Trade talks between U.S., China mask threat of a divorce
Yet while the “Phase One” deal suggests the United States and China are drawing closer, the two countries actually are edging toward a partial economic divorce.
Away from the trade talks, the Commerce Department is poised to issue new regulations to prohibit exports of advanced technologies such as artificial intelligence to China. An interagency panel chaired by the Treasury Department is intensifying scrutiny of Chinese investments in cutting-edge U.S. companies. And the Justice Department last month announced its latest indictment of a Chinese national accused of pilfering U.S. trade secrets.
“Selective decoupling is really the unstated policy that’s driving all of this,” said David Hanke, a partner at Arent Fox, who worked on China-related issues while a staffer on the Senate Intelligence Committee.
China likewise is taking steps to extricate itself from a relationship of mutual dependence with the United States. After Chinese telecom giant ZTE was nearly put out of business by U.S. sanctions last year, Chinese President Xi Jinping re-emphasized efforts to reduce China’s reliance upon American high-tech suppliers. He also is pushing a state-backed campaign for Chinese companies to dominate 10 futuristic industries including artificial intelligence and new energy vehicles, with specific sector-by-sector market-share goals.
Indeed, tomorrow’s technology is the crux of the slow-motion split. After 40 years of ever-closer economic ties, including collaborating on Internet, computing and telecommunications breakthroughs, officials in Beijing and Washington increasingly see a potential enemy where they once saw a partner.
U.S. officials worry that depending upon Chinese components could leave critical military, communications and public transit systems vulnerable to sabotage or spying. The administration already has strictly limited the ability of China’s Huawei to buy American parts, barred U.S. government agencies from buying the company’s equipment and sought to persuade U.S. allies to keep the telecom giant out of their most advanced 5G networks.
Last month, Commerce Secretary Wilbur Ross recommended evaluating on a case-by-case basis whether proposed purchases of any foreign information, communications and technology gear were in the national interest. The defense spending bill Trump signed earlier this month includes provisions aimed at avoiding suspect foreign telecommunications equipment, which analysts say are aimed mostly at China.
“Trump has set in motion an anti-China train that will not be derailed just because the Trade War has been temporarily settled,” Andrew Collier, managing director of Orient Capital Research, said via email.
Aftershocks from the trade conflict are encouraging multinational corporations to shift portions of their supply chains from China to other low-cost countries, including Vietnam and Malaysia. Continuing uncertainty about future tariff rates may chill business investment “at the expense of global economic growth,” wrote Collier, a Hong Kong-based adviser to institutional investors.
The tougher stance toward China enjoys bipartisan support on Capitol Hill. In a recent speech, Sen. Marco Rubio, R-Fla., a member of the Senate Foreign Relations Committee, warned that China was seeking to replace the United States as the “world leader in industries such as aerospace, quantum computing and industrial machinery” and needed to be stopped.
“For the first time in three decades, we are confronted with a near-peer rival that seeks to displace us militarily, economically, technologically and geopolitically,” Rubio said.
The Senate’s top Democrat, Minority Leader Chuck Schumer of New York, meanwhile, attacked Trump’s limited trade deal as a “surrender to China.”
Yet moves to decouple the two countries’ technology sectors are being resisted by U.S. industry and its Washington allies. The Commerce Department was expected to make public its export control regulations in August, but officials have been stalling, according to Derek Scissors, a China expert at the American Enterprise Institute, who supports tighter controls.
The agency last year began work on draft regulations designed to limit exports to China of 14 technologies, such as robotics, biotechnology and quantum computing. Now, nongovernment analysts who are tracking the regulations say the first installment, which is expected soon, will focus on just a handful.
“Commerce’s export control draft is so bad. They’re going to get attacked for it,” Scissors said. “It’s a blatant undermining of the will of Congress. They’re not doing what they’re supposed to.”
A department spokesman said only that the rulemaking process was “ongoing.”
The export control regulations help inform the Treasury Department-led Committee on Foreign Investment in the United States (CFIUS), which lawmakers gave new powers last year to reject even non-controlling foreign investments in American companies if they affected national security.
Previously, CFIUS could act only if foreign buyers attempted to gain control of a U.S. enterprise. The focus now is to prevent China from buying knowledge it can’t develop on its own.
At the Justice Department, investigators and prosecutors are in the second year of a “China initiative” designed to thwart Beijing’s efforts to steal American technology secrets. John Demers, the assistant attorney general for national security, describes China’s approach as “rob, replicate and replace.”
