- The US-China relationship faces downside risk over the next two months, given that the Trump administration will not have to manage the consequences of any new coercive policies.
- Possible last-minute actions include new tariffs, export controls, financial and non-financial sanctions, immigration restrictions, and high-profile prosecutions.
- The Biden administration will face challenges in reversing any new hardline policies, given strong anti-China sentiment in Washington and US public opinion.
Signs are increasing that the Trump administration plans to use the two months before President-Elect Joe Biden’s inauguration to enact more hardline policies against China. Several overlapping factors may motivate such a last-minute push. First, US President Donald Trump may blame his election loss on China’s alleged role in allowing the coronavirus to spread. Second, administration hardliners are concerned that President-Elect Joe Biden will seek rapprochement with Beijing and may seek to enact coercive policies that Biden would be reluctant to reverse. Third, the outgoing Trump administration will not have to deal with any messy consequences that result from last-minute policy changes. Following is a list of potential actions against China that the Trump administration could take in the coming weeks:
- Withdrawal from phase 1 trade deal. China is far behind on its commitments to purchase USD 77bn in additional US exports in 2020 against the 2017 baseline. The pandemic offers a plausible excuse for China’s failure, but the fact that China’s economy has recovered strongly and that Chinese exports are surging – boosting China’s trade surplus – weakens this justification. Abandoning the trade deal would likely be accompanied by a re-imposition of tariffs that were rolled back as part of the agreement, but since the degree of tariff rollback in the deal was modest, simply re-imposing them would have only a modest impact. But the Trump administration could also move to enact tariffs that were threatened but never imposed on USD 180bn in consumer goods.
- Sanctions on financial institutions. The Hong Kong Autonomy Act requires the US Treasury to issue a report to congress before 13 December identifying any financial institutions that are engaged in “significant transactions” with Hong Kong and mainland officials that have already been sanctioned under the act. One possibility is that the administration could make a symbolic statement by sanctioning a small Chinese bank with minimal foreign operations. But if the administration targeted a large Chinese bank, the impact on trade and investment – and on sentiment in financial markets – would be significant. Sanctions on one of the “Big 4” state-owned commercial banks (Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China) would be the most impactful, but even sanctions on a mid-sized commercial bank or securities company would be significant.
- Sanctions on non-financial companies. Other sanctions could target companies allegedly complicit in repression in Hong Kong, Xinjiang, or Tibet. These could range from import bans on Xinjiang cotton and tomatoes to use of export controls such as the entity list to target companies that supply riot control and surveillance equipment to Hong Kong police. The administration is also reportedly considering action against alleged forced labor in China’s commercial fishing industry. The administration could also target the US operations of Chinese technology and fintech companies such as Tencent and Ant Group, following the pattern set by the attempted bans of TikTok and WeChat. The fact that those bans are facing significant legal challenges would not necessarily be a deterrent.
- Restrictions on portfolio investment. Trump’s executive order on 12 November banned US investment in the publicly-traded securities of 31 Chinese companies that allegedly support China’s military. The administration is reportedly planning to expand this investment ban to include additional companies.
- De-listing Chinese companies from US exchanges. An interagency task force of US financial regulators issued recommendations in August for dealing with the longstanding issue of Chinese companies that do not abide by US auditing and disclosure requirements. The Securities and Exchange Commission is now reportedly expediting the drafting of regulations to implement those recommendations, though the public comment process would likely stretch into the Biden administration, enabling Biden’s SEC to delay or alter the final rule if desired.
- ICT import restrictions. Trump’s May 2019 executive order declaring a national emergency in the US information and communications technology (ICT) supply chain granted the Commerce Department sweeping, CFIUS-like powers to veto procurement of foreign equipment by private US technology companies. Commerce issued a draft rule in November 2019, for which the public comment period ended in January. The agency could issue a final rule in the coming weeks.
- New immigration restrictions. The Trump administration has already tightened visa approvals for Chinese students and researchers from STEM fields and revoked visas for around 1,000 students with alleged links to China’s military. In the coming weeks, the administration could go further by imposing a ban on entry to the US by all Chinese Communist Party members, a move that was reportedly under consideration earlier this year. Though such a ban would be complex and difficult to enforce, the Trump administration may appreciate the symbolism and spare little concern about implementation.
- High-profile criminal prosecutions. The US Justice Department’s “China Initiative” has led to the prosecution of dozens of Chinese nationals on charges including visa fraud, IP theft, hacking, smuggling, and espionage. Some prosecutions target individuals living in China who are unlikely ever to appear in a US court. Following this pattern, the Trump administration could indict a high-profile Communist Party official or business executive.
Though the Biden administration would likely not favor many of these aggressive actions, Biden could find them politically difficult to reverse, given concerns that he would be criticized as “soft” on China. Biden himself has also been critical of Chinese trade and manufacturing policies office, and his campaign enjoyed strong support from organize labor. If Trump administration actions forced China to retaliate, the resulting damage to bilateral relations could be difficult for Biden to repair, effectively locking Biden into a highly confrontational stance. Beijing has so far shown notable restraint in retaliating against coercive US actions, but indictment of a senior official would test Beijing’s forbearance.