The clashes of the last few weeks between the U.S. and China might be leading to a system overload on the many circuits involved in the bilateral relationship. The White House has rolled out actions at a fast and furious pace lately, but with few details—which has left companies trying to scenario plan for anything and everything.
The U.S. “whole of government” approach targets China on all fronts and all at once. In just the past two weeks, for example, the Administration has announced new and potential measures across a staggering array of issues:
- Hong Kong Legislation: On July 14, President Donald Trump signed into law the Hong Kong Autonomy Act and signed an executive order removing Hong Kong’s special status. The Act requires sanctions on Chinese officials and entities materially “contributing to the erosion of Hong Kong’s autonomy.” Financial institutions doing business with those who will appear on the yet-to-be-released blacklist could also face sanctions.
- Banning Apps: President Trump, Secretary of State Mike Pompeo, and White House Trade Advisor Peter Navarro all indicated that the Administration is considering a ban on Chinese apps, like the Indian government did recently.
- Targeting Visas: The State Department announced on July 15 that they will be imposing visa restrictions on Chinese technology firms for providing material support to regimes engaging in human rights violations and abuses globally. One day later, they announced that they are exploring not granting any member of the Chinese Communist Party or their family a visa, which has the potential of cutting off more than 270 million people. However, the Administration walked back its plan to eliminate visas for foreign students studying in the United States online (of which there are 360,000 from China—by far the largest demographic).
- Uyghur Human Rights Legislation: On July 9, President Trump announced sanctions against four Chinese officials, including the Xinjiang Communist Party chief, who is also a Politburo member. This was the first time a sitting Politburo member has ever been sanctioned. On June 17, the Uyghur Human Rights Policy Act of 2020 was signed which allowed for these sanctions on officials responsible for China’s forced labor camps targeting Uyghur Muslims and other Muslim minority groups. Earlier this month, the Departments of State, Treasury, Commerce, and Homeland Security jointly issued a business advisory urging U.S. and non-U.S. businesses, academic institutions, research service providers, and investors with connections to Xinjiang to implement appropriate human rights due diligence policies, procedures, and internal controls to mitigate reputational, economic, and legal risks or face the risk of sanctions or law enforcement activity. And, on July 20, the U.S. sanctioned 11 Chinese companies for human rights abuses, effectively barring them from purchasing U.S. tech and products.
- Condemning Actions in the South China Sea: On July 13, Secretary Pompeo announced that the U.S. rejects China’s claims to offshore resources in the South China Sea and will stand with countries that have made these claims. This was the first time that the U.S. claimed China’s actions were “completely unlawful”.
- Consulate Closures: On July 22, the U.S. Government ordered the closure of the Chinese Consulate in Houston within 72 hours in order “to protect American intellectual property and Americans' private information." In response, there is now speculation that the Chinese government will order the U.S. Consulate in Chengdu to close. And, the FBI Director accused the Chinese Consulate in San Francisco of harboring a fugitive Chinese scientist.
Confusion and Uncertainty Abounds
For many of these actions with impacts on business, it is unclear how they will actually be implemented or who could appear on the various sanctions list, making it difficult to anticipate Chinese actions let alone be clear on how to take internal actions to implement the policies.
With the Hong Kong legislation, there is not yet clarity about the type of financial transactions that will be covered or the banks that will be targeted. China’s state-owned banks are among the largest banks in the world; it is hard to imagine how they could be sanctioned without severely impacting the global financial system. Therefore, there is speculation that it will be mid-sized or smaller Chinese banks that could be impacted.
On Hong Kong, in addition, there is discussion about restricting visas on certain high-level officials.
With the Uyghur legislation, it is unclear how to implement the advisory. Cotton producers in China have been a focus, causing some confusion for retailers importing cotton apparel and products from China.
The visa announcements have made everyone confused, including students from China and those looking to study in China. There is speculation that recent statements on banning CCP officials are intended more to demonstrate how far the Trump Administration will go to push back on China in order to boost the campaign.
Meanwhile in China, the government’s actions so far have been a direct and proportional response to U.S. actions. When the U.S. kicked out Chinese journalists; China did the same. When we sanctioned Chinese officials; they do too—using our same criteria. There is speculation that the U.S. Consulate closure will result in China closing a consulate in China, potentially in Wuhan.
One of the biggest issues of concern, however, is how and when China could unveil their Unreliable Entity List, and who might be on it. We continue to hear that the criteria for the list are under development and discussion, but so far there is no list of companies. That, however, could change based on ongoing U.S. actions. This week, China sanctioned Lockheed Martin for sales to Taiwan, for example.
Any Glimmers of Hope?
It remains to be seen how deep the damage will be based on the recent actions involving consulates. For now, one positive area of engagement has been the phase one trade deal. Implementation is moving apace, and there is a strong working relationship on the trade front where bilateral conversations are ongoing, and the Chinese government has been consistently serious about implementing their commitments.
While China is most definitely not on track to meet purchasing commitments on energy—and maybe services—there is another year to catch up and much uncertainty in that market. It is unfortunate that the energy targets were all set in dollar amounts versus quantities as the rock bottom prices in the sector will make it very hard to hit targets this year.
Yet China has rolled out a new plan on intellectual property rights fulfilling their obligations. They have moved on financial services opening on the agreed-upon timeline. One of the real indicators on how well the agreement is being implemented will be when and if these American applications for wholly foreign-owned entities or majority ownership are approved.
Against so much uncertainty around global economic recovery and when the coronavirus will come under control, having this additional layer of uncertainty from a spate of policy announcements is one of the biggest challenges for U.S. companies operating in China. China-focused actions by the Administration move markets and impact jobs.
Nevertheless, we are in the election season and China is a centerpiece of both campaigns. It seems as if the Trump team has calculated that being tough on China is good for polls. For the time being, we will be working with clients to scenario plan for any and all eventualities.
Edelman and Basilinna have partnered to provide multinational corporations with expanded communications and government relations advisement in China, the Middle East, and United States. The new alliance combines the full range of Edelman’s integrated global communications services with Basilinna’s specialized strategic consulting to help clients navigate through current international market dynamics.
Kirsty Graham is CEO, Edelman Public Affairs; Deborah Lehr is CEO and Founding Partner, Basilinna; Leigh Wedell is COO and Founding Partner, Basilinna.
