U.S. and Chinese negotiators are scoping out new venues after the protest-wracked Chilean capital of Santiago canceled the Nov. 16-17 Asia-Pacific Economic Cooperation forum, where U.S. President Donald Trump and Chinese President Xi Jinping had been expected to endorse a so-called Phase 1 deal to allow White House and Beijing to justify another fragile cease-fire in their trade war. An alternative location for the two leaders is likely to emerge, giving both sides more time to shake out the details of what appears to be a lightweight compromise: Beijing has committed to around $20 billion in agricultural purchases in 2020 (around what it averaged before the trade war even started), is dusting off earlier pledges to boost intellectual property protections via an updated foreign investment law passed earlier this year, will make an additional symbolic pledge to avoid currency manipulation, and will partially liberalize its financial sector by lifting equity caps for foreigners on financial services firms at a time when Beijing faces a growing imperative to keep Western capital flowing to the mainland. In return, the White House so far is restraining itself from raising existing tariffs on $250 billion worth of Chinese imports from 25 percent to 30 percent and will likely hold off on following through with a threat to impose on Dec. 15 a 15 percent tariff on $110 billion in mostly consumer goods. That would still leave U.S. tariffs on more than $360 billion worth of Chinese goods weighing on the global economy.
With the 2020 election approaching, the White House is under pressure to temper the trade war and avoid destabilizing a record-long U.S. economic expansion. But against the backdrop of lightweight trade truces, the battle over technological prowess is intensifying while restive parts of China’s periphery offer ample opportunities to the White House to drum up human rights sanctions against Beijing. Once the tech and trade wars bleed into human rights territory, however, the political cost of bargaining over these issues rises dramatically and leaves little room for compromise.
Conspicuously absent from the emerging truce is the outstanding issue of U.S. export restrictions against Huawei. This is in spite of Trump's largely unfulfilled promise in June following his G-20 meeting with Xi that the ban would be eased and indications last month from Beijing that even a boost in agricultural purchases would have to be matched with concessions on Huawei for a Phase 1 deal to advance. The Huawei issue is apparently being punted to an elusive "Phase 2" negotiation that may or may not get off the ground as Beijing digs in and prepares for whatever the November 2020 U.S. presidential election brings.
The omission reveals an uncomfortable and growing reality for U.S. tech firms: Politically convenient trade truces will come and go, but the strategic competition between the United States and China is deepening. Technology is a fundamental component of this broader rivalry, which also makes it a radioactive element in the trade talks and a prime target for China hawks advocating a decoupling of the U.S. and Chinese economies. At this stage of the competition, national security, human rights and sovereignty are getting mashed together along with American public attitudes on how to contend with China when it comes to shaping U.S. policy. As a result, the political room to negotiate on an issue like Huawei is narrowing by the day, driving a more hard-line U.S. policy toward China overall.
Packaging the Huawei Threat
The White House has taken three broad swings against Chinese tech giant Huawei:
- A ban preventing Huawei from selling technology and hardware to U.S. telecom providers over concerns that U.S. telecommunications infrastructure could be made vulnerable to espionage or even sabotage by the Chinese government.
- Criminal charges alleging violations of Iran sanctions, intellectual property theft and bank fraud.
- A sweeping export ban imposed in May that largely prevents Huawei from purchasing critical U.S.-made parts and services, like semiconductor chips or access to Google's Android operating system.
When it comes to keeping Huawei out of U.S. — and allied — telecom networks, the United States is doubling down on its position. Washington is now in the process of trying to scrub rural networks of existing Chinese telecom gear. (Huawei has contracts with smaller telecom providers in rural America that are reliant on government subsidies to service low-income households, thus making them more vulnerable to government influence.) The U.S. government has also launched a largely unsuccessful campaign to pressure reluctant foreign partners not only to ban Huawei from their 5G networks, but also to preclude competitors to U.S. firms like Samsung, Nokia or Ericsson from even manufacturing their equipment in China.
When it comes to keeping Huawei out of U.S. — and allied — telecom networks, the United States is doubling down on its position.
