CvT: Sept. 23, 2020

Stay in the know on US-China relations

EU-China Investment Deal: Will Economics Price Out the Trans-Atlantic Alliance?

Written by: Alex Hurley

Germany’s Chancellor Angela Merkel headlined a virtual summit meeting with President Xi Jinping last month to expedite the Comprehensive Agreement on Investment (CAI) between the European Union and China. The September 2020 summit was meant to conclude seven years of protracted talks surrounding the expansion of Chinese market access for EU investors, the removal and reduction of forced technology transfers (FTT), and future trade relations between the two partners. While patience may be virtuous, particularly when commercial diplomacy talks can cement trade rules for decades at a time, this current round of talks revealed a conspicuous reality for the world’s largest trading bloc – its uncomfortable position between the US and China.

Stuck between a rock and a hard place

In 2019, China was the EU’s third largest purchaser of exports and largest supplier of imports of goods. This economic reality, to the tune of a €164 billion trade deficit in favor of China, outlines the importance of a mutually beneficial EU-China relationship. As the Middle Kingdom is projected to outpace total US GDP and become the world’s largest economy by 2024, European leadership desperately needs this partnership to maintain and revive an EU economy which contracted by 11.9% in Q2 2020 due to the coronavirus pandemic. Although a global outbreak of another infectious disease is unlikely in the near-term, the current economic environment finds Europe at odds with US leadership’s geopolitical concerns within the Indo-Pacific region.

The implications of a changing global dynamic

The US’ August 2020 sanctions targeting China’s semiconductor and defense industries, in particular, reveal Washington’s strategy of containment against China’s rising power. These export controls are testing the US foreign policy’s presumption that the EU – and other historical allies – will continue to enforce Washington’s campaign of economic coercion against the Chinese state indefinitely due to shared ideological values and favorable terms of financial inclusion. While the United States was the largest and second largest partner for EU exports and imports, respectively, in 2019 and drove a €153 billion trade surplus in favor of the EU, recent comments from EU Commission President Ursula von der Leyen suggest the political will exists within Europe to build a closer and more strategic relationship with China.

The EU official statement from the prior June 2020 virtual summit, “EU-China Summit: Defending EU interests and values in a complex and vital partnership,” should serve as a reminder to the US that practical needs, including economic security, trump ideological values and historical relations. Particularly with the transatlantic alliance at its lowest point of cooperation since the NATO’s establishment in 1949, the EU-China CAI represents an opportunity for European nations to maintain their economic relationship with China while leveraging equal concessions from the US Trade Representative. The real question remains as to whether the growing EU-China strategic partnership and investment deal will challenge the diplomatic utility of the historic transatlantic alliance.


China: A ‘Moderately Prosperous’ Nation Seeking ‘National Rejuvenation’

Written by: Archit Oswal

In October 2020, CCP leadership plans to convene in Beijing to begin finalizing proposals for the nation’s 14th five-year plan that will outline China’s policy blueprint for the 2021-25 period. The previous five-year plan laid the roadmap for China to become a moderately prosperous nation by 2021, and Beijing has signaled that the upcoming plan will lay the foundation for China to become a fully-developed, powerful nation by 2049. Having more than doubled its GDP and GDP per capita since 2010 as well as sharply reduced extreme poverty domestically, Beijing can reasonably claim to have met its most important development targets and therefore qualify as a “moderately prosperous nation.”

National rejuvenation as a goal

Sights have now been set on moving beyond the “middle-income trap” and achieving “national rejuvenation” by 2049. Although the exact implications of “national rejuvenation” remain undefined, the term often refers to the restoration of China’s political and economic significance on the world stage. Well aware that an increased role for China in world affairs would upset the global balance of power, China’s leaders believe that the greatest external threat to “national rejuvenation” will come from the US, the current global hegemon. Believing that the US feels threatened by China’s rise and therefore seeks to contain it, China’s top diplomats and political thinkers use the term “strategic anxiety” to describe recent US actions targeting Chinese entities. Therefore, to achieve “national rejuvenation” by 2049, the upcoming five-year plan will bolster support for and introduce new initiatives designed to combat US “strategic anxiety.”

Full steam ahead towards manufacturing technology autonomy

Recent five-year plans have increasingly emphasized moving China up the value-added manufacturing chain and building its technological edge. Until recently, global supply chains have enabled China’s progress toward this goal. Huawei, for example, relied on Qualcomm, a US company, for the semiconductors that went into its telecommunications gear and consumer handsets. However, as the US escalates its attacks on the global supply chains of Chinese technology companies, Beijing is responding with measures aimed at accelerating progress toward autonomy in technology manufacturing capabilities. President Xi’s announcement earlier this year that China would invest an eye-watering US$1.4 trillion over the next five years to promote “indigenous innovation” fits within this narrative. However, much to the consternation of foreign companies that operate in China, it also cements the central role of the state in China’s political economy and the secondary role of the market in allocating resources.

