Webinar: A New U.S. President – What’s in store for U.S. policy and engagement with China? What does this mean for European businesses? – 19 January 2021
January 27, 2021 Category Past events, Weekly
The EU-China Business Association and the Flanders-China Chamber of Commerce in partnership with The Conference Board organized a webinar on: ‘A New U.S. President – What’s in store for U.S. policy and engagement with China? What does this mean for European businesses?’ This webcast outlined the Biden policy agenda for China and identified the key areas of similarities and differences from the outgoing Trump administration.
Ms Gwenn Sonck, Executive Director of the Flanders-China Chamber of Commerce and the EU-China Business Association, welcomed the participants to the annual joint webinar with The Conference Board and introduced the speaker, Mr. David Hoffman, Senior Vice President Asia and Managing Director of the China Center for Economics & Business of The Conference Board.
Mr David Hoffman said he hoped to introduce what we might know and the unknowns in the change of administrations in the United States and what it means for U.S.-China and Sino-Western relations. First he gave a recap of the last four years, followed by a preview of what might be in store, a medium-term view on the structural factors shaping the U.S.-China, EU-China and China-Western relationships more broadly and a view of developments three years out, and finally the implications for business.
The last four years have been a whirlwind, especially the last year with the Covid pandemic. Many business leaders and policy makers summarize the Trump years vis-a-vis China as a situation where the administration was strategically correct in terms of pressuring China to make some important and arguably overdue changes in its trading and investment arrangements and also its geo-strategic arrangements on defense and military posture, but that it was operationally flawed. Nonetheless, it has comprised some key achievements where credits are due. A phase 1 trade deal was reached, a light agreement mostly related to procurement of goods and services and an attempt to balance the trade relationship and deal with the very significant trade deficit on the U.S. side of the trading relationship. Despite all of the difficulties since May 2019 when Huawei was put on the Entity List, the phase 1 deal has stuck. Although China is significantly behind its procurement commitments – about 50% at this point – with one year to go, China will have to make it up considerably in year two if the commitments are to be achieved in full.
The Trump administration changed narratives on China globally by calling out perceived misconduct and detailing fair play issues. Many sacred cows were broken, many sensitive issues that many governments around the world had issue with vis-a-vis trade and investment asymmetries with China and were afraid to mention for fear of retribution or criticism or retaliation were raised. Trump and his team put those on the table. This raised public awareness globally, broke the established inertia of legacy dialogues which many perceived as ongoing forever without a whole lot of progress. On the national security side, Trump and his team managed to mobilize a “whole-of-government” pressure campaign. This began in November 2018 when the previous Department of Justice’s Attorney General Jeff Sessions introduced what he called the “China initiative”, basically an unlocking of U.S. law enforcement agencies to pursue and elevate the legal cases they had on China, whether security or visa fraud or others. This culminated in Huawei being put on the Entity List in May 2019. Arguably, there were some achievements. The door is now open to potentially a reset. At least the core problems are exposed, neither side is denying that these problems exist, nor that there is a great power competition.
The main critique of the Trump administration was on style issues, the way diplomacy was conducted in a very public way in many cases via Twitter. The perception of the Chinese public at least was that the U.S. was embarking on a wholesale attack on China’s political and economic system, with unachievable goals where major Western-like market and political liberalizations were on the agenda, i.e. the disavowal of industrial planning, the diminished control of the central government over the economy, a de-elevated position if not a complete deregulation of the state-owned enterprise structure and so on. Many of these features marked the Chinese system for over 2,000 years. A lot of people felt that those demands were not realistic. It was a highly public, politicized and confrontational engagement style, which is an approach that is generally not well received. A lot of the rhetoric was quite demonizing to the Chinese public and government and highly insulting to the Chinese polity and citizenry.
The current status is that we have seemingly broken dialogue channels and deep distrust primarily on the Chinese side, because there is a ubiquitous belief on the Chinese side that containment and regime change are the U.S. motives. That is obviously not a healthy starting point. If this was the idea behind the policy approach, you could consider it successful at least from that point of view and it resulted in two important changes. One, the dual circulation policy in China that was announced in October last year, implying that China should become less reliant on trade and investment and global engagement and be more self-sufficient. Second, we have seen growing anti-China sentiment in many Western publics and polities across many issues. If this was the aspiration of the outgoing administration, then some progress has been achieved.
