Analysis

US companies in China need to ensure plans for the eventuality that Beijing favors its relationship with Russia over other engagement with Western companies and partners. Last week, in an attempt to ensure continued Chinese support for Russia’s economy and ongoing war in Ukraine, Russian President Vladimir Putin traveled to Beijing to meet with General Secretary Xi Jinping. In a rare foreign visit by Putin, the two leaders discussed their “no limits” partnership and “confluence of interests” that aimed to cement China’s support for Russia and to underscore their efforts against the “collective West.” For Russia, the relationship is clear: China lends Russia clout on the world stage, sustains the Russian economy amid Western sanctions, and reframes Russia’s war in Ukraine as a wider conflict of “the West vs. the Rest.” 

The relationship, however, is murkier for China. In contrast to Xi’s recent visit to Europe, where French President Macron imparted the importance of China’s withdrawing support for Russia, Xi doubled-down on ties with Moscow. Despite warnings from the Biden Administration not to lend support for Russia’s war, Xi therefore appears to have alternative ideas that ultimately frame world politics in binary terms between pro-US and pro-China camps, with Russia firmly in the latter. Russia is also a crucial energy supplier to China, which helps to insulate their relationship. 

Despite a zero-sum view of its relationship with the U.S., China is walking a delicate tightrope between supporting Russia while sustaining some business and governmental ties with Western to boost domestic economic growth, and not triggering Western sanctions against Chinese institutions seen as assisting Russia’s war effort. Where Russia is increasingly desperate for China’s support, Beijing is therefore in a stronger negotiating position vis-a-vis Moscow and the West in terms of playing both sides off each other. This also helps to ensure that China will either be on the winning side if Putin is victorious in Ukraine (whatever that looks like), but will not receive blame if Russia loses the war. Consequently, there is little incentive for China to pressure Russia into ending the conflict, even if it makes for a more contentious relationship with European partners.

US companies in China will therefore need to plan for the increasing pressure on foreign businesses. The squeeze is currently unlikely to exclude Western companies from China entirely, as the economy still requires foreign investment, particularly in tech, to recover from slowing post-pandemic growth rates. Nevertheless, restrictions on certain business operations are likely in the near future. Companies should plan for what parts of their operations they can relocate or adapt to prevent disruption.

Analysis

Tariffs and sanctions took center stage in US-China relations, with each side introducing targeted restrictions on EVs, technology exports, defense contractors, and exports. The Biden Administration and Congress are both exploring how to restrict China’s exploitation of US technology and economic openness, with the White House unveiling tariffs (see below for details) that took aim at China’s dumping of excess supply because of overcapacity, the Biden Administration’s introduction of tariffs. 

In partial response to the Biden Administration's tariffs, China accused the US of “political manipulation” and announced sanctions on three US companies–Boeing’s Defense, Space & Security unit, General Atomics Aeronautical Systems, and General Dynamics Land Systems–for their selling of arms to Taiwan. Taking umbrage with accusations of “overcapacity”–a feature of the Chinese economy that CCP leaders have, until recently, openly acknowledged–China will therefore likely continue to pursue restrictions on certain US components or businesses, particularly in sensitive industries like EV, tech, or defense. 

While the Biden Administration’s tariffs purportedly address the economic imbalance between the US and China, they also help Biden appear tough on China ahead of the November election and provide a roadmap for European allies to introduce similar and arguably more effective measures against Chinese dumping practices. The US, for example, imports a relatively small percentage of Chinese EV exports compared to Europe, but European leaders are less certain about how to respond collectively to Chinese business practices. These tariffs therefore serve to outline  terms for how the US and Europe can collectively counter Chinese goods flooding their markets. 

Some European business leaders have protested that tariffs will disrupt their ability to export goods that they manufacture in China, and some have even continued using Chinese parts that were banned by the US in their supply chains. Most companies, however, are exploring how to insulate their supply chains from disruption introduced by sanctions or restrictions from both the US and Chinese governments. Collectively, this means that companies should look to isolate their China-based operations, but they should also be attentive to additional restrictions from the US, China, or Europe that will affect key parts of their business.

