US-China Sanctions Raise Questions for Trade Policy

New bans on investment in Chinese companies come on the heels of renewed trade and economic talks.
An analysis by Michael Lelyveld
2021-06-11
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US-China Sanctions Raise Questions for Trade Policy Chinese Vice Premier Liu He attends the closing session of the Chinese People's Political Consultative Conference (CPPCC) at the Great Hall of the People in Beijing, China May 27, 2020.
Reuters

The complexities of U.S.-China relations have been on full display in the past month with a succession of trade talks and sanctions that may leave progress in doubt.

The recent series of events began with separate video meetings between U.S. Trade Representative Katherine Tai and Treasury Secretary Janet Yellen with Chinese Vice-Premier Liu He on May 27 and June 2.

Those contacts left Chinese negotiators with a positive view of developments. Bilateral economic talks were "back on track," the official English-language China Daily reported.

"Both sides believed that the exchanges were professional, candid and constructive, and that the two countries' economic and trade communications have returned to normal," the paper quoted Ministry of Commerce spokesman Gao Feng as saying.

But China's optimism dimmed on June 3 when U.S. President Joseph R. Biden Jr. issued an executive order barring investment in securities of 59 Chinese companies and organizations linked to Beijing's military, intelligence and surveillance activities.

The expansion of sanctions originally aimed at 31 Chinese entities last November by former President Donald J. Trump was needed to counter the unusual and extraordinary threats to human rights posed by Chinese surveillance technologies, the Biden order said.

Coming just one day after the Yelen-Liu video meeting, the new sanctions also appeared to challenge the progress in relations that the trade and economic contacts had achieved.

The updated sanctions of the new executive order prompted a "strong condemnation" from China's Foreign Ministry as spokesman Wang Wenbin charged Washington with "abusing national power."

"China will take necessary measures to resolutely safeguard the legitimate rights and interests of Chinese enterprises," Wang said, according to the official Xinhua news agency.

The U.S. move spurred legislative action in China to defend the targeted enterprises ranging from telecom companies like Huawei and China Mobile to facial recognition developers like Hikvision and electronic giants like Semiconductor Manufacturing International Corp. (SMIC).

Legal defense

On June 7, a draft law raising defenses against foreign sanctions was advanced by the Standing Committee of the National People's Congress (NPC) for a second reading, state media reported.

"People from all walks of life suggested that it is necessary for China to formulate a specific law on countering foreign sanctions, to provide legal support and guarantee for the country to counter discriminatory measures," Xinhua said.

On Thursday, the NPC moved quickly to vote the anti- sanctions measure into law without a third reading.

While details were sketchy, the new law would provide a legal basis for retaliating against sanctions on China and could impose penalties for complying with foreign curbs, the South China Morning Post said.

Under the law, Chinese parties could sue in Chinese courts for damages caused by foreign sanctions, The Wall Street Journal reported.

Individuals or entities that fail to comply with Chinese anti-sanctions measures would be subject to "unspecified legal repercussions," the paper said.

The U.S. bans could have far-reaching impacts on Chinese enterprises and the value of their offerings.

The sanctions prohibit any U.S. person "from engaging in the purchase or sale of any publicly traded securities" of the listed companies or those with "investment exposure" to such securities. Those holding such investments have one year to divest.

The new list of sanctioned companies largely mirrors the roster of targeted enterprises from the Trump administration including about a dozen entities added by the Pentagon in December and January.

The major changes include a focus on companies not only with ties to the military but also those that contribute to surveillance of religious or ethnic minorities, as in Xinjiang, an analysis by the Ropes & Gray law firm said.

Another major change is a shift of control over the list of additional targets from the Pentagon to the Treasury Department's Office of Foreign Assets Control (OFAC), the government's watchdog for financial sanctions, suggesting tougher enforcement ahead.

But the timing of the Yelen-Liu meeting with the announcement of the Treasury-supervised sanctions one day later may raise questions about the state of U.S.-China relations and the conflicting policy signals that both sides have sent.

A U.S. government official contacted by RFA cautioned against drawing conclusions from the sequence of events.

"The two events were not related. The executive order was part of a regular interagency policy process," said the official.

William Reinsch, a former Commerce Department undersecretary in the Clinton administration, also sees it as likely that the sanctions and the trade contacts advanced on separate tracks.

"My experience in the government suggested that things tend to happen when they are ready, and there is not always a lot of consultation or coordination between different agencies on timing," said Reinsch, who now holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington.

Echoes of the past

But the mixed signals on talks and sanctions are reminiscent of previous episodes in the bilateral relationship this year.

Within hours of Biden's inauguration in January, China's Ministry of Foreign Affairs slapped visa and financial sanctions on 28 former officials of the outgoing Trump administration, charging them with interfering in the country's "internal affairs."

The next day, the ministry called for improved bilateral ties.

"With cooperation from both sides, the better angels in China-U.S. relations will beat the evil forces," a ministry spokeswoman said.

The pattern was repeated nearly two months later at the high-level meeting in Alaska with Secretary of State Antony Blinken, National Security Adviser Jake Sullivan, State Council Yang Jiechi and Foreign Minister Wang Yi in March.

The day before, Blinken announced sanctions against 24 Chinese officials, citing their efforts to "unilaterally undermine Hong Kong's electoral system" with legislation to exclude candidates not approved by Beijing.

In that case, the sequence of events leading up to the meeting appeared to leave little room for ambiguity about the state of relations.

"In diplomatic terms, the timing of the action was pointed and clearly intentional, continuing a testy start to relations between the Biden administration and China after a tumultuous four years under President Donald J. Trump," The New York Times said.

On Tuesday, yet another sign of frictions raised tensions between Washington and Beijing as the U.S. Senate voted 68-32 to approve funding of nearly U.S. $250 billion (1.6 trillion yuan) for technology and research to compete with China in fields including semiconductors, telecommunications and lithium battery development.

In a statement, President Biden praised the Senate passage of the bipartisan legislation.

"We are in a competition to win the 21st century, and the starting gun has gone off," Biden said. "As other countries continue to invest in their own research and development, we cannot risk falling behind."

In a Xinhua commentary, China blasted the bill, charging that it was driven by "ideological prejudice towards China's development."

The bill's sponsors were "steering their country onto a wrong and dangerous path, which will only harm the United States and the world at large," the commentary warned.

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