A multi-nation alliance is coalescing against China

A multi-nation alliance is coalescing against China for its many violations of international law in Hong Kong and elsewhere.

The weekly trade report with L.C.

The Hong Kong Security Law that China released on June 30th is a blatant breach of China’s promises to Hong Kong and the world. Unsurprisingly, a multi-nation alliance is coalescing against China for its

• international treaty-breaking in Hong Kong,
• genocide against Xinjiang’s Uighurs,
• mercantilist foreign trade and economic policies,
• bullying neighbors,
• violating international law in the South China Sea,
• military threats to India, Taiwan, and Japan, and
• deliberately spreading the Wuhan virus to the rest of the world, causing widespread death and economic depression.

The Hong Kong Security Law breaches the “one country, two systems” principle of the 1984 UK-China Joint Declaration, a UN-registered treaty that assured 50 years of autonomy to the territory after it was officially handed over to China in 1997, with guarantees also embodied in Hong Kong’s Basic Law.

Threatened extraterritorial reach

The new law makes illegal “acts of subversion, secession, terrorism and colluding with foreign forces” – with punishment up to life in prison. The law also applies to persons who are not permanent residents in Hong Kong and commit “crimes” under the law outside of Hong Kong. The law thus appears to have an extraterritorial reach that threatens critics who speak out while abroad.

Thus far, foreign and US responses to China’s treaty-breaking have taken two basic approaches:

• new trade restrictions on Hong Kong, along with sanctions on Chinese officials and entities, and
• measures to provide sanctuary to those Hong Kong citizens who are threatened most directly by the new law.

UK actions

The UK has already acted, stating it will accept around three million Hong Kong residents holding British National Overseas passports. Australia, Taiwan and others are considering similar measures. In the US Congress, Reps. Tom Malinowski (D-NJ) and Adam Kinzinger (R-IL) introduced the Hong Kong People’s Freedom & Choice Act “to protect Hong Kongers facing persecution.” It would expedite visas for highly-skilled Hong Kong residents – “in recognition of ongoing US-China strategic competition for human capital” – and expedite residency for those who already fled Hong Kong for the US.

Inter-Parliamentary Alliance on China (IPAC)

Governments are realizing that foreign penalties won’t have much bite unless coordinated in an alliance opposing China’s abusive behavior. An alliance spurred by parliamentarians came together last month with the unveiling of the Inter-Parliamentary Alliance on China. IPAC issued a statement last week following China’s promulgation of the Hong Kong Security Law:

We, members of the IPAC, condemn the imposition of so-called National Security legislation on Hong Kong…. a comprehensive assault on the city’s fundamental freedoms, rule of law, and autonomy….[a] clear breach of its treaty obligations…[and]. a grave challenge to the international community…. These actions cannot go unanswered. No country should be able to violate international norms and agreements with impunity…. We therefore call upon governments to review and to recalibrate relations with [China] in coordination with allies…reduce strategic dependence on China…. [and] offer protection to Hong Kong citizens… through an international ‘lifeboat’ scheme organized by a coalition of democracies…. The world must unite in defense of Hong Kong for the sake of the people, and for the maintenance of global peace, democratic values, and rule of law everywhere.

Apart from IPAC, the EU has also been stepping up its criticism of China, including proposing a US-EU “Trade & Technology Council” to coordinate actions regarding China. Pompeo has accepted the proposal.

Huawei

Recently, Washington has been having some success in its effort to stop Huawei’s penetration of foreign 5G networks. The UK is moving to reverse its earlier decision to allow it into non-core components of its network; the EU and members Germany, France, and Denmark are looking at banning Huawei; and India is reviewing the matter.

The big impediment to shunning the Chinese companies is the lack of alternatives. That’s widely recognized. The British government has put it on the agenda of the G7 Summit that President Trump is expected to host in September. London’s “D10” initiative – the G7 countries plus South Korea, Australia, and India – is seeking to form an alliance that can together create serious competition for Huawei.

US support of foreign 5G companies possible

A new idea that has surfaced is to have the US Export-Import Bank or US International Development Finance Corporation provide support to foreign 5G companies, something these companies are calling for.

A report released this week by the Information Technology & Innovation Foundation looking into the rise of Huawei and ZTE said that the companies would have attained only a minimal share of the global telecom market if they hadn’t been so heavily subsidized by the Chinese government. China’s mercantilist policies, the report found, “confer unfair, non-market-based advantages” on the company that have distorted international competition. Such revelations may make it easier for some US opponents of industrial policy to accept a role for the government in boosting the US telecom industry.

Huawei and ZTE banned from FCC funding

The US government took another incremental step this week in its effort to exclude Chinese telecom companies from the US 5G network. The Federal Communications Commission on June 30th classified Huawei and ZTE as security threats, which means that US companies are banned from accessing the FCC’s Universal Service Fund if they use these companies’ technology. The $8.5 billion fund grants financial assistance to institutions like schools and libraries in poor and rural areas to help them build up their telecom capabilities. Companies that receive money from the fund will have to remove any Huawei or ZTE equipment they already have in their network.