Analysis

As reported above, the Biden administration announced new measures to combat Chinese overcapacity and dumping risks. A key component of this new policy is the quadrupling of tariffs on Chinese EVs, from 25% to 100%, which is set to take effect later this year.  A 50% increase on Chinese-made semiconductors and solar cells will take effect in the beginning of 2025. A representative for China’s Foreign Ministry provided the standard performative and hypocritical response, declaring that “China has consistently opposed the violation of WTO rules and the unilateral imposition of tariffs.” After threatening retaliation in their response, too, the Chinese Ministry of Commerce followed by launching an anti-dumping probe against the US, EU, Taiwan, and Japan regarding thermoplastics (polyoxymethylene or POM copolymers), which are used in a wide range of auto parts and electronics. The threat of Chinese tariffs on US and its allies goods also serves as a warning to the EU, which is set to announce the results of its subsidy-probe against China in early June. Analysts anticipate that the EU will impose anti-subsidy duties on Chinese EVs that will take effect in July. A social media channel run by one of China’s state broadcasters has further intimated the potential for retaliatory measures, such as against European wine and dairy products.

At the same time, Chinese EV makers are looking for ways to circumvent US tariffs. Two Chinese auto-battery makers, Shinzoom and Hailang, recently announced new plants to be built in Morocco, in addition to Moroccan government approval for a Chinese cathode-production plant–a key component in EV batteries–in April. This is a strategic choice on the part of Chinese companies, as Morocco enjoys MOE status with both the United States and the EU and would enable Chinese products produced there to circumvent existing tariffs. Chinese EV makers are also looking to Mexico and Brazil. While the Biden administration has already warned the Mexican government to tread carefully with Chinese EVs, even threatening to adjust language to exclude Chinese vehicles routed through Mexico, Chinese EV companies’ shift to Brazil is meant to compensate for lost market shares in the US and EU. 

While protectionist measures at home and in the EU may balance the playing field for the time being, Chinese-made EVs are going to compensate for their exclusion from those markets by targeting other markets where US products do not benefit from such protections. Consequently, while EV makers engage in zero-sum competition for the domestic market, they should not rely on global markets to bolster sales since they will likely be unable to compete with cheaper Chinese equivalent products. A possible strategy for increasing the competitiveness of US-made EVs will be to emphasize that data stored by vehicles will be protected rather than available to the CCP, which may appeal to both national government and corporate interests. Regardless, as the trade wars rage on, competing with Chinese EVs may mean taking a loss to make a sale.

Analysis

Analysis

Chinese domestic tech giants, like Alibaba, in a bid to replicate Microsoft’s success with OpenAI in the US, are driving investment in Chinese AI startups to a much greater extent than before. While this stems in part from Chinese government pressure, it is also an indirect result of US restrictions on investment in Chinese tech startups, which is forcing companies to look to domestic sources of capital. While private investors and venture capital firms continue to invest in AI startups, China’s tech scene is therefore becoming increasingly homogenous in terms of ownership, with a growing number of startups relying on financing by Chinese tech giants, most of which are state-owned rather than private. 

This is leading to a state-tech symbiosis, with large tech giants–and, by extension, the CCP–becoming drivers of innovation financing rather than smaller or private sector investors. A key example of this is the recent release of “Chat Xi-PT,” an AI LLM trained on Xi’s writings and speeches. This means that US companies are both increasingly unable to capitalize on startup growth in China, and that US entities will be cut out of Chinese innovation, which limits knowledge of how China’s AI development is progressing. Moreover, as access to US components is blocked by both Chinese and US government directives, China’s own innovation capacity is taking off, with domestic chip manufacturing rapidly replacing US-made components that were the target of recent restrictions by the Biden Administration.

As the CCP strives for alternatives to Western knowledge and components, the prioritization of AI as a core component of the party’s tech innovation strategy has consequences for foreign tech companies operating in China. Underscoring the increased fusion of tech and national security, Microsoft has asked its China-based employees working on AI to relocate out of the country if they wish to continue working on global projects. The move, which follows on from an announcement last year that the company would relocate some of its China-based staff to Vancouver, highlights fears of employee safety and potential IP theft, particularly in fields like AI and machine learning that have recently become central to the Chinese government’s tech and national security ambitions. As the case of Microsoft demonstrates, foreign tech companies operating or investing in China will therefore need contingency plans in case their operations are deemed “important to national security” or shut down.

Analysis

Police found a British national accused of spying for Hong Kong dead near his home, in what authorities have described as “unexplained” circumstances. The arrests, including several accused of spying for China and Russia, in addition to hacking and arson attacks targeting individuals across the UK, were condemned by Hong Kong authorities, but the death of one of the accused has raised red flags across UK intelligence. 