Institutional advantage: the cornerstone of China’s political economy

While Chinese state capitalism attracts criticism for the inefficiencies it engenders, President Xi often trumpets China’s mixed economy as an “institutional advantage,” or the idea that China can productively allocate resources at a moment’s notice by marrying the innovative spirit of private enterprise with the raw power of the state.
The embodiment of China’s “institutional advantage,” the state-owned enterprise (SOE), has acquired an increasingly prominent role in Beijing’s development strategy in recent years. At the end of 2018, the foreign assets of SOEs totaled over US$1 trillion, revealing the magnitude of the role that SOEs play in China’s overseas multilateral OBOR initiative. Beijing’s support for SOEs and public-private partnerships have allowed China to expand its global footprint in a relatively short period of time, but it has also created an uneven playing field at home for foreign companies.

The next five-year plan is unlikely to reverse the trends that have gradually coalesced over the past several years as a response to geopolitical competition with the US. As Beijing doubles down on its current development strategy to compete more effectively with the US, foreign companies operating in China should not expect market reforms intended to even the long-term playing field any time soon.


US Visa Bans: Winning the IP Battle to Lose the Talent War?

Written by: Grace Spoerner

National security has and continues to remain a core topic when discussing the deteriorating relations between the United States and China. In 2019, these concerns first manifested themselves through a US ban on Chinese tech company Huawei that referenced security issues, which ultimately brought the company to the forefront of diplomatic relations. In a more recent development in US-China relations, on September 8th, Washington revoked nearly 1,000 visas from Chinese researchers and graduate students, once again citing security concerns.

A changing tone on IP protections

Intellectual property protection laws have been central to the national security conflict between the two power players. As the US and China compete for global leadership across a spectrum of strategic fields spanning AI and cloud computing to military technologies, it comes as no surprise that proprietary information within these fields needs protection. Although the US has long voiced concerns about Chinese espionage over American intellectual property, Washington has recently become more direct in accusing groups of Chinese nationals like students and researchers of specific IP-related crimes like the theft of COVID-19 research, trade secrets, proprietary software code, and military intelligence. Most recently, Chad Wolf, the acting head of the US Department of Homeland Security (DHS), claimed that the 1,000 Chinese students and researchers who had their visas revoked were said to have ties to China’s People’s Liberation Army and China’s central military strategy. Although the visa ban is designed to prevent the theft of US intellectual property, it raises the questions of the broader impact that bolder US action will bring.

As restrictions against Chinese citizens in the US tighten, some also question the effect that the decision to revoke the visas will have on American technology and medical development. Steven Chu, the former United States Secretary of Energy, has expressed concern that Chinese researchers are leaving the US due to the fear of being unfairly targeted and investigated. The visa ban has raised the alarm that it may set a dangerous precedent and association with the broader Chinese community as a risk to national security. Reportedly, several researchers (namely those in the medical field) have proactively sought lawyers out of fear of national profiling in their workplaces and that “their lives will be ruined for no good reason.” Although the FBI and institutions like the National Institute of Health have come forward stating investigations are not conducted based on race or nationality, this highlights how the wider impacts of the ongoing feud between China and the United States are profoundly changing the lives of many individuals for the worse.

Winning the battle to lose the war?

Given the importance of protecting intellectual property and national security for both countries, it is unlikely either side will yield to the other. At present, it seems both the US and China will continue implementing security measures through new policies and protocols like the US revoking the visas of suspected Chinese students and researchers. The issue that remains to be answered is the lasting implication the dispute between the US and China will not only have on current Chinese nationals in the US but how it will impact the US’ ability to attract talent from China to its academic and research institutions – thus potentially hampering the nation’s ability to remain competitive over the long-term in a rapidly innovating global landscape.

Further Reading

Coffee vs Tea

CvT: Oct. 28, 2020

Coffee vs Tea

CvT: Oct. 21, 2020

Coffee vs Tea

CvT: Oct. 14, 2020

Scroll to Top
Teacup_250x233

The Weekly Steep Newsletter

Arm yourself with bite-sized insights to stay in the know on all China business news. Leave your translator at home – our free weekly newsletter will keep you current on local news updates and top industry developments in the time it takes to drink a cup of tea!