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July 28, 2020

Asia

US/CHINA: US election politics elevate bilateral risks in the coming months

BY Gabriel Wildau

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  • US presidential campaign politics are exerting an increasing influence on US policy towards China, creating elevated risks through January 2021.
  • The Trump administration may seek to accelerate enactment of tough new policies against China in case US President Donald Trump loses the election.
  • Beijing wants to avoid further deterioration of the bilateral relationship but will respond tit for tat to US actions to avoid the appearance of weakness.

A series of recent US actions against China appears to be influenced by China’s role as a prominent issue in the US presidential election. Moreover, with polls showing Trump trailing presumptive Democratic nominee Joe Biden by a wide margin, Trump administration officials may seek to maximize what could be their last window of opportunity to enact tough new policies against China. This note lists actions that the Trump administration may take before the next presidential inauguration in January 2021 and discusses the Chinese government’s likely response.

Possible US actions

Pending or under serious consideration

  • Sanctions on Chinese officials over Hong Kong. Trump signed the Hong Kong Autonomy Act (HKAA) and issued an accompanying executive order on 14 July. The law empowers Trump to sanction Chinese officials whom Washington deems responsible for alleged repression in Hong Kong. Sanctions are likely to include US visa bans and asset seizures. Though some sanctions may already be in effect, the administration has not announced any names publicly. Such an announcement could occur in the coming days or weeks.
  • Sanctions on companies linked to alleged Hong Kong repression. The HKAA also empowers the president to sanction companies. The US Commerce Department’s entity list provides an additional tool, which the administration has already used against both Huawei and a broader group of companies deemed complicit in alleged abuses in Xinjiang. Chinese companies that provide riot control equipment or surveillance technology to Hong Kong police and/or Chinese intelligence are possible targets of US sanctions.
  • Secondary sanctions on Chinese financial institutions. The HKAA enables the administration to impose sanctions on financial institutions that provide service to sanctioned individuals and companies. The timeline is flexible, but financial sanctions could come as early as 30 days after the date that individuals and/or companies are sanctioned.
  • Hong Kong trade, investment, and travel barriers. Trump’s executive order instructed federal government agencies to eliminate distinctions between Hong Kong and mainland China across a range of policy areas, including customs, investment into the US, and visa requirements. Specific policy changes to achieve equalization in these areas are still pending and could be announced in the coming weeks.
  • De-listing Chinese companies. The White House instructed a task force of financial regulators to submit recommendations by 3 August on how to deal with US-listed foreign companies that fail to abide by US audit requirements. These recommendations are likely to lead to the eventual de-listing of around 200 Chinese companies traded on the New York Stock Exchange or Nasdaq. Some companies may avoid actual de-listings for up to three years, but the de-listing process may begin in the coming weeks.

Less likely but possible

  • Ban on Communist Party members entering the US. The Trump administration is considering banning party members and their families from entering the US. The party has 92mn members, and a ban that includes family members could affect hundreds of millions. The proposal has provoked significant pushback, and enforcement would be challenging. Such a ban appears unlikely but cannot be ruled out.
  • Ban on Chinese apps WeChat and/or TikTok. Both the administration and congress are considering full or partial bans on popular Chinese social media apps WeChat and TikTok. The House of Representatives has already voted to ban TikTok on federal government-issued devices. The legal mechanism for imposing a ban on all US users remains unclear, and such a ban would likely face court challenge.
  • New US arms sales to Taiwan. The Trump administration approved a sale of arms to Taiwan in May, prompting Beijing to announce sanctions on Lockheed Martin in July. The administration could announce further sales in the coming months.
  • Abandoning the phase one trade deal. Trade was the main source of US-China tension in 2018-19, but this dynamic has since shifted. Trade now appears to be serving as a rare anchor for a bilateral relationship that is deteriorating on most other fronts. Both sides are motivated to preserve the trade deal: Trump wants to portray the deal as a success of his first term, while China wants to avoid additional tariffs. Nevertheless, if the bilateral relationship deteriorates further, campaign politics could push Trump to abandon the deal.

China’s response

Beijing would likely respond tit for tat to US actions, while also seeking to avoid escalation. Even as China’s foreign policy has grown more aggressive in recent months, Beijing has largely avoided direct provocations of the US. On the other hand, Chinese leaders feel pressure to respond to US actions to avoid appearing weak – both to the world and to potential nationalist critics at home. China’s Commerce Ministry has not yet followed through on its threat to activate its “unreliable entities” list but could do so in the coming months.

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