US blocks Chinese access to additional defense-related US technologies. Coalitions of democracies to resist China are expanding on four continents. The CPTPP has become newly popular. Will the US rejoin? One off-note: Treasury’s currency manipulation report.
The weekly trade report with L.C.
The Commerce Department announced on December 18th that it has added China’s Semiconductor Manufacturing International Corp. (SMIC) to its Entity List of bad-actor foreign companies whose access to US technology is restricted. If a company is on that list, its US suppliers must apply for and receive a license for any item exported that is subject to Export Administration Regulations (EAR). Those licenses are usually denied. This is not just another isolated, unilateral Trump administration trade move: international resistance to China is growing.
According to Commerce, “This action stems from China’s MCF [military-civilian fusion] doctrine and evidence of activities between SMIC and entities of concern in the Chinese military industrial complex.” SMIC was also recently added to the Defense Department’s list of companies targeted by President Trump’s November 12th executive order prohibiting investment by Americans in certain Chinese companies.
SMIC sanctioned
While SMIC – China’s largest semiconductor manufacturer – was the highest-profile entity listed that day, Commerce announced it has “added 77 entities to the Entity List for actions deemed contrary to [US] national security or foreign policy interests. Ten of the 77 are tied to SMIC. “These include,” Commerce continued, “entities in China that enable human rights abuses… supported the militarization and unlawful maritime claims in the South China Sea… acquired US-origin items in support of the PLA’s programs, and… engaged in the theft of US trade secrets.”
This latest US blow to Chinese tech companies has multiple implications. Commercially, the effect will be to make it hard for SMIC to obtain inputs and equipment and software it needs, including to upgrade its own chip-making capabilities. That will make it harder for China to realize its national ambition to become a leader in advanced semiconductor technology. After Huawei was put on the Entity List and subjected to the “direct product rule” so it couldn’t access US tech, and Taiwan’s TSMC halted sales to it, it was thought that SMIC might be a source for Huawei. But its semiconductors and tech are understood to be far behind its US and Taiwanese rivals.
For the US high-tech companies that sell to SMIC, it means the loss of a lucrative customer, likely to the benefit of foreign rivals, though the US was a world leader in the technology purchased by SMIC. It also means that China will redouble its efforts to surpass the US in semiconductor tech, though that’s probably not a near-term threat.
For bilateral relations, it will also make it harder for China to fulfill the purchase commitments it made in the US-China Phase One Trade Agreement. The semiconductor sector was the one area where it seemed China was on track to meet its promised quota.
Commerce Secretary reflects consensus
Commerce Secretary Wilbur Ross’s statements on the December 18 actions reflect the strong bipartisan consensus in Washington for taking action to restrain China from attaining military and technological dominance. That consensus has formed not only around the negative act of restraining China but also the positive act of beefing up US capabilities to make its dominance more difficult to challenge. That consensus was reflected in measures that passed Congress in recent years, including this year’s National Defense Authorization Act, which includes new federal support for the domestic semiconductor industry.
Ross said:
“We will not allow advanced US technology to help build the military of an increasingly belligerent adversary. Between SMIC’s relationships of concern with the military industrial complex, China’s aggressive application of military-civil fusion mandates and state-directed subsidies, SMIC perfectly illustrates the risks of China’s leverage of US technology to support its military modernization.”
Beyond the military, “China’s corrupt and bullying behavior both inside and outside its borders harms US national security interests, undermines the sovereignty of our allies and partners, and violates the human rights and dignity of ethnic and religious minority groups…. China actively promotes the reprehensible practices of forced labor, DNA collection and ubiquitous surveillance… in Xinjiang and elsewhere.”
Treasury’s currency manipulation report ridiculed
Meanwhile, however, the US Treasury Department made an ass of itself by labeling, in one and the same breath, Vietnam and Switzerland as currency manipulators. The former is one of the world’s weakest currencies, the latter the world’s strongest.
Now that the Commerce Department is authorized to treat currency undervaluation as a countervailable subsidy, countries that are labeled manipulators should probably expect more unfair subsidy cases to be filed against their exports since such allegations would have a good chance of prevailing.
But there is also a potential negative for the US. Trading partners could turn the criticism back on Washington and charge that the Fed’s low interest rate and stimulative policies, which have the effect of weakening the dollar, are countervailable. However, the WTO really doesn’t authorize this. WTO rules don’t appear to allow undervaluation to be treated as countervailable because it is not a “specific subsidy.” Thus, countries hit by US duties for this reason might challenge them at the WTO.
Two respected economists weigh in
Jason Furman, now with PIIE, published an analysis of the labeling of Vietnam as a currency manipulator. He claims that Treasury’s case is weak and he also criticizes the whole exercise of determining if trading partners are currency cheats (noting that “in some sense all monetary policy is currency manipulation”). Regarding Vietnam, he argues that the rise in its trade surplus with the US is largely due to “a shift of export production to Vietnam” – that is, it is a result of the US push for manufacturers to relocate out of China. He also notes that “Vietnam’s currency changes so far this year have not been particularly notable, remaining virtually unchanged,” and that “Vietnam is one of the few countries that did not see a depreciating exchange rate relative to the US dollar in 2020.” Furman further notes that there is no clear, recognized methodology for analyzing the appropriateness of a country’s currency practices.
Steve H. Hanke, a world authority in currency values, writes in the National Review that the US Treasury’s Report is “little more than an invitation for political mischief that would interfere with free trade…. [I] think that the entire semi-annual currency-manipulator ritual is rubbish and should be trashed…. Since World War I, the [Swiss] franc has experienced a strong trend of nominal and real appreciation against the British pound, U.S. dollar, and major continental currencies…. The trend rate of the real, inflation-adjusted Swiss franc appreciation against the world’s international currency, the U.S. dollar, has been nearly one percent per year during the post-WWI era…. I wonder if all this Swiss franc strength has anything to do with the 1,040 tonnes of gold that the Swiss back the franc with?”
