In light of the increasingly contentious nature of the US-China relationship, it is worth examining Americans’ views about economic ties between the two countries. Fortunately, recent Cato Institute polling data (full survey crosstabs (XLS)) covers this very topic. Here are the China-specific results:

• 55 percent of survey respondents agree that “The US trading with China helps increase global stability and peace” versus 45 percent who disagree. Specifically, 11 percent strongly agree and 45 percent somewhat agree; 29 percent somewhat disagree and 16 percent strongly disagree.
• Digging into the crosstabs, it is clear there is a strong partisan split on this question. Sixty-eight percent of Democrats and those who lean Democratic agree that the US-China trading relationship helps increase global stability and peace versus 45 percent of Republicans and those leaning Republican. 45 percent of independents also agreed with the statement.
• The next China-related question asked respondents whether China generally practices fair or unfair trade with the United States. Fifteen percent of those surveyed said China practices mostly fair trade with the US versus 59 percent who believe China practices mostly unfair trade. Another 25 percent said they didn’t know.
• Unlike the previous China question about global stability and peace, there isn’t much of a partisan split on this issue. Twenty percent of Democrats/​those leaning Democratic, 10 percent of independents, and 13 percent of Republicans/​those leaning Republican believe China practices largely fair trade with the United States. In comparison, 52 percent of Democrats/​those leaning Democratic, 53 percent of independents, and 71 percent of Republicans/​those leaning Republican believe China practices mostly unfair trade.
• Cato asked respondents, “based on what you know, approximately what percent of goods imported into the United States come from China?” It turns out the overwhelming majority vastly overestimated China’s share of US goods imports: 5 percent of respondents said less than 5 percent; 13 percent said 15 percent (the correct answer); 31 percent said 25 percent; 28 percent said 50 percent, 18 percent said 75 percent and 4 percent said 95 percent. There’s not much of a partisan split on this question.

The last question is straightforward enough—and the respondents’ overestimates are understandable given US policymakers’ overwhelming focus on China when discussing matters of international economic policy—but the first two are more nuanced, so let’s dig in.

First, there is a large body of scholarly work about whether economic integration tends to reduce conflict and helps facilitate peace and stability between trading partners. This idea can be traced at least as far back as Montesquieu who wrote in the 1700s that peace is the “natural effect of trade.” This belief has been a pillar of U.S. international economic policy—and foreign policy more broadly–since the leadership of Secretary of State Cordell Hull in the 1930s and especially in the aftermath of World War II.

While I’m inclined to think the American public’s instincts are correct and trade does tend to promote peace, it’s also clearly not a panacea given prominent counterexamples (including World War I and Russia’s 2022 invasion of Ukraine). That said, policymakers pushing for a hard decoupling with China risk a greater likelihood of conflict.

On the issue of abusive Chinese trading practices, public skepticism is well-founded. The issue, however, is complicated. Although it’s true Beijing engages in numerous troublesome international economic practices that hurt American firms (which my Cato colleague Scott Lincicome and I documented in a paper last year), a lot of US-China trade is fairly conducted. That said, even though policymakers have (largely) diagnosed the problems correctly, their “solutions” have done little to alter Beijing’s behavior while imposing substantial costs on American citizens. A course change is desperately needed.

The US and China trade a lot with one another, but, ultimately, two-way trade (imports and exports) with China is just 11 percent of all US trade. As Lincicome recently noted, “contrary to so much of the protectionist spin you read these days … the vast majority of US trade (goods and services; imports and exports) involves countries other than China.” Indeed, too often China is invoked as a pretext for old-fashioned protectionism against other countries. Yet the American public largely supports more trade with the rest of the world (55 percent of poll respondents had a positive opinion of international trade compared to 12 percent unfavorable), particularly allied countries.

More broadly, Cato’s poll results demonstrate that Americans generally do not worry too much about international trade and globalization. A mere 1 percent of respondents said that international trade was in the top three most important issues facing them (perhaps surprising given the rhetoric from Donald Trump’s presidential campaign, which has focused heavily on across-the-board protectionism).

Yet Cato’s polling shows that aggressive protectionism is not popular with the American public, especially if it comes with higher prices and other tangible costs (spoilers: it does). Politicians hoping to appeal to Americans on the issue of international trade should focus their efforts on boosting trade ties with friendly nations not pushing unpopular protectionism.

To read the blog as it was published on the CATO Institute webpage, click here.

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The global supply chain is an ever-changing landscape, always looking to implement the most efficient and effective means to ensure products are sourced, manufactured and delivered as quickly and safely as possible. Many companies have relied on specific regions for sourcing and manufacturing over the decades, but a new survey indicates that the interest is at unprecedented levels. According to a QIMA survey, the appeal of shortened supply chains has reached a record high, with more than 64% of businesses globally expressing interest in nearshoring and reshoring strategies for 2024.

In 2023, a significant shift was already underway, with more than half of the surveyed participants reporting increased purchases from domestic and regional suppliers. This trend, driven by a desire to reduce disruptions, ensure greater supply chain resilience and underscore ESG initiatives, is set to gain even more momentum in the coming year.

While the United States has long relied on Chinese imports driven primarily by cost considerations, access to a large manufacturing base, the wide range of products available to manufacture/develop in the region, geopolitical tensions and trade uncertainties have prompted a reevaluation of this dependency, leading to a significant shift in supply chain dynamics. Even more so, the COVID-19 pandemic exposed the massive dependency the West had on China and other South Eastern Asia countries.

Concerns grow

Concerns over trade disputes, tariffs and geopolitical risks continue to intensify, especially as the U.S. enters another high-profile election year. U.S.-based businesses continue to seek alternative sourcing destinations to diversify their supply chains and mitigate potential disruptions.

While some may view nearshoring and reshoring as protectionist measures, they present real opportunities to foster additional global economic growth, job creation and sustainability initiatives. Mexico has emerged as a preferred destination for these nearshoring and reshoring efforts, especially for U.S. companies seeking to optimize their supply chains.

In fact, the U.S. Commerce Department released data that reinforced Mexico as the top source for goods to the U.S., ahead of China for the first time in two decades.

The Chinese manufacturing industry has also recognized the importance of reshoring and the continued growth of Mexico’s manufacturing sector for U.S. companies. Mexico offers several advantages, including proximity to the U.S. market, favorable trade agreements like the USMCA (United States-Mexico-Canada Agreement), and a skilled labor force at competitive costs.

Leveraging Mexico as an intermediary for Chinese manufacturing provides a buffer against escalating disputes and tariffs, ensuring continuity in supply chains and preserving market access for both exporters and importers. This strategic alignment fosters stability and facilitates smoother trade relations amidst geopolitical uncertainties.

From a supply chain perspective, this strategic shift holds several implications. For one, it reduces reliance on a single source of supply, enhancing resilience and risk management capabilities. By diversifying manufacturing locations, companies in all countries can better navigate geopolitical uncertainties, trade disruptions and unexpected events, such as natural disasters or political instability.

Additionally, the proximity of Mexico to the U.S. market offers logistical advantages, including shorter lead times, reduced transportation costs and increased agility in responding to changing consumer demand. This geographical strategy aligns with the growing trend toward nearshoring and regionalization of supply chains, driven by the need for speed, flexibility and responsiveness in today’s competitive business environment.

The strategic shift toward utilizing Mexico as a manufacturing hub for Chinese goods destined for the U.S. underscores the evolving dynamics of global supply chains. By diversifying sourcing destinations, businesses can enhance supply chain resilience and efficacy, navigate geopolitical unease and maintain seamless trade relationships amidst an increasingly complex and uncertain landscape.

Ivan Hernandez is managing director, Mexico, for QIMA, which provides quality control solutions for supply chains.

To read the full article as it was published by Supply Chain Management Review, click here.

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Bipartisan Embrace of Denying Realities Escalates Future Economic Risks

Mark Kennedy

Director, Wahba Institute for Strategic Competition

As the US drifts further from the economic orthodoxy that propelled America to global economic leadership, I am struck by how those across the political spectrum deny reality in justifying their protectionist actions. 

Reality Denied: “Tariffs won’t increase inflation.”

We are led to believe that whether tariffs cause inflation is different, depending on which president implements them.

