China in Transition

U.S.-China Confrontation Intensifying on All Fronts amid COVID-19
—Would Tensions Ease after U.S. Presidential Election?

Chi Hung KWAN
Consulting Fellow, RIETI

Against the backdrop of the global COVID-19 pandemic, the U.S.-China confrontation has spread from trade to the full spectrum of bilateral relations. Since the inauguration of the Trump administration in 2017, Washington has transitioned its traditional engagement with China to a decoupling of the U.S. and Chinese economies, which has expanded from trade to direct investment, technological and financial areas. Chinese policy has become a focus of attention in campaigns for November's U.S. presidential election. How the election result would influence U.S.-China relations is attracting attention.

1. U.S.-China relations deteriorated further amid COVID-19 expansion

As COVID-19 originating from China has rapidly spread throughout the world, the United States has been plagued with the world's largest numbers of COVID-19 infections and deaths. It has held China responsible for the pandemic and been alerted to China's attempt to take advantage of the pandemic for expanding its influence.

1) Holding China responsible for COVID-19 expansion

President Donald Trump has held China responsible for COVID-19 expansion in the following way (Note 1).

"China's cover-up of the Wuhan virus allowed the disease to spread all over the world, instigating a global pandemic that has cost more than 100,000 American lives and over a million lives worldwide. Chinese officials ignored their reporting obligations to the World Health Organization and pressured the World Health Organization to mislead the world when the virus was first discovered by Chinese authorities. Countless lives have been taken, and profound economic hardship has been inflicted all around the globe… (China) allowed them (infected people) to freely travel throughout the world, including Europe and the United States. The death and destruction caused by this is incalculable."

In response, China made the following rebuttal (Note 2).

"Since the outbreak of COVID-19, the Chinese government has taken the most comprehensive, rigorous and thorough prevention and control measures in a timely manner to contain the spread of the epidemic, effectively cut off the chain of transmission of the virus, and made a major contribution to global public health security, which has been widely praised by the international community. According to a study in Science, the measures taken by China have reduced the number of infected people in the country by more than 700,000.
"Facts are the best answer. The Chinese side locked down Wuhan on January 23, and there were no commercial flights or trains leaving Wuhan from January 24 to April 8. The three major U.S. airlines announced the suspension of direct flights between China and the U.S. on January 31, and on February 2, the U.S. government banned the entry of Chinese citizens and foreigners who had visited China in the past 14 days. I wonder what he meant by saying China let infected people ‘travel freely’?
"Between China and the U.S., who is incompetent and guilty of inadequate response? Let the numbers speak for themselves. The U.S. now (June 1) has more than 1.8 million confirmed cases and more than 100,000 deaths, nearly 22 times the number in China.
"Scapegoating China will not drive away the virus or cure the sick. We urge those in the U.S. who still want to label and politicize the virus to put their mind and energy into fighting the epidemic at home."

While President Trump has stuck to holding China responsible for the COVID-19 expansion in the United States in a bid to avoid criticism that his administration's policy failure led the United States to become the world's most COVID-19 infected country, his bid might have failed to be accomplished. An ABC News/Ipsos Poll on July 29 and 30, 2020, found that 66% of respondents disapproved of his handling of COVID-19, far exceeding 34% who approved it (Chart 1). A poll by Dalia Research indicated that the percentage share for respondents rating China's response to the COVID-19 pandemic as better than the United States' surpassed that for those seeing the U.S. response as better in 51 economies excluding the United States and Japan (Note 3).

Chart 1 Changes in Approval Rating for President Trump's Handling of COVID-19
Chart 1 Changes in Approval Rating for President Trump's Handling of COVID-19
Source: Compiled by the author from Kendall Karson, "Trump in Trouble as Nearly Two-thirds of Americans Disapprove of His Handling of COVID-19, Protests, Russia: Poll" ABC News/Ipsos Poll, July 31, 2020

2) China increasingly viewed as threat

In response to the spread of COVID-19, Americans have increasingly recognized that China's rise is a threat to the United States.