Ms Gwenn Sonck: An audience poll showed that 33% found that Trump’s policy and approach to China has been “quite damaging”, while 19% said it was “potentially cathartic in a positive way”; 19% “cathartic but we don’t know in what way,” 11% “extremely damaging”, and only 2.8% said it was “game changing positive”, while 13% said it was “unproductive and soon forgotten”.
Mr David Hoffman: When we polled U.S. audiences it was split three-way: positive, potentially positive or we don’t know yet, while with this audience it is more skewed to quite damaging or extremely damaging. It’s very interesting. My own answer would be somewhere between unproductive and quite damaging.
Mr Hoffman: The Biden campaign has formulated a number of documents that we synthesized to try to establish what the orientation would be. The overarching theme of the campaign is that the Biden administration will focus on making America more competitive vis-a-vis China, not on changing China. That is a very important distinction by contrast with the Trump administration’s focus on changing China and the idea that with hard policy and hard power China would concede these changes. The Biden campaign has outlined 12 policy priorities focused on consensus goals, consistent with Biden’s standing as a self-proclaimed centrist.
- Invest at home to strengthen U.S. ability to compete with China. We can expect almost every domestic U.S. policy – investment structure, education reform or health care reform – will be in the context of being necessary to compete with China over the long term.
- Work with allies and partners to address China-related challenges.
- Refocus on big, achievable goals for remedying unfair trading practices. The Trump administration had 148 items on the Trade Representative’s list that were being pursued for concessions. The Biden administration is expected to focus on a smaller set that they believe is achievable.
- Define clear principles and processes to manage technological competition.
- Fight climate change as a national and global priority.
- Mobilize an Indo-Pacific defense strategy to meet the Chinese military challenge.
- Return to leadership in international organizations.
- Advance American values to address the Xinjiang and Hong Kong crises.
- Deter CCP efforts to exploit American openness.
- Promote highest standards for infrastructure development.
- Pressure China to contribute more to global public goods.
- Ensure necessary resources and clear lines of responsibility to manage China policy.
The Biden administration has produced the documents around these 12 points and within each describes very clearly the tools and tactics that will be used to achieve these goals. There is coherence around a policy architecture and strategy.
Foreign policy is shaped by contingencies. What are we expecting to see in the “first hundred days”? Not all of the things initiated by the Trump administration will be discontinued. Many things will be continued but in a different way and style. We will see a continuation of the phase 1 deal, tariffs will continue to be used as a leverage mechanism. We will continue to see cross-agency law enforcement. There will be some changes, such as a transition plan for tariffs and embrace of phase 2 as a focal initiative. We will see a continuation of the upgrade and enhancement of Asia regional military and defense alliances. The Biden team has talked about new multilaterals to establish the highest standards for environmental, labor, and digital activity and forging a new alliance with Europe in this regard. There has been talk of a democracy summit and the withdrawal of tariffs on allies. The Biden team will take a stronger position on human rights in Hong Kong and Xinjiang. Trump called Biden a coward for not meeting with the Dalai Lama. On the technology side we will see a ‘small yard, high fence’ concept, where restricted or controlled technologies are limited to the most sensitive ones and the walls that constrain the trade in these technologies will be very high and impermeable, but most technologies won’t fall within that yard. There will be a ramp up of the Committee on Foreign Investment in the U.S. (CFIUS) – a Treasury agency – and the Foreign Investment Risk Review Modernization Act (FIRRMA) – a new congressional act – to monitor technology flows and IP security. We will see an effort to collaborate on shared issues such as climate, public goods and anti-terrorism. The U.S. might join the Asian Infrastructure Investment Bank (AIIB) and rebuild the operations of the Center for Disease Control (CDC) in Beijing.
This is not a soft policy set, it is quite hard on China. We expect the hard stance to continue and it is hard to predict how China will react. It is not likely to result in an immediate deescalation of tensions. Things may not get better quickly but at least they won’t get worse is about the best prediction at this stage.
Style will certainly change. Under Biden we will see a de-politization of trade and technology. We will see a return to civility and quiet diplomacy and a return to experts and process. The cabinet that Biden has nominated is a team of professionals. A return to process will be well received on the Chinese side.
Ms. Gwenn Sonck: In a second poll the audience was asked about expectations of the administration change in the U.S. About 69% said that relations between the U.S. and China will improve a bit, while 23% felt that it would have a strongly positive impact on U.S.-China relations. Only 7.7% answered that the change of administration would not have much impact.
