SinoTech: The U.S. and China Remain Defiant in Their Trade and Tech Positions Ahead of the G20 Summit

U.S.-China tensions persist ahead of G20 summit

On Tuesday, President Trump tweeted that he had a “good telephone conversation with President Xi” and that the two would meet in Osaka during the G20 Summit, to be held at the end of the month. The tweet follows speculation as to whether the two leaders would meet at the summit and President Trump’s declaration on Friday that it “doesn’t matter” if he gets to meet with Xi. Trade talks broke down in May after the U.S. accused Chinese negotiators of backtracking on commitments. Trump now has argued that the Chinese government will eventually be forced back to the negotiating table and that “the China deal is going to work out...because of tariffs.”

Despite President Trump’s Friday comments, his administration has been signaling toward a G20 meeting for weeks. Bloomberg reported that the president stopped Secretary of State Mike Pompeo from delivering a speech criticizing China’s human rights record on June 4, the 30th anniversary of the Tiananmen Square massacre. According to the article, Trump “delayed the speech to avoid upsetting Beijing ahead of...the Group of 20 meeting.” Trump also warned that if President Xi does not meet him in Osaka, the U.S. would raise tariffs on another $300 billion in Chinese goods. The U.S. has already imposed 25 percent tariffs on $250 billion worth of Chinese goods; if Trump follows through on his threat, tariffs would be imposed on nearly all of China’s exports to the United States.

The Chinese government has yet to announce whether or not Xi will meet with Trump. Even if the meeting proceeds as expected, however, it is unlikely to produce any immediate resolution to the current trade dispute. U.S. Commerce Secretary Wilbur Ross has said that “the most that will come out of the G20 might be an agreement to actively resume talks,” noting that the two leaders are unlikely to “talk about the details of how…[to] enforce a trade agreement.” Former Australian Prime Minister Kevin Rudd similarly argued that the G20 Summit “will see a ‘reboot’ to the negotiating process.” Pompeo noted that Trump is unlikely to focus solely on trade during his talks with Xi, indicating that Trump would also discuss the mass protests in Hong Kong. . Meanwhile, Xi will make his first state visit to North Korea ahead of the summit, a topic Trump is expected to raise with Xi during their discussion.

Though Trump has expressed confidence that China will be receptive to a trade deal, the Chinese government has shown no signs of surrender. As discussed in a previous post, China’s State Council released a white paper on June 2 arguing that “cooperation is the only correct choice for China,” but also noting that “China will not bow under pressure and will rise to any challenge coming its way.” Chinese media outlets have taken on a similarly defiant tone. A June 12 piece in Xinhua argued that, in spite of trade barriers facing the country, “China’s foreign trade remained steady, showing its ability to handle external headwinds.” On Sunday, Qiu Shi (“Seeking Truth”), a Communist Party periodical, declared that “no one, no force should underestimate and belittle the steel will of the Chinese people and its strength and tenacity to fight a war.”

Chinese Government Warns U.S. Tech Companies

The fallout from the Trump administration’s placement of Huawei on the Entity List, restricting the sale of U.S. components to the company, was felt on both sides of the Pacific last week. The Chinese government called in representatives from major international tech companies including Samsung, Microsoft and Dell to announce that there could be “dire consequences” for complying with the terms of the Entity List and not supplying certain technology and components to Huawei or other companies.

The meetings were organized by China’s National Development and Reform Commission, responsible for economic planning, with participation from the Ministry of Industry and Information Technology and the Ministry of Commerce. According to the New York Times, the Chinese government may be attempting to use “America’s tech behemoths as a tool of diplomacy,” encouraging them to lobby the Trump administration to reverse the export limits so as not to disrupt global supply chains.

The effective ban on exporting components to Huawei has generated considerable uncertainty in the U.S. semiconductor industry in particular, which supplies a large number of chips for Huawei phones. While there is a 90-day reprieve before the ban goes into effect, companies nonetheless expect it to hit their bottom lines. Broadcom, a U.S.-based chip manufacturer, has indicated that the decision may cost it $2 billion in annual sales, while Micron, another chip supplier, indicated it was conducting a legal review of what could be exported to Huawei, but would “focus on following the laws and regulations.”

Several companies are seeking licenses from the Department of Commerce that would allow them to continue to supply Huawei. These companies argue that sharply reduced sales will cut into their profits and force them to spend less on research and development. Reduced research could then have ripple effects for U.S. companies or government entities that benefit from cutting-edge semiconductors or other components.

