Cybersecurity & Tech Foreign Relations & International Law

SinoTech: Whiplash in U.S.-China Tech Trade Relations, with More Conflict on Horizon

Wenqing Zhao, David Stanton
Wednesday, May 30, 2018, 2:24 PM

The U.S.-China trade conflict appeared to reach a temporary détente last week after the Trump administration agreed to resuscitate Chinese telecom giant ZTE in exchange for a package of concessions by the Chinese government.

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The U.S.-China trade conflict appeared to reach a temporary détente last week after the Trump administration agreed to resuscitate Chinese telecom giant ZTE in exchange for a package of concessions by the Chinese government. The truce followed three days of negotiations in Washington between Liu He, China’s top economic official, and an American trade delegation led by Treasury Secretary Steve Mnuchin. But the terms of the deal have earned suspicion in Congress, and the decision to put the U.S.-China trade war “on hold” is proving to be short-lived; the Trump administration announced in a statement on Tuesday that it would move ahead with tariffs against $50 billion in Chinese tech imports, heightened investment restrictions for Chinese buyers, and WTO action. State Department officials also indicated earlier this week that the Department would restrict visa access length for Chinese students studying cutting-edge technology. These latest announcements complicate the U.S. trade delegation’s expected trip to Beijing early next week.

Under the apparent terms of the truce, the Trump administration had agreed to lift the crippling denial order the Commerce Department issued against ZTE last month for violating the terms of a settlement agreement that included penalties for past violations of U.S. sanctions against Iran and North Korea. The denial order would have prohibited ZTE from purchasing U.S. hardware or software for a period of seven years—effectively a “death sentence” given ZTE’s reliance on American semiconductors. Instead, ZTE reportedly will now pay a significant monetary penalty, remove key executives, and hire U.S. officers to oversee compliance. According to comments from President Trump last week, ZTE may also be forced to purchase more American-made parts. The Chinese government, meanwhile, pledged to import more American products to reduce the trade deficit; dropped an inquest into U.S. sorghum export practices; reduced tariffs on foreign auto imports; provided regulatory sign-off on the acquisition of a significant share of Toshiba’s microchip department by a consortium led by Bain Capital; signaled that it may approve the purchase of Dutch chipmaker NXP by U.S. industry leader Qualcomm; and reportedly indicated a willingness to cancel prospective tariffs on American agricultural imports.

The outlines of the deal—at least as it stood following Liu He’s visit to the U.S. and prior to the White House’s Tuesday tariff announcement—suggest the Trump administration may be negotiating for short-term concessions over long-term adjustments. Trump’s rhetoric on the campaign trail and afterwards has emphasized cutting the $375 billion trade deficit with China; that focus is reportedly shared by Secretary Mnuchin and Secretary of Commerce Wilbur Ross, who would be happy to reduce the deficit and thereby head off the worst effects of a trade war. But hard-line advisor Peter Navarro and Trade Representative Robert Lighthizer have argued that more structural changes are needed to protect American companies and their intellectual property. That division, which reportedly escalated into a shouting match during the trade delegation’s visit to Beijing, appears to have already damaged the American delegation’s ability to effectively negotiate.

A détente of the character outlined above is unlikely to solve the structural issues identified by Lighthizer, Navarro, and critics outside of the administration, as it largely sets the two parties back to their positions from early last month. The Commerce Department announced its denial order against ZTE on April 16, although the original investigation that resulted in earlier sanctions stretches back much further. China’s sorghum tariffs were announced one day later, and its agricultural tariffs were outlined (CN) two weeks before, in early April. China had also been considering lowering automobile tariffs since last month, after relaxing restrictions on foreign ownership in mid-April. The approval of Bain and Qualcomm’s purchases reportedly had been delayed to add another tool to China’s box of trade threats.

The Trump administration’s promise to impose new restrictions on trade with China threatens to undo this recent denouement. A statement from China’s Ministry of Commerce expressed concern that the administration’s actions were “contrary to the consensus that China and the U.S. reached not long ago in Washington”; fallout is likely to spread over the upcoming week.