This year alone, U.S. attorneys have charged Chinese nationals with stealing turbine technologies from General Electric and medical trade secrets for the treatment of pediatric diseases from an Ohio hospital’s research institute.
Last month, a federal grand jury in the Eastern District of Missouri returned an indictment of Haitao Xiang, 42, a former Monsanto employee.
Xiang is accused of stealing a secret Monsanto algorithm called the “Nutrient Optimizer,” part of a cloud-based software program that allowed farmers to track the condition of their fields from a desktop.
While working for Monsanto, Xiang applied for the Chinese government’s “Hundred Talents Program,” designed to reward Chinese citizens who returned from abroad with valuable skills. Beijing uses the program, which often dangles rewards and future employment, “to encourage employees to steal intellectual property from their U.S. employers,” according to Demers.
One day after quitting his job in June 2017, Xiang bought a one-way ticket to China and headed for Chicago O’Hare International Airport, the indictment alleges. Federal agents intercepted him before he could board the aircraft and confiscated a 32-gigabyte memory card containing a proprietary Monsanto algorithm.
Xiang entered a plea of not guilty to the charges, according to court records. Eric Selig, his St. Louis-based attorney, declined to comment.
If convicted on all counts, the Chinese man faces up to 100 years in prison and fines totaling $21 million.
Even as various federal departments toughen their approach, the administration has yet to articulate a consistent strategy toward China. The president has oscillated between accusing China of the “rape” of the U.S. economy and proclaiming China’s Xi a blameless “good friend.”
A months-long State Department project to produce a statement meant to unite the competing threads of administration thinking on China has yet to bear fruit, leaving room for Treasury to promote investment with a country that the Pentagon regards as an adversary.
“It is not a holistic policy; it’s an opportunistic policy,” said Michael Wessel, a member of the U.S.-China Economic and Security Review Commission.
Details of the president’s initial trade deal with China, announced Dec. 13, remain unclear. Robert Lighthizer, the president’s chief negotiator, says the agreement will mean a sharp increase in Chinese orders for American farm, energy and manufactured goods of $200 billion over two years.
But the text, which is being translated and given final checks by both sides, has not yet been made public.
Lighthizer told reporters that the accord was aimed at resetting a troubled trans-Pacific relationship.
“I’m not one who thinks you can at this point decouple the economy of the United States from China,” he said. “On the other hand, we do have major technology issues and other issues of market access and the like that we have to deal with. So, hopefully, this is one building block in building up something that will actually lead to the ability for the two systems to work together to mutual benefit. That’s my hope.”
The president has said negotiations over a second agreement, which would grapple with unresolved U.S. demands for far-reaching changes in China’s economic model, will begin “immediately.” But no date for resumed talks has been set, according to Lighthizer.
The administration hopes a “Phase Two” deal would finally force meaningful changes in China’s arsenal of subsidies, preferential treatment for strategic companies and cyber hacking. But Chinese officials have told American corporate executives they do not anticipate quick progress.
After more than 18 months of Trump’s unpredictable mix of flattery and bullying, the Chinese have concluded they need to redouble their efforts to separate from the United States. Even before Trump took office, Xi sought to spur a domestic semiconductor industry to reduce China’s overwhelming dependence upon American supplies.
That impulse has only intensified following the tortuous trade talks. Earlier this month, the Communist Party gave government offices three years to replace all of their foreign-made computer hardware and software.
China’s “Great Firewall” already keeps staples of the U.S. digital economy such as Facebook, Google and Twitter off-limits to 1.4 billion Chinese citizens. A more comprehensive technology split would sever commercial and scientific bonds that have thickened over decades. Intel, for example, established its first Chinese research center in Beijing in 1998 and started an institute focused on autonomous driving in 2018.
Government officials rarely mention the “Made in China 2025” program that called for domestic technology companies to supplant foreign rivals. Its aggressive market share targets spooked U.S. and other foreign officials. But even without the publicity, the work continues.
The development of two distinct digital jurisdictions will be driven by national security concerns on both sides, said economist Mary Lovely of Syracuse University. But it will carry enormous economic implications.
“Decoupling doesn’t mean what you think it means,” Lovely said. “It means higher costs for the U.S. and fewer jobs here. If Microsoft can’t sell in China, there’ll be fewer jobs here.”