The criminal charges and export ban, on the other hand, leave room for negotiation — in theory, anyway. Barring China from critical IT infrastructure is one thing, but severe restrictions on U.S. suppliers selling to China is another. U.S.-based multinational corporations cannot simply forfeit the growth and revenue the massive Chinese market offers. The White House could have left Chinese telecom firm ZTE to die after the U.S. Commerce Department in April 2018 cut the company off from U.S. software and hardware and drove it to the verge of bankruptcy. Instead, the White House swooped in with an eleventh-hour deal between Xi and Trump a month later that punished the firm for violating U.S. sanctions on Iran and North Korea, but restored U.S. business ties with the Chinese firm. But the White House was just ramping up its trade war with China at the time, calculating the first big tariff barrage announced in March 2018 coupled with the near-death blow to a big Chinese tech firm would be enough to grab Beijing's attention and drive a deal. Instead, a now all-too-familiar cycle ensued: The White House imposed tariffs, China retaliated, Trump and Xi eventually held a high-level summit, Xi promised big agricultural purchases, a truce was called, talks broke down over U.S. accusations that China was reneging on enforcement agreement, and more tariffs followed. Critically, the ZTE compromise also exposed Trump's narrowing room for maneuver on future tech bargains. After releasing ZTE from a chokehold, Trump faced significant criticism from lawmakers on both sides of the aisle who argued against any compromise on national security matters involving China.
Bargaining Chip or Strategic Target?
ZTE served as U.S. target practice for the attack against Huawei that followed in May 2019. The move by the Commerce Department to place the world's largest telecom equipment provider and second-largest manufacturer of smartphones on its entity list means that U.S. tech suppliers like Intel, Qualcomm, Xilinx, Broadcom, Micron and Google, all of which derive significant revenue from sales to China, are facing pressure to either reduce or cut ties with Huawei to avoid sanctions or fight an uphill regulatory battle to obtain an export license from the Commerce Department's Bureau of Industry and Security. The Commerce Department has been issuing 90-day temporary general licenses (TGLs) — the next one expires on Nov. 18 — ostensibly to give U.S. telecom companies more time to find alternatives to Huawei equipment, technology and software. The TGLs have been narrow in scope and do little to address uncertainty for U.S. tech suppliers to China. Trump himself has meanwhile periodically raised the prospect of including an easing of the export ban in a future trade deal.
The U.S. crackdown on Huawei leaves open the question of whether the White House ultimately views Huawei as a bargaining chip or a strategic target. The uncomfortable answer for U.S. tech firms and the global industry at large is that it is both. From the ban on 5G infrastructure to the ban on U.S. chipmakers, the Huawei issue is often politically packaged as one mega national security threat. This makes it very hard to compartmentalize, for example, more defined guidance from the Commerce Department on which exports actually constitute a threat to U.S. national security and more stringent rules that keep China out of U.S. 5G infrastructure.
This is perhaps why Huawei founder Ren Zhengfei has telegraphed a startling offer via The Economist and The New York Times: Huawei would sell its 5G technology stack of patents, code, blueprints and know-how to a Western firm, which could then further develop, implement and maintain the technology according to its own standards. On the surface, this appears like a tempting offer considering that the United States lacks a competitor in the 5G space and would have to look to Samsung, Nokia or Ericsson as a Huawei alternative. But concerns over software vulnerabilities and maintenance, not to mention the political firestorm such a transaction would ignite, probably render it impractical. That may be Ren's plan all along — to call out overt U.S. politicization of U.S. business interactions with the company, while also giving the appearance that Huawei is a responsible global stakeholder while governments worldwide must weigh the clear economic benefit of working with Huawei to install their 5G networks amid a U.S. campaign to brand Huawei as a critical danger to allied networks.
The muddling of White House tactics and strategy in dealing with Beijing on trade and technology risks reducing space for meaningful negotiation and will inevitably drive the United States down a more hawkish path. This reality was on display a few weeks ago when the Trump White House, in its incessant search for leverage in trying to secure a Phase 1 deal on its terms, blacklisted 28 Chinese companies, including eight critical Chinese tech companies. The companies included artificial intelligence firms SenseTime Group Ltd. and Megvii Technology Ltd. and surveillance product manufacturers Hangzhou Hikvision Digital Technology and Zhejiang Dahua Technology Co. The additions to the Commerce Department's burgeoning entity list were pinned on human rights violations against Muslim minorities in Xinjiang province, where Beijing has been pilot testing highly invasive technologies to control what it views as a restive part of its periphery.
The muddling of White House tactics and strategy in dealing with Beijing on trade and technology risks reducing space for meaningful negotiation.
The move appears to have been designed to kill two birds with one stone: The White House had been sitting on these human rights sanctions for months, holding the tactic in reserve for an opportune point in its trade negotiation to escalate pressure on Beijing. At the same time, the blacklisting clearly had a strategic end in targeting some of the biggest tech challengers to the United States.
