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

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National security concerns in both Washington and Beijing threaten to cloud prospects for greater commercial cooperation between the United States and China, leaving business leaders worried about the casualties of a superpower clash.

After four decades of forging a profitable partnership, the two countries are now emphasizing greater self-sufficiency. Supply chain upheavals during the pandemic have led some companies to back up their Chinese plants with factories in countries such as Vietnam, while geopolitical tensions have risen, underscoring for both sides the risks of trading with a strategic adversary.

Chinese President Xi Jinping in Beijing this month opened the landmark Communist Party Congress with a speech emphasizing security and Marxist ideology. China’s leader broke precedent by securing a third term as party general secretary and promoting hardliners to top posts over economic reformers.

The moves came two weeks after Biden effectively banned the sale of cutting-edge U.S. computer chips and chip-making technology to China. The new export control measures, more than a year in the making, reflect the president’s determination to curb Beijing’s development of sophisticated technology that could be used to improve its military or monitor its citizens.

The shift from business-as-usual began more than four years ago under former President Donald Trump, who levied steep import tariffs on goods from China and restricted Chinese technology companies from buying some key U.S. components. But this month’s Communist Party conclave and Biden’s tough export restrictions marked a significant widening of the gap between the US and China.

“It’s a complete change. We just have to understand that the old idea of ​​economic emphasis – those days are gone,” said Joerg Wuttke, president of the European Union China Chamber of Commerce, 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 plenty to discuss, including their $655 billion trade relationship and Taiwan, a self-governing island that Beijing claims as its own.

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

Meanwhile, in the United States, the chairman and co-chairman of the Congressional Executive Committee on China on Thursday called on the top executives of Wall Street banks, including Goldman Sachs, Morgan Stanley, Citigroup and JPMorgan Chase, to abandon planned investment appearances. summit next week in Hong Kong.

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Sen. Jeff Merkley (Ore.) and Rep. Jim McGovern (Mass.) said U.S. leaders should “rethink” their decision to speak with Hong Kong Chief Executive John Lee, who has been under two years of U.S. sanctions. before his role in anti-democratic repression, adding that otherwise they would be “complicit” in human rights abuses.

Citi CEO Jane Fraser resigned Friday, citing a positive coronavirus test. Goldman Sachs, JPMorgan and Morgan Stanley declined to comment.

What may have seemed like a temporary lull in the US-China trade war has become a definitive break with the past. For decades, the United States and China have made economic ties a priority in their relationship, even as some warned that the two countries were destined for a clash. But now though with two-way trade volumes exceeding last year’s record pace, the balance has tipped definitively towards competition and disputes.

“To some extent, everyone has been willing to put aside security concerns and other concerns in pursuit of a win-win economic benefit and the idea that this will lead to a better relationship,” said Michael Schumann, a senior fellow at the Atlantic Council. Beijing. “What’s happening in both Beijing and Washington is now a willingness to sacrifice some of those economic gains for security reasons.”

Xi’s strongman approach is holding back China’s economy, which grew at an annual rate of 3 percent in the first nine months of this year, up from more than 8 percent last year. His signature “zero covid” policy has dampened consumer spending and industrial production with multiple lockdowns, including one this week that hit Apple supplier Zhengzhou.

Just 55 percent of American companies said they were optimistic about the five-year outlook in China, an all-time low 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 planned Chinese investments to other markets, nearly double the number in 2021.

Budweiser told investors this week that it is adjusting its spending in certain Chinese markets depending on the number of Covid cases. Caterpillar said sales of its 10-ton excavators were suffering from a slowdown in construction. And Boeing recently cut forecasts for China’s expected aircraft needs over the next two decades.

“Trade numbers might say otherwise, but the rising political tensions have translated into a worsening business environment for many US companies,” said Myron Brillant, executive vice president of the US Chamber of Commerce. “There is more sand in the news. It will get harder. “

Making matters worse, the export controls the White House imposed this month are the strongest vindication yet of the administration’s high-tech containment strategy. The Commerce Department’s rules are intended to freeze China’s chip-making capabilities and hamper Beijing’s efforts to build cutting-edge semiconductors to modernize its military.

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Advanced chips and supercomputing capabilities, which will be limited, 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 said.

On Thursday, Commerce Under Secretary for Industry and Security Alan Estevez said the administration had consulted with U.S. allies before announcing the move. The U.S. expects major trading partners to adopt similar measures soon, he said at the Center for a New American Security. He also suggested that officials are considering additional technology-focused controls in 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, it’s up to me from top to bottom to take care of it, regardless of the impact.”

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But Estevez said the license requirements are not meant to hinder China’s economic development. Chinese customers would retain “a strong ability to make semiconductors that will go into car airbags, which I have no problem with,” he said.

This probably underestimates the economic impact. In 2015, the Chinese government set a goal of producing 70 percent of the country’s semiconductors by 2025, up from 10 percent.

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

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“Biden’s semiconductor sanctions will implement a central part of China’s global ambitions. Xi Jinping has staked his reputation on creating a high-tech economy, but without Western semiconductor equipment, he will struggle to achieve that,” said Collier, author of “China’s Tech War.”

The administration’s insistence on a consensus on the security rationale for export controls has done little to assuage the concerns of business leaders. While companies making toys and clothing in China may not have reason to worry, other manufacturers worry that the margins of narrowly tailored technology 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 manufacturing facilities outside of China or developing contingency plans to relocate operations.

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

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

“Political and regulatory risk has definitely increased,” said Craig Allen, president of the US-China Business Council. “If you’re a company manager or CEO, it’s very difficult to calculate where it’s happening and what your risks are.”

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

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

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However, Xi is expected to reduce commercial ties with the US. The Biden administration’s success this year in securing allied support for punishing Russia with financial sanctions after its February 24 invasion of Ukraine has Beijing worried that it will face similar measures in any conflict over Taiwan’s status in the future.

The once-every-five-years CCP Congress, which concluded on October 22, reinforced Xi’s vision of a threatening international climate. Congress envisioned “a very dark international environment based on the United States,” said one senior administration official, who spoke on condition of anonymity to discuss the sensitive issue.

Xi brought together the seven-member Politburo Standing Committee with loyalists and high-ranking officials from the hardline state security and public security ministries.

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

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

Diplomats from both countries attend far fewer meetings than in previous years, leaving room for misinterpretation and misunderstandings. Isolation caused by strict Covid quarantine protocols has curtailed a routine that brought together top American and Chinese officials several times each year.

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

Jeanne Whalen contributed to this report.

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