Trump’s Trade Moves Face Backlash in Congress, as CFIUS Bill Moves Forward

President Trump’s moves to grant a lifeline to ZTE and explore easing of export controls on U.S. technologies proved controversial on Capitol Hill, where representatives from both parties criticized the administration for failing to put U.S. national security before a short-term trade deal. On May 22, a bipartisan group of 27 senators, including Majority Whip John Cornyn, Sen. Marco Rubio, and Minority Leader Chuck Schumer, sent an open letter urging the American trade delegation to maintain sanctions against ZTE and contest the Chinese government’s to loosen the American technology transfer regime. In more partisan action, over 60 Democratic legislators called for an investigation into President Trump’s relationship with China and his clemency toward ZTE in light of reports that a Chinese state-owned enterprise had provided funding for a theme park adjacent to one of Trump’s properties.

Both the House and Senate have moved to signal that ZTE will not get off so easily. On March 24, the House passed by 351-66 vote the National Defense Authorization Act of 2019, section 880 of which would prohibit federal agencies from purchasing from ZTE, fellow Chinese telecom giant Huawei, or companies that source parts from ZTE or Huawei. That section, which would not go into effect until 2021, incorporates a stand-alone bill brought before the House and Senate earlier this year.

The Authorization Act will now head to the Senate, which is also considering the Foreign Investment Risk Review Modernization Act of 2018, a bill that would reform the process for national security review of foreign investment in the United States. On May 22, the Senate Banking Committee voted overwhelmingly to approve an amendment to that bill (now section 27) that would prohibit the Trump administration from lifting sanctions on ZTE unless it can vouch that ZTE is currently cooperating with U.S. officials and has been compliance with U.S. law for at least one year. The Senate had earlier abandoned a provision that would have established review of outbound investment to China. The updated bill will now go to the full Senate; the House’s version of the bill passed through the House Financial Services Committee last week.

China Holds Tech Expo, and Xi Doubles Down on “Indigenous Innovation”

China held several tech conventions and expos in the past two weeks, showcasing China’s newest advances in various technological sectors and re-emphasizing the perceived importance of China’s technological development. On May 17, the annual four-day China Beijing International High-Tech Expo opened in Beijing, showcasing products like a two-wheel electric car. Representatives from the Ministry of Science and Technology and the Deputy Mayor of Beijing hosted (CN) a symposium at the expo, where they reiterated the importance of technological development, urged greater opening-up to integrate China into the network of global innovation, and pledged to strengthen international technological collaborations on raw materials, environment, finance, and national security. On May 25, the three-day World Manufacturing Convention kicked off (EN/CN) in Hefei, Anhui Province, highlighting China’s smart manufacturing capabilities to representatives from more than 70 governments and global organizations. Local authorities said (EN/CN) that 436 deals were signed during the convention, with a total investment volume of 447 billion yuan ($70 billion) in new energy, biomedicine, AI chips, and other developing technologies. China also pushed its big data development through the International Big Data Industry Expo (EN/CN) in Guiyang, Guizhou Province. President Xi sent (EN/CN) a congratulatory letter to the expo highlighting the importance of global communication and cooperation in promoting the healthy growth of the big data industry and protecting data security. He also emphasized big data development as a national strategy to make China a cyber superpower.

President Xi took a more direct stance against American trade restrictions at the annual conference of the Chinese Academy of Sciences and Chinese Academy of Engineering, where he gave the opening speech (CN). China, Xi said, must become a global leader in science and technology. Although the speech was light on specifics, it appeared to indicate Xi’s recommitment to the “Made in China 2025” program that has earned the ire of American officials, and suggests that China will remain resolute against attempts to restructure its core policies for technological development.