China became the first country plagued with the spread of COVID-19, but its tough response including lockdowns has allowed economic activities to go in the direction of normalization faster than in other countries such as the United States. Year-on-year real GDP growth in the second quarter of 2020 came to 3.2% in China in contrast to a 9.1% contraction in the United States. (In the first quarter of 2020, China posted a 6.8% contraction against a 0.3% increase in the United States.) For some time to come, the U.S.-China growth gap may remain greater than before the COVID-19 crisis. As a result, China could replace the United States as the world's largest economy faster than earlier expected.

As the United States has plunged into massive medical equipment and drug shortages, it has no choice but to increase medical equipment and drug imports from China. Concern is growing that U.S. national security would be at risk if China refuses to supply the United States with strategic materials in an emergency. The U.S. government is pledging to help U.S. companies to relocate their factories from China to the United States.

While competition between different systems has become a factor behind the U.S.-China confrontation, the Chinese model that greatly restricts individual rights has taken a lead over the U.S. system that respects individual rights in curbing with the pandemic. While COVID-19 infection was contained within a relatively short period in China, the infection is still spreading in the United States.

Finally, China is trying to take advantage of the pandemic to increase its global influence. Since COVID-19 started an explosive global spread, the Trump administration has maintained its "America First" foreign policy or unilateralism, remained unable to promptly support other countries and decided to secede from the World Health Organization. In contrast, China has provided mainly developing countries with medical supplies, increasing its presence in the international community.

In fact, a poll by the Bertelsmann Foundation, the German Marshall Fund of the United States, and Institut Montaigne in France, Germany, and the United States in May 2020 indicated a growing recognition in the three countries that while the United States' influence on the global stage substantially declined through the pandemic, China's influence remarkably increased (Note 4). Specifically, the percentage share for respondents citing China as the world's most influential country increased sharply to 28% from 13% in the January 2020 poll in France, to 20% from 12% in Germany and to 14% from 6% in the United States.

Some experts position the COVID-19 pandemic as a critical phase of the U.S.-China struggle for supremacy. In this respect, Kurt M. Campbell, a former U.S. assistant secretary of state for East Asian and Pacific Affairs, and Rush Doshi, director of the Brookings Institution's China Strategy Initiative, made the following point (Note 5).

"As Washington falters, Beijing is moving quickly and adeptly to take advantage of the opening created by U.S. mistakes, filling the vacuum to position itself as the global leader in pandemic response. It is working to tout its own system, provide material assistance to other countries, and even organize other governments. The sheer chutzpah of China's move is hard to overstate. After all, it was Beijing's own missteps—especially its efforts at first to cover up the severity and spread of the outbreak—that helped create the very crisis now afflicting much of the world. Yet Beijing understands that if it is seen as leading, and Washington is seen as unable or unwilling to do so, this perception could fundamentally alter the United States' position in global politics and the contest for leadership in the twenty-first century.
In 1956, a botched intervention in the Suez laid bare the decay in British power and marked the end of the United Kingdom's reign as a global power. Today, U.S. policymakers should recognize that if the United States does not rise to meet the moment, the coronavirus pandemic could mark another ‘Suez moment."

2. From economic disputes to all-out confrontation

The U.S.-China confrontation had focused on economic issues over a long term, but it has expanded to a full range of diplomatic issues including from the COVID-19 infection spread to Hong Kong, Taiwan, the South China Sea, Xinjiang, Chinese espionage and propaganda.

1) Enforcement of Hong Kong national security law

In order to end Hong Kong political turbulence since rallies against the so-called extradition bill in 2019, China at a session of the National People's Congress (NPC) in May 2020 decided to enact the Law on Safeguarding National Security in the Hong Kong Special Administrative Region. The NPC Standing Committee passed the law on June 30. The law bans terrorism, secession, regime subversion, collusion with foreign forces and other acts. The maximum penalty is life imprisonment. The law also provides for the establishment of a powerful national security agency in Hong Kong and mainland China's investigations and deliberations on individual cases.

Concern has grown in the international community over the Beijing-led enactment of the Hong Kong national security law, as symbolized by the G7 Foreign Ministers' Statement on Hong Kong (Note 6).

