The weekly trade report with L.C.
Taiwan’s diplomatic isolation in the face of Chinese threats seems to be coming to an end: Japan is promoting Taiwan’s entry to the CPTPP. Parliamentarians from the Japanese (LDP) and Taiwanese (DPP) ruling parties met virtually on August 27th, an unusual occurrence indicative of Tokyo’s efforts to warm its relations with Taiwan. The main purpose of the meeting was for the Japanese to express their support for Taiwan’s eventual accession to the CPTPP, something the ruling Democratic Progressive Party and President Tsai Ing-wen have expressed strong interest in.
China was not amused. The meeting promoted two separate developments that are vexing to Beijing: strengthening Japanese support for Taiwan and an additional potential obstacle to China’s bid to join the TPP. A Foreign Ministry spokesperson told reporters that Taiwan’s status “concerns the political foundation” of the China-Japan relationship, and “Japan bears historical responsibility and crimes on the issue, which underscores the importance to act prudently.”
The Tokyo-Taipei meeting also reportedly discussed Japan’s desire to have Taiwan Semiconductor Manufacturing Company (TSMC) establish a manufacturing hub in Japan. TSMC is the world’s most valuable semiconductor company.
EU-Taiwan ties are warming
Japanese parliamentarians weren’t the only ones expressing support for Taiwan this week. The European Parliament moved to strengthen ties with Taipei. On September 1st its Foreign Affairs Committee adopted a report – which will be presented to the full Parliament for a future vote – calling for opening talks for an EU-Taiwan bilateral investment treaty. This comes at a time when the almost completed EU-China investment accord is languishing.
The report also reportedly expressed concern about “China’s continued military belligerence and gray-zone activities” and other provocations against Taiwan including spying, cyber-attacks, and talent poaching, which pose “a grave threat to the status quo between Taiwan and China, as well as to the peace and stability of the Indo-Pacific region.”
Beijing responded with a number of condemnations, calling the moves “provocative and confrontational” and saying the committee report violates the one-China principle and undermines EU-China trust and cooperation.
But Taiwan’s Foreign Ministry released a statement indicating it welcomed the committee’s report and that “it would closely monitor that vote, and seek cooperation with like-minded partners and countries such as EU, US and Japan, to consolidate a “global democratic camp.”
Threats against Lithuania not sitting well with EU parliamentarians
Separately, EU foreign ministers held informal stock-taking talks on September 4th in Slovenia regarding the EU-China relationship. One key focus was China’s recent punishment of Lithuania – withdrawing its ambassador from Vilnius, expelling Lithuania’s ambassador, and blocking some Lithuanian exports to China – to punish it for Vilnius’s withdrawal from the EU-China “17+1” group and its upgrading of its presence in Taipei. (The two countries will open reciprocal representative diplomatic offices.)
The meeting was preceded by an August 27th statement signed by the chairmen of the parliamentary foreign affairs committees of 12 EU countries plus the US and UK that said they “strongly condemn the political, diplomatic and economic pressure of… China on Lithuania…. We… welcome the developing economic relations with Taiwan.” The US has also come out in strong support of Lithuania, with Secretary of State Antony Blinken calling his Lithuanian counterpart on August 21st to denounce China’s actions and pledge US help to Vilnius to withstand the pressure.
At the foreign ministers’ meeting, Lithuania’s foreign minister urged the EU as a bloc to reassess reliance on China and take a common approach to relations with China.
When Beijing first moved against Lithuania, it was intended to send a signal to other countries, especially in Europe, that it would retaliate for any warming of relations with Taiwan. While there remains a division within Europe over how aggressively to move to “decouple” from China economically and diplomatically, China’s effort to force the rest of Europe away from warmer ties with Taiwan appears thus far largely unsuccessful.
UK bid to enter the CPTPP
The UK’s bid to be the first new entry and first non-Asia-Pacific member of the CPTPP is also moving ahead, with Trade Secretary Liz Truss saying, “We will be able to have concluded negotiations by the end of next year.”
Japan, which is the CPTPP lead country this year, will take the lead on the negotiations with the UK. Post-Brexit London is known to be especially enthusiastic to win a free trade deal with the Asia-Pacific bloc, with Truss calling CPTPP accession “A glittering post-Brexit prize that I want us to seize.”
