February 25, 2021

Asia

US/CHINA: Biden caught between business community and national security hawks

BY Gabriel Wildau

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( 6 mins)
  • The US business community has mobilized in recent weeks to press the Biden administration for a less confrontational approach to China, including easing of tariffs and export controls.
  • The broad principles for balancing economic and national security considerations that the business community advocates appear to be consistent with the administration’s views.
  • But the administration’s ability to shift away from on coercive policies will largely rely on whether it can frame these shifts as consistent with a policy of “strategic competition.”

As US-China relations have worsened in recent years, US corporate executives have become cautious about publicly advocating for engagement or warning about the economic harm from tariffs, export controls, and investment restriction. Companies have instead relied on trade groups to deliver this controversial message. Three recent research reports on the US-China economic and technology relationship advocate for a less confrontational approach that recognizes the significant benefits to the US of economic engagement with China. While the Biden administration probably favors the kind of approach that these reports advocate, the administration’s willingness to decisively shift policy will be constrained by strong anti-China sentiment in both parties and the Republican Party’s calculation that depicting Biden as “soft” on China is a winning political message.

Business pressure

The China Strategy Group, a task force led by prominent technology executives, argues that “some degree of technological bifurcation is in US interests” but criticizes the Trump administration’s approach and warns against “actions that, on balance, are counterproductive and undermine U.S. innovation by severing ties and closing off the United States to the ideas, people, and supply chains necessary to compete effectively.”

A report commissioned by the US-China Business Council directly advocates tariff rollback. Its analysis concludes that “even a moderate rollback in tariffs could increase economic growth and stimulate employment growth” and that “significant decoupling with China would hurt the US economy further and reduce employment.” In November, the head of the Business Roundtable, another US trade group, similarly called on the Biden administration to begin reducing tariffs, though only in the context of bilateral negotiations in which Beijing also offers concessions.

Finally, a report published by the US Chamber of Commerce similarly highlights the heavy economic costs of a maximalist US-China decoupling scenario. A divestment of half of US foreign direct investment stock in China would cause a one-off GDP loss of USD 500bn and USD 25bn annually in lost capital gains to US investors, the report estimates. Among specific sectors of the US economy, aviation, semiconductors, chemicals, and medical devices would be hardest hit by further tariffs and investment decoupling. The report concludes that “the costs of anything approaching ‘full’ decoupling are uncomfortably high” and that “alternative approaches – including mitigation and in many cases forbearance – would complement any decoupling scenario.”

US President Joe Biden has not yet committed to specific policy changes – indeed, Biden has said he will not roll back tariffs in the short term. Still, general statements by Biden and his advisors suggest that they broadly support the balanced approach that the business community advocates. In a 2019 essay, current National Security Advisor Jake Sullivan and his deputy for Asia policy, Kurt Campbell, warned of a “drift toward competition for competition’s sake and … a dangerous cycle of confrontation” and called for a “balance between cooperation and competition.”

Political constraints

Though the Biden administration’s broad principles for China policy are relatively clear, there is significant uncertainty about how the administration will translate principle in policy and how political dynamics in Washington may influence that process. Republican politicians have signaled that they view “soft on China” as a potent weapon against the new administration. Biden’s nominee for commerce secretary, Gina Raimondo, faced harsh criticism in her confirmation hearing for refusing to guarantee that she would maintain export controls on Huawei. In follow-up remarks, she toughened her rhetoric, saying she sees “no reason” to lift sanctions on the company.

While Democratic politicians will be less inclined to criticize the administration, they will also face pressure to project toughness, as economic and military competition with China remains one of the few bipartisan areas of agreement on Capitol Hill. Senate Majority Leader Chuck Schumer, a Democrat, announced this week that he has directed committees to develop a bipartisan bill to invest in high-tech research and manufacturing.

The administration’s announcement of several China-related policy reviews appears to be an attempt to insulate itself from potential criticism by hardliners. The National Security Council is conducting a broad review of China policy with a focus on technology issues. The White House also said it is reviewing the phase-one trade deal, while the Pentagon is also leading its own China policy review. Biden also issued an executive order on 24 February calling for a broad review of “critical supply chains,” with a focus on semiconductors, high-capacity batteries, medical supplies, and rare earth metals. The results of that review will likely build on Biden’s executive order strengthening “Buy American” requirements for government procurement.

These reviews may offer the Biden administration a degree of political cover to reverse at least some of the hardline policies that the Trump administration enacted in its final months. For example, in the context of a broad review, the administration could apply new sanctions to some Chinese companies while removing others from various blacklists, thereby insulating Biden from the “soft on China” accusation. The supply-chain review will likely be a prelude to new policies designed to boost domestic US production of critical items. These policies could also serve as political cover for easing some coercive policies against China by allowing the administration to argue that US national security is better served by boosting US competitiveness than by seeking to cripple China.

Balancing policy and politics

Ultimately, Biden’s policy towards China may turn into a contest between policy principle and political expediency. The Biden administration includes some hawkish voices that genuinely support maintaining most elements of Trump’s confrontational approach, but the main obstacle to course correction may be pressure from congress and the media. The administration’s ability to shift away from reliance on coercive policies will largely depend on whether it can successfully frame these shifts as consistent with a broader strategy of “strategic competition.”

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