Welcome, China Watchers. This week’s guest host is Craig Allen, president of the U.S.-China Business Council. Craig has held several senior positions at the Commerce Department, including deputy assistant secretary for Asia and as senior commercial officer in Beijing. He also served as ambassador to Brunei. Over to you, Craig. — John Yearwood, global news editor
U.S. Trade Representative Katherine Tai and other Biden administration economic officials have held a flurry of meetings in recent weeks with their Chinese counterparts. These conversations are a good start to stabilizing strained relations between the two countries, worsened by Trump-era policies aimed at recalibrating the commercial relationship ranging from tariffs to sanctions to tightened export controls and foreign investment reviews. But after these initial meetings — and reports Wednesday of future talks — it’s unclear what the next steps are in U.S.-China trade and investment negotiations.
While the Biden team is still conducting what it calls a “top-to-bottom” review of policies toward China, Tai has said that any movement on tariffs would depend on three factors: conversations with China, the effectiveness of the Phase One trade agreement and U.S. strategy on China. As Cabinet members and President Joe Biden prepare for additional discussions, they should also consider a fourth factor: the price that the United States will continue paying — with American jobs and competitiveness — if it keeps on the current path, particularly regarding the tariffs that remain on goods worth $370 billion.
U.S. exports to China consistently support around 1 million American jobs. The trade war of the last three years has given us a small window into a future in which the United States and China deliberately erode their commercial relations, and the emerging picture is not pretty.
At its peak, the trade war cost the United States about 245,000 jobs and $108 billion in lost GDP, according to a study by Oxford Economics. Keep in mind that this was before Covid-19 drove millions of Americans to file for unemployment.
States and municipalities across America are caught in the crossfire of the trade war. For years, states have increased trade ties with China, which has created complex, two-way relationships. Recognition of the deep local relations aiding U.S.-China trade is often missing in the larger policy debate. A California state official described it well: “We don’t have a foreign policy; that’s the federal government’s responsibility. But we do have foreign relations, and they are extremely important to us.” A 2019 Business Roundtable study notes that up to one in five California jobs depend on international trade, with almost 146,000 jobs supported by exports to China.
Middle class trade policy
There appears to be a disconnect between the reality of local economies’ dependence on trade, the cost of the tariffs and the rhetoric of their elected representatives in Washington.
A Michigan lumber exporter complained to your host that tariffs of 25 percent have almost killed the industry: “Dozens of mills have closed throughout the country, with the loss of thousands of good jobs. Soybean and corn farmers in the Midwest got bailed out; we got nothing. Nobody seems to pay attention.”
Two years ago, Chinese buyers snapped up 80 percent of Michigan’s production. Now, it’s down to the single digits. His former Chinese buyers may turn to non-U.S. suppliers, some of whom are in countries that don’t manage their forests sustainably. In addition to not contributing to bottom lines here in the United States, the cost is also to climate change efforts everywhere. This is another hidden, unintended cost of tariffs.
When the Biden administration talks about a trade policy for the middle class, it must acknowledge the jobs that depend now on foreign trade and those that will in the future. A study by Trade Partnership Worldwide suggests that 21 million American jobs along the value chain, including transportation, final assembly, wholesale and retail, are associated with imports. Imports from China comprised 19 percent of all U.S. goods imports in 2020. These jobs include assembly and trucking, as well as marketing, selling and accounting.
In 2020, despite pandemic-induced political tension, tariffs and disruptions, exports to China from all 50 states increased by 18 percent. Much of the increase reflects billions of dollars in purchases of goods, such as agricultural commodities, as Chinese retaliatory tariffs on U.S. goods were waived to meet commitments under the Phase One trade agreement. This agreement ends at the end of this year. Unless it is renewed or replaced with understandings that permanently lift tariffs, states that rely on exports of agricultural commodities and other goods hit hard by tariffs over the last three years may very well see declines in trade-dependent jobs and associated tax revenues. Chinese tariffs on U.S. agricultural products, for example, cut these exports by more than half between 2017 and 2018, but these reached a record high last year after tariff exclusions were put in place.