Whoops, that was a politically incorrect statement by Hanks. Every good Keynesian central banker knows that gold is obsolete and that the heretical Judy Shelton, who is not so sure, must be kept from a Fed position because only orthodox Keynesian inflationists should be allowed to fill that post.
CPTPP newly popular
Suddenly there is new interest in expanding the membership of the CPTPP. Japan takes the annual rotating chairmanship of the bloc next year and is expected to insist on maintaining the high standards of the agreement for new entrants. That’s actually what’s written into the deal: any country is supposed to be allowed to join (even from out of the Pacific region) as long as it accepts all the existing provisions and the entire current membership supports its accession. An exception is made for the US: about 20 provisions that the US won in the negotiations but other countries didn’t want were suspended, but will be reactivated if the US joins. Otherwise, new members are not supposed to seek changes – though in reality a country may ask to renegotiate some part of the deal and could do so as long as all existing members agree.
Prime Minister Yoshihide Suga told reporters recently, “There are 11 members to the TPP, and new countries cannot just join without their approval…. We need to ensure that any new member is prepared to meet these standards” set in the original deal. Suga’s remarks appear directed specifically at China. Japan, and others, are particularly interested in getting the US back in – for strategic as well as economic reasons. Many think it will happen under the Biden administration, though probably not quickly. As Vice President, Biden strongly promoted the TPP as did his foreign policy advisers. USTR-designate Katherine Tai is thought to be open to it. Still, for political reasons Biden would probably have to go through the motions of renegotiating the pact in some way, probably with an emphasis on labor and environmental standards, just as Trump did with NAFTA. Biden would also have to spend political capital winning congressional renewal of his Trade Promotion Authority, the current version of which expires on August 1st, 2021.
The business community and much of the foreign policy community, it is expected, will support US reentry. Countries that are also seriously considering joining the CPTPP are the UK, Taiwan, South Korea, and Thailand.
Democratic coalitions to resist China are growing
The China-provoked trade war with Australia is an effort by Beijing to warn its trading partners away from allying against it. But many moves are already underway that could turn China’s latest hostile move against it:
- The Quad (US-Japan-Australia-India) is intensifying military collaboration among its four, obviously aimed at China. Former Prime Minister Shinzo Abe’s vision for a “Free and Open Indo-Pacific” raises the possibility of expanding the formal status of the Quad to other Western-allied countries in the region.
- Parliamentarians from liberal democratic countries this year joined together to form the Inter-Parliamentary Alliance on China explicitly created to confront the China “challenge.” Parliamentarians of several more countries have joined IPAC since its founding. IPAC has already spoken out strongly against Chinese abuses, including the Hong Kong Security Law. Its co-chairman just criticized the EU for moving to conclude an investment deal with China despite China’s forced labor practices.
- President Trump has also proposed an alliance of countries to help those targeted by China — as Australia has been — by compensating the injured country or taking its exports to make up for the loss of exports to China. While that may be difficult to implement, it no doubt worries Beijing.
- Beijing is also concerned over the EU’s draft foreign policy proposals urging Washington to seize a “once-in-a-generation” chance to create an alliance to defend US-EU values (translation: take on China).
- A proposal for another new group came from Secretary of State Mike Pompeo. At the end of a strong anti-China speech last summer, he declared, “Maybe it’s time for a new grouping of like-minded nations, a new alliance of democracies.”
- It seems that London has taken up Pompeo’s vision as well. Prime Minister Boris Johnson intends to use Britain’s 2021 chairmanship of the Group of Seven to expand it into a “D-10” group of 10 democratic countries. To get this started he has invited the leaders of India, South Korea, and Australia to join the US, Japan, Canada, UK, Germany, France, and Italy at the G7 Summit he will host to next summer. He will begin the effort with a January trip to India where he will promote the idea. Being the guest of honor at India’s National Day, he will also promote UK-India bilateral relations.
- President-elect Joe Biden has similarly called for a summit of democracies to be held next year. Biden advisers make clear that the target is not just China but autocratic governments around the world. (But that suggests that the Biden administration could put human rights considerations above strategic ones – a tendency to which past Democratic administrations have been susceptible.)
- Former NATO head Anders Fogh Rasmussen, who in 2017 founded the Alliance of Democracies Foundation, declared in a December 15th Wall Street Journal op-ed, using words similar to the EU, “In 2021 the US and its allies have a once-in-a-generation opportunity to reverse global democratic retreat and put autocracies like Russia and China on the back foot. That will happen if major democracies unite in the pursuit of freedom.” Claiming the President-elect is ready for the task, he said, “America will lead the endeavor, but it won’t be alone. Democracies in the Indo-Pacific, from Taiwan to Australia, India and Japan, are also looking for like-minded friends to counter China’s aggressive posture.”
- And, as anticipated, Australia notified the WTO on December 16th that it is requesting consultations with China over the antidumping and countervailing duties it imposed on Australian barley. That’s the first step toward lodging a formal complaint to the WTO. If consultations don’t lead to a resolution within 60 days, Canberra can request establishment of a dispute settlement panel or a Multi-Party Interim Appeal arbitration arrangement (MPIA) to rule on its complaint. Meanwhile, China’s boycott of Australian coal isn’t going so well. “Beijing’s trade war with Australia spectacularly backfires as China is plagued by electricity woes plunging millions into darkness – after it refused delivery of $1billion of Aussie coal,” WUWT reports.
L.C. reports on trade matters for business as well as Founders Broadsheet.
Leave a Reply