In recent years, Washington’s China policies have expanded rapidly into technology sectors such as telecommunications, semiconductors, data security, and financial services. Growing bipartisan concern about Beijing’s actions and intentions have fueled these developments, with little difference between the Trump and Biden administrations or between the White House and Congress.
The result has been a flurry of new restrictions—including on exports, imports, direct investment, and financial securities—that are fundamentally reshaping the U.S.-China economic relationship. Cross-border business travel between the United States and China, essentially halted for the past two years due to the COVID-19 pandemic, is unlikely to fully rebound because of increased caution and suspicion on both sides of the Pacific.
At the same time as this more defensive approach to economic and technology competition with China has taken root, Congress has also gone on the offensive by moving to appropriate new funding to areas deemed critical to maintaining U.S. competitive advantages in technology, manufacturing, and defense. The current depth and breadth of these approaches were hard to imagine just a few years ago. The corporate sector, besides facing increased government action with respect to doing business with China, must also contend with shifting public opinion and increased investor scrutiny—for example, on human rights issues along companies’ supply lines in China. Looking ahead, 2022 promises a continuation of these trends, which will have far-reaching impacts across multiple business sectors.
In just the last three years, Washington has enacted a raft of policy changes and regulation related to economic competition with China. In early 2018, the Trump administration applied and expanded tariffs on Chinese goods in response to Beijing’s unfair practices, including industrial subsidies, forced technology transfer, and state-sponsored intellectual property theft. Leveraging new laws passed in 2018, Washington expanded the use of export controls in defense technology, imposed stricter vetting of foreign investments in strategic U.S. industries, and restricted the procurement of equipment and services from five Chinese information technology companies, the most prominent of which was Huawei.
In addition, U.S. border agencies shifted their sights from primarily countering terrorists to screening for nontraditional intelligence collectors—for example, journalists, researchers, and businesspeople, who are frequently used by Beijing to gather information—as well as counterfeit goods and goods produced with forced labor. Using presidential emergency powers, the Trump administration also created regimes to remove untrusted contractors from U.S. IT infrastructure projects and block Americans from investing in companies that work with the Chinese military.
To Beijing’s consternation, the Biden administration has signaled its general agreement with all these approaches—and even expanded the investment ban to include Chinese surveillance technology companies. While close U.S. allies in Europe and Asia have been reluctant to impose a similarly broad sweep of policies, the Biden administration has achieved significant rhetorical alignment on defining the challenges posed by Beijing. Under pressure from the Trump administration, several U.S. allies turned away from Huawei, blocked inbound Chinese technology investments, and held up the shipment of critical semiconductor manufacturing equipment to China. However, Europe has yet to follow the United States in imposing real costs on China for its ongoing human rights violations, even though this is a declared point of convergence between the United States and the European Union.
For its part, Congress has passed a slew of China-related bills. Among other actions, legislators have reformed inbound investment screening, forced the delisting of Chinese stocks that do not comply with U.S. accounting practices, expanded requirements for the U.S. Defense Department to list Chinese companies assisting the People’s Liberation Army, strengthened sanctions authorities in response to atrocities in Xinjiang and repression in Hong Kong, presumed that all goods produced in Xinjiang are made with forced labor (and thus banned as imports), and prohibited the federal purchase of Chinese telecommunications equipment.
While Washington mainly focused on defensive measures in recent years, Congress began in 2020 to balance its approach with a more offensive agenda. Efforts to invest in semiconductor manufacturing, accelerate the adoption of 5G telecommunications capabilities, and reorganize the National Science Foundation to focus on increasing U.S competitiveness were all added to the Senate’s U.S. Innovation and Competition Act. The House of Representatives, in turn, recently passed a similar bill—the America COMPETES Act of 2022—so the prospects for final passage of a bipartisan competitiveness bill sometime this spring look strong.
This flurry of activity raises the question of what comes next. Looming issues such as rising inflation, possible new variants of COVID-19, and Russian aggression toward Ukraine could take Washington’s attention away from China policy, at least temporarily. At the same time, there is a strong bipartisan consensus—between the White House and Congress—on China. In particular, there are five policy areas where further action appears imminent this year.
