Analysis

China’s global leadership is in the spotlight as tensions between Israel and Iran shifted attention to Beijing’s close partnership with, and possible leverage over, Tehran. In response to Iranian drone strikes towards Israel, Beijing neither fully condemned nor supported Tehran, instead calling for restraint. This does not mean that China will side with Israel. Indeed, the failure to condemn Iran’s actions mean that China has lost both goodwill with the Israeli government and the possibility that it might serve as a future mediator in the conflict. Instead, Beijing’s decisions so far indicate that it values its crucial partnership with Iran, and that Beijing likely does not have significant diplomatic clout or leverage to influence Tehran’s decision making. 

China’s interests in the Middle East are complex. It needs oil imports and access to foreign markets to aid with domestic overcapacity. That would augur for stability. Yet, conflict in the region draws US focus away from East Asia just as tensions are flaring in the South China Sea. Moreover, Middle East conflicts help China make the case that the US has failed as the guarantor of peace and stability in the region. China, of course presents itself as an alternative, 

as evidenced by its mediation between Saudi Arabia and Iran last year. Thus, China is playing a careful game with goals that conflict: support friends while avoiding all-out war, ensure energy imports and export markets, and win new allies in the Middle East at the expense of the US.

Ultimately, China views the Middle East principally as an important theater in the global, zero-sum struggle against the US. This reframing of all foreign relations as fundamentally dividing states into pro-US or pro-China camps means that Beijing views Gaza as a catalyst for forcing states to choose to support Israel or Palestine, and, by extension, the US or China. This trend means that regardless of how well US companies adhere to Chinese regulatory changes, they will continue to be viewed with suspicion by authorities in China, a fact that has US companies operating in China extremely nervous about the future.

Analysis

Secretary of State Antony Blinken traveled to China for the second time in the past year to discuss, among other items, China’s backing of Russia’s war effort in Ukraine. With Russia increasingly dependent on Chinese support, the Biden Administration has floated a sanctioning of Chinese banks if China continues to send weapons-related technology to Russia (a threat that Janet Yellen then walked back). Chinese officials responded that they “oppose bullying disguised as competition” and that China did not appreciate the State Department’s publishing of a human rights report this week that criticized the CCP’s record in Xinjiang. Blinken’s message aimed to increase the stakes for negotiations with Chinese officials, but also to give tangible bargaining chips as the Biden Administration tries to persuade Chinese officials to assist with issues ranging from fentanyl supplies, to Ukraine and Gaza. While Blinken’s visit is not expected to significantly alter US-China relations, it does demonstrate a willingness by both sides to continue to engage in face-to-face dialogue. That said, China made it clear that the US cannot see China as both partner and competitor, but must instead decide one way or the other.

Matt Pottinger and Mike Gallagher, two leading Republican voices on China, agree, and come down on the side of competition. They argue that China sees the US as an adversary regardless of what the US does. Therefore, competition with China is zero-sum and “must be won.” Their views echo the present prevailing opinion in Washington that China is an adversary and that Chinese engagement in the US public and private sector should be minimized. Some US companies push back against cutting China out of US supply chains completely, not in the least because it encourages Chinese innovation and removes US knowledge of Chinese products. However, Pottinger and Gallagher’s views are likely to be the majority view on both sides of Congress for the foreseeable future. US companies should therefore continue to pursue decoupling strategies, most notably by looking to source alternatives to Chinese-made products or technologies, to help mitigate a potential worsening of US-China relations in the future.

Analysis

German Chancellor Olaf Scholz visited China April 15-16, accompanied by a delegation of twelve leaders from some of Germany’s biggest firms including Mercedes-Benz, BMW, and Siemens. This was Scholz’s second visit to China since taking office in 2021. In his public statements, Scholz strove to draw a line between Germany and the United States, remarking that he is interested in “de-risking” but not “decoupling” from China (although the finer points of this distinction seem purely symbolic rather than substantive). Emphasizing the need for fair competition, Scholz warned China to get its domestic overproduction problem under control. Memories of Chinese solar panels being dumped on European markets in 2012 cannot be far from the chancellor’s mind, not to mention the broader and potentially catastrophic outcome of global deflation in the event that Chinese goods begin to flood world markets. 

Scholz’s warning is part of a balancing act. On the one hand, Germany wants to retain access to Chinese markets. Just last year, German companies invested US$11B in China and, unlike other major investors like the US and Japan, have shown no signs of slowing down. As the largest single-market for German investment, the loss of such revenues would risk further accelerating the shift from “complementarity to substitution” between German and Chinese goods, with Chinese products replacing German ones even within the EU. On the other hand, Scholz must placate other EU member states, especially following a European Commission investigation into unfair subsidies for Chinese EVs entering European markets just last year. Xi cautioned Scholz and, by extension, the EU from considering further protectionist measures, with later discussion of expanding the Belt-Road Initiative to include German-based projects.

The German case is only a single example of a broader dilemma facing many countries, especially the United States. The Biden administration issued a call to triple tariffs on Chinese steel and aluminum as a preemptive measure against Chinese dumping of surplus materials into US markets. When Secretary of the Treasury, Janet Yellen, visited China at the beginning of April, she, too, warned China about the potential consequences of its industrial overcapacity. In Europe, the European Commission's decision about EVs is due this summer. In the meantime, a surplus of Chinese solar panels continues to render EU- and US-produced products uncompetitive. Protectionist measures are not a panacea for overproduction, however, and companies must therefore not only be wary of oversaturated markets but also put an emphasis on research and development. In lieu of discovering new markets to tap, innovation and strategic marketing that highlights the superiority of your products relative to cheaper, Chinese alternatives will remain the most advisable course of short-term action.

