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Tariffs and Trade Wars
This week in The Red Report
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Image: "Canola Bloom" by Tinker & Rove is licensed under CC BY 2.0.
From Zhongnanhai: This week in Chinese Politics
“Two Sessions”; One message
Recent political announcements point to a prioritization of domestic economic growth spurred by government spending and tech innovation. Foreign companies will be welcomed as long as they contribute to these targets, but will likely be discarded once domestic alternatives emerge.
Analysis
While Trump’s tariffs and threats of a trade war are a point of discussion in China, recent political moves in Beijing hint that CCP leaders are more concerned with pressing domestic issues. As China’s recent annual “Two Sessions” (两会) of its legislative National People’s Congress (NPC) and Chinese People's Political Consultative Conference (CPPCC) highlighted, China’s leaders are focusing now on how to insulate China from external economic shocks–and how to respond to them–and to boost domestic consumption. The NPC is a highly choreographed act of theater that yields few or no surprises. Its function is to stress the party’s policy priorities. NPC delegates, for example, agreed with party leaders to continue conservative stimulus measures, increase spending on select national projects, and boost tech innovation (particularly in LLMs), all of which are consistent with the party’s recent messaging.
Economic growth remained the primary focus of the NPC. Much of the discussion addressed how to strengthen China’s internal market and boost domestic innovation. Economic concerns around lagging consumption, a stagnant housing market, and losing China’s tech advantage all point to shaky confidence in the Chinese economy and a renewed effort by CCP leaders to attend to domestic sources of growth. Foreign companies present in China, particularly US companies, are therefore likely to face rough going as the CCP prioritizes state investment in Chinese entities as a mechanism for boosting domestic performance.
While CCP leaders take pains to convey to foreign corporations and China’s private sector that China is open for business, these overtures should be treated with caution. As the CCP repeatedly demonstrates, private businesses, particularly foreign ones, are allowed to operate thanks only to the good graces of the party, and the CCP can limit or revoke those operating rights whenever it sees it advantageous to do so. In particular, the drive to boost domestic industry incentivizes Chinese corporations, backed by state actors, to undermine foreign competitors and replace their market share with domestic brands. Foreign companies operating in China should therefore see the message from the Two Meetings as a prioritization of domestic economic drivers in which foreign companies will be welcomed to the extent that they serve the CCP’s domestic agenda. Companies should prepare, however, for the eventuality that they will likely be discarded in favor of a Chinese entity when convenient for the party.
On the Hill: Developments in US China policy
Is Trump aiming for a “Super Deal” with China?
If the Trump Administration is attempting to pry Russia away from China, he faces an uphill battle. In the meantime, the global business environment and US partners are reeling from the uprooting of US partnerships.
Analysis
The Trump Administration’s global on-again-off-again tariff wars continue to spark tensions with US partners from Canada to Ukraine. One reading of these policies is that they are tactics designed to drive partners to the negotiating table, with the ultimate goal being more favorable trade terms for the US. This appears to be the Administration’s approach to China, with tariffs as a possible first step towards a US-China “super deal.” The Trump Administration, for example, seems keen to make a meeting with Xi Jinping happen soon as groundwork for a potential “grand bargain” between the US and China, although negotiations are still stuck with lower-level officials.
In this context, Trump’s threat to withdraw support for Ukraine and Europe, and his olive branch to Russia, could hint at a broader play to pull Moscow away from Beijing as part of a global realignment against China. The Russia-China axis is not a given. That said, the current relationship is premised on more than short-term gains; it is grounded in deeper shared values about autocracy and a sense of shared security. As our Director Glenn Chafetz argues about the prospects for dividing Moscow and Beijing, “To succeed, Russia would need to overcome more than a century of hostility and distrust. Both Russia and the US would have to reorient their relationships with allies and adversaries; and the US would need to replace China’s economic support to Russia. Russia would also have to be sure that the US would fully abandon its commitment to democracy and human rights for the long term. None of this will happen.”
Trump’s weakening of support for Ukraine will certainly placate the Kremlin, but is less likely to divide Eurasia, not in the least because China needs Russia to deflect US attention away from its future moves on Taiwan. Instead, Trump’s moves have arguably made it more challenging for the US to rely on allies, particularly in Europe. European governments are now extremely cautious in their engagements with the US, not in the least because weakening military support for Ukraine and questioning the value of NATO have triggered a sea change in how Europe approaches its collective defense. High tariffs on Canadian goods and open threats to turn Canada into the “51st state,” have shaken previously rock solid assumptions about US values and commitments.
Even if Trump’s words are, according to his closest supporters, “...not to be taken literally,” Europe, Canada, and other partners believe what he tells them, and respond accordingly. For global businesses, Trump’s negotiating tactics will likely trigger a rethinking of how corporations operate across the US and other markets, particularly if they rely on cross-border goods or services. Trump’s words are therefore extremely relevant to the corporate world. Tariffs, changing regulations, and shifting geopolitics making for a messier, less predictable landscape ahead.
Business Matters
The new answer to tariffs: risky business ventures and secret investments
Escalating US-China reciprocal tariffs have brought about a raft of consequences from risky business deals to secret investments, all as the US and China brace for possible recession while trying to project strength.