"We, the Foreign Ministers of the United States, Canada, France, Germany, Italy, Japan, the United Kingdom, and the High Representative of the European Union underscore our grave concern regarding China's decision to impose a national security law on Hong Kong.
China's decision is not in conformity with the Hong Kong Basic Law and its international commitments under the principles of the legally binding, UN-registered Sino-British Joint Declaration. The proposed national security law would risk seriously undermining the "One Country, Two Systems" principle and the territory's high degree of autonomy. It would jeopardize the system which has allowed Hong Kong to flourish and made it a success over many years.
Open debate, consultation with stakeholders, and respect for protected rights and freedoms in Hong Kong are essential.
We are also extremely concerned that this action would curtail and threaten the fundamental rights and freedoms of all the population protected by the rule of law and the existence of an independent justice system.
We strongly urge the Government of China to reconsider this decision."

In particular, the United States made a strong reaction. On July 15, President Trump signed into law the Hong Kong Autonomy Act, passed by the U.S. Congress unanimously, and issued an executive order to end preferential economic treatment for Hong Kong (Note 7).

The Hong Kong Autonomy Act imposes sanctions on financial institutions that do business with Chinese officials involved in the enactment of the Hong Kong national security law. It also requires the Department of State to make an annual report on officials attempting to undermine the "One Country, Two Systems" policy in Hong Kong, empowering the president to ban these officials' entry into the United States and seize their assets. Based on the act, the Trump administration on August 7, 2020, announced that sanctions would be imposed on 11 officials including Hong Kong Chief Executive Carrie Lam.

Although the Hong Kong Policy Act of 1992 allowed the United States to treat Hong Kong separately from Mainland China for matters concerning legal and economic systems under the "One Country, Two Systems" policy, the executive order revoked preferential treatment for Hong Kong passport holders and license exceptions for exports to Hong Kong and suspended the United States' extradition agreement with Hong Kong (Note 8).

2) U.S. enhancing relations with Taiwan

Taiwan has increased independence aspirations since the Democratic Progressive Party's Tsai Ing-wen was reelected president in January 2020. The independence aspirations have grown further due to China's enforcement of the Hong Kong national security law. As Taiwan's relations with Beijing have chilled, its relations with the United States, including military ties, have been growing closer.

On May 20, 2020, U.S. Secretary of State Mike Pompeo issued a statement congratulating Taiwanese President Tsai on her second inauguration and calling Taiwan "a reliable partner," indicating an emphasis on relations with Taiwan. In response, the Chinese Foreign Ministry in a statement condemned that the Pompeo statement and other U.S. practices "are in serious violation of the one-China principle and the three China-U.S. joint communiqués, and constitute grave interference in China's internal affairs."

U.S. Secretary of Health and Human Services Alex Azar visited Taiwan to pay tribute to former Taiwanese President Lee Tenghui who died on July 30, 2020, and met with President Tsai on August 10. In response, a Chinese Foreign Ministry spokesman stated that "China consistently and firmly opposes any official interactions between the United States and Taiwan (Note 9).

China has been alerted to the expansion of U.S. arms sales to Taiwan. Soon after the U.S. government approved Taiwan's plan to recertify its Patriot Advance Capability-3 ground-based air defense missiles in July, China announced to impose sanctions on Lockheed Martin, prime contractor for the PAC-3 sale (Note 10).

Against this background, the armed forces of the United States, China and Taiwan have taken actions that may further raise tensions in the Taiwan Strait, including military drills by China and Taiwan, Chinese fighter aircraft's entry into Taiwan's air defense identification zone, and U.S. naval ships' frequent passages through the strait.

3) South China Sea territorial sovereignty issues

The United States has been alerted to China's enhancement of its territorial sovereignty claims and military presence in the South China Sea, as indicated by the following document (Note 11).

"As part of our worldwide freedom of navigation operations program, the United States is pushing back on Beijing's hegemonic assertions and excessive claims. The United States military will continue to exercise the right to navigate and operate wherever international law allows, including in the South China Sea. We are speaking up for regional allies and partners and providing security assistance to help them build capacity to withstand Beijing's attempts to use its military, paramilitary, and law enforcement forces to coerce and prevail in disputes. In 2018, the United States military withdrew the invitation for the PLA to participate in the biennial Rim of the Pacific exercise due to Beijing's deployment of advanced missile systems onto manmade features in the South China Sea."

