Congress Targets China with Trade Controls

Bipartisan congressional action targeting China is reaching a fever pitch.

In the first half of 2021 alone, Congress has introduced more than 100 bills seeking to manage the growing tensions with China through trade and technology controls. Congressional actions suggest a bipartisan focus on pressuring China.  If some of these counter-China bills become law, they could greatly constrain this and future U.S. administrations in their ability to engage China.

For businesses with interests in China, trade and finance could soon be subject to newfound volatility that combines modern trade controls’ capriciousness with Cold War-era obstinacy.

The reasons for Congress’ assertiveness are numerous. The upcoming 2022 Midterm elections loom large in the minds of legislators looking for easy political wins. Furthermore, as the “Made in China 2025” program advances in tandem with China’s military-civil fusion (MCF) there is a sense that the window is closing for a robust, whole-of-government response to China’s growing technological and military might.

 

If Congress overreacts, however, it may result in an escalation of tensions with China that cannot be reversed.  The Biden administration and future U.S. presidents may be left with extraordinarily little room to reorient relations in a more positive direction.

Congress Comes Off the Sidelines

While China was not yet at the forefront of Congressional trade control efforts during the Trump administration, the groundwork was laid for the present legislative climate.

The primary front over congressional involvement in foreign policy was the Countering America’s Adversaries Through Sanctions Act (CAATSA). Ostensibly focused on Russia, Iran and North Korea, it set a precedent by legally mandating the President impose sanctions for certain proscribed actions by foreign powers. This meant a shift in Presidential discretion from directing the scope of sanctions regimes to choosing from a menu of penalties on preset target countries.

The impetus for such a shift in the dynamics of sanctions was Congress’s fear that Trump would pursue warm relations with unfriendly powers like Russia at the expense of continued economic pressure through sanctions. Trump reluctantly signed CAATSA into law in 2017, representing a major win for Congress which had long been content to cede its powers on foreign policy. Congress’ attempts at reasserting itself in foreign policy then had ramifications that would outlive the Trump-era partisan debate over Russia. This pattern has accelerated today in regard to China.

Congressional Efforts on China

Amidst the flurry of legislative activity regarding China in 2021, Congress is seeking to formalize guardrails for the future of U.S.-China relations.

Alliances

The first focus of this formalization relates to alliances. H.R. 3524 (a.k.a. the EAGLE Act) seeks to cement in U.S. policy “diplomatic, economic, and security cooperation” between the United States and Japan, South Korea, Australia, the Philippines, and Thailand. It would also establish an intra-parliamentary Working Group between the Quad states (U.S., Australia, Japan, and India) to project power in the Pacific and pursue the Resilient Supply Chain Initiative.

A Senate bill, S.687 (a.k.a the Strengthening Trade, Regional Alliances, Technology, and Economic and Geopolitical Initiatives concerning China (STRATEGIC Act)), seeks to facilitate dialogue with foreign regulatory and technical agencies in partner countries to adopt U.S. standards. That the standards the U.S. seeks to internationalize relate to supply chains and 5G are a clear indication of where it aims to push back against China.

However, these Congressional efforts dovetail nicely with the approach taken by President Biden, who recently agreed with the European Union on a framework for shared challenges from China. A compliment to this framework was the U.S.-E.U. Trade and Technology Council (TTC), which is tasked to “coordinate approaches to key global trade, economic, and technology issues and to deepen transatlantic trade and economic relations based on shared democratic values.” The whole-of-government result is to move anti-China alliances from the informal to the formal, from the potential to the practicable.

Sanctions

The second area of focus relates to sanctions. Both the aforementioned STRATEGIC Act (S.687) and the Strategic Competition Act (S.1169) seek to add pathways for sanctions on Chinese individuals and entities. The former would require the President to establish a process for U.S. persons to petition for sanctions against a foreign person involved in a significant act of intellectual property theft or the forced transfer of technology. The latter would impose sanctions on foreign individuals and entities responsible for certain abuses (e.g., including coercive abortions and forced labor).

Up to this point, the U.S. has been reluctant to directly sanction key Chinese individuals and entities. If enacted, all of these bills would significantly increase the likelihood of sanctions list expansions and Chinese retaliatory countermeasures. In the case of the STRATEGIC Act, the President would be required to create yet another method for sanctions implementation. Likewise, the China Technology Transfer Control Act of 2021 (H.R. 1131) would mandate sanctions on any foreign person who sells to China or purchases from China any items controlled for military end-uses and any Chinese person who knowingly uses such items provided to them in violation of U.S. export control law.

Export Control

The third focus relates to export control. The China Technology Transfer Control Act of 2021 also calls for a new list of items categorized as “national interest technology.” These “national interest technologies” would be defined as controlled technology or IP that:

would contribute significantly to the Chinese military to the detriment of U.S. national security;

are necessary to protect the U.S. economy from the drain of scarce materials by demand from China;

are included in a designated list of product components compiled by the U.S. Trade Representative (USTR); or,

are used by China to violate human rights or religious liberties.

Legislators’ desire to further broaden the scope of export-controlled items, particularly for China, could radically change the present nature of export control. BIS is already straining under the demands to define and control nebulous “foundational and emerging technologies,” but Congress’s potential alterations to the existing control system seem likely to further muddy the waters. As a result, compliance will be harder for the government to define and be harder for companies to implement and maintain.

China’s Response  

China meanwhile is planning its own response to U.S. pressure.

In June 2021, China adopted the Anti-Foreign Sanctions Law, following the 2020 adoption of the Export Control Law. Both laws empowered the Chinese government to take reciprocal measures against “discriminatory” foreign sanctions and export controls. Interest in such measures to counter U.S. sanctions has also carried over to Hong Kong.

Despite the placing of Chinese companies on the Entity List and the creation of new lists for Chinese Military Companies, Communist Chinese Military Companies, and (Non-SDN) Chinese Military Industry Companies, China has yet to take significant action in response. Naturally, the more intense the statutory pressure Congress exerts on China, the more drastic calls will be within China for leadership to commensurately respond. Industry will be caught in the middle.

Economic interdependency between China and the U.S. has so far kept the relationship from spiraling out of control. However, stability is not guaranteed; and without the U.S. President having the future flexibility to deescalate, legislation may lock in a cycle of persistent escalation.

Conclusions

The majority of the bills discussed above are early in the legislative process, but the sheer amount speaks to Congress’ priorities. Legislators have assessed China as a politically viable target, and their assertiveness in the bilateral relationship may produce an unpalatable reality.

The cumulative effect of the passage of many of these bills would be a Congressionally-mandated collision course with China. As the U.S. has experienced with the Cuban embargo, a bipartisan patchwork of laws can restrict what actions a U.S. president can take to alter an antagonistic relationship. Likewise, CAATSA demonstrated that Congress can statutorily lock the President out of options for de-escalation.

While the U.S. has succeeded in hamstringing certain Chinese companies or drawing international attention to China’s bad actions, it has not fundamentally changed the relationship in its favor. As Congress tinkers with how the next few decades of U.S.-China relations will be defined, the needle appears to be headed in only one direction. For companies with a footprint in China, this means a trade environment that is more complex, more prone to drastic swings, and fraught with risks of being caught in a crossfire.

DISCLAIMER

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials herein are for general informational purposes only.