Referring to new tariffs proposed by Donald Trump, President Joe Biden’s spokesman Andrew Bates said in August that, “Combining a sweeping tariff tax on the middle class with more trickle-down tax welfare for rich special interests would stifle economic growth and fuel inflation.” Bates said that President Biden “strongly opposes” the Trump plan, suggesting it would lead to higher prices and higher inflation. Indeed, analysis shows that part of the resurgence in inflation we have experienced recently is from tariffs on Chinese imports.

Now, as Biden rolled out his added tariffs on China this week, US Trade Representative Katherine Tai asserted, “I think that that link in terms of tariffs to prices has been largely debunked.” Tai argued that “the tariff hikes, combined with public investments, would help spur domestic manufacturing, which could help prevent future inflation and price volatility.”

Clearly supply chain shocks relating to the COVD-19 pandemic had a major impact on inflation and investments recently sparked may or may not over time have a perceptible impact on this variable. But whether fueled by “tax welfare” or “public investment,” the International Monetary Fund thinks US core inflation (excluding food and energy) “is a half percentage point higher than otherwise would be because of fiscal policy” as the US continues massive deficit spending during today’s period of low unemployment. Contrary to Tai’s assertions, this deficit funding spending magnifies rather than mitigates inflation.

Those seeking to provide a 101 explanation of economics put it this way:

Tariffs increase the price of goods and services in domestic markets by applying a tax on imported goods that is paid by the domestic importer. To cover the increased costs, the domestic importer then charges higher prices for the goods and services.

Does anyone really think that the tariffs on Chinese solar panels will not lead to increased prices on solar panels available in the US (and slow down progress toward the energy transition)?

Reality Denied: “Other nations won’t retaliate.”

In his defense of his idea for broad tariffs on friends and foe alike in pursuit of achieving a balance of trade, US Trade Representative in the Donald Trump administration Robert Lighthizer doubts others will retaliate. Yet both historical and recent facts suggest otherwise.

President Biden recently called for tripling tariffs on Chinese steel and aluminum imports (that represent only 0.6% of the US market). The next day, China imposed a 43.5% tariff on propionic acid  it says the US is dumping on the market. 

Coincident with a new law requiring TikTok to be banned if it is not sold in nine months, China ordered Apple to remove several social media sites from it app store, including Meta-owned apps WhatsApp and Threads.

Given all the advance warnings that China received about the US responding to its perceived “overcapacity” during visits by Treasury Secretary Janet Yellen and Secretary of State Antony Blinken, Yellen recently said she hoped the US will not see a significant Chinese retaliatory response. Yet she was honest enough to admit, “but that’s always a possibility.”

Does anyone not believe that Chinese imports of US agricultural products being at a three-year low are driven in significant part by retaliation against tariffs?

The list of denied realities is much longer, including that solar panel imports represent a strategic threat to the US. Suffice it to say that two parties out-competing each other in their embrace of economic myths, rather than holding each other to account based on proven realities, escalates future economic risks.

Tariffs Have Consequences

Jerry Haar

Global Fellow, Wahba Institute for Strategic Competition

In the fast and furious competition between presidential candidates to determine who is more protectionist than the other vis-à-vis China, President Biden has upped the ante with his recent announcement of new tariffs of $18 billion on Chinese EVs, semiconductors, batteries, solar cells, steel, and aluminum. (The current tariff of 25% on EVs will increase fourfold, to 100%.)

While EVs are in the center ring of this three-ring protectionist circus, the pathology of our trade predicament extends beyond any one industry and has its genesis in politics, pure and simple, combined with media that thrives on stirring things up and a public whose basic knowledge of economics would fill half a thimble. 

Xenophobes and isolationists who would sever economic relations with China buy into the specious argument that “we don’t make anything anymore” and we need to adopt a strictly made-in-America agenda and “bring those jobs back home.” While it is true that traditionally US-made products such as TVs, Levi’s jeans, cellphones, flatware, and steel rebar are sourced overseas, the US exports more than $165 billion in goods to China, including machinery, electrical equipment, vehicles, aircraft, and pharmaceuticals—all high-value goods that employ thousands of Americans, directly and indirectly. Additionally, when the media reports US-China trade balances, it invariably excludes our greatest strength in global commerce—services, where the US registers a surplus with China of nearly $15 billion. Travel, financial services, and intellectual property are among our leading exports to China. The last is clearly the most important since intellectual property is a knowledge-based asset that a great many Chinese manufacturers incorporate into their finished products under licensing agreements with US firms. Ironically, that would make many Chinese imports also (in part) a U.S. export.

Back to EVs, the Biden administration champions a “green” agenda where alternative energy is a high priority. Therefore, increasing tariffs impedes the goal of a carbon-free planet. Figuratively speaking, it is the equivalent of a circular firing squad, where the result will be an increase in EV prices for consumers not only in the short term, but in the long term. The price of fossil fuels will not be rising any time soon, thereby creating a disincentive for consumers to purchase electric vehicles.

One can expect China to retaliate in some form in response to the Biden administration’s latest tariff salvo, while the administration itself would be wise to keep in mind that the US is 100% reliant on imports for more than a dozen key minerals deemed critical by the US government. China is the primary import source for those minerals.

Like it or not, the US and China need one another to address serious global problems such as drug trafficking, terrorism, fentanyl, transnational crime, and environmental degradation. It would be an enormous mistake for America to jeopardize its national and economic security due to political expediency. Tariffs, indeed, have consequences.

The Folly of Biden’s New China Tariffs

Marc Busch

Global Fellow, Wahba Institute for Strategic Competition

On May 14, US Trade Representative Katherine Tai announced the result of her office’s four-year review of the Section 301 tariffs on China. 

The review finds that the duties “have been effective” in getting China “to take some steps” to stop its “unfair technology-related policies and practices,” but concludes that “further action is required.”

The press release explains that further action will entail adding new tariffs and increasing existing ones. Tai’s list of proposed tariff hikes includes electric vehicles (100%), lithium-ion batteries (25%), medical gloves (25%) and semiconductors (50%), among others. 

The 1974 Trade Act allows for Section 301 tariffs to be recalibrated to ensure compliance from a recalcitrant trade partner. But this list looks to be more about supporting President Biden’s green initiatives. The 301 report explains that “[f]or many of the sectors covered by these proposed tariff increases, the United States has made significant investments, including through such initiatives as the IRA and the Bipartisan Infrastructure Law.”

Tai’s tariff salvo is about US competitiveness in clean technology, not Chinese forced-tech transfer policies. The Biden administration has done nothing to protect the intellectual property of America’s innovators, as evidenced by its retreat on digital trade and its feckless Special 301 Report issued in April. But if cheap talk about intellectual property clears the way for Tai to slap new tariffs on China and support Biden’s floundering executive order on electric vehicles, she’s all in.

 Moreover, the press release flags the negative effects of the Section 301 tariffs “associated with retaliatory tariffs that the PRC has applied to US exports.” This is important, because the 1974 Trade Act does not give the president authority to wage an all-out trade war. But that’s what Presidents Trump and Biden have done through four rounds of Section 301 tariffs, and now into another round.

HMTX and other American companies will argue this before the US Court of Appeals for the Federal Circuit, looking for a tariff rebate. They insist the third and fourth lists of 301 tariffs were not mere adjustments of the first and second, but an “unprecedented, unbounded, and unlimited trade war impacting over $500 billion in imports from the People’s Republic of China.” The US Court of International Trade refused to “unscramble this egg,” but Tai’s proposed China tariffs may help the Court of Appeals get the job done right this time.

In this election season, new China tariffs will make a good soundbite on the campaign trail. But new import duties will punish American companies that use imported inputs or retail consumer goods. It’s time for Congress to rein in these abuses of Section 301 and reclaim its authority on tariffs.

New US Tariffs on China, “China Plus One,” and Southeast Asia

Lucas Myers

Senior Associate, Southeast Asia and Indo-Pacific Program

The US announced a suite of new tariffs on Chinese imports targeting the electric vehicle and green and advanced technology sectors. Following its covid-era economic slowdown, the People’s Republic of China has pursued an export-driven model to jolt its recovery, but concerns about overcapacity soon emerged around the world. The US tariffs are a response to protect its still-burgeoning industries in these key sectors, as well as in line with policies intended to boost domestic manufacturing in America.

However, amidst bilateral US-China rivalry and American efforts to protect strategic industries, perhaps the biggest potential winners are the countries in the Association of Southeast Asian Nations (ASEAN).

