CvT: Aug. 26, 2020

Stay in the know on US-China relations

How Did We Get Here? A Glance at US-China Relations in 2020

Written by: Zoe Roth

From pandemic accusations to market fluctuation, 2020 has been anything but a placid year for the relations between two of the world’s top superpowers. Here’s a look at some key moments that have defined the year so far, and a look towards what is to come.

Trade

In January of this year, the US and China signed a trade agreement called the Phase One deal that enumerated each nations’ expectations, including the loosening of US tariffs on Chinese goods and China’s commitment to purchase US$200 billion of US goods over two years. The Phase One deal aimed to signify significant progress in U.S.-China relations, but has since shown underwhelming results. As of June 2020, China had already fallen short of import commitments in key sectors, namely agriculture and energy. Both sides have slapped billions of dollars’ worth of tariffs onto one another’s goods, and neither nation is backing down.

Coronavirus

Following the virus out of Wuhan and across borders, Washington was quick to point fingers at Beijing. From barring citizens from traveling between countries, to accusations of bio-warfare and military provocation, official responses to the pandemic inspired further tensions. While both countries have since shifted their rhetoric to a less militant tone, underlying distrust continues to characterize the bilateral relationship.

Hong Kong

Hong Kong has enjoyed a special economic status from Western nations after the city’s 1997 handover stipulated that the region would enjoy unique autonomy from the Mainland via the “one nation, two systems” governance framework. After a growing democracy movement that first swelled in 2014 and peaked in 2019 garnered international attention, Beijing began cracking down on the city through a series of reforms that culminated in a new national security law that effectively stripped the city of its political, judicial, and economic autonomy. President Trump and several allied Western nations decisively terminated Hong Kong’s special status, ending prior special privileges and favored economic treatment for the semi-autonomous region.

Tech Wars

As August rolls around, Chinese tech goliaths Tik Tok and WeChat have found themselves at the frontline of the US-China spat, with both apps’ US operations at risk of termination. Citing a threat to national security, President Trump announced a five-pronged plan to secure America from cyber-threats, including shielding business IP and COVID vaccine research. The plan implicitly refers to the two social media apps as threats and cites the need to establish clean networks, carriers, and apps that are free from Chinese ownership. This clean network program aims to protect data from Beijing by building an “e-fortress” around US citizens’ data and reflects how escalating tensions are extending into the tech frontier. 

Looking Forward

It is tough to predict the future of US-China relations during such volatile times. The two superpowers are so deeply interconnected that, despite sitting on opposite ends of the political spectrum, a complete decoupling is impractical to discuss – even in theory. As the U.S. election season approaches, it is unlikely that de-escalation is in the cards for the two nations, especially as they continue to embrace a strongman approach to their relations with one another.


Hong Kong: A City Caught in the Middle

Written by: Steve Hopkins

With more than 1,300 American firms that include over 300 regional headquarters, Hong Kong has long been the de facto launching point for foreign businesses that seek riches within the vast Chinese market, but also value the operational familiarity of the former British colony. It comes as an uncomfortable truth to many, then, that the city’s stature as the bridge between the East and the West may be crumbling under the weight of a newly minted national security law (NSL) that threatens to undermine the autonomy that has elevated Hong Kong into a pillar of US-China relations.

Learn the past to understand the present

Hong Kong owes its unique stature to its unorthodox roots. The city was officially ceded to the British in 1898 under the terms of a 99-year lease, expiring on July 1, 1997. During British rule, the city flourished as a primary trading port for goods not only in and out of China, but also across the region. As the handover approached, British and Chinese leaders negotiated terms that the city would return to China under a ‘One Country, Two Systems’ framework, wherein Hong Kong residents would continue to have rights to speech, press, assembly and religious belief, among others—at least until 2047.

The framework also demarcated regulatory, judicial, and business processes between the Mainland and Hong Kong, which poised the city to maintain its competitive edge through the transparency and emphasis on ‘rule by law’ that governed its business environment. The city has since continued to blossom, recently ranking as the #3 financial center in the world after New York and London.

Additionally, Hong Kong has been a staging point for wealth creation in Mainland China. As recently as 2019, approximately two-thirds of all FDI into China came via Hong Kong. In 2018, US$47 billion of US-China trade was transshipped through Hong Kong and, in terms of capital flows, approximately 80% of the IPOs outside the Mainland have been issued in Hong Kong over the last decade.

