the rest of China and the region, will determine how dampening the blanket is on trade.
Xinjiang produces more than 90% of China’s cotton, which is used by the textile and apparel industries across the country. Thus the impact of the law will be widespread in those sectors.
According to the South China Morning Post, stocks of unsold cotton are piling up at Xinjiang mills as US importers get their supply chains into compliance. With the next harvest less than three months away, half the cotton harvested last autumn has yet to be sold.
Xinjiang is also a grower of tomatoes for export and a producer of solar-grade polysilicon and electronics components.
The act will further harm China-US relations, regardless of any cosmetic changes the Biden administration may make to Trump-era tariffs on Chinese imports of consumer goods, semi-manufactures and raw materials.
ANOTHER CHAT BETWEEN Xi Jinping and US President Joe Biden is reportedly in the offing as the United States mulls easing Trump-era tariffs on Chinese imports of solar panels and household goods like washing machines and bicycles.
Helping to suppress domestic inflation appears to be more of a motivation for easing tariffs than improving China-US relations. If anything, US attitudes towards Beijing are hardening.
There is also a division of opinion within Biden’s economic team over tariff easing. Trade officials argue for the retention of tariffs to give the US leverage in trade discussions.
Tariffs on steel and aluminium will likely stay regardless, and while tariffs make goods more expensive for US consumers, lifting them will not make much of a dent in US inflation. However, Biden will undoubtedly be considering, if he does ease sanctions, what he can extract from Xi in return.
Rising tensions over Taiwan are complicating the issue. A particular point is Chinese officials repeated assertions to US counterparts of late that the Taiwan Strait is not international waters. While that stops short of saying the strait is an internal waterway, it still implies that US warships should not be freely sailing through it as they have been doing around once a month.
Update: Taiwan’s defence ministry said that the PLA Air Force flew 29 warplanes including six H-6 bombers towards the island’s airspace, its third-largest such sortie this year, after Washington rejected Beijing’s suggestions that the Taiwan Strait was not international waters.