While it is difficult to say whether the U.S. or China has suffered more from the trade war, Moody’s Analytics says that American companies shouldered more than 90 percent of the cost of U.S. tariffs on Chinese goods. The price of Chinese imports has remained stable as the United States ramped up tariffs, which means the brunt of the tariff burden is borne by U.S. consumers and companies. There is a tendency to view this as a zero-sum game: that cooperating or collaborating with China can only hurt U.S. competitiveness.
But American high-tech companies have operated in China for decades. Primarily, they operate “in China, for China” or “in China, for Asia” — selling to consumers in those markets. Of goods produced by U.S. companies in China, 80 percent are sold in China and only 7 percent are exported to the United States, with the rest going to other countries.
The Chinese market has enormous scale. If American companies are prevented from operating in China, they will be rapidly replaced by Japanese and European competitors and Chinese domestic firms. If American companies are prevented from operating in China, our competitors will be able to take advantage of China’s economies of scale and rapid adoption of technology to outcompete U.S. companies everywhere else, including in our home market. While American companies are on board with precise export controls scoped to address precise security concerns, broad restrictions — such as the Trump-era order that allows the government to block a wide swath of technology transactions between U.S. and Chinese companies — create significant uncertainty and could be very damaging to U.S. competitiveness.
U.S. companies have been operating successfully in China for decades and investing profits from their China-based operations in their research and development programs back in the United States — creating good-paying jobs. Without U.S.-China trade in technology, there will be less money to invest in R&D, personnel and factories back home that keep American companies at the leading edge.
The path the U.S. is currently on needlessly hinders the trade relationship through ineffective tariffs, heavy-handed export control measures and other restrictions. Without a consensus among allies, it’s unclear what these tactics will accomplish, including China’s access to sensitive technologies. But it will certainly dampen U.S. technological leadership, cede U.S. market share to foreign competitors and reduce investment in future jobs.
China must face up to its role in contributing to the friction in U.S.-China relations and help in easing current tensions. For its own sustainable economic development, China needs to improve market access and industrial competitiveness across a whole range of industries, especially in parts of the economy that are dominated by state-owned enterprises.
But the United States also needs to be clear and honest in its own accounting. Actions it has taken that need to be reassessed include limiting Chinese students at our universities, blocking access to U.S. capital markets, restricting investments in both directions and barring visitors because of their membership in the Communist Party. These and other actions undermine the stability and predictability on which business and people-to-people relationships depend.
The United States and China will eventually return to the negotiating table, hopefully soon. Given its impact on the middle class, trade must be at or near the top of the agenda.
And now, back to your regular China Watcher programming…
— A tech update from Protocol | China. Protocol | China, backed by Robert Allbritton, publisher of Protocol and POLITICO, tracks the intersection of technology and policy in the world’s largest country. Sign up for the newsletter and learn more about Protocol’s research here. This week’s coverage includes Beijing’s plan to nationalize data, a long battle is brewing over short dramas, a shopping bonanza under the dark cloud of antitrust.
— CBP TO BLOCK SOLAR PANEL MATERIAL FROM XINJIANG FIRM: The Biden administration will announce an import ban on solar materials from a major Chinese firm, according to three sources familiar with the plans, a day after placing the company and four others on a trade blacklist over forced labor concerns, POLITICO reported.
Hoshine hit with WRO: On Thursday, CBP will issue a ban on imports of products containing inputs from Hoshine Silicon Industry Co. Ltd, a major manufacturer of the feedstock for the polysilicon inside most solar panels, according to two of the sources. The action, called a “withhold release order,” will allow CBP to seize shipments from Hoshine, only releasing them if the importer can prove they are not made with forced labor.
Ho-shining the spotlight: Hoshine was largely the subject of a report earlier this year on Uyghur forced labor in global supply chains from the Sheffield Hallam University Helena Kennedy Centre for International Justice that received attention from the solar industry.
Entity list additions: “The move will come a day after the Commerce Department’s Bureau of Industry and Security added Hoshine and four other firms located in Xinjiang to its ‘entity list,’ a trade blacklist that prevents U.S. firms from doing business with the listed entities without approval from the U.S. government.
Those other companies are Xinjiang Daqo New Energy Co., Xinjiang East Hope Nonferrous Metals Co., Xinjiang GCL New Energy Material Co., and the Xinjiang Production and Construction Corps. All are involved in the manufacture or use of polysilicon products,” and XPCC, the last entry, is already subject to an import ban from the Trump administration, POLITICO reported.
