Chinese tech in Washington’s cross hairs

On May 29, the Trump Administration announced that the United States (US) will: (i) “impose a 25 percent tariff on $50 billion of goods imported from China containing industrially significant technology, including those related to the ‘Made in China 2025′ program,” and (ii) “implement specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology.”

Meanwhile, both the House and Senate versions of the National Defense Authorization Act for Fiscal Year 2019 (NDAA), Congress’ over $700 billion annual defense policy bill, include provisions targeting Chinese technology companies.

$50 billion in tariffs on Chinese technology sector /  Investment restrictions and enhanced export controls targeting Chinese acquisition of US technology

The White House’s announcement of these measures to “defend America’s intellectual property and proprietary technology from theft and other threats” comes less than a week before a US delegation led by Secretary of Commerce Wilbur Ross is scheduled to return to China for another round of trade talks from June 2-4.  The final list of covered Chinese imports containing advanced technologies that will be subject to the tariffs will be announced by June 15, and the list of investment restrictions and enhanced export controls will be announced by June 30.  However, there is no guarantee that the US will implement these measures.  Today’s announcement may be viewed as an attempt to create negotiating leverage in advance of the upcoming US-China trade talks.  It may also be a response to bipartisan pressure from Capitol Hill arising from President Trump’s announcement on May 25 about a deal that would lift severe sanctions imposed on Chinese telecom company ZTE in exchange for a $1.3 billion fine, oversight by American compliance officers, and the replacement of certain members of ZTE’s executive/management team.

Of course, President Trump has established a consistent track record of following through on proposed trade and related actions.  Therefore, companies that would be impacted by the imposition of the 25 percent tariffs on $50 billion worth of Chinese goods containing advanced technologies, and the imposition of new investment restrictions and enhanced export controls related to the acquisition of US technology, should monitor all forthcoming developments related to today’s announcement closely and prepare for the Administration’s corresponding follow-up announcements on or before June 15 and June 30, respectively.

House and Senate versions of NDAA include provisions prohibiting US Government procurement of certain Chinese technologies

Capitol Hill has become an increasingly hostile environment for Chinese technology companies.  The wave of opposition in Congress against Chinese technology companies is not limited to members of one party or a select few in both parties.  Widespread, bipartisan concern exists about the real and potential threats to US national security resulting from the use by federal employees and appointees, and in particular — military and intelligence community personnel — of Chinese technology / devices.

The US House of Representatives passed its version of the NDAA by a vote of 351-66 on May 24.  The Senate’s version of the annual defense policy bill was approved by the Senate Armed Services Committee (SASC) on May 23 and could be considered on the Senate floor as early as during the week of June 4.  The House-passed version of the NDAA “directs a whole-of-government strategy to confront the People’s Republic of China” and prohibits all US Government agencies from acquiring or using technology developed by Huawei or ZTE.  The House bill also includes a provision that would prohibit federal agencies from acquiring or using certain Chinese-made surveillance equipment.

Although the SASC-approved version of the NDAA that is on its way to the Senate floor has not been released by the Committee, it contains provisions that adhere to a core tenet of the US Department of Defense’s (DOD’s) National Defense Strategy, which classifies China as a “revisionist power” and “strategic competitor” that “seek[s] to shape the world toward [its] authoritarian model through destabilizing activities that threaten the security of the United States and its allies.”  The current Senate version of the NDAA contains a provision that would prohibit DOD from acquiring or using technology developed by Huawei or ZTE (as compared to the House version of the bill that prohibits all US Government agencies from such acquisition or use).  The Senate bill also includes a provision that would require all companies doing business with DOD to disclose whether they allow foreign government access to sensitive company information, including their software source code.  This provision is said to be a direct response to Russian and Chinese government contracting processes that at times require companies pursuing government business to submit to source code reviews.  Additionally, Committee on Foreign Investment in the United States (CFIUS) reform legislation — the Foreign Investment Risk Review Modernization Act (FIRRMA or S. 2098) — which would impose heightened restrictions on Chinese investment in the US, is included in the Senate version of the NDAA.  An effort to add FIRRMA to the House NDAA via amendment failed.  The unsuccessful action in the House and successful action in the Senate are a direct acknowledgment of Secretary of Defense Jim Mattis’ requests in separate letters on May 4 to House Armed Services Committee (HASC) and SASC leadership to include FIRRMA in this year’s NDAA.