Analysis
On March 4, the US doubled its universal tariffs on Chinese goods, increasing it from 10% to 20%, as part of a suite of tariffs on Canada and Mexico that have since been delayed. China was quick to retaliate, with a more targeted set of poultry and agricultural tariffs intended to make business more difficult for President Trump’s voter base. China’s response is being received as somewhat moderate and intentionally leaving the door open to further talks with Trump. At the same time, China announced plans to place 100% tariffs on Canadian rapeseed oil and peas as well as 25% on pork and other agricultural goods, effective March 20, in what is likely an attempt to dissuade Canada from adopting a broader US-style, anti-China tariff regime.
Ever-changing tariffs compel investors and companies to take greater risks to continue business as usual. On the Chinese side, investors are starting to special-purpose vehicles to funnel their money through the Cayman islands and into US-based hedge funds that hold stakes in companies by Elon Musk, including SpaceX, xAI, and Neurolink. While this investment structure circumvents current US-China tensions by intentionally concealing Chinese money in Musk’s companies, it also comes with risks for investors: in the case of military conflict, the assets may be liquidated. That investors are still willing to take the risk, however, gives an indication of the unstable and limited business environment in China. On the US side, this also creates an obvious conflict of interest for Musk, whose Department of Government Efficiency continues to wield significant authority.
On the US side, Apple is set to begin a new collaboration with Alibaba. In an attempt to reverse declining sales, new iPhone 16e’s will be equipped with Alibaba’s open-source AI model, Qwen, since ChatGPT is banned in China and otherwise part of Apple’s standard AI model. The transition will not be seamless or painless, however, as Apple’s domestic competitors in China, like Huawei, can exploit China’s relatively lax regulatory environment while Apple is bound by US privacy and other rights protections.
While companies attempt to balance risks with rewards, US markets are still trending downward on the already realized and future fears of ever-escalating tariffs, and President Trump refuses to rule out recession as a possibility. China continues to project confidence, but a paper one, as its approximately 5% GDP growth predictions for 2025 are based on numbers that not even its own people, let alone economists, believe. In short, there are turbulent times ahead with great rewards to be reaped for those willing to take the risk, but the risks will be monumental.
Tech Futures
China’s “Deepseek” Congress
AI enjoyed prominent billing at the National People’s Congress for the first time, pointing to the CCP’s fusion of tech and politics.
Analysis
China’s “Two Sessions” meetings revealed a major shift in how the CCP is embracing technology to achieve its global political ambitions. In a first for a Government Work Report published after the meetings, CCP leaders named AI models as a means to kickstart domestic economic growth. This sends a strong signal that the CCP will drive state backing for next-generation computing innovation and adoption. Ultimately, the CCP intends AI to accelerate economic modernization, insulate China’s domestic tech from external pressures or US attacks, and secure vital talent to make China the next global leader.
Against this backdrop, Chinese tech companies should no longer be viewed as private enterprises akin to their foreign competitors (if they ever were). Rather, Chinese tech companies are an extension of the CCP and its whole-of-government approach to achieving technological (and therefore political) dominance. One way that this is manifesting is in the CCP’s increasing demands for domestic consumers to buy locally-produced chips and tech services, rather than foreign equivalents.
This points to an increasingly competitive environment for foreign tech companies operating in China, as well as a more competitive global environment for companies that are trying to compete against state-supported Chinese tech enterprises. The CCP is therefore pushing its thumb on the scale in favor of Chinese innovation as a way to not only ensure domestic competitiveness, but as a function of national security. Tech companies need to note that they face an uphill battle against Chinese competitors, as they are not only competing against a company, but against a superpower.
Espionage Alert
The threat of China’s hacking-for-hire
China’s Ministry of State Security outsources attacks on US corporations to private cybercrime entities. US companies need to prepare accordingly.
Analysis
China’s hacking-for-hire economy is booming, and state law enforcement is barely keeping up. The Department of Justice’s latest arrests charged 12 Chinese citizens accused of cybercrime targeting dissidents, news organizations, U.S. agencies and universities, but these few individuals hint at much broader and nefarious campaigns against US targets. These campaigns outsource Chinese government cyber attacks and espionage to private contractors that then attack preselected targets according to government priorities, all while providing cover for state actors. With new estimates suggesting that China’s Ministry of State Security employs upwards of 80,000 personnel–around double the number employed by Russia’s KGB at its peak–the additional capabilities of private contractors means that the threat of attacks against the US private sector are at a critical and unprecedented level. US private sector risk assessments need to factor this. More spies equals more espionage equals greater risk.
In the context of broader espionage efforts against the US private sector, from massive attacks like Salt Typhoon to more targeted attacks from companies like iSoon, corporations need to take responsibility for their own protection. As the DOJ’s recent indictments indicate, this should involve tightening cybersecurity, taking insider threats seriously, researching the provenance of supply chains and vendors, and thinking about how to better protect corporate data from outside partners. While this is particularly important for companies in sectors of interest to China, especially in tech and defense, it is increasingly also the case for sectors that might think of their industry as insulated from geopolitics. But as tariffs and trade wars escalate with China, all US companies will find that they are of interest to Chinese attempts to destabilize the US economy.
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