The UK has been increasingly targeted by Chinese intelligence operatives and agents, in part because of Britain's close ties to the US, but also because China wants to track Chinese students and the approximately 100,000 Hong Kongers who moved to the UK after the recent imposition of Hong Kong’s draconian national security laws. Moreover, as 2430 Group Director Glenn Chafetz writes in this week’s Cipher Brief, Article 7 of China’s 2017 National Intelligence Law renders all PRC citizens as legally obligated to cooperation with China’s intelligence services regardless of their residency, which adds further urgency to UK’s threat perception as the number of PRC citizens, including Hong Kongers, increases. 

The increasing number of espionage cases, and accusations that the British government is not taking the threat of Chinese espionage seriously enough, have led ministers to become more publicly hawkish on China. Grant Schapps, the Secretary of State for Defense, publicly charged China with supplying lethal aid to Russia for use in Ukraine, a charge that Secretary Blinken and the US State Department tried to downplay, seemingly out of fear of derailing recent dialogues between the Biden Administration and the CCP. 

While the UK is not alone in highlighting the alarming increased risk of Chinese espionage, with several European countries also responding to a boom in cases, London’s position as a financial and business hub means that global companies with a footprint in the UK will likely come under increasing pressure to rethink their engagements with China. The increase in espionage cases, and in particular the death of suspects, means that mounting political pressure will continue to frame China as an adversary that the UK can ill-afford to ignore. Espionage cases therefore make it increasingly difficult for companies to use Europe as a more “neutral” base for global operations amid US-China tensions. Companies with both UK and China footprints should therefore consider replicating similar strategies to their US counterparts: they should either sever or segregate their China-based operations to insulate from potential political pressure as UK-China relations continue to sour.

Analysis

Taiwan inaugurated its new president, Lai Ching-te 賴清德, who campaigned on continuity from his predecessor and fellow Democratic Progressive Party (DPP) member, Tsai Ing-wen 蔡英文, amid threats from China and a chaotic opening legislative session. Lai’s inauguration speech notably concentrated on pragmatic domestic–rather than foreign–policy issues, as he seeks to reassure voters and Taiwan’s allies that he will not challenge the status quo with China. 

Lai’s inauguration notably lacked the attendance of opposition Nationalist (KMT) lawmakers (save one), who were advised by the party caucus to avoid attending the ceremony. In response to the inaugural address, KMT officials criticized Lai’s use of “Taiwan”--rather than the official name, “Republic of China”–as evidence that he was unofficially rewriting the constitution towards de facto independence, despite Lai’s stated support for maintaining the status quo. His lack of explicitly mentioning certain cornerstones of PRC-ROC relations, like the 1992 Consensus, led to criticisms from both the KMT and the CCP in Beijing, who accused Lai of “promoting the separatist ideology of ‘Taiwan independence’” and warned of the need for “complete unification” between China and Taiwan. With Taiwan the most likely spark in a future conflict between the US and China, Beijing’s military drills around Taiwan in response to Lai’s inauguration also reinforced China’s message that investing or assisting Taiwan is risky for businesses and foreign governments alike. 

Despite Lai campaigning on maintaining the status quo and winning the presidency, his DPP party lost its legislative majority in Taiwan’s parliament. The KMT-Taiwan People’s Party (TPP) coalition majority wasted no time in attempting to rush through five bills without review that would immediately curtail the power of the executive branch, including allowing legislators to effectively conduct show trials of government officials and ban criticism of legislators. Led by the KMT’s right-wing populist speaker, Han Guo-yu 韓國瑜, the KMT-TPP coalition’s authoritarian move sparked mass demonstrations akin to the Sunflower Movement in 2014 when protestors occupied the Legislative Yuan. While the KMT-TPP failed to pass the five bills right away, and lawmakers from both parties met to discuss paths forward, events of the past week have set the tone for what will likely be repeated showdowns between Lai’s presidency and the KMT-TPP legislature. 

As Taiwanese politics becomes increasingly polarized, the challenge is that the KMT looks likely to move increasingly to the political far right and embrace Beijing in an attempt to distinguish its position from the DPP. As seen in the recent presidential election, this also means Chinese disinformation is exploiting domestic political cleavages by inserting anti-US messages among targeted Taiwanese populations. While KMT politicians have domestic constituencies in mind, their actions imply potentially dramatic consequences for national, and global security. If the KMT continues to be dominated by individuals like current Speaker Han Guoyu, not to mention the continued support of former-president and now pro-China advocate Ma Ying-jeou 馬英九, then US policy makers and business leaders should be hyper aware of the consequences of KMT electoral victories. In a reversal of most of Taiwan’s recent history, the KMT, rather than the DPP, is therefore now the wildcard in the US-built East Asian security architecture.