Once the Senate has passed its version of the bill, the NDAA will be conferenced, during which time HASC and SASC staff will work to resolve the minor disparities between the two versions of the bill, HASC and SASC members and staff will resolve some of the more challenging disparities, and the Big Four (the Chairmen and Ranking Members of the two committees) will resolve the most contentious disparities.

Congress has passed the NDAA for 57 straight years.  It is one of but a few remaining must-pass annual bills on Capitol Hill.  Companies that could be impacted by these provisions in the two versions of the NDAA moving through Congress should monitor the NDAA consideration process closely in anticipation of the bill’s enactment later this year.

Branstad, ‘old friend’ to China, Trump’s pick for Beijing

President-elect Donald Trump has offered Terry Branstad the ambassadorship to China after huddling with the long-serving Iowa governor Tuesday in New York.

At an event shortly after the news was first reported by Bloomberg Wednesday morning, Mr. Trump said Branstad was well-versed in US-China relations and trade, telling reporters that the governor “knows them all.” China’s foreign ministry, too, responded warmly to the selection.

“First of all, I would like to say that Mr. Branstad is an old friend of the Chinese people and we welcome him to play a greater role in promoting Sino-U.S. relations,” ministry spokesman Lu Kang said at a daily news briefing.

The announcement comes only days after the president-elect reportedly angered Beijing by speaking with Taiwain’s president, Tsai Ing-wen, a break of nearly four decades of US diplomatic protocol.

The call between Mr. Trump and Ms. Tsai was the first known contact between a president or president-elect with a leader of the island since at least 1979, when the U.S. government severed diplomatic relations with Taiwan, which mainland China considers a rebellious province.

The White House responded by saying there was no break in “long-standing cross-Straits” protocol and it remained “firmly committed to our One China policy.”

While the U.S. continues to formally recognize the One China policy (read five disparate interpretations of the policy here), in which the federal government recognizes Taiwan as part of China under the Taiwan Relations Act, it practices a delicate de facto “Two China” policy: Taiwan is the United States’ ninth-largest trading partner, including the sale of military arms.

Trump, Xi talk as Chinese media threatens trade war

Chinese President Xi Jinping spoke by telephone Sunday with Donald Trump, according to a statement issued by the president-elect's transition team.

Aides to the president-elect said he “believes the two leaders will have one of the strongest relationships for both countries moving forward,” while Mr. Xi was quoted in Chinese media as saying there was “huge potential” in cooperation between the two nations.

But the conversation, in which the two “established a clear sense of mutual respect for one another,” according to the statement, came as a state-run newspaper in China warned President-elect Trump against punitive trade measures.

Despite the outwardly friendly tone from Trump and Xi, the media organ of the Community Party of China condemned the president-elect as “naïve” for his pledge to levy a 45% tariff on Chinese imports to the United States, warning it would result in a retaliatory squeeze on American exports of automobiles, agriculture, and smartphones.

“China will take a tit-for-tat approach,” an unsigned editorial in the Global Times reads. “A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.”

The two nations traded some $650 billion in goods last year, registering the Chinese trading relationship as America's second-most profitable.

Trump described the trade deficit between China and the United States as “the greatest theft in the history of the world” and has pledged to officially label the country a currency manipulator on this first day in office. In the days since his historic victory last week, though, the president-elect has adopted a more conciliatory tone with China.

Soapbox will continue to monitor transition developments, including key staffing and agency appointments, foreign relations, and policy objectives.