The US-China trade war and the risks of investing in China spurred many international firms to pursue a “China Plus One” strategy in recent years, aiming to diversify manufacturing and mitigate supply chain dependence upon China. Southeast Asia, by virtue of its relatively young population, free trade agreements with key players, prime geographic location, and competitive labor costs, is a magnet for foreign direct investment in manufacturing. Indeed, data suggests that the ASEAN states, particularly Vietnam, emerged as winners in the initial stages of the US-China trade war. By 2022, ASEAN exports to the US had soared 17.6 percent over the previous year to $336.4 billion, and every Southeast Asian state bar Brunei and Singapore expanded their share of US imports. In 2023, China had ceased to be the top exporter to the United States.

Yet, the picture is somewhat more complicated than a simple story of multinational firms moving to Southeast Asia to avoid China. Moreover, US efforts to secure and diversify its supply chains are far from simple in ASEAN. 

For one, it is not only American companies making the shift to Southeast Asia but Chinese manufacturers too. Crucially, Chinese firms are attempting to bypass tariffs by selling components to manufacturers in ASEAN, whose finished goods eventually enter the US market marked as originating in places like Vietnam. Indeed, there are now calls for the imposition of tariffs on solar cell imports from four Southeast Asian countries due to allegations of Chinese manufacturers bypassing existing tariffs. In the electric vehicle sector, Chinese companies are aggressively pushing into Southeast Asia both as a booming market and a manufacturing hub, particularly Thailand. 

Second, US economic engagement in the region still lags China’s. While the US government works to facilitate economic ties, such as considering upgrading Vietnam to “market economy status,” and pursues closer investments and relations across the board—often in conjunction with other allies and partners like Japan—the market access that ASEAN craves is not on the table. Meanwhile, ASEAN’s trade with China continues to grow, complicating regional calculus in US-China competition. US efforts to provide an effective alternative to China, such as in Indonesia’s crucial nickel industry, have fallen flat. Although the US remains the largest source of foreign direct investment in Southeast Asia, China is attempting to tie the region to it economically. 

As the US grapples with China over trade and the industries of the future, more global manufacturing can be expected to move to Southeast Asia. But today China still has an edge in ASEAN’s economies. The US must do more to ensure that “China Plus One” in ASEAN leads to secure, diverse supply chains and that the region has a viable alternative to Chinese investment.  

Biden Administration China Sanctions Reveal True Policy Objectives

Keith Rockwell

Global Fellow, Wahba Institute for Strategic Competition

The decision by the Biden administration to levy punishing tariffs on an array of Chinese imports will have little economic impact. But should these trade frictions spread, and there is a chance they will, the diplomatic consequences may be much more severe. 

All told, $18 billion of Chinese imports will be hit with higher tariffs.  Duties on electric vehicles will quadruple to 100%, duties on steel will jump threefold to 25%, while tariffs on lithium-ion EV batteries will rise by the same margin also to 25%. 

China dominates the global electric car market and exports this year are expected to grow 25% to 5.3 million units. But in the US market the Chinese have no presence. 

For years, a cavalcade of US anti-dumping and countervailing duties have suppressed Chinese sales of steel and today China makes up less than 1% of total US steel imports. 

But this is an election year and with industrial states like Michigan, Wisconsin and Pennsylvania key to the presidential prospects of both President Biden and Donald Trump, this week’s announcement comes as no surprise. Neither candidate wants to be seen as weak on trade with China and when Mr. Trump said he would raise tariffs on electric cars to 100%, Mr. Biden beat him to the punch. 

Beyond the muscle flexing, this announcement reveals the inherent inconsistencies in the administration’s flagship Inflation Reduction Act. The act has been billed as a game changer in addressing climate change, but the reality is that the law features a plethora of conflicting objectives. The Chinese are the world’s leading producers of electric cars and solar panels, and they make and sell them far cheaper than anyone else. If the IRA was really all about the environment it would make sense to ensure that affordable electric vehicles and solar energy were available to everyone. 

The new tariffs  expose the real motivation behind the IRA and the Chips and Science Act – the creation and preservation of US jobs, ideally the administration believes, union jobs. The IRA’s tax incentive scheme is heavily skewed against foreign producers of electric cars and batteries and domestic companies have, for now at least, been unable to price these cars attractively.  This, together with an underdeveloped charging network, helps explain why EV demand is flagging. 

China is well aware of the growing alarm in the US and European Union at the threat of surging Chinese exports. Chinese carmaker BYD, the world’s largest producer of electric vehicles is building a production facility in Hungary, an EU member state. BYD and other Chinese producers are actively considering setting up shop in Mexico which would enable them to sell cars in the US duty-free. Moreover, by producing in North America they could also be eligible to tap into the rich vein of subsidies on offer under the IRA. 

The Biden administration has taken note. Washington has flagged its concerns to Mexican officials and is now reaching for the “national security” trade lever by conducting, since February, an investigation into whether “connected” Chinese cars might provide a means to access data of American consumers and should thus be banned.

But it’s a tricky balancing act.  Mexico is the largest US trading partner selling more goods to the country than any other and importing more US goods than any country but Canada. 

Like all countries Mexico wants to be seen as welcoming foreign investment and the Chinese already have manufacturing operations in the country. If elected, Mr. Trump intends to violate the terms of the agreement he negotiated with Mexico by slapping 100% duties on cars built in Mexico by Chinese companies. Would President Biden entertain such a move as well?

Mexicans go to the polls June 2 and Mexico City Mayor Claudia Sheinbaum is widely expected to win. President Biden understands sanctions would be a slap in the face of the new president of his country’s largest trading partner. 

On solar panels the problem is similar. Chinese imports into the US have not been huge but Chinese owned companies in Southeast Asia have seen their exports to the US market jump in the last year. To hit these products with duties risks alienating the Malaysians, Thais and Vietnamese. The Biden administration’s supply chain resilience plan hinges on “friendshoring” and Mexico, Thailand and Vietnam are often cited as key friends.  Hammering imports from these countries would not be considered friendly. 

There is little doubt China’s massive government support tilts the playing field in trade in electric cars, steel and solar panels. We will learn soon the extent of this support when the European Union releases its study on Beijing’s EV subsidies. 

But trade sanctions are a blunt instrument which often inflicts damage on unintended targets including allies and domestic consumers. The cost of these actions will likely rise soon if the Chinese retaliate against, say, General Motors which sold 2.1 million cars in China last year. 

The US-China commercial relationship is probably beyond repair, at least in the short term. As trade tensions escalate the bigger danger is the threat of collateral damage to US allies, to the development of resilient supply chains and to the administration’s environmental aspirations.  

Protectionism Is Hurting US Allies

Rory Linehan

Global Fellow, Wahba Institute for Strategic Competition

As I’ve argued previously, the US’ greatest strength is its network of allies, underpinned by shared values such as democracy, human rights, and market-driven economies. 

The US was only able to build the global economic order, multilateral institutions and create new markets for its good and services with the support of our allies, guided by shared values. This helped usher in an unprecedented era of global peace and prosperity which now stands in jeopardy.  

The latest round of US tariffs on China reflects a broader push to protectionist policies by successive administrations. From the blanket steel and aluminum tariffs of the Trump Administration to the subsidies of the Inflation Reduction Act to the Biden Administration’s new China tariffs, the US Government has upended its approach to a market-driven economy. While the US isn’t alone among its allies in pursuing protectionism, it stands out as a leader in the breadth, depth, and scope of its actions. 

This is deeply concerning. The two major world wars were both preceded by sharp rises in protectionism. Economic integration is a key to securing peace. Countries that trade together, rarely go to war together – the economic pain is just too high. Protectionism is a tool that must be used sparingly because its unintended consequences are significant.

United States Trade Representative, Katherine Tai, has said the primary goal of the latest round of tariffs is to motivate China to change its unfair trade practices. Issues such as forced IP transfer and IP theft should and must be addressed. National security and securing supply chains are worthy goals. However, the US Government itself has legislated many of the same subsidies and tariffs to support its own manufacturing industry that it complains China is doing. 

Moreover, US protectionist policies are not just hurting China, they are hurting our allies. The steel and aluminum tariffs not only hit China but the European Union and Japan. The subsidies of the Inflation Reduction Act made it harder for US allies to do business in the US. In response, Japan, the EU, Canada, Australia, and others have since implemented their own domestic subsidies which will make it harder for US businesses to compete abroad and further erode shared economic ties.