In a press statement on China's expansion into the South China Sea on July 13, 2020, U.S. Secretary of State Pompeo officially condemned that "Beijing's claims to offshore resources across most of the South China Sea are completely unlawful," indicating Washington's support for a July 2016 ruling by an Arbitral Tribunal in The Hague that rejected China's claims over the South China Sea (Note 12).

Furthermore, the U.S. government on August 26, 2020, banned exports to 24 Chinese companies and imposed sanctions on individuals for their part in military drills and artificial island construction in the South China Sea (Note 13).

In response to a series of U.S. statements and actions regarding the South China Sea, China claimed that "China's territorial sovereignty and maritime rights and interests in the South China Sea are solidly grounded in history and law and consistent with relevant international law and practice." It went on to say: "The United States, as a country outside the region, wishes nothing but chaos in the South China Sea so that it can gain from the muddied waters. To this end, it goes to great lengths to stoke trouble and sow discord between China and other regional countries, thwarting and undermining efforts by China and ASEAN countries to maintain peace and stability (Note 14).

In such situation, the United States and China have conducted their respective large-scale military exercises in the South China Sea, intensifying their confrontation.

4) Xinjiang human rights issue

Washington has criticized Beijing for having detained more than a million Uighurs and members of other ethnic and religious minority groups in indoctrination camps in the Xinjiang Uighur Autonomous Region since 2017 and for having instituted outside these camps a police state employing emerging technologies such as artificial intelligence and biogenetics to monitor ethnic minorities' activities to ensure allegiance to the Chinese Communist Party (Note 15).

In a bid to exert pressure on China in this respect, the U.S. government on July 9, 2020, announced that it would impose sanctions on four Chinese officials including Chen Quanguo, the Communist Party Secretary of the Xinjiang Uighur Autonomous Region, for their engagement in human rights abuse in the region under the Global Magnitsky Act, which allows the U.S. government to freeze U.S. assets of persons engaging in human rights abuse in any country and prohibit such persons from traveling to the United States or doing business with Americans (Note 16).

On July 20, 2020, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) announced that 11 Chinese companies would be added to the Entity List based on the Export Administration Regulations (EAR) for their engagement in human rights abuse against ethnic minorities in the Xinjiang Uighur Autonomous Region. In October 2019 and June 2020, the BIS added a total of 37 Chinese companies and organizations to the Entity List for the same reason.

5) "China Initiative" prosecutions

In his remarks at the Hudson Institute in Washington on July 7, 2020, Federal Bureau of Investigation (FBI) Director Christopher Wray stated that the counterintelligence and economic espionage threat from China was the "greatest long-term threat" to the United States. He condemned Beijing for its alleged attempt to influence U.S. policies through economic espionage, illegal political activities, bribery, and blackmail. The FBI director also pointed out that the FBI was opening a new China-related counterintelligence case about every 10 hours and that Chinese espionage was targeting not only government agencies but also business, academic and research institutions (Note 17). In particular, FBI Director Wray criticized the Chinese government for trying to bring out secret documents and information from U.S. companies and research institutions through U.S.-based Chinese scientists who apply to China's so-called Thousand Talents Program to invite top scientists from foreign countries.

The U.S. Department of Justice launched the China Initiative in November 2018 to counter Chinese national security threats and protect U.S. technologies. The initiative brings the U.S. government's enforcement actions on Chinese nationals and companies operating in the United States and those cooperating with U.S. companies or universities, according to the department. Individual researchers or scientists having connections with China are also subject to investigation under the initiative. The China Initiative also focuses on identifying and prosecuting those engaged in trade secret theft, hacking and economic espionage, on protecting U.S. critical infrastructure against external threats through foreign direct investments and supply chain compromises, and on combatting covert efforts to influence the American public and policymakers without proper transparency (Note 18).

Numerous efforts have been made under the Chinese Initiative, including the following cases that have attracted wide attention:

On December 1, 2018, Meng Wanzhou, chief financial officer and daughter of the founder of Chinese telecommunications conglomerate Huawei, was arrested in Canada at the U.S. government's request for her extradition. U.S. authorities have charged her with bank fraud and other charges over an allegation that she gave false statements to banks on deals with Iran.

