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Foreign Policy

Seven Tools of US Power

Jun 12 , 2020
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

Since Donald Trump took office, America’s China policy framework has been transformed from the traditional “engagement plus containment” to pure containment. That transition climaxed in the trade and hi-tech frictions that started in 2018 and represent the most profound change in bilateral relations since the establishment of diplomatic ties.

The United States has moved to decouple from China in areas where the most Chinese interests are involved, such as trade and high-tech. Determined to strike at China’s economic, industrial and technological development, the U.S. launched a trade war even though heavy losses will certainly be incurred at home.

Obviously for the U.S., the logic of power has replaced the logic of the market. The country has begun trying to use its power to control China with tools in such fields as manufacturing, trade, sci-tech, investment, finance and data.

These attempts can be broken down as follows: 

1. Accelerated moves to decouple from China at all costs.

Trump has done everything he can to pull manufacturing back to the U.S. Even in the face of the COVID-19 pandemic, the U.S. government has increased efforts to speed up supply chain relocations. All-around independence of supply chains and the manufacturing sector is becoming an important strategic option.

The White House’s “Strategy for American Leadership in Advanced Manufacturing,” released in October 2018, vowed to ensure the domestic manufacture of medical products and to expand the capabilities of the domestic manufacturing supply chain.

The Trump administration plans to promote policies to lure U.S. companies back from China by, for example, offering 100 percent immediate expensing of the moving cost. 

2. Increased science and technology sanctions.

In addition to sanctions imposed through the Entity List, the U.S. Department of Commerce recently announced new export restrictions on China, Russia and Venezuela, including:

• expansion of military end-user and end-use restrictions to cover semiconductor equipment and sensors;

• elimination of civil end-user license exceptions to place future exports of integrated circuits, telecommunications equipment, radar and high-end computers under stricter scrutiny;

• revision of the additional permissive re-export license exception to require third-party countries to seek U.S. government permission to re-export U.S. items to China. 

3. A push for closer economic unions.

Actions are being taken by the U.S. for the creation of the so-called Economic Prosperity Network, or EPN, an alliance of trusted partners including companies and civil groups in such fields as digital business, energy, infrastructure, trade and education.

Members of the alliance will follow the same set of standards to reduce dependence on China through coordinated planning.

Chinese exports to the U.S. fell 13 percent in 2019 from a year earlier, while imports fell 21 percent, the largest drop since 1984. Exports to China fell to $23 billion in the first quarter of this year, down 14.7 percent year-on-year, while imports fell 30.1 percent and two-way trade shrank by 27.2 percent, according to the U.S. Commerce Department. 

4. Tighter investment restrictions on grounds of national security.

The U.S. has been tightening investment restrictions on China, with its allies Japan, Australia and other countries following suit more recently. More discriminatory legislation and policies have been introduced that are not limited to overseas investments, leading to increasing risks for Chinese investors.

As a result of tighter foreign investment reviews in major countries, the total value of mergers and acquisitions of listed companies worldwide fell 39 percent to $498 billion in the first quarter, the biggest quarterly drop in seven years.

After the 2008 financial crisis, it took eight years for global M&A deals to return to pre-crisis level. It may take longer to revive global cross-border investment and far more difficult than restoring production and supply chains. 

5. Asset controls plus investment and financing bans.

It has been a general trend in regulation to strengthen the financial supervision of listed companies. However, abuse of this measure may well amount to a de facto investment and financing ban. The U.S. Senate recently passed the Foreign Company Accountability Act, obviously targeting the listing of Chinese companies in the U.S. In addition, the act indefinitely delayed plans to restructure international portfolios and halted investments in Chinese capital markets. 

6. Poison-pill provisions within multilateral trade frameworks.

The USMCA, which links the U.S., Mexico and Canada, has a poison-pill sunset clause providing that if any of the three parties signs a free trade agreement with a “non-market economy,” the other parties will be entitled to withdraw from the USMCA within six months. The U.S.-UK trade agreement currently being negotiated will include a similar poison pill: The UK will have to choose between the U.S. and China, and the U.S. will have the right to withdraw from the agreement if the UK enters into an agreement with China.

It seems that poison pill clauses will become a template to be used in other bilateral, plurilateral and even multilateral agreements involving the U.S., Europe or Japan. This will consolidate an international trading system based on the U.S. paradigm and virtually devastate the world multilateral regime. 

7. Data exclusivity system.

The U.S. has placed controls related to China in the fields of cutting-edge and basic technologies. It restricts the cross-border transfer of large amounts of technical data and sensitive personal data through long-arm jurisdiction and with strong intelligence and law enforcement capabilities.

The U.S. is also teaming up with other countries to try to set rules for the flow of data across borders. In early 2019, the U.S., Japan and Europe opened discussions on digital governance, including the issue of permission when transferring personal, business and industrial data and restrictions over the transfer of data to countries with inadequate or unfavorable systems for protecting personal information and data.

Further objectives seem to be developing a “data circulation circle” mutually recognized by the U.S., Japan and Europe to establish a West-centric framework of rules governing cross-border data flows and even ultimately putting in place data exclusivity based on a country’s ideology and political system.

 

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