Calls for ten-nation “club” to build own 5G network
The weekly trade report by L.C.
There were two important Huawei developments this week. Huawei Chief Financial Officer Meng Wanzhou lost her bid for a Canadian court to halt her extradition to the US, and the UK reversed its earlier decision to allow Huawei to be involved in non-core elements of its 5G network. The UK has proposed instead that a new club of democracies – the “D10” – create a rival supplier.
The London reversal has been reported but not yet publicly announced. Prime Minister Boris Johnson has asked his government to come up with plans for time-limiting or entirely cutting Huawei’s role in constructing 5G infrastructure. The motivation is the growing anger at and suspicion of China, especially among British Conservative politicians. The shift, if finalized, will anger Beijing but please Washington and perhaps facilitate the negotiations for a US-UK trade agreement.
The UK had already identified Huawei as a “high-risk” supplier when it decided to limit its involvement in Britain’s 5G development to non-core elements and a 35% market cap. Johnson more recently reportedly expressed the wish to terminate all Chinese involvement in British 5G by 2023. But the only other two companies that could take over – Nokia (Finland) and Ericsson (Sweden) – are not as far along as Huawei and would slow down and raise the cost of the network.
The “D10” 5G alliance
So the UK is now trying to configure a new alliance of 10 democratic countries who together should be able to create serious competition for Huawei. The “D10” are the G7 countries (US, UK, Japan, Canada, France, Germany, Italy) plus South Korea, Australia, and India. According to the London Times, London is already discussing the idea with Washington, which should go along since it was the first country to urge that other countries find alternatives to Huawei for security reasons.
Among options that might be reviewed is coordinating investment into telecom companies already based in one of the D10 countries to quickly build up a rival to the Chinese.
Escalation over Hong Kong
The US Secretary of State has determined that China no longer allows Hong Kong sufficient autonomy to be treated as a separate customs territory. President Trump reacted to the finding by announcing steps that his administration might take. He did not, however, announce any immediate actions or a timetable for when he might act. Some China-watchers and some legislators interpreted his response as weak and in line with what Xi Jinping anticipated.
More forcefully, the Wall Street Journal in its lead editorial of May 30-31st called for the US to “give Hong Kongers an escape route to America….Offer Hong Kong’s people green cards to live and work in the U.S. with a path to citizenship if they want.”
An exit route for freedom-loving Chinese
The brain drain would hurt the Beijing regime by draining away some of its most talented citizens. The UK has already offered a similar path to employment and future citizenship for the 350,000 Hong Kong residents with British passports. Taiwan is considering similar moves. Hong Kong citizens are already exploring options for a quick exit.
But the US President, an immigration restrictionist, may not follow the Journal’s advice. He is also concerned that China may tear up the US-China Phase One trade deal, important to US farmers. But according to the June 1st financial press, China is already holding back on some of these purchases in a warning to the US over its “interference” in Beijing’s ripping up its treaty commitments to Hong Kong.
China could be hit with even stronger options. As an op ed in the May 29th Wall Street Journal notes:
Putting the ability of Chinese banks to conduct dollar-denominated activities at risk would be deleterious to China’s ability to operate financially overseas, posing a challenge for the largely dollar-denominated Belt and Road global infrastructure initiative. It would also put the more financially fragile parts of the country, like its debt-laden property developers, under strain.
Business resistance
Much of the US business community doesn’t want its ability to operate in Hong Kong and its access to the Chinese market through Hong Kong to be disrupted. Most US allies have also reacted far less strongly. They have condemned the violation of Hong Kong’s autonomy but are not threatening to take strong actions in response. Australia, Canada, and the UK, however, did sign a joint statement on Hong Kong with the US, albeit a weak one.
The President said, “I am directing my administration to begin the process of eliminating policy exemptions that give Hong Kong different and special treatment. My announcement today will affect the full range of agreements we have with Hong Kong, from our extradition treaty to our export controls on dual-use technologies and more, with few exceptions.”