On January 28, 2020, Charles Lieber, a former chair of Harvard University's Chemistry and Chemical Biology Department, was arrested on charges of making false statements to federal authorities regarding his connections with China and Wuhan University of Technology (his participation in China's Thousand Talents Program) while receiving financial assistance from the U.S. Department of Defense and National Institute of Health for military-related research.

Apart from the China Initiative, the United States in July 2020 ordered China to close its consulate-general in Houston, claiming that the consulate-general was a hub for espionage and intellectual property theft (Note 19).

In a bid to restrict the Chinese government's propaganda in the United States, meanwhile, the Trump administration in 2020 designated the Confucius Institute American Center and Chinese media organizations, including Xinhua, China Central Television, China News Service, and the People's Daily, as the Chinese Communist Party's propaganda organs or diplomatic missions subject to tougher regulations. The designation requires these organizations to report lists of employees, their employment conditions, and property they own or lease in the United States, as foreign embassies and consulates-general in the United States do. In May 2020, furthermore, the United States limited the visa term for Chinese reporters to 90 days.

3. U.S. and Chinese economies on a path to decoupling

While U.S.-China relations have been deteriorating more and more, the United States has been enhancing its anti-China offensive to deal an economic blow to China while exerting military pressure. Although the U.S.-China trade war has entered a cease-fire since the signing of a bilateral economic and trade agreement in January 2020, the trend towards decoupling between their economies regarding direct investments, technologies, and finance has become more and more apparent.

1) Trade war has entered a cease-fire

U.S.-China trade disputes that developed into a trade war were triggered by Washington's announcement of sanctions on China that include additional tariffs under Article 301 of the U.S. Trade Act, following the release of an investigation report on China in March 2018. China responded by taking retaliatory measures. As symbolized by the subsequent tit-for-tat exchange of tariff hikes, their trade disputes escalated into a trade war. By September 2019, the United States had levied additional tariffs up to 25% in four tranches on $370 billion worth of Chinese products accounting for two-thirds of imports from China.

On December 13, 2019, the United States and China announced that they reached their Phase 1 trade agreement. Subsequently, U.S. President Trump and Chinese Vice Premier Liu He signed the U.S.-China economic and trade agreement at the White House on January 15, 2020. In the agreement, China pledged to substantially increase imports from the United States (Note 20). However, most of the additional U.S. tariffs on Chinese imports have been maintained. A U.S. request for China to revise industrial policies and subsidies has been left pending along with China's request for the United States to repeal additional tariffs. Future negotiations on these issues are viewed as extremely difficult (Note 21).

2) High-tech war breaking out

For national security concerns, the United States is trying to block Chinese companies' acquisition of U.S. high-tech companies and to ban Huawei and other Chinese high-tech companies from the U.S. market.

On August 13, 2018, President Trump signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA) to expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) that screens foreign companies' investments in the United States. FIRRMA regulates foreign companies' investments in U.S. companies that have key technologies or industrial infrastructure. The act allows the CFIUS to screen non-passive foreign investments in U.S. companies (including even small investments to gain access to unpublished technology information owned by U.S. companies or participate in or engage with boards of directors of U.S. firms) in addition to the original screening target of foreign investments to take control of U.S. firms.

The enforcement of FIRRMA has led CFIUS screening to become stricter, halting most Chinese firms' acquisitions of U.S. high-tech companies. According to a joint report by the National Committee on United States-China Relations and Rhodium Group, Chinese direct investments in the United States peaked at $45 billion in 2016 and declined dramatically to $29 billion in 2017, $5.4 billion in 2018 and $5.0 billion in 2019. Chinese investments in U.S. ventures also plunged from $4.7 billion in 2018 to $2.6 billion in 2019 (Note 22).

The United States is also trying to exclude Chinese information technology companies from the U.S. market for the reason of national security risks. China's National Intelligence Law requires any organization or person to support, help, and cooperate in national intelligence activities. Its Cyber Security Law requires network operators to cooperate in Chinese pubic and national security agencies' national security and investigation activities. Based on these laws, the United States has claimed that Huawei, ZTE, and other Chinese companies are compelled to cooperate with China's public and national security services even when doing business abroad, creating security vulnerabilities for foreign countries and enterprises utilizing Chinese vendors' equipment and services (Note 23).