In this week’s round of tariffs, the Biden Administration acknowledged the need to work with likeminded partners to curtail China’s unfair trading practices and the benefits of a rules-based trading system. This was terrific to see. However, many of the US’ partners could rightly complain about its own market distorting practices. If the goal of this week’s tariffs was to encourage China to change its unfair trading practices by working together with allies, the US will find this hard going. While it will likely find some success on China’s dumping of EVs and solar panels, it will not find much sympathy for its broader complains of unfair trading practices. In the longer term, if it’s an economic choice between the US and China, that decision is made. China is the top trading partner to more than 120 countries. US allies, the EU, Japan, ASEAN, the UK, and New Zealand have Free Trade Agreements with China but not the US. In an environment where China’s economic ties continue to increase with US allies, it’ll be a hard sell for any US Administration to convince allies to side with it over China. 

If the Administration is to achieve its stated goal of changing Chinese unfair trading practices by working with partners, it’ll need to also consider its own trade-distorting policies and reignite a policy of market-driven economic integration with its allies. If not, the US may isolate itself from its allies at a time when the world desperately needs to come together to address our shared challenges.

US Tariff Diplomacy: “It’s China Stupid; Never Mind the Environment.” 

Klaus Larres

Fellow, Global Europe Program and Kissinger Institute on China and the United States

US-Chinese relations have been on a downward slope for almost a decade. The formal announcement that the Biden administration intends to significantly increase tariffs on electric vehicles (EV), solar panels, advanced batteries, and other climate-related technologies from China has raised tensions further. Yet this was an unintended though not unforeseen consequence; it was not the driving force behind President Biden’s decision. In fact, the US is deeply concerned about keeping relations with Beijing on an even keel to prevent them from veering out of control, as threatened to be the case before the bilateral Biden-Xi Jinping summit in San Francisco in November 2023.

Above all, Biden’s tariff diplomacy is dictated by the US general election in November 2024. It also relates to the Biden administration’s concerns regarding US national security and its vision of how the green energy transition in the US should proceed. Biden has imposed new tariffs on Chinese products for three major reasons:

1. In view of Donald Trump’s loose talk about his firm and protectionist foreign policy course if he were to be elected in November, Biden clearly feels that he too has to demonstrate that he is equally tough, if not tougher on China, than his Republican competitor. In practice, imposing 100 per cent tariffs on Chinese EVs, for instance, means little in view of the fact that just over 2,200 Geely-made EV vehicles entered the US market in 2023. Yet Biden clearly believes that among undecided voters, his rhetoric about defending the American car industry against a forthcoming industrial onslaught from China may help his electoral prospects.
   
   Recent polls have shown Biden is behind Trump in five of the six most important swing states. As Biden needs to win Pennsylvania, Wisconsin, and Ohio (all states with large manufacturing bases) to get a second term in office, the imposition of extremely high tariffs on EVs, solar panels, advanced battery cells, and other high tech and climate-related technological products might be decisive for winning these states.
   
   
2. The Biden administration also appears to be genuinely concerned that having China dominate the supply lines for manufacturing EVs (and other climate-related products such as solar panels) would have a seriously negative impact on US national security. That way, Beijing might well be able to raise prices unexpectedly, put pressure on the US government by limiting production resources, threaten to disrupt US domestic energy, and, not least, also obtain data collected by EVs about the driving habits of individual Americans and information about US road traffic, perhaps including military and security-related traffic movements. Thus, at least indirectly, US national security would become dependent on the good will and cooperation of a potentially hostile foreign power. This, it seems, is the thinking which dominates the White House. It is difficult to judge whether or not this is a truly realistic assessment.
   
   
3. The Biden administration is also firmly convinced that a slower but more solid and reliable transition to solar power and EVs will make the green transition more palatable for the US consumer, who can get used to it gradually, leading to a more robust green energy transition, according to the administration. A ‘big bang’ approach that could follow the fairly sudden importation of hundreds of thousands of cheap and highly subsidized Chinese EVs would be much more fragile and uncertain and thus, counterproductive to realizing the energy transition in the long run. 
   
   This, however, means that nothing much will happen in terms of the introduction of climate-friendly policies before the presidential election. Thus, Biden makes sure not to upset any potential voters with any new dramatic policy turns while reassuring environmentally concerned voters that a better policy has already been set in motion. Understandably, like any US President, Biden wishes to have his cake and eat it too. Yet, such a course of action clearly causes concern among many environmental organizations that are worried that for electoral and national security reasons, the transition to solar power and electric cars will be delayed for a significant period of time. One analyst argues that the climate situation has become so precarious for the survival of mankind that the world, including the US, can simply not afford to delay the green energy and climate transition a moment longer. He points out that if the Chinese wished to subsidize America’s transition to green energy and EVs by offering cheap electric cars to the US consumer, Washington should not reject this offer.

It is clear that all foreign, domestic, and indeed energy and climate policies in the US have become secondary to electoral concerns. This applies to all major candidates, including Biden. The good news among this sad fact of life is that within less than six months, policy makers can look beyond focusing their attention on the forthcoming election and perhaps deal with the energy transition in a more serious way.

To read the full article as it appears on the Wilson Center’s website, click here.

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The Allure of Steady States

In introducing his 2022 National Security Strategy, President Joe Biden promised to “win the competition for the 21st century.” But what winning means remains unclear. Indeed, senior officials within the Biden administration reject the notion that the United States should aim for a specific “end state”—which usually describes a situation following the completion of an objective—when it comes to China. Instead, Kurt Campbell and Jake Sullivan have advocated that the United States “seek to achieve not a definitive end state akin to the Cold War’s ultimate conclusion but a steady state of clear-eyed coexistence on terms favorable to U.S. interests and values.” They reject end states in favor of “accepting competition as a condition to be managed rather than a problem to be solved.”

There are three strong arguments against identifying an end state for U.S. strategy on China. First, “solving” the “China challenge” is a misnomer since even a change of governance in Beijing would bring about new challenges. If the Chinese people choose to make fundamental changes to their country’s political structures tomorrow, tensions over Taiwan and U.S. regional presence would no doubt remain. Political science research even suggests that a democratizing China could worsen tensions with the United States. As a result, some experts have endorsed the Biden administration’s focus on steady states, with Center for a New American Security CEO Richard Fontaine affirming that Washington “should manage global problems, not try to solve them.”

Second, bureaucratic disagreements could stymie efforts to select an ideal end state. Although there is growing concern about China in Washington, there remains little consensus on the strategy that U.S. policymakers should adopt. A debate about end states might therefore prove divisive since no single end state is likely to appeal to all stakeholders. Even within the Biden administration, it could be difficult to get democracy and human rights advocates on the same page with environmentalists and economists. Getting Congress on board would be another matter altogether. As a result, it might not be possible bureaucratically to agree on an end state.

Third, even if U.S. leaders could agree on what they ultimately want, doing so might alienate allies and partners. For example, if the United States sought to accelerate the collapse of the Communist Party, few if any U.S. allies and partners would be comfortable with that objective. Conversely, returning to a “new type of great power relations” would leave many worried about a great power condominium. Forcing a discussion on end states might thus weaken rather than strengthen the very coalitions that the United States needs to address the challenges that China poses.

The Necessity of End States

It is entirely reasonable, therefore, that Kurt Campbell has urged turning “the focus from end states to steady states.” Indeed, many in Washington agree that it might be wiser to sidestep the end states discussion, at least for the time being. The question is whether this approach is sustainable. Can policymakers build a lasting China strategy without an end goal in mind? Will the American people and friends abroad support a strategy predicated on an ongoing competition with no ultimate objective? In short, is managed competition a description of the current situation, or is it an actual strategy?

Advocates of identifying an end state counter their critics with three arguments of their own. First, without a clear objective, it is difficult to assess the success or failure of America’s current strategy. The Biden team sometimes says it is aiming for managed competition with China. But this simply implies competition without conflict, which already exists today. Strategy usually requires identifying an objective and then marshaling resources and plans to accomplish that goal. If the objective is simply maintaining the status quo of competition without conflict, then so long as deterrence holds, the administration’s strategy is working. This makes it nearly impossible to assess or measure progress, since the objective is already being accomplished.