Various British constituencies, led by agriculture but also including services/financial services and the automotive sector, will be watching closely for fear the UK’s eagerness could undermine its leverage in the talks. Farmers, however, fear they will give up more British market share than they will gain abroad.
But the UK already has trade agreements with most of the CPTPP countries. That limits the upside of CPTPP entry. Still, that will make CPTPP entry easier, though there will nonetheless be many issues to hammer out – which is why negotiations are expected to take at least a year. The UK will have leverage in the negotiations because it would be the second largest economy in the bloc after Japan, and many CPTPP members want trading relationships that give them some counterweight to Chinese regional dominance.
Biden administration trade review continues at snail’s pace
Meanwhile, the Biden administration’s review of relations with China drags on. The pressure on the administration and on USTR Tai to complete their review of China policy and come up with a coherent strategy continued this week, and so did China’s regulatory crackdown. The National Association of Manufacturers sent an August 13th letter to USTR Tai and other high-level administration officials saying the administration should “act as quickly as possible to finalize… a comprehensive China strategy” since “such a clear, robust strategy on China, including US-China trade, would be critical in bolstering” manufacturing and job growth here. The letter follows a string of similar communications from major business groups expressing impatience as the “top-to-bottom” review of China policy drags on. Notably, most such statements show the business community wanting enforcement but also urging dialogue and, usually, an end to the Section 301 tariffs or at least a restart of the exclusion process.
That, however, may prove impossible since the Xi Jinping government is pushing in another direction, toward decoupling with less dependence on Western markets and technology and more statist policies and tighter CCP control over commerce and society. It is doing so in a confusing fashion, however, claiming its policy changes are aimed at strengthening the rule of law or fighting wealth inequality or protecting social values or curtailing over-indebtedness and financial risk or countering anti-competitive practices – not that they are an effort at greater central control.
Xi’s Maoist turn
Many of these moves are promoted under the watchword “common prosperity,” a slogan with Maoist overtones that ostensibly prioritizes social advancement over economic growth (e.g., prioritizes CCP principles, with Xi as the “core leader,” over encouragement of private business.
While the crackdown is intended to curb private, not state-controlled, commercial activity that doesn’t directly benefit the CCP, the government is continuing to promote the development of sectors seen as important for national security, including for domestic security.
Several China-watchers here and in China likened Li’s commentary to the Cultural Revolution and noted that Xi has been promoting former Maoists and pushing policies modeled on the former leader. Some said a Cultural Revolution isn’t in the works but the reversal from pre-Xi liberalization is escalating.
Beijing meanwhile is trying to use one point of leverage it thinks it has to influence the US: it threatens that if Washington doesn’t ease its pressure on China’s core interests, it won’t cooperate with the US on climate mitigation. President Trump would have laughed at this threat, but the Biden administration regard this as a serious threat and may already have made concessions to China.
US addressing Chinese rare earth / magnet domination; EU also
Meanwhile there is an intensifying effort to get the federal government to provide incentives for domestic production of rare earth magnets. They are grabbing attention because the magnets are a key component of electric vehicle technology, though they have wider application to an array of technological products.
The US currently doesn’t produce any and is largely dependent on China, the world’s largest producer of rare earth magnets as it is of rare earth minerals. China heavily subsidizes and protects its entire rare earths industry, and Western countries feel they can’t compete without providing incentives for their domestic producers.
Last month the Rare Earth Magnet Manufacturing Production Tax Credit Act was introduced in the House by Reps. Eric Swalwell (D-CA) and Guy Reschenthaler (R-PA). It would provide a tax credit for neodymium iron boron magnets made in the US and a larger credit if they are made with domestically mined rare earths. The credits wouldn’t be available for any magnets that contain material produced in non-allied countries (China, Iran, North Korea, Russia).
Swalwell introduced the bill with a strong “Buy American” motivation: “As the Biden administration makes a strong commitment to vehicle electrification, it’s more important than ever that the US secures all of the necessary components in the supply chain.” China meanwhile is threatening to restrict its rare earth magnet exports to the US.
The EU is similarly working on developing incentives to spark its own rare earth magnet industry and is looking at subsidizing manufacturers’ financing or raw materials costs. It too has long been worried about reliance on China for critical materials and is considering proposals for encouraging domestic rare earth mining as well.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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