Loss of special trade status could mean, among other changes, that exports from Hong Kong would be hit by the Section 301 tariffs as well as duties now applied to the same products from China. Goods made in Hong Kong would be considered China-origin.
Sanctions threatened, no firm date
The President also announced that “The US will… take necessary steps to sanction PRC and Hong Kong officials directly or indirectly involved in eroding Hong Kong’s autonomy and… absolutely smothering Hong Kong’s freedom. Our actions will be strong. Our actions will be meaningful.”
He didn’t give a deadline for when he would change Hong Kong’s status or impose sanctions on officials for abuses in Hong Kong. He didn’t specify which officials or what kind of sanctions, nor under what authority he would act. Presumably, targeted officials and entities could face asset freezes, visa denials, and restrictions on business transactions, but this wasn’t spelled out.
Xi puts on a bold face
While special status termination would harm US businesses and potentially cripple the territory’s economy, it would hurt China less than it would have in the past when the mainland was much more dependent on Hong Kong’s position as a financial hub. Many analysts therefore think Washington has few cards to play in this game, and there is little it could do to change China’s behavior or force a retraction of the national security law.
Perhaps signaling that he won’t back down (if not signaling something worse), President Xi Jinping has – according to remarks he made to the military reported in the official Chinese press – told the People’s Liberation Army to prepare for war.
On May 29th, the day before the President made his remarks on China, he released two statements pertaining to new measures to protect intellectual property largely by restricting access for certain Chinese nationals to US research. The proclamation was aimed at “dismantling China’s ability to use graduate students to steal intellectual property and technology from the US.”
Allied foot-dragging
Part of the dilemma the President faces is that he has not been able to enlist allied countries in a united front to face off China. Though most agree with US complaints about Beijing, the President has alienated many by slapping tariffs on them as well as on China and not cooperating with them in international organizations. With the possible exception of the English-speaking world, most countries are not interested in getting into a confrontation with China. They fear disrupting economic and trade relations and want to avoid the Chinese retaliation that Australia recently experienced.
The Trump administration undercut international cooperation against China first by pulling out of the Trans-Pacific Partnership (TPP) and then obstructing the work of the WTO.
Beijing meanwhile is working with Tokyo and Seoul to conclude the Trilateral China-Japan-South Korea FTA that has long been in the works
Battle over next WTO Director General
In the effort to find the next WTO Director General to replace Roberto Azevedo when he steps down on August 31st, the EU is making it clear they would like a European to get the post. But Africans continue to make clear that they believe it is the turn of an African to be DG. They are expected to decide on one African candidate to support from among the several that are interested in the job. They have a good case. The current DG, Azevedo, is Portuguese.
US-Kenya negotiations
The Africans could get US support in this endeavor. The US Trade Representative (USTR) Robert Lighthizer on May 22nd released a 16-page summary of US negotiating objectives for a US-Kenya Free Trade Agreement. As USTR said, “Our vision is to conclude an agreement with Kenya that can serve as a model for additional agreements in Africa, leading to a network of agreements that contribute to Africa’s regional integration objectives.”
Kenya is significant for the US because it has been among the most prosperous African economy and is considered by Washington to be a strategic partner. It is thus well-suited to be a model for future trade relations in the region. Some in Africa have expressed concern that the deal with the US could interfere with Africa’s just-formed Africa Continental FTA (AfCFTA), whose implementation was postponed due to the pandemic. But Washington assures that the deal with Kenya is intended to promote continental integration.
The objectives set out by the USTR largely parallel those that released earlier for trade agreements with the UK, EU, and Japan. US farmers are eager to have the Kenya deal serve as a way to begin to overcome African resistance to GMOs. That resistance has hurt African farmers but was largely dictated by the Green-movement obsessed EU, a major African trading partner. Kenyan farmers have just begun to plant biotech cotton but so far are still banning other GMOs.
Textiles are another negotiating objective in the talks.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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