Second, without a clear aim it is difficult to explain how the United States should make difficult strategic choices on everything from economic de-risking to deterrence posture to diplomatic engagement. Building political support for costly policies within the United States and among allies and partners requires a clear logic, which demands more than a hazy concept of competition. The vagueness of managed competition can justify almost any policy, from tough export controls and investment restrictions to deep dialogue with Beijing. Identifying an ultimate objective would help policymakers determine how to assess trade-offs strategically.

Third, the Biden team has been effective at describing what it does not want with China, but ineffective at describing what it does want. For example, Chinese media asserts that U.S. leaders committed privately to “four no’s and one no-intention” during last year’s Xi-Biden meeting in Bali, Indonesia. Regardless of the veracity of these claims, senior U.S. leaders have made a wide variety of statements asserting that they:

• “don’t want to contain China”
• “are not seeking a new Cold War”
• “do not see the relationship . . . through the frame of great power conflict”
• “don’t seek to block China from its role as a major power”
• “don’t seek to block China . . . from growing [its] economy”
• “[are] not seeking to decouple from China”
• “do not seek to transform China’s political system”
• “do not support Taiwan independence”
• “don’t want to see the status quo across that strait changed unilaterally”
• “are not looking for confrontation or conflict”

These statements lay out what Washington does not want, without presenting a positive vision. This is one reason that Chinese observers are so skeptical of American assurances—many seem to be substanceless platitudes at odds with American actions. Although the National Security Strategy and Indo-Pacific Strategy articulate some positive goals such as “strengthening democratic institutions, the rule of law, and accountable democratic governance,” these documents say surprisingly little about U.S. objectives vis-à-vis China. This leaves many American citizens, members of Congress, and foreign policymakers unsure about whether Washington actually has a vision for what managed competition entails. For all these reasons, it would be beneficial for the United States to identify an ultimate objective of its China policy.

The Impracticality of a Unifying Objective

Aprimary reason the Biden team has rejected end states appears to be that no single end state is simultaneously realistic and acceptable to two key audiences: the American public and policymakers in ally and partner countries. Administration leaders insist “neither collapse nor condominium are tenable end-states” and note that each suffers from fatal flaws.

The goal of bringing about the collapse of the Communist Party has some notable champions. When he was Secretary of State, Mike Pompeo suggested that “we, the freedom-loving nations of the world, must induce China to change.” Others have insisted that Washington should aim for Xi Jinping to be “replaced by a more moderate party leadership” and for the Chinese people to “challenge the Communist Party’s century-long proposition that China’s ancient civilization is forever destined to an authoritarian future.” Many Americans are tempted by these arguments. After all, the United States brought about its opponents’ downfall in two World Wars and then waited out the Soviet Union during the Cold War. Why should the United States not do so again?

Explicitly attempting to bring about the end of the Communist Party, however, poses numerous problems. Washington has few levers to alter China’s domestic governance model. Worse still, making such an objective explicit could actually strengthen the Communist Party’s hold on power. And a public U.S. goal of forcible regime change would be opposed by most, if not all, U.S. allies and partners. Finally, attempting to remove the Communist Party from power would usher in a zero-sum struggle, which could lead to a heightened risk of conflict. For all these reasons, the Trump White House asserted that its approach was “not premised on an attempt to change the PRC’s domestic governance model.” The Biden team has done the same, with Jake Sullivan noting the U.S. goal “is not to bring about some fundamental transformation of China itself.”

The other end state rejected by the Biden team is creation of what they have called a great power condominium—essentially, an agreement by Beijing and Washington to share global leadership. The basic logic of those who favor such a condominium is analogous to the common understanding of the “responsible stakeholder” concept promoted by Robert Zoellick almost 20 years ago when he was Deputy Secretary of State. He suggested efforts “to encourage China to become a responsible stakeholder in the international system. . . [to] work with us to sustain the international system that has enabled its success.” Along similar lines, Michael Swaine, Jessica Lee, and Rachel Esplin Odell have more recently advocated “ultimately integrating Beijing into inclusive economic and cooperative security mechanisms.”

Unfortunately, this end state is hard to imagine today. Julia Bowie has described the responsible stakeholder theory as resting on “the expectation that China would become a status quo power.” Indeed, Zoellick had asserted, “China does not believe that its future depends on overturning the fundamental order of the international system.” But now even the European Commission has publicly described China as a “systemic rival promoting alternative models of governance.” Beijing’s coercive actions against Japan, India, South Korea, the Philippines, Australia, Lithuania, Canada, Norway, and others have driven a global reassessment of China’s behavior. Over 70 percent of respondents in a July Pew poll said that China does not contribute to peace and stability nor take into account the interests of countries like theirs. As a result, it is difficult to imagine a successful effort at engagement without some fundamental changes occurring in Beijing. The “era of engagement” appears to be over, at least for now.

So neither collapse nor condominium appears to be a practical end state around which to build consensus. They have something else in common: neither seems possible under Xi Jinping. Another concerted American attempt at engagement appears unlikely to shift Xi’s worldview, including his assessment that “Western countries led by the United States have implemented all-around containment, encirclement and suppression of China.” Even if American leaders could change Xi’s views of the bilateral relationship, there is no political appetite on either side of the aisle in Washington to test this proposition. U.S. officials from both parties appear to concur with Orville Schell, who has argued that it was “Xi’s aggressiveness that put a stake through the heart of ‘engagement’ as a viable US or Western policy.”

To say that engagement is now implausible as a strategy is not to imply that diplomatic meetings with Chinese leaders are unwise. The Communist Party is so opaque that American leaders are likely to learn more from their Chinese counterparts than vice versa. Yet, the objective of this diplomacy must change, even if its value remains. Leaders in Beijing and Washington now describe their aims in bilateral dialogues not as seeking to “improve” the relationship but rather to “stabilize” it. This is a much more limited objective predicated on continued competition, rather than an outright improvement in the relationship. In short, few on either side expect that these engagements will lead to any major change in behavior.

The Need for Phased Objectives

If end states are unattainable in the near-term and steady states are unsatisfying in the long-term, does that doom efforts to embrace a well-defined objective for America’s strategy on China? No. There is a third way: a phased approach. The United States could endeavor to maintain a stable steady state in the near-term while awaiting more fundamental change in China in the long-term. Doing so does not require American leaders to choose either collapse or condominium, but rather leaves the door open for either, depending on the choices of the Chinese people. If the United States is going to articulate an end state, this phased approach is the only approach likely to win support in both Washington and key allied capitals.

In the short-term, the Biden administration is right that America’s aim should be to establish a more durable steady state. Many of the administration’s actions have put the United States on a sounder path, particularly efforts to bolster cooperation with U.S. allies and partners while investing in the sources of American strength. Central to these initiatives will be reinforcing deterrence through adjustments to U.S. and allied military capabilities, posture, and planning. Unfortunately, efforts to make measurable progress with China on crisis management mechanisms have been slow going. Nonetheless, the Biden administration is right to try—and be seen trying—to push China to reduce the risk of conflict.

In the long-term, the United States should be clear that it is awaiting substantial changes in China’s behavior or governance. This is not a strategy of forceful regime change, but rather patience until the Chinese people themselves bring about a fundamental transformation in Beijing. Until then, the best Washington can hope for is to manage a risky competition and hope it does not spiral out of control. The Xi Jinping era will continue to be difficult and dangerous, so ultimately the American public and friends abroad should want a more durable end state. If this “patient but firm” approach sounds familiar, it is for good reason—it echoes U.S. strategy in the Cold War. Just as George Kennan foresaw the “break-up or the gradual mellowing of Soviet power,” Washington should hope for the mellowing or break-up of Chinese power. Then as now, waiting for regime failure should not be equated with forcible regime change.

Raising parallels with American strategy in the Cold War is not to suggest that the challenges posed by Beijing today are the same as Moscow’s decades ago. China bears little resemblance to the Soviet Union. Beijing boasts a far larger and more globally integrated economy than Moscow ever had. Yet, the Chinese Communist Party’s governance model is less attractive internationally than the Soviet system was in the early Cold War. Beijing’s political appeal lags far beyond that of the Soviets, who benefited from the communist bloc of aligned sympathizers worldwide. To date, Xi Jinping has also been less willing to use force at scale abroad than Soviet leaders, although U.S. policymakers must be wary because Beijing’s behavior could change over time. Thus, China is far more economically engaged abroad than the Soviet Union was, but is also less threatening ideologically. Containment is therefore inapplicable; Washington should not challenge Beijing abroad in the same way that it confronted Soviet influence globally, particularly given China’s current economic headwinds.