Chinese companies are also beginning to feel the decision’s impact. Huawei plans to release a new foldable smartphone known as the Mate X in September; however, it is unclear whether the phone will contain Google’s Android operating system as past Huawei devices have. The product was unveiled prior to Huawei’s placement on the Entity List and before Google announced its suspension of business with Huawei, which may require Huawei to use an open-source version of Android in its devices. Nearly a month after the Trump administration’s Huawei Entity List announcement, the ripple effects for global supply chains continue to emerge.

In Other News

• On Saturday, Vodafone España—in cooperation with Huawei—launched its 5G service across 15 Spanish cities, using telecom gear from Huawei and Ericsson in its network. China Daily wrote that “Huawei is steadily securing votes of confidence from foreign companies despite the United States government’s crackdown.” Xinhua, which likewise heralded the announcement, noted that download speeds on the 5G network “could be 10 times faster than...the 4G network” and that Huawei and Vodafone had enjoyed “close cooperation for more than 10 years.”
• Samsung Electronics has cut production at its only remaining smartphone factory in China. As the South China Morning Post reports, Samsung launched its factory in Huizhou in 1992, and by 2011 it produced and exported 70.14 million phones. Analysts, however, now expect Samsung to close the plant. Samsung has faced sharp competition from Chinese rivals such as Huawei, Xiaomi, Oppo and Vivo, in addition to rising production costs within China. As a result, Samsung has been forced to shift smartphone production to Vietnam and India over the past decade.
• Israeli outlets such as Haaretz and the Times of Israel reported on opposition in the U.S. Senate to Chinese involvement with the Israeli naval port at Haifa. The Shanghai International Port Group is set to operate the Haifa port for 25 years starting in 2021. The passing of the National Defense Authorization Act for Fiscal 2019 came with a Senate warning that the U.S. “has serious security concerns with respect to the leasing arrangements of the Port of Haifa.” An editorial in Israel Hayom concluded that the “Haifa port deal should be scrapped,” arguing that “Israel would profit from its Chinese deal, but not as much as it will lose in good will with a good friend should it not be canceled.”
• A Bloomberg investigative piece examines how the U.S. is “purging Chinese cancer researchers from top institutions.” While cancer research has become an increasingly global enterprise, the Trump administration has pushed to “counter Chinese influence at U.S. research institutions.” The article assesses that although the Trump administration has aimed to “staunch China’s...theft of U.S. innovation and know how,” the “collateral effect” has been “to stymie basic science.” In April, three Chinese faculty members at MD Anderson Cancer Center in Texas were sanctioned after failing to “disclose outside funding, academic appointments, and roles in laboratories outside the U.S.”

Commentary

The Center for Strategic and International Studies’ China Power Project examines whether China has become the global leader in innovation. The Financial Times editorial board warns that, in the long run, the Trump administration’s decision to place Huawei on the Entity List may harm the United States by accelerating China’s push for domestic innovation. For the Council on Foreign Relations, Brad Setser examines whether Huawei’s stockpiling of a months-long supply of semiconductors from foreign companies reduced China’s trade surplus in 2018. Julianne Smith explains why the United States needs to coordinate with European allies in its China strategy, including on 5G network technology.

For the Center for a New American Security, Robert Work and Greg Grant argue that the People’s Liberation Army is following the example of the United States in pursuing technological advances to “offset” its capabilities. In Wired, Nitasha Tiku considers how Google and Facebook have invoked competition with China as a reason to maintain their scale. Finally, for the Peterson Institute of International Economics, Chad P. Bown and Eva Yiwen Zhang discuss whether a trade deal will actually lead to a lifting of the 2018 tariffs imposed by the United States and China or simply restructure them to focus on different sets of goods.

At Lawfare, Bobby Chesney surveys new legislation, the Active Cyber Defense Certainty Act, which would amend the Computer Fraud and Abuse Act to allow private sector actors to “hack back” when attacked, without violating current law. Dan Efrony outlines developments in cyberspace governance over the past three decades. Amy Zeng describes how speeches by U.S. Acting Defense Secretary Patrick Shanahan and Chinese Minister of Defense General Wei Fenghe at the Shangri-La Dialogue highlighted the ongoing U.S.-China rift over militarization of the South China Sea.