First, the issue that promises to get the most attention is a new focus on the screening and potential restriction of outbound investments to sensitive Chinese companies. Washington currently has tools to screen inbound investments of concern and grant licenses for the export of sensitive technologies but no means to control the flow of outbound private equity and other direct investment in companies involved in the modernization of China’s military or digital authoritarian policies. U.S. investors making these deals typically provide access to networks and knowhow, representing a softer yet important channel of knowledge transfer. While there is potential for an executive order to limit outbound investment, interagency divisions (such as those between the Treasury Department, which would prefer to avoid further restrictions, and the Defense Department, which favors more controls) may continue to prevent a clear policy approach by the administration. It is more likely that Congress will take the lead by holding hearings and looking to pass legislation to create a new screening mechanism. Bills have been introduced in the Senate and House, with one version included in the base text of the COMPETES Act. This sets the stage for a bicameral conference committee negotiation over the final bill text, which is likely to include a new screening provision. There will undoubtedly be increased attention from think tanks and the media, highlighting concrete cases with relevance to national security and exploring the best policy approach for instituting an investment screening tool.
Second, as the national security community expands its focus beyond 5G telecommunications, Chinese cloud service providers (CSPs)—including Alibaba Cloud, Huawei Cloud, Tencent Cloud, and Baidu AI Cloud—are likely to face similar scrutiny. Recent reports have flagged national security concerns associated with the growth and international competitiveness of CSPs. French security officials have also raised concerns about Alibaba Cloud being the data storage provider for the Paris Olympics in 2024. The conversation about Chinese CSPs and potential policy responses—including efforts to inhibit U.S. contributions to the growth of Chinese CSPs and support U.S. global competitiveness—is in its early stages. The first agencies likely to act are the Commerce Department, using its new executive authorities to secure U.S. domestic IT infrastructure, and perhaps the Federal Communications Commission.
Third, as Beijing rolls out the digital yuan—a government-backed central bank digital currency—in the coming months, the broad national security implications of this development are likely to invigorate the policy discussion in Washington. In just the first few weeks after the launch of the digital yuan wallet app in January, it has become one of the most downloaded apps in China. If Beijing is able to achieve its goals for digital currency and electronic payment by making its new currency ubiquitous inside China and even around the globe, it could gain a powerful coercive tool to shape the decision-making of international companies seeking to retain market access inside Beijing. In this scenario, if a company did not comply with Beijing’s human rights narrative or policy toward Taiwan, for example, it would risk suddenly being cut off from accepting digital yuan as a form of payment. Should Beijing succeed in using its digital yuan to further uncouple from the U.S.-dominated international financial system, it would also reduce the effectiveness of U.S. financial sanctions as a tool of deterrence and make China and other adversaries more likely to take risks of aggression. Just like telecommunications, digital currency is as much a national security issue as an economic and regulatory one. The United States has a range of options to respond, including by developing credible alternatives, identifying Chinese technology firms involved with the digital yuan and their ties to U.S. companies, monitoring data collection risks to Americans, and restricting the use of China’s digital currency in the United States. As the digital yuan rolls out and receives even more attention, we expect Congress to make a focus on Beijing’s digital currency plans a part of its oversight agenda. We have recently seen the Federal Reserve preparing the way for a digital currency for the United States.
Fourth, an emerging battle over control of the supply chain for large-capacity batteries used in electric vehicles is taking shape. On current trajectories, the United States risks becoming as reliant on China for its energy needs as it once was on the Middle East for oil. In critical minerals, mineral processing, and battery assembly, China is the world leader. The Biden administration acknowledged this last year in its supply chain report, noting that “China has positioned itself as a market leader in the [large-capacity battery] manufacturing supply chain through the practice of questionable environmental policies, price distortion, state-run entities that minimize competition, and large subsidies throughout the battery supply chain.” As the United States moves toward an automotive future where electric vehicles are commonplace, Washington will take a hard look at domestic mining and processing options and also look to allies and partners to generate solutions to this national security supply chain challenge.
Finally, the U.S. midterm elections in November could bring a political shift that will impact China policy. Democrats in Congress have been key to many of the bipartisan China bills that have passed in recent years. But while the Senate has been relatively focused and aligned on China policy, Democrats in the House of Representatives have given the issue less priority. Should the House flip to Republican control, it will likely lead to a more aggressive legislative agenda on China beginning in January 2023. Today, House Republicans are already working on a second China task force and have introduced a number of bills this year related to export controls that their Democratic colleagues have largely opposed. If House leadership does shift, a China policy focused on financial services and export controls could experience new energy in 2023. In addition, should a new competitiveness bill ultimately pass this year, Congress will look to other areas of competition to expand its offensive investment agenda. Just as last year’s CHIPS for America Act did for semiconductors, this could include a bipartisan push for new investment in biotechnology and quantum computing.
The pace and scope of Washington’s policymaking with respect to China have accelerated in recent years in ways not previously considered possible. Inevitable distractions are on the horizon—including inflation, competing foreign-policy priorities, and the midterm elections. Despite this, 2022 is highly likely to be another busy year for China-related policymaking that will be just as disruptive to the traditional economic relationship between the United States and China as recent years have been.