EU joins US in Nuctech concerns

Separately, the US government has been targeting another Chinese company with security implications, the Wall Street Journal reports, and is trying to convince allies to ban its technology. The company is Nuctech, a major – and lower cost – provider of screening tech for people and cargo at ports, airports, and border facilities. A state-controlled Chinese enterprise, its screening machines often access data that could pose a security risk if handed over to Beijing. US and UK manufacturers of competing systems say that Nuctech is subsidized and thus able to undercut their prices. In fact, its prices are so low that there is suspicion the company’s motives go beyond the commercial. Nuctech is barred from US airports, but it has made major inroads in Europe. However, EU VP Margrethe Vestager has acknowledged EU concerns. The new EU proposals to block investments from and contracts for foreign government-subsidized companies may disrupt Nuctech’s activities.

Bipartisan unity on China response

The US Congress has passed and is working on more legislation to penalize China and help Hong Kong’s democracy fighters. Last week the Senate passed a bill to slap sanctions on Chinese involved in suppressing Hong Kong’s freedom. The House unanimously passed the bill on July 1st. Earlier, on June 20th, a bipartisan bill was introduced that would grant refugee status to anyone from Hong Kong — and his or her family — threatened with persecution under the Security Law. Chief sponsors Sens. Marco Rubio (R-FL) and Bob Menendez (D-NJ) urged other countries to also offer asylum.

Last November the US enacted the Hong Kong Human Rights & Democracy Act, requiring the Secretary of State to annually certify that Hong Kong enjoys autonomy and qualifies for its special status. But this May 27th, Secretary of State Mike Pompeo certified that China is breaching the territory’s autonomy. Then on May 29th, President Trump said the US will “take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China.” The US could also make investments from Hong Kong subject to the tighter CFIUS scrutiny given Chinese investors. But a revocation of its special status hasn’t yet been fully implemented.

Decline likely

It appears inevitable that Hong Kong will lose its role as a free-trade gateway to and financial hub for China, though that role has been diminishing in recent years as other parts of China have developed. That means that foreign sanctions that target Hong Kong will have less bite than they might have had in the past.

There are currently around 1,300 US companies operating in Hong Kong. It is the trading partner with which the US enjoys its largest trade surplus. That could end as the US imposes export restrictions.

Few analysts expect the sanctions or any other foreign reprisals to change the direction of China’s Hong Kong policy. But coordinated action could restrain future actions and begin to politically isolate the Xi Jinping regime.

US reaction swift

Washington is also working on measures to penalize China for human rights abuses in Xinjiang, which has assumed an even higher profile with recent reports of forced sterilizations and abortions of Uighurs. The administration would use the 2016 Global Magnitsky Human Rights Accountability Act. A new version passed in 2016 enables the government to place an array of sanctions on foreign officials from any country who are involved in human rights abuses. The administration had reportedly delayed using the act against China so as not to interfere with the trade deal, but the President is now thought likely to use it.

The administration issued a notice to businesses on July 1st warning against sourcing from companies that “engage in human rights abuses, including forced labor in Xinjiang and elsewhere in China.” Pompeo warned, “CEOs should… be aware of the reputational, economic, and legal risks of supporting such assaults on human dignity.”

The US meanwhile is conducting a major air-military exercise from two aircraft carriers in the international waters of the South China Sea as a warning to China that its attempts to claim national control over these international waters and intimidate the areas littoral nations will not go unresisted.

Re-shoring yes, Phase Two deal on hold

Nevertheless, in Washington, there are charges that President Trump has been playing down China’s human rights abuses in order to preserve his US-China Phase One Trade Agreement. When asked by reporters last week if he would go for a second, Phase Two, China deal if reelected, he responded, “I will sort of hold that answer in abeyance.”

Regarding re-shoring, the US International Development Finance Corporation is currently considering how to use the support it can make available to US companies to help them relocate manufacturing back to the US, especially of medical-related products but also for things like semiconductors. Reportedly, this week it reached agreement with the Department of Defense to jointly administer $100 million of available funds for this effort. The IDFC is also looking at supporting 5G rivals to Huawei.

Countering China’s Belt & Road

Some are also suggesting the IDFC might be used to help counter China’s Belt & Road Initiative, which is accused of making abusive loans to gain leverage over cash-strapped countries. Former Trump White House trade official Clete Willems told a hearing of the Senate Finance Trade Subcommittee on June 30th that the US should work with other countries to set “international standards on development financing” that the IDFC and Europe’s development agencies can meet “but that China cannot.”

L.C. reports on trade matters for business as well as Founders Broadsheet.

Photo credit: Wikipedia, Flickr, and Studio Incendo