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

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National security fears in Washington and Beijing threaten to cloud prospects for closer commercial cooperation between the U.S. and China, leaving business leaders worried about casualties in a superpower clash.

After four decades of a profitable partnership, both countries are now emphasizing greater independence. Supply chain grunts during the pandemic have prompted some companies to back up their Chinese factories with factories in countries such as Vietnam, while rising geopolitical tensions have highlighted the risks for both sides of trading with a strategic foe.

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 has broken precedent by securing a third term as party general secretary and elevating hardliners to top posts over economic reformers.

The moves come two weeks after Biden effectively banned the sale of cutting-edge US computer chips and chip-making technology to China. The new export controls, 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 upgrade its military or monitor its citizens.

The turnaround in business-as-usual began more than four years ago when former President Donald Trump imposed heavy import tariffs on goods from China and restricted Chinese technology companies from buying some critical US components. But this month’s Communist Party conclave and Biden’s tough export restrictions marked a widening of the US-China divide.

“It’s a complete shift. We just have to realize that the old idea of ​​adding a premium to the economy is no longer there,” said Joerg Wuttke, president of the European Union Chamber of Commerce in China, who has been living in China for the past 32 years. “The agenda is self-sufficiency. We have entered a new era.”

The new dynamic between the US and China 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 fortune.

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Investors took 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 chairman of Congress’s executive committee on China on Thursday called on top executives from Wall Street banks including Goldman Sachs, Morgan Stanley, Citigroup and JPMorgan Chase to pull out of planned investment appearances. at a summit in Hong Kong next week.

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Sen. Jeff Merkley (Ore.) and Rep. Jim McGovern (Mass.), both Democrats, said U.S. leaders should “reconsider” their decision to speak with Hong Kong leader John Lee, who has been sanctioned by the U.S. for two years. against their role in the crackdown on democracy, adding that they would otherwise be “complicit” in human rights abuses.

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

What may have seemed like a temporary cooling off in the US-China trade war has become a definitive break with the past. For decades, the United States and China have prioritized economic ties in their relationship, even as some warned that the two countries were destined to cross paths. But now though two-way trade is exceeding last year’s record pace, and the balance has finally tipped toward competition and dispute.

“Up to a point, everyone was willing to put aside security and other concerns in favor of mutually beneficial economic benefits and the idea that it would lead to better relations,” said Michael Schuman, senior fellow at the Atlantic Council. in Beijing. “What’s happening in both Beijing and Washington now is a willingness to sacrifice some of that economic gain for security.”

Xi’s strongmanship is holding back China’s economy, which grew at an annual rate of 3 percent in the first nine months of this year, down from more than 8 percent last year. His signature “zero-coronavirus” policy has reduced consumer spending and industrial production due to repeated lockdowns, including one this week that affected an Apple supplier in Zhengzhou.

Just 55 percent of American companies said they were optimistic about the five-year outlook for China, the lowest number since last year, according to a survey released Thursday by the American Chamber of Commerce in Shanghai. A third of responding companies said they had diverted their planned Chinese investments to other markets, almost double the number in 2021.

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

“The volume of trade may say otherwise, but rising political tensions have translated into a worsening business environment for many US companies,” said Myron Brilliant, executive vice president of the US Chamber of Commerce. “There is more sand in the gears. It will be even more difficult.”

Making matters worse is that the export controls the White House began imposing this month are the most effective demonstration yet of the administration’s evolving high-tech containment strategy. The Commerce Department’s rules aim to halt China’s chip-making capabilities and thwart Beijing’s efforts to develop cutting-edge semiconductors to modernize its military.

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Advanced chips and supercomputer capabilities, which will be limitless, can be used to develop nuclear weapons, hypersonic missiles, autonomous systems and mass surveillance systems. Some of the same technologies will also have profitable commercial applications, analysts said.

On Thursday, Alan Estevez, Commerce’s undersecretary for industry and security, said the administration consulted with U.S. allies before announcing the move. The United States expects major trading partners to take similar measures soon, he told the Center for a New American Security. He also suggested that officials are considering 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-to-bottom coverage to take care of it, regardless of the impact.”

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Estevez, however, said the license requirements were not meant to hold back China’s economic development. Chinese customers would retain a “robust ability to make semiconductors that go into car airbags, I don’t have a problem with that,” 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 drive the core of China’s global ambitions.” “Xi Jinping has bet his reputation on building a high-tech economy, but without Western semiconductor equipment, he will have a hard time getting there,” said Collier, author of China’s Technology War.

The administration’s insistence on a unified security rationale for export controls did little to assuage business leaders’ concerns. While China’s toy and apparel companies probably have nothing to worry about, other manufacturers worry that the fringes of niche technology could be expanding.

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 of China or making contingency plans to relocate operations.

“Look at consulting firms. Ten years ago they were about “How do I get to China?”. said Patrick Chovanec, an economic adviser at Silvercrest Asset Management in New York. “Now it’s all, ‘How do you limit your 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 about being 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 going and what your risks are.”

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

“Despite some investors’ geopolitical concerns, we see significant opportunities in China,” Richard Bernstein, chief investment officer in New York, wrote in a note to clients this week.

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But Xi is expected to weaken trade ties with the US. After the Biden administration succeeded this year in securing the support of allies for financial sanctions against Russia after February 24. invasion of Ukraine, Beijing worried about similar measures in any future conflict over Taiwan’s status.

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

Xi has brought together loyalists and senior figures from the hardline ministries of state security and public security in the seven-person Politburo Standing Committee.

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

At the last party convention in 2017 Xi said that “peace and development remain the cry of our day”, this year he warned the party faithful to prepare to withstand “strong winds, turbulent waters and even dangerous storms”.

Diplomats from both countries are attending far fewer meetings than last year, leaving room for misinterpretation and misunderstandings. The isolation created by strict coronavirus quarantine protocols has disrupted a routine that brings together top American and Chinese officials countless times each year.

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

Jeanne Whalen contributed to this report.

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