It is ironic that American strategists have spent much of the last few years playing the “Kennan sweepstakes” by trying to develop a phrase akin to containment that might guide American strategy. A better strategy is simply to adopt Kennan’s own phased approach: patience and firmness today while awaiting the mellowing or break-up of the Communist Party tomorrow. This is no panacea. It will have critics in Washington, Beijing, and beyond. But combining these two concepts is not as radical as it might seem. Indeed, Robert Zoellick ended his responsible stakeholder speech by insisting that “We can cooperate with the emerging China of today, even as we work for the democratic China of tomorrow.”

The Biden team has done an able job executing the first phase of an enduring American strategy on China. In fact, the early portion of the phased strategy recommended here might look almost identical to the Biden administration’s approach. Where a two-phased strategy would differ is in the long term. The indefinite maintenance of an inherently risky and increasingly tense competition should not be the ultimate objective of American strategy. As the time nears to hand off the baton to a second Biden administration or a new Republican team, U.S. leaders should be discussing end states. Effective strategies require clear objectives, so it is time to go back to the future and embrace a phased approach.

Zack Cooper is a Senior Fellow at the American Enterprise Institute (AEI), where he studies U.S. strategy in Asia. He also teaches at Princeton University, is a partner with Armitage International, and co-hosts the Net Assessment podcast for War on the Rocks.

This article was co-published with Foreign Policy. To read the full article as it was published by the ChinaFile, click here.

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A move by China that could curtail exports of graphite may throw a wrench into the supply chains of electric vehicle and battery makers that rely on highly processed versions of the mineral to help power their fleets of plug-in automobiles.

To read the full article, click here.

To read the full CRS report referenced in the article, click here.

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Both sides have called this meeting productive and reports in the press suggest that, in the careful world of international diplomacy, it suggests Xi will attend a summit of Pacific Rim nations in San Francisco next month where he will meet face to face with U.S. President Joe Biden.

It’s all part and parcel of the diplomatic focus the U.S. government has trained on China since Balloon-Gate blew everything up earlier this year. U.S. Secretary of State Antony Blinken visited to help get everybody talking again. U.S. Treasury Secretary Janet Yellen established a pair of “economic working groups” with her counterparts. U.S. Commerce Secretary Gina Raimondo went to Shanghai Disneyland. Even John Kerry, the Biden administration’s envoy on climate change, was in Beijing this summer to talk with Chinese officials about how we’re all cooking the planet by continuing to burn fossil fuels.

But what made the Schumer delegation stand out was its bipartisanship. Sens. Mike Crapo (R-ID), John Kennedy (R-LA) and Bill Cassidy (R-LA) were part of the group, as were Sens. Maggie Hassan (D-NH) and John Ossoff (D-GA), and it provides further evidence that the American side wants Sino-U.S. relations to be less heated and more predictable. And this is not a terrible idea when you’re talking about interactions between nuclear-armed states with huge militaries and economies.

We should, however, keep the Trump-era Section 301 tariffs on China in place.

Yes, that’s right. Donald Trump was many things, including hard to predict – here he is this past weekend, talking about “The Silence of the Lambs”, as one typically does during a campaign speech – but U.S. trade policy regarding China went through a necessary rearrangement during his administration, and the Section 301 tariffs enacted during his time in the White House are its chief result.  

The United States for years ran hundreds of billions of dollars in annual goods trade deficits with China. With the tariffs in place to provide some relief from Chinese import competition, and now with something like a bona fide industrial policy to complement them, the supply chains on which the U.S. relies have begun to diversify. There are factories – long term investments that will pay economic dividends for years to come – being built across the country. They represent the industries of the future, and it looks like they’re gonna be good union jobs. The tariffs laid the groundwork for that.

The Chinese government obviously doesn’t like these tariffs and wants them removed. The complaints against Chinese trade policy that raised them in the first place haven’t been addressed. China still heavily subsidizes key industries to the point of overcapacity, and looks likely to try to export its way out of its current economic doldrums.

And hey: Good luck with that! But the United States shouldn’t be the destination for those inevitably dumped imports. Make nice with the Chinese, engage with its leadership, sure. But the tariffs should stay up, and the U.S. should continue to improve its industrial resilience.

To read the full blog post, click here

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The G7 statement didn’t define those terms. It didn’t even mention that the foremost object of both decoupling and de-risking is China. That’s diplomacy for you.

The leaders of the seven countries (the United States, the United Kingdom, Canada, Japan, Germany, France and Italy) simply said they were coordinating their approaches to economic resilience and economic security “based on diversifying partnerships and de-risking, not decoupling.”

As often happens in diplomacy, the vagueness was intentional. It conveniently papered over differences between the U.S. and some of its allies. “Economic resiliency” and “economic security” are diplo-speak for avoiding overreliance on China (and to some extent Russia) for key products and avoiding supplying those countries with strategically sensitive technologies.

On the surface, decoupling (the trendy word until recently) implies taking separation from China further than de-risking (the European Commission president’s word). De-risking suggests diversifying, ending exclusive reliance on China, rather than withdrawal.

In practice, though, much of the decoupling to date has also been diversification. For communique purposes, the difference between decoupling and de-risking is semantics. That’s why the U.S. could agree to the communique even though there are real differences between the U.S. and its allies in their concerns about reliance on China.

Those differences reflect their differing geopolitical situations, especially with regard to Taiwan. A Chinese military attack on the island seems increasingly possible — possible enough that U.S. officials have to plan for it even as they pray it never happens.

Washington’s allies don’t. In the event of an attack, Japan could end up supporting the U.S., at least logistically. It’s a prisoner of its history and geography. The European allies would be far less inclined to see an attack on Taiwan as their problem. They might be cajoled into joining a coalition of the willing, but that is far from guaranteed.

The U.S., then, has greater reason to worry about providing China with technologies that strengthen it militarily. It has more serious fears of being cut off by China from critical products during hostilities.

When governments are planning for war, national security ranks higher in their concerns than economic efficiency. This can be a hard swallow for those who believe, as many in exporting sectors like agriculture do, that financial markets allocate capital more efficiently than governments and free trade produces the best economic outcomes.

But it explains why some Republican believers in free markets have voted for Biden administration industrial-policy initiatives. And why Republicans are solidly behind the Biden administration’s stepped-up efforts to block exports of the most advanced semiconductor technologies to China, despite warnings from U.S. high-tech companies that restrictions will have long-term economic consequences.

European countries share some of the same concerns about China as the U.S., but they’re nowhere near as worried about national security. Referring to Taiwan, French President Emmanuel Macron has warned Europe not to get “caught up in crises that are not ours.”

Europeans are displeased with the Biden administration’s high-tech subsidies and buy-American rules, which they see as drawing investment away from them as much as from China. Some Europeans are also leery of U.S. efforts to block exports of high-tech products to China. The Dutch government, however, eventually went along with the U.S. and restricted Dutch companies’ exports of the most advanced semiconductor manufacturing equipment to China.

Europe, in sum, prefers “de-risking” because it doesn’t want as much economic separation from China as the U.S. The Biden administration accepted “de-risking” because it’s sufficiently vague to let allies march to different drummers.

Actually, so is decoupling. For all the talk of it over the last few years, for all the government’s industrial-policy moves, for all its export restrictions, for all the announcements by companies of plans to move manufacturing back to the U.S. or to Asian countries other than China, U.S.-China trade in goods set a record in 2022, as did U.S. exports to China.

U.S. ag exports to China also set a record in fiscal 2022 at $36.4 billion.

Though the U.S. and China are rivals, American companies’ supply chains are deeply imbedded in China. China is the largest trading partner of the U.S. and of about 120 countries, including American allies like Japan, South Korea and Germany.

China has dominant world market share in some product lines, like drones and solar panels, and is a critical supplier of countless thousands of others. In a war, China would unquestionably cut off exports to the U.S., which makes it logical to decrease reliance on China.

But short of war, how far disentangling today’s supply chains can or will go is unclear, regardless of which diplomatic euphemism is used to describe it.

Urban C. Lehner joined DTN as editor-in-chief in July 2003. He became vice president of the editorial operations of DTN and the Progressive Farmer in July 2010. He is a past president of the North American Agricultural Journalists and in August 2009 was named “Writer of the Year” by the American Agricultural Editors’ Association.

To read the full blog post, please click here.