Analysis

President Biden signed into law a provision that could lead to the much-touted TikTok ban, including giving parent company Bytedance a minimum of nine months to sell the platform or face a ban on operations in the US. TikTok’s ties to the CCP through its parent company Bytedance are well-documented. Recent whistle-blower reports about how the company assists its Beijing-based overseers have further reinforced the close association between the app and the CCP in the minds of many lawmakers. Where a ban on TikTok will be challenging, and likely include lengthy court battles, not to mention the question of who might buy the app, there is therefore bipartisan willingness to pursue a ban on national security grounds. 

While TikTok continues to dominate tech discourse in DC, Apple also reportedly removed social media apps, including Meta’s WhatsApp and Threads, from its Chinese app store on orders from the Cyberspace Administration of China (CAC), likely in response to news about TikTok’s banning. Where CAC stresses that these moves close existing loopholes in how Chinese users can access foreign apps, the connection to the U.S. action against TikTok cannot be discounted. ByteDance has just released its latest social media platform: Kesong 可颂  (“Croissant”). Echoing Meta’s rollout of “Threads,” the app aims to attach to Bytedance’s existing consumer base and prevent seepage of its users to other apps, including WhatsApp, although it remains to be seen whether Kesong will gain much traction in China. The CAC’s moves are therefore likely a combination of “techno-nationalism” in response to the US’s ban on TikTok, and a move to support domestic tech innovation. 

Tech is trending toward independent “clean networks” that do not rely on software or hardware from adversaries. App bans should therefore be viewed as part of a broader effort for China to outlaw US-made tech, and for the US to outlaw Chinese-made tech. The US’s ban will likely expand beyond TikTok to include components in any US-made products. Both Congress and the Administration will continue to scrutinize the supply chains of industries that rely heavily on Chinese manufacturing, like electric vehicles or renewable energy. Companies in these industries would be wise to begin exploring sourcing from alternative suppliers outside of China, despite potential higher overheads and disruptions to production.

Analysis

British authorities charged two parliamentary researchers with breaching the UK’s Official Secrets Act for “providing prejudicial information” to China. At the same time, German authorities arrested three of its citizens on suspicion of working for Chinese secret services, claiming that the individuals were trying to form research partnerships with German universities to extract sensitive information about Germany’s military. Other reports of espionage further bolster the European publics’ perception of China as an adversary: an employee of a German far-right European lawmaker was arrested on suspicion of spying for China; China had turned a far-right Belgian lawmaker into an asset; and China hacked the Belgian foreign minister. China’s espionage effort is unprecedented in scale and scope, and appears to be especially well received among low paid parliamentary staff in high cost-of-living Europe. 

Despite China’s aggressive efforts against his country, German Chancellor Scholz’s recent visit to China with business leaders indicates that he is determined to solidify Germany’s trade partnership with China, even at the expense of national security. While China’s state media were happy to see Scholz stress economic partnerships, repeated news across Europe of Chinese spying efforts, most notably by recruiting assets within parliaments, is heightening narratives that frame China as a “threat” rather than as a “partner.” The CCP’s summoning of the German Ambassador to China in response to the espionage cases will further reinforce this position in the minds of many Germans. Companies with ties to China–for example, with supply chains that rely on Chinese partners–will therefore likely face scrutiny from law makers or law enforcement officials who see these ties as a liability and matter of national security. Moreover, companies in sensitive industries should be hyper vigilant regarding employees with access to information of value to Chinese competitors or government actors, as China’s intelligence agency pushes to infiltrate key sectors and institutions through approaches to insiders.

Analysis

European Commission authorities raided a Chinese surveillance company’s offices in Poland and the Netherlands, seizing phones and IT equipment. The basis for the raids was the suspicion that the Chinese companies were relying on “foreign subsidies'' to distort markets and undercut European competitors. The inspection raised eyebrows among Chinese businesses operating in Europe, but it reflects a growing assertiveness by European authorities against Chinese companies exploiting foreign subsidies to out-compete other firms. The EU has investigated four Chinese companies under its Foreign Subsidies Regulation in the past two months. Additional companies will likely face scrutiny in the near future. 

Despite Beijing’s criticism that such moves discriminate against Chinese firms, the EU’s enforcement of its market regulations underscores both the unfair treatment of European firms in China, where they face more stringent and arbitrary restrictions, and the bloc’s acknowledgement that Chinese firms are increasingly exploiting subsidies from both the Chinese government and the EU to undercut domestic competitors. As the EU shifts from viewing China as a partner to a competitor, it will likely break with member states, like Germany, that hope for closer trade relations with Beijing. Instead, the EU will likely push for measures aimed at minimizing China’s state and private sector attempts to undermine its European counterparts. 

China’s protests against EU “protectionism,” sound like gross hypocrisy to European ears, given China’s own blatant protectionism and discrimination against foreign businesses. Nevertheless, the EU actions will exacerbate the already high tensions between Brussels and Beijing. Companies operating in the EU with ties to Chinese suppliers or partners should therefore be attuned to possible further restrictions as the EU reduces its tolerance of China’s state intervention in its private companies.