Short of regional ban: The trade ban on Hoshine stops short of a “region-wide WRO to block imports of polysilicon from all entities in Xinjiang. The administration has recently considered such a ban, POLITICO reported this week, but CBP often blocks imports from individual companies as it builds the legal case for broader action. The Trump administration took that approach, banning imports from XPCC before a Xinjiang-wide ban on cotton and tomatoes.”
— APPLE DAILY FOLDS: Hong Kong’s embattled Apple Daily printed its last edition on Thursday, closing after 26 years after a new national security law made it practically impossible to continue operations.
“Apple Daily is not perfect, but what will Hong Kong be like without us?” the paper said in an open letter to readers. “We thank our readers for joining us. We have fought a good war.”
The South China Morning Post reported that the decision to end the print and online publication came hours after its lead editorial writer was detained by police on suspicion of conspiracy to collude with foreign forces.
“Yeung Ching-kee, 55, also a senior columnist, was the sixth arrest under the national security law in relation to a series of articles published by the paper allegedly calling for foreign sanctions, following last week’s detention of five top executives,” SCMP reported.
“Insiders said Yeung’s arrest prompted a fresh round of resignations, worsening the exodus since last week in which the newspaper lost nearly half of its workforce, that earlier this month had numbered 800.”
— CHINA PREPARES FOR A CELEBRATION: As China prepares for July 1 celebrations to mark the 100th anniversary of the Chinese Communist Party, China Watcher contributor Shirley Martey Hargis spoke with Brian Wong, founding editor of Oxford Political Review, about what he’s seeing on social media in China about the event.
Wong said he has noticed three distinct conversations among netizens. “There is truly a sense of pride and triumphalism amongst a lot of netizens. They resonate, although there might be dispute, with the fully doctrinal thought that this is a very important watershed moment for the Party’s and China’s development moving from just another socialist state to a genuine superpower,” he said.
But Wong said some in China, especially Beijing, are concerned about lockdowns during the celebrations.
“A chap who commented that he ordered a smoked chicken, but he couldn’t get it through because he was told, ‘No ducks allowed! No entry into Beijing — even if it is a dead duck.’ This signifies that the triumphalist rhetoric is not shared by everyone on the ground. There is an annoyance, but I don’t think it translates to annoyance with the party,” Wong said.
The final strand that Wong noted was the “view of the adversities — the ‘treacherous international environment’ where the perception is China is currently besieged by a lot of backlash and Western consternation. This celebration has a very, very important symbolic effect. It symbolizes strength despite adversities,” Wong said.
Watch for more on the CCP’s 100th anniversary in the next China Watcher.
— SECRET DETENTION INCREASE: Secret detention without trial in China is on the rise, creating one of the world’s largest systems of forced disappearances, according to a new report from human rights activists.
Tens of thousands of people have been subjected to “residential surveillance at a designated location” (RSDL), a name for an Orwellian system, the group Safeguard Defenders said in the report, Locked Up, the Guardian reported.
“Researchers have combed China’s official court database to identify nearly 23,000 cases nationwide where it had been used since 2013, after a change in Chinese law gave police sweeping powers to detain with virtually no oversight,” the newspaper reported.
“The detained person’s family is meant to be notified that they have been taken into custody, but police ‘routinely bypass’ this requirement and there is little contact with relatives or legal teams.”
— SMART ELEPHANT HERD: The BBC reported that “a herd of endangered elephants in China has completely dumbfounded scientists globally, while captivating an entire nation in the process.”
The herd has been making its way across China for more than a year, stunning scientists. Elephants normally move small distances, but not 310 miles.
“It’s thought that they started their journey last spring from Xishuangbanna National Nature Reserve in the southwest of the country, near the border with Myanmar and Laos. They began moving north and in the last few months, the elephants have popped up in a number of villages, towns and cities,” the BBC reported.
Thanks to: Ben Pauker, Gavin Bade, Shirley Martey Hargis, Luiza Ch. Savage, Matt Kaminski and editor John Yearwood.
Do you have tips? Chinese-language stories we might have missed? Would you like to contribute to China Watcher or comment on this week’s items? Email us at [email protected].