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While China’s support for Russia is widely reported, Hong Kong’s substantial contributions to Russia’s war efforts are less known. Recent reports have identified Hong Kong as a prominent node in Russia’s illicit procurement network, acting as a transshipment hub for diverting Western-made microelectronic components to companies affiliated with the Russian military. Since Russia’s invasion of Ukraine, Hong Kong has doubled its integrated circuits exports to around $400 million worth of semiconductors in 2022, second only to China and far exceeding any third country in the volume of semiconductor trade with Russia. Many of these transactions violate U.S. export control regulations against Russia, and multiple individuals and entities operating from Hong Kong have been sanctioned for their involvement in the Russian military’s procurement network.

Hong Kong’s complicity in sanctions busting is not merely a byproduct of being one of the busiest shipping hubs in the world; it is a direct consequence of Hong Kong’s increased subservience to China, now that Beijing has wiped out the last vestiges of autonomy in the special administrative region. In today’s Hong Kong, the government follows Beijing’s orders in virtually all matters of governance, particularly for issues with geopolitical salience. High levels of semiconductor trade between Hong Kong and Russia, as well as the Hong Kong government’s public scorn for Western sanctions, have made Hong Kong’s allegiance clear: it sits firmly in the camp of an emerging China-Russia axis.

RUSSIA’S SEMICONDUCTOR SUPPLY CHAIN

Numerous reports indicate that despite sweeping Western sanctions, Russia’s defense industrial base has successfully established alternative routes to import dual-use components needed for manufacturing military equipment. Lacking scalable domestic substitutes, Russia relies on foreign-made microelectronic components to produce a range of military gear, including weapons like drones and cruise missiles. Examining Russian weapons captured in Ukraine, the Royal United Services Institute (RUSI) discovered in August 2022 that the majority of microchip components in Russian systems originated from the United States, East Asia, and Western Europe. Tracing the supply chain of microelectronics, RUSI concluded that “third-country transshipment hubs and clandestine networks operated by Russia’s special services are now working to build new routes to secure access to Western microelectronics.”

A leader in low-end microchip manufacturing and the world’s top chip importer, China is now the foremost supplier of semiconductors to Russia. In 2022, as Western countries restricted technology supply, Russia’s semiconductor imports from China skyrocketed, jumping from $200 million in 2021 to well over $500 million in 2022, according to Russian customs data analyzed by the Free Russia Foundation. Importantly, the Sino-Russian technology trade involves not only Chinese-made components but also products manufactured by top U.S. chipmakers such as Intel, Advanced Micro Devices, and Texas Instruments. Nikkei Asia recently reported that exports of U.S. chips from Hong Kong and China to Russia increased tenfold between 2021 and 2022, reaching about $570 million worth. By one figure, China and Hong Kong together accounted for nearly 90 percent of global chip exports to Russia in the period between March and December 2022.

China’s support to Russia’s war effort is unsurprising. The two countries are aligned in their ambition to undermine the U.S.-led international order. Before the war, Beijing and Moscow declared that the countries’ friendship had “no limits,” and a Chinese top diplomat has recently reaffirmed that Sino-Russian relations are “reaching new milestones.” The summit between Chinese President Xi Jinping and Russian President Vladimir Putin in Moscow, held in March 2023, further consolidated the importance of this strategic partnership. Less examined is Hong Kong’s role in Russia’s technology supply chain.

While most countries have begun to recognize Hong Kong’s loss of autonomy following the passage of the Hong Kong national security law in 2020, the city is still often treated as separate from China in economic and trade data. This is as much a matter of convention as an acknowledgement of Hong Kong’s unique function to China: the former British colony is highly integrated into the global economy, serving as China’s window to the world. Hong Kong’s connectivity with the world has allowed unscrupulous actors to hide their footprints amid the busy international flows. Its prominence in Russia’s technology supply chain exemplifies this point. Researchers and journalists have found that some Hong Kong–based companies have diverted significant quantities of Western-made electronic components to Russia since its invasion of Ukraine. Macro-level data bear out Hong Kong’s importance to Russia’s defense-industrial base (although export statistics vary depending on the source). The Free Russia Foundation found that Hong Kong doubled its semiconductors and integrated circuits exports to around $400 million in 2022, putting it second only to China’s $500-million-plus exports. China and Hong Kong far exceed any third country in the volume of microchips trade with Russia.

BEIJING PULLING THE STRINGS

What explains Hong Kong’s prominence in Russia’s effort to sustain war in Ukraine? The most immediate factor is Beijing’s increased control over all aspects of the governance of Hong Kong. Historically, Western countries treated Hong Kong’s exports as sufficiently autonomous from China’s strategic objectives. In 1992, the United States and other former Coordinating Committee for Multilateral Export Controls (COCOM) members designated Hong Kong a “cooperating country,” affirming that it possessed the necessary elements of an effective licensing and enforcement system.

The transfer of sovereignty to China in 1997 prompted fears that Hong Kong would become a hub for technology diversion into China and other so-called rogue states like North Korea. The principle of “one country, two systems” was designed to assuage such anxiety by promising that Hong Kong would continue to exercise independent authority over export controls, which the government interprets as a trade matter, meaning that it falls under the legal bounds of Hong Kong’s autonomy. Under the United States-Hong Kong Policy Act of 1992, after China took over Hong Kong’s sovereignty in 1997, the “United States should continue to support access by Hong Kong to sensitive technologies controlled under [COCOM] for so long as the United States is satisfied that such technologies are protected from improper use or export.” As a result, Hong Kong was eligible to import, without license, extensive categories of U.S.-controlled dual-use items and was eligible for license exceptions for some categories. In contrast, China was required to obtain a license to procure items controlled for U.S. national security and was eligible for a license exception only when the destination was verified as civil end users. A 1997 report by the U.S. General Accounting Office (now Government Accountability Office) characterized Hong Kong favorably for having demonstrated “excellent cooperation with the United States on export enforcement activities, including sharing of information and cooperation on investigations, searches, and seizures of suspected illegal shipments.”

However, as Hong Kong’s autonomy has steadily eroded, so has its willingness to comply with Western export control regimes, especially when they contradict China’s strategic interests. Today’s Hong Kong scorns Western sanctions against Russia. After Russia invaded Ukraine in February 2022, Western governments launched a frantic campaign to seize the assets of Russian oligarchs, hoping to deter elites from aiding Russian war efforts. In sharp contrast, Hong Kong’s Chief Executive John Lee, himself sanctioned by the United States for suppressing the 2019 protests, said that the government would not recognize U.S. sanctions against Russia, asserting that Hong Kong has no legal obligation to enforce “unilateral sanctions” after a Russian oligarch’s yacht was spotted in Hong Kong in October 2022. Furthermore, Hong Kong has become a top alternative for Russian companies shut out of Western financial capitals like New York and London. As Bloomberg reported in October 2022, a number of major Russian companies, including state-owned enterprises, have sought to engage with Hong Kong law firms to help anchor them in a “friendlier jurisdiction.” A local research group later found that between February and October 2022, the number of Russia-affiliated businesses registered in Hong Kong reached thirty-five, more than doubled from the same period in 2021.

DOES THE CHINA FACTOR REALLY MATTER?

It is no coincidence that Hong Kong’s noncompliance with Western sanctions has been simultaneous with Hong Kong’s deteriorating political autonomy. Xi is determined to exploit Hong Kong’s advantages to further his strategic ambitions, even if it means tarnishing Hong Kong’s international reputation.

Some might argue that Beijing’s increased grip on Hong Kong has had little effect on the city’s attitude toward Western sanctions. After all, Hong Kong was already a major transshipment hub, even prior to signs of serious deterioration of its autonomy. The volume of dual-use items transshipped through Hong Kong has contributed to conflict and terrorist activities that had less strategic salience to China than the war in Ukraine has. For example, transshipped U.S. electronics components and devices were used to build improvised explosive devices that were deployed against coalition forces in the Iraq war, a conflict for which China largely stayed on the sidelines.

Additionally, Hong Kong’s status as a busy transshipment port to locations around the world naturally increases the risks of illicit technology diversion. Transshipment is notoriously hard to detect from trade data because it requires visibility throughout multiple stages in the supply chain. Due to the sheer volume of transshipment occurring via Hong Kong, it is hard for export control officials to conduct preshipment screening or postshipment checks. It is particularly easy to set up front companies in jurisdictions like Hong Kong. As a manager at a leading U.S. semiconductor distributor explains, “there are many formless shell companies and small trading companies in Hong Kong that serve as receptacles for secondary sales. . . . If you spot one illegal trade, they can just change their name or use their other trading companies’ names.”