Mr David Hoffman: In the near term we are likely to see detente, where relations stabilize, dialogue channels begin to open and we will see a slow improvement. The Chinese side expects relations to be fraught for the foreseeable future. If you would ask the Chinese leadership to answer the questionnaire they would probably answer that it wouldn’t have much impact. Or relations would get worse before they get better.
Administrations in the U.S. come and go and it is questionable what any President can get done. The structural drivers on each side are the most important. On the U.S. side there is a broad-based awakening to the “China challenge”. China has been named a strategic competitor, and by some in Washington even an enemy. Congress is now heavily involved. There are 366 bills in circulation and 75 non-binding resolutions and this will constrain the Executive branch to conduct foreign policy on an unfettered basis. There is significant working class dissatisfaction with globalization.They believe that foreign trade and globalization have had a very negative impact on welfare and those are the people who vote in Congressmen and Senators. The U.S. government will need to be responsive to them. There is also an erosion of mediating institutions such as the WTO, the UN and the G20.
On the Chinese side there is an entrenched belief of U.S. “containment” motives; a very different global development and governance vision; a self-reliance obsessed approach, and a uniquely ambitious and powerful leader in Xi Jinping. For both the U.S. and China there are acute domestic challenges.
Looking two to three years out on how this relationship will evolve, the friction emanates from an incompatibility of the authoritarian state-capitalist system and the Western democratic free market system. It is not a criticism of either system. Both systems have strengths and weaknesses but they have some fundamental incompatibilities that will necessarily – if unresolved – lead to a more separated business environment. The only question is how fast this separation will occur and whether and how it will be possible for companies and foreign investors to play both sides and address the increasingly divergent business environments.
There are three scenarios of how this systemic tension will resolve:
- Partial accommodation: doors open wider.
- Persistent friction: business continues, but is complicated.
- Impassable friction: business becomes impossible due to an unforeseen event that drives a huge wedge between the West and China.
The second scenario is the most likely where neither side imposes hard policy actions that prevent business and commerce. Huawei and many other companies are on the Entity List of the Department of Commerce, which means U.S. companies must apply for permission to continue supplying semiconductors and restricted components. Most of those applications are approved and trade continues. Things will remain for the foreseeable future and military tensions will also remain under control.
The big questions for European business in the next 100 days are:
- Will the EU Council and EU Parliament ratify the EU-China Comprehensive Investment Agreement? There are some contentious issues around labor and human rights.
- How will Beijing respond to intensifying European criticism and action on China human rights and labor issues?
- Will U.S. aspirations for coordinated U.S.-EU actions on China materialize? How fast, how extensive and how serious?
Ms Gwenn Sonck: A third poll asked the audience about their expectations of U.S.-China coordination on China. “Be fast-coming, substantive and impactful” (8%); “Be fast-coming but probably limited in scope and impact” (39%); “Be more talk than action and not accomplish much” (47%); and “Never really get off the ground” (6%) were the answers given.
Mr David Hoffman: We don’t really know what the reasons are for these answers. The new administration will be challenged to put the political capital into foreign affairs to establish and motivate multilateral cooperation, and reform global institutions because the domestic demands are so high. Much will depend on how much effort and leadership the U.S. can apply to this challenge.
Three predictions:
- Political, geopolitical and economic trends point to increasing bifurcation between the China market and Western markets.
- MNCs will need to adapt significantly to succeed in an increasingly divergent, more separated Chinese business environment.
- Autonomy challenges related to control, alignment and compliance loom large.
One key question: in an increasingly politicized commercial sphere, how can companies successfully navigate home-market politics and China-related ethics and dependency risks?
Q&A: Are the current tariffs going to remain in full? Mr Hoffman: They will be reduced over time as there is not much support for tariffs in the U.S. Congress, with a few exceptions. The Biden administration recognizes the true cost of tariffs and the impact they have on American household finances. There is a deep recognition that they hurt American workers and consumers.
How will President Biden handle the Hong Kong case? Mr Hoffman: We can expect the Biden team to be swifter to impose stricter sanctions on Hong Kong. They will be very cautious in trying to undertake pressure campaigns that do not harm the Hong Kong people but that actually do pressure Chinese policy makers. We will probably see a strengthened sanctions programs around companies and individuals and the FED settlement windows tinkered with.
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