As a lighthouse for US-China exchange, the question looms large: ‘How will undermining the One Country, Two Systems framework that grants Hong Kong veritable autonomy from the Mainland impact US-China relations?’

Impaired opportunity for economic exchange

First and foremost, economic collaboration has historically been the driving force shaping US-China relations. However, in response to the NSL, the US stripped Hong Kong of its special economic status – introducing punitive trade restrictions that will increase the cost of trade and complicate supply chains on both shores.

Ironically, during previous political flare ups between the US and China, Hong Kong has actually thrived as companies took advantage of Hong Kong’s independent trade status to increase transshipments of goods through the city’s ports. However, with tariffs and other trade controls levied on goods flowing through Hong Kong, these preferential opportunities have disappeared, and few available options remain to reduce the impact of trade barriers.

Furthermore, given the current macroeconomic climate, Hong Kong-based American firms could easily find themselves caught in the crossfire of an escalating tit-for-tat game between the two nations. Given the spiraling business landscape in Hong Kong, a July temperature survey conducted by the American Chamber of Commerce in Hong Kong showed a majority (63%) of respondents were negative about the impact of the NSL on Hong Kong’s business prospects, while 35% of respondents indicated that their companies are planning to shift their operations away from Hong Kong due to political instability and other operational risks in light of the new law.

Looking forward

Hong Kong has long served as a hub for global trade. However, as opportunity for economic exchange through the city diminishes, the anchor for US-China relations will continue to erode, thereby further straining the diplomatic tether between the two nations.

While it may be difficult to understand why China made the decision to introduce the sweeping NSL at this time – whether simply opportunistic action as the outside world reels in the wake of the outbreak or as a heavy handed response to growing support for the city’s pro-independence movement – the move has already set off chain reaction of events that have sunk US-China relations to unprecedented lows and will continue to define the US-China relationship for some time to come.


Huawei: An Opportunity for US Foreign Policy

Written by: Alex Hurley

Boasting over 45% of the global telecom market share and US$122 billion in revenues in 2019, Huawei is both a global leader in the tech industry and a prime example of China’s “catch up and surpass” vision for its domestic technology industry. The Chinese tech giant has consolidated high-profile support from Beijing through loose regulation and capital investment to push Huawei’s boundaries of innovation and directly challenge the long-held global perception of China’s technological inferiority. 

Huawei’s swift rise brings a fall from grace

Huawei’s swift ascent to its status as a leading developer of 5G technologies has surprised competitors and sovereign nations that viewed China’s rise from sleeping giant to global superpower with skepticism. Regardless, citing concerns that Beijing could use Huawei’s telecom infrastructure to conduct mass surveillance operations throughout the world, and more importantly, rejecting the notion that authoritarian regimes could represent a viable alternative to democratic forms of government and private-sector development, the US has taken action to impede the tech giant’s global rise.

These security and ideological risks are significant drivers behind the recent economic sanctions levied by the US Treasury Department. In particular, the Department’s 2019 decision to place Huawei and 114 of its overseas affiliates on the sanctioned “Entity List” and 2020 move to expand export controls and penalize Huawei’s foreign semiconductor suppliers are seen as direct responses to Huawei’s growing international influence.

US action wins the battle but may lose the war

While Washington’s actions may inhibit the Chinese telecom’s growth over the short-term, they also expose the US to consequences that could impact its long-term global competitiveness. By restricting the availability of semiconductors to the Chinese marketplace, the US government has compelled Beijing and Huawei to expedite their campaign of “indigenous innovation.” This strategy, lauded by President Xi Jinping upon his appointment to General Secretary in 2013, would promote the development of high precision manufacturing capabilities for domestic semiconductor producers through R&D, and potentially exclude US involvement in future production of Chinese 5G technology.

Furthermore, US restrictions placed on the exchange of technological information and boycott of 3GPP (a leading international standards body for 5G) would allow Huawei to monopolize international standards and add to the company’s growing arsenal of over 2,000 standard essential patents (SEPs). 

Looking Forward

Huawei’s global rise as a leader in 5G technology creates an opportunity for Washington to bring China back to the foreign policy table. Instead of instituting economic sanctions that indirectly hamper US innovation while driving Chinese progress, Washington should engage China in the evolving arms-race of 5G technology. With an active role contributing to global 5G standards, US companies can use their expertise in semiconductor production technology to guide global discourse while US regulators focus on intellectual property theft and other trade infringements.

Further Reading

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