In Other News

  • China continues its AI push, as the city of Tianjin announced (EN/ CN) plans to set up a 100 billion yuan ($15.7 billion) fund to support the local artificial intelligence industry, especially in the development of smart sensors, AI hardware, and virtual and augmented reality software. An additional 10 billion yuan ($1.57) has been set aside to support intelligent manufacturing. Tianjin’s plan is just one of many provincial and municipal plans developed to spur the national AI industry.
  • ZTE’s apparent dependence on American components has reinforced the Chinese government’s commitment to gaining independence in semiconductor production. According to China Daily, governments and companies are expected to construct at least 46 major semiconductor installations in the next two to three years. Domestic processors will also be included in China’s new annual government procurement plans (EN/CN). In the private sector, Pony Ma, CEO of Tencent Holdings, also expressed interest in investing in China’s domestic chip industry, warning that the ZTE ban was a “wake-up call.”
  • A report published by the the Australian Strategic Policy Institute indicates that the Chinese government has censored the communications of foreign embassies on popular microblogging site Weibo. The U.S. embassy had the highest number of censored posts, followed by France and Cuba.
  • China has invited scientists from all U.N. nations to carry out research in the China Space Station, its newest planned orbital. The China Space Station, which could be operational by 2022, will replace the Tiangong-1, which crashed into the Pacific Ocean earlier this year. China was reportedly barred by the U.S. from joining the International Space Station at its launch.
  • Apple began construction on its new data center in China’s Guizhou province last week. The center, prompted by requirements under China’s 2017 Cybersecurity Law to store Chinese user data domestically in China, will be built by Apple and Guizhou Cloud Big data, to whom Apple had transferred the hosting of Chinese users’ iCloud accounts back in February.

Commentary & Analysis

Elsewhere on Lawfare, Samm Sacks argues that the concessions made by the Chinese government are insufficient to address the structural policies harming America’s tech industry. Nicholas Weaver analyzes the Trump administration’s decision to relieve sanctions on ZTE. Matthew Kahn has posted DHS’s Cybersecurity Strategy and the remarks of NSA General Counsel Glenn Gerstell at the Georgetown Cybersecurity Law Institute. This week’s Cyberlaw Podcast kicks off with a brief discussion of Trump’s rapid switch on ZTE. For more podcast analysis of the ongoing trade issues, check out last week’s Sinica Podcast or The Trade Guys.

At the Center for Strategic and International Studies, Christopher K. Johnson has published a report placing the recent trade tensions in the broader context of U.S.-China relations, and Jane Nakano and Andrew Stanley offer insight into how energy trade may affect the U.S.-China trade deficit. At War on the Rocks, Ian Brown imagines how China might use data from the 2015 OPM hack to sow distrust in the United States. At the Council on Foreign Relations, Edward Alden takes a pessimistic view of Trump’s ZTE agreement. At The Diplomat, Grzegorz Stec summarizes the risks posed by Chinese tech firms’ expansion abroad, and Anthony Fensom accurately predicts that the “US-China Trade Ceasefire Won’t Last.” Graham Webster of the Paul Tsai China Center and New America provides a blow-by-blow summary and analysis of the past two week’s chaotic events in his Transpacifica newsletter.

At Politico, Megan Cassella provides a longer-term summary of the escalating trade tensions, and Corey Bennett and Bryan Bender examine CFIUS’s inability to police Chinese acquisition of U.S. critical industries. Stu Woo of the Wall Street Journal provides a brief introduction to the cybersecurity threat posed by ZTE and its compatriots. At Bloomberg, Peter Coy et al. discuss the long-term ramifications of the ongoing trade restrictions. At the Washington Post, Catherine Rampell discusses infighting within the Trump administration on negotiations with China.

Wenqing Zhao is a first-year student at Yale Law School and a student fellow of the Paul Tsai China Center. She was born in China and holds a bachelor's degree in Physics and Philosophy from the College of William and Mary.
David Stanton is a second-year student at Yale Law School and a student fellow of the Paul Tsai China Center. Before law school, he worked as a Peace Corps volunteer in Guizhou, China. He holds a bachelor's degree in Economics and Psychology from the University of Pennsylvania.

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