U.S., Allies Weigh How to Reduce Economic Ties With China
Countries seek to lessen dependence on China but maintain global trade, investment
WASHINGTON—The U.S. and its allies are grappling with how to pare their economic relationships with China, attempting to limit ties in certain sectors they view as strategic while preserving broader trade and investment flows with the world’s second-largest economy.
Russia’s invasion of Ukraine changed how Western powers think about their strategy toward China, another geopolitical rival and a close partner of Moscow. Russia throttled natural-gas exports to Europe during the war, destabilizing global energy markets.
The Group of Seven advanced democracies are growing concerned that China, a dominant supplier of many goods and materials, could similarly cut off key exports in the event of a conflict or another pandemic, according to top Western economic officials. They also worry that Western investment and expertise, if left unrestricted, could help develop Beijing’s military.
“So the lesson learned from that for all of us has been: Let’s do that hard work now on the front end,” said Wally Adeyemo, deputy Treasury secretary.
But G-7 officials say they are also trying to avoid beggar-thy-neighbor steps that undermine global economic growth as they try to unify behind specific policy measures that reduce dependence on China. The G-7 comprises the U.S., Canada, France, Germany, Italy, the U.K. and Japan.
“The big strategic choice that we have is whether in seeking to strengthen our supply-chain resilience…we do so in a way that tumbles the world back into protectionism,” Jeremy Hunt, the U.K.’s chancellor of the Exchequer, said in an interview last week in Washington. He said Western allies should “work together as fellow democracies to improve that resilience.”
G-7 officials said last week they had agreed to new initiatives for bolstering supply chains on the sidelines of the semiannual meetings of the International Monetary Fund and World Bank. The step followed a recent commitment by the U.S. and its allies to develop new policy tools to counter hostile economic measures.
The IMF released a report last week echoing its previous warnings against carving the global economy into competing geopolitical blocs led by the U.S. and China. Such a split would lower global trade and growth, the multilateral financial organization warned.
“The question is, can we be more determined to enhance security of supplies, but not push the world that far that we are into a second Cold War?” IMF Managing Director Kristalina Georgieva, of Bulgaria, said at a press conference last week. “I am among those who know what are the consequences of a Cold War. It is a loss of talent and contribution to the world. I don’t want to see that repeated.”
Of the G-7 members, the U.S., led by the Biden administration, has been pushing the most urgently to reorient the global economy away from China.
New laws enacted last year offer major subsidies to lure key clean-energy and semiconductor technology companies into the U.S. The administration has restricted the export of advanced semiconductors and related equipment into China and is preparing new curbs on investment in the country.
Treasury Secretary Janet Yellen has repeatedly called for the U.S. to “friendshore” by relying more closely on its allies for trade. She said during a press conference last week that IMF projections about the negative consequences of friendshoring were overblown. U.S. trade with China reached a record level last year.
“The benefits of open trade, which include more efficient allocation of global resources, is maintained with friendshoring. So I think the argument that friendshoring is going to cause huge fragmentation and loss of the benefits of trade is really not valid,” Ms. Yellen said.
Some allies broadly aligned with the U.S. goals have raised concerns about the Biden administration’s approach to reducing ties with China.
U.S. subsidies for clean-energy technology, primarily aimed at building up the industry outside China, enraged European officials who argued that the new subsidies’ sourcing requirements put their companies at a disadvantage.
U.S. officials are trying to ease those complaints by putting together a series of trade deals to cooperate on procuring critical minerals through a buyers’ club. The Americans also are starting a forum on clean-energy incentives with the European Union to try to prevent a subsidies war.
Looming over the U.S. push to create more independence from China is the possibility of a military conflict over Taiwan, a self-governing island that Beijing regards as part of China and aims to take control of—and another possible flashpoint with U.S. allies. French President Emmanuel Macron said last week that taking cues from the U.S. on tensions between Taiwan and China would be “the worst thing” for Europe.
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French officials have since tried to calm the uproar over those remarks, and French Finance Minister Bruno Le Maire said last week that France shared U.S. concerns about relying on China. “On de-risking, we share exactly the same view as the U.S.,” he said.
But even crafting U.S. policy toward China can prove challenging and time consuming, according to people familiar with the Biden administration’s deliberations. U.S. officials have been weighing, for example, how to restrict U.S. investment into China by targeting only sectors that could help enhance Beijing’s military capabilities.
The rules are set to prohibit U.S. private-equity and venture-capital investment in quantum computing and advanced semiconductors, while requiring firms to disclose such investments in less-advanced semiconductors, according to people familiar with them. The rules are expected to be rolled out under a yearlong rule-making period.
Administration officials have struggled with how to address artificial intelligence, as they try to draw lines between forms of AI that could be used for military purposes and other forms of AI broadly used in civilian technology, according to the people familiar with the talks.
U.S. officials are hoping to rally the rest of the G-7 behind the proposal to restrict investment into China. President Biden and European Commission President Ursula von der Leyen committed to taking steps to prevent capital and knowledge from fueling the militaries of their strategic rivals during a meeting in Washington last month.
On trade, some Western officials see China as already engaging in hostile acts. China imposed informal trade embargoes on Australia over its calls for an inquiry into the origins of Covid-19 and on Lithuania for allowing Taiwan to open a diplomatic outpost under the name Taiwan.
China is also considering restricting exports of key solar manufacturing technology.
The European Union’s executive body, member governments and parliament last month agreed on a draft “economic coercion instrument” that would lay out steps for consultation and retaliation against a country deemed to engage in economic coercion. The subject is expected to be on the agenda for the G-7 leaders’ summit in Hiroshima, Japan, next month, and a bipartisan pair of U.S. senators has drafted legislation on the topic.
“We should not repeat miscalculations or mistakes we made in the past with regard to Russia with other big countries,” Niels Annen, Germany’s parliamentary state secretary for economic cooperation and development, said in an interview, referring to Europe’s reliance on Russian energy exports before the invasion. But, he said, “We don’t want to enforce a policy or strategy of decoupling.”
Write to Andrew Duehren at andrew.duehren@wsj.com and Greg Ip at greg.ip@wsj.com
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Appeared in the April 18, 2023, print edition as 'G-7 Seeks To Lessen Economic Reliance On Beijing'.