For China, this was only further confirmation that the White House remains intent on trying to handicap Chinese tech giants by squeezing their supply chain vulnerabilities to American tech suppliers. Beijing can only assume at this point that future sanctions could target other valuable Chinese tech companies, like electronics manufacturers Xiaomi and Lenovo and digital services companies like Tencent, Baidu and Alibaba. Rather than drive China toward deeper concessions on reforming its industrial policies, the U.S. move more likely will intensify China's imperative to put state resources to work (including the country's cyberespionage prowess) to facilitate a rapid build-up in indigenous tech capabilities. This is what makes a Phase 2 deal on more substantive issues that much harder to envision, and what will keep the trade war in an extreme state for the foreseeable future.
The Costs of Playing the Human Rights Card
In leveraging human rights issues, the White House may also be painting itself into a negotiating corner in managing its economic standoff with Beijing. The potent narrative of Beijing harnessing its technological strengths in artificial intelligence-powered facial recognition to fortify government surveillance and oppress minorities in Xinjiang and democracy defenders in Hong Kong is not one that can be easily walked back politically. Capitol Hill is already buzzing with China hawks on both sides of the aisle, with more than 150 anti-China bills and counting introduced in the 116th Congress so far, including the Hong Kong Human Rights and Democracy Act of 2019 (which has passed the House but has yet to be voted on in the Senate) and an upcoming bill by Sen. Marco Rubio, R.-Florida, that could open the door to U.S. capital controls by preventing a federal pension fund from investing in China. As U.S. Navy Secretary Richard Spencer put it in a recent op-ed in The Washington Post, "imagine retiring after a long career serving in uniform, only to learn that your savings all those years had helped fund advanced weapons systems for America's adversaries."
In this charged political climate, an easing of the U.S. export ban on Chinese tech companies as part of a broader trade deal would be met with an avalanche of political criticism from both Democrats and Republicans. Even outside the circle of policy wonks in Washington, the explosive controversy between China and the NBA over a tweet in support of the Hong Kong protests by the general manager of the Houston Rockets and Beijing's ban on "South Park" for satirizing U.S. corporations that enable Chinese censorship of American pop culture are drawing a much broader swath of the American public into recognizing "the China issue." At this stage, corporations heavily invested in China not only may have to worry about social media activism that translates into consumer boycotts against companies seen as facilitating Chinese repression, they also are unlikely to see much in the way of a reprieve in White House policy when it comes to sweeping trade restrictions affecting their bottom line.
I imagine this has been a major point of discussion among the Chinese leadership as the Central Committee of the Communist Party has held its secretive plenum this week in Beijing. The Chinese leadership will remain engaged with the Trump White House, watching and waiting to see if a more politically vulnerable Trump in 2020 will lead to some tariff easing, especially if a broader industrial slowdown and the jitters from the trade war start to more visibly drag on U.S. economic growth and risk depriving the president of his chief electoral advantage. But Beijing is also looking well beyond the Phase 1 deal and the 2020 election in preparing the country for a much more intensive U.S. containment strategy against China.
Though it may seem counterintuitive, many scholars and officials in Beijing actually see Trump as the lesser of two evils compared to any of his Democratic challengers. The U.S.-China confrontation is already in full swing, so now it is a question of where and how does the rivalry escalate. Some in Beijing will argue that a more transactional and impressionistic president like Trump whose unilateralist policies tend more to polarize than to recruit allies may be more advantageous to Beijing than a more traditional strategist who would work with allies to more effectively contain China and who would have a stronger ideological grounding in human rights issues — risking heavier interference in flashpoints like Hong Kong or Taiwan.
Less than two months ago, Trump did say rather bluntly that the potential for intervention by Beijing in Hong Kong was "between Hong Kong and that's between China, because Hong Kong is a part of China. They'll have to deal with that themselves. They don't need advice." That message of noninterference may have been music to Beijing's ears, but it is far from a guarantee of a policy of noninterference, as recently evidenced by the Xinjiang sanctions. With the trade war already in extreme territory, the White House will grasp at tech-infused human rights issues in trying to pressure Beijing. As the theme of self-determination takes hold in the Hong Kong protests and threatens to embolden Taiwanese nationalists, Beijing will face a growing compulsion to lock down what it sees as the most vulnerable nodes of its periphery. In the end, this will create more ammunition for policy hard-liners to play off growing American public sensitivities to the China challenge and build on the momentum created by the president to drive to a more hawkish U.S. policy toward China.