It becomes even more challenging to distinguish between transshipment to sanctioned entities and transshipment to legitimate importers if the importing country has a large existing market for dual-use goods. According to trade data compiled by the Observatory of Economic Complexity, Hong Kong has consistently been the world’s top importer of electrical machinery and electronics since 2004. In the global trade of integrated circuits, for instance, Hong Kong imported 24.3 percent (or $162 billion) of the world’s trade in 2020, exceeding even China’s $114 billion imports.

But this line of argument fails to account for the big picture. While the problem of illicit trade has historically bedeviled Hong Kong, the government’s open defiance against Western sanctions since the Ukraine war signals its commitment to a deliberately lax approach to export controls. The sizeable flow of technology from Hong Kong to Russia is the result of an active political choice. The reactions from other major transshipment hubs, such as Singapore and the United Arab Emirates (UAE), illustrate that it is possible to stem the flow of technology to Russia if there is political will to do so. U.S. authorities have long recognized the prominence of Hong Kong, Singapore, and the UAE in illicit trade networks. The three major transshipment ports reacted to Western sanctions regimes against Russia differently according to their geopolitical interests.

Despite being a U.S. security partner, the UAE has joined other Middle Eastern states in refusing to participate in Western sanctions regimes. It has abstained from voting in favor of a United Nations Security Council (UNSC) draft resolution condemning Russian aggression in Ukraine, allowed Russian oligarchs to launder money through its ports, spurned Washington’s request that it pump more oil to diminish Russian oil revenue by reducing global oil price, and refused to crack down on the reexporting of electronic components to Russia. Data show that exports of electronic parts from the UAE to Russia increased sevenfold within a year to almost $283 million in 2022, while microchip exports rose by fifteen times to $24.3 million from $1.6 million in 2021. The Gulf country also sold 158 drones worth a total of $600,000 to Russia.

If the UAE has allowed tech trade with Russia to flourish out of self-interest, Singaporean leaders have pursued a different calculus—choosing to align themselves more closely with the U.S. position. In a statement made on February 28, 2022, Singapore’s foreign minister said, “Russia’s invasion of Ukraine is a clear and gross violation of the international norms and a completely unacceptable precedent. This is an existential issue for us.” In a rare move, the city-state announced sanctions against Russia that included “four banks and an export ban on electronics, computers and military items,” becoming the only Southeast Asian country to impose sanctions against Russia in the absence of binding UNSC approval. According to the Free Russia Foundation, Singapore is among the countries that have most dramatically curtailed trade with Russia. In terms of semiconductors and integrated circuits, Singapore was the ninth-biggest exporter to Russia in 2021. A prominent node in the global supply chain, Singapore accounts for 19 percent of the global share of semiconductor equipment, providing Russia in 2019 with approximately $10.6 million worth of semiconductor devices. This has shifted since Russia’s full-scale invasion of Ukraine, when Singapore chose to side with Western sanctions regimes. In 2022, exports of semiconductors from Singapore to Russia collapsed dramatically down to a negligible level.

Geopolitical interests explain both the UAE’s spike and Singapore’s plummet in exports to Russia. These cases illustrate that changes in economic and technology ties with Russia are largely driven by the countries’ stances on the Ukraine war, which are in turn motivated by their geostrategic calculus. Similarly, Hong Kong’s permissive stance toward trading technology with Russia is a product of Beijing’s geopolitical calculations. Repeatedly, Hong Kong officials have demonstrated that they have no ability to defy Beijing’s will and no interest in doing so, even if it means alienating the international community. If China is determined to help Russia wage war against Ukraine by extending a technology lifeline, Hong Kong will follow suit.

STILL ASIA’S WORLD CITY?

In July 2020, recognizing Hong Kong’s loss of autonomy, former U.S. president Donald Trump announced that Hong Kong “is no longer sufficiently autonomous to justify differential treatment in relation to the People’s Republic of China.” The United States would “suspend or eliminate different and preferential treatment for Hong Kong.” Shortly after, the Commerce Department began rescinding Hong Kong’s export licensing privileges, such as by equalizing the availability of license exceptions for Hong Kong and China. In December, the department declared that it would treat exports to Hong Kong as destined for China, effectively ending Hong Kong’s preferential status in the U.S. export control system. Some of the United States’ closest partners have implemented similar changes.

Stripping away Hong Kong’s preferential trading status is a good first step in stopping the leakage of sensitive goods to China and its autocratic allies. But unilateral action from the United States is not enough. While these restrictions have slowed the movement of export-controlled goods in and out of Hong Kong—for example, the Commerce Department detected a 17.4 percent decline in shipments under a Bureau of Industry and Security license exception between 2020 and 2021—Hong Kong on the whole remains relatively interconnected with the global economy.

Russia’s permanent seat on the UNSC has guaranteed the failure of any efforts to push for comprehensive UN sanctions and continues to provide political cover for jurisdictions like Hong Kong and the UAE to resist pressure to cooperate with Western countries. This, combined with Hong Kong’s posture as a busy shipping port that is inherently difficult to monitor, has given the Hong Kong government plausible deniability when accused of supporting Russia’s war machine. There is no clear answer to how Western countries should deal with nonaligned countries in the Global South that wish to stay out of what they perceive as a great power competition, but one thing should be clear: Hong Kong falls outside the nonalignment camp, since it has taken the side of the emerging China-Russia axis.

A wider recognition of Hong Kong as a geostrategic asset of Chinese statecraft is in order. Hong Kong’s government is investing large sums in a charm offensive to rehabilitate its international image and attract international business. In a promotional video for the government’s $2 billion HKD “Hello Hong Kong” campaign, Lee claimed, “Hong Kong is now seamlessly connected to the mainland of China and the whole international world.” But the findings presented in this article show that a portrayal of Hong Kong as a neutral trading hub connecting East and West no longer holds up. Western leaders should be aware of the geopolitical costs of Hong Kong’s position as a major center of global trade and the advantages that subsequently accrue to Beijing.

Correction: This piece has been edited to reflect that Chief Executive John Lee said Hong Kong would disregard U.S. sanctions on Russia, not those on China.

Brian (Chun Hey) Kot is a research assistant in Carnegie’s Democracy, Conflict, and Governance Program.

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…China is getting riskier and all of the data points point to that continuing. Nonetheless, there are still some companies that should not leave China. If you are making money from China or you cannot yet move your manufacturing out of China and the benefits of you staying in China outweigh whatever harm to your reputation you might face by doing so, you should stay. There are a surprising number of these companies and many of my firm’s lawyers are still kept busy helping them navigate China’s legal landscape.

2-23-2023 Update. Politico this morning has come out with an article that very nicely details and updates the decline in China’s relations with the democratic world, and how China’s aid for Russia (on top of its spying) has accelerated this. The article is titled, U.S. diplomatic counter-offensive targets China’s ‘false information and it focuses on how close to the “red line” China is with Russia.

Per Politico, the Biden administration is “pushing back on Beijing behind the scenes through diplomatic outreach to allies and partners” in an effort to underscore its “resolve to hold Beijing accountable for the [balloon] incident and to use it as an exemplar of the long international reach of China’s malign activities, even as China tries to woo Europe and other regional blocs.”:

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Global supply chains proved remarkably resilient. In June, the World Trade Organization (WTO) had a reasonably successful Ministerial Conference attended by trade ministers from most of the world’s trading nations. They made good progress on reining in fisheries subsidies that were stripping the oceans bare of stocks of this important food source for the world’s peoples and undermining the livelihood of fishermen, particularly in very poor countries.

The ministers noted that work was underway to address environmental issues and promised to address needed reforms of the global trade organization. They dodged a bullet by keeping in place a moratorium on levying customs duties on e-commerce, with digital trade being one of the bright growth areas of international commerce.

This does not suggest that there will be smooth sailing for international trade in 2023. There are three areas of U.S. trade policy that will require particular attention.

Alan Wm. Wolff is a former U.S. deputy trade representative and World Trade Organization deputy director-general. He is currently a distinguished visiting fellow at the Peterson Institute for International Economics (PIIE). His new book, “Revitalizing the World Trading System”, Cambridge University Press, will be published later this spring.

To read the full article, please click here.

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