The United States has first targeted Huawei that accounts for a large share of the global telecommunications equipment market and has cutting-edge technology for the fifth-generation mobile network, coming up with actions to exclude the Chinese company from the input (sales) and output (parts procurement) sides of its global supply chain.

Regarding sales, the National Defense Authorization Act for Fiscal Year 2019, enacted in August 2018, included a ban on U.S. government procurement from Huawei as well as ZTE, Hytera Communications, Hikvision and Dahua. The ban was enforced in two phases. In the first phase from August 2019, the U.S. government was prohibited from procuring, acquiring, using, or signing, extending, or renewing contracts for telecommunications equipment or services that include these Chinese companies' products or services as major components or key technologies. In the second phase from August 2020, the government was banned from signing, extending, or renewing contracts with companies that use telecommunications equipment or services that adopt the Chinese firms' products or services as major components or key technologies.

Furthermore, the Federal Communications Commission (FCC) designated Huawei and ZTE as national security threats on June 30, 2020, preventing rural small telecommunications business operators from using federal subsidies for purchasing or maintaining equipment made by the two Chinese firms.

Regarding parts procurement, the U.S. Department of Commerce put Huawei and its 68 affiliates on the Entity List based on the EAR on May 15, 2019, and added 46 other Huawei affiliates to the list in August 2020, banning U.S. high-tech parts exports to the Huawei group in principle. The export ban has covered products that are produced in foreign countries such as Japan if U.S. companies' parts or software account for content of more than 25% of these products. Some exceptions to the export ban were temporarily admitted (Note 24). In May 2020, U.S. export regulations targeting Huawei were further toughened to ban exports to Huawei of semiconductors produced overseas with U.S. technologies used in principle. As a result, Taiwan's TSMC, a major semiconductor supplier for Huawei, was banned from supplying semiconductors to Huawei (Note 25). In August 2020, the export ban was further expanded to make it impossible for Huawei to use third parties for procuring semiconductors (Note 26). At the same time, 38 more Huawei affiliates were added to the Entity List, with the temporary exceptions expiring.

Chinese companies that the United States tries to exclude from the U.S. market are not limited to Huawei and other telecommunications equipment makers but include companies that operate mobile applications. On August 6, 2020, President Trump signed an executive order for ByteDance, the Chinese company that owns the TikTok video-sharing mobile application, to separate and sell its U.S. operations and another order prohibiting residents in the United States from doing transactions involving the WeChat mobile application owned by Tencent Holdings of China, for the reason of national security risks in which U.S. citizens' personal information could be collected (Note 27). orders were set to take effect in 45 days. In response, ByteDance launched negotiations with U.S. companies such as Microsoft to sell its U.S. operations (Note 28).

These U.S. actions are in line with the Clean Path initiative and its expanded version called the Clean Network program (Note 29)). The Clean Path initiative calls for excluding equipment and services from untrusted vendors such as Huawei and ZTE. The Clean Network program cites the following five lines of effort:

  1. (1) Clean Carrier: To ensure "untrusted carriers" are not connected with U.S. telecommunications networks.
  2. (2) Clean Store: To remove "untrusted applications" such as TikTok and WeChat of China from U.S. mobile application stores.
  3. (3) Clean Apps: To prevent Huawei and other "untrusted PRC smartphone manufacturers" from using U.S. applications.
  4. (4) Clean Cloud: To prevent such Chinese companies as Alibaba, Baidu, and Tencent from accessing cloud-based systems in the United States.
  5. (5) Clean Cable: To ensure the undersea cables connecting China to the global internet are not used for intelligence gathering by the Chinese Communist Party.

In this way, the United States has expanded its high-tech war with China to cover the 5G mobile network, semiconductors, software, networks, and other digital fields in a bid to exclude Chinese high-tech industries from global networks.

3) Financial decoupling put into sight

In pursuit of U.S.-China economic decoupling, the United States has expanded sanctions on China to cover not only trade, direct investment, and technology, but also finance.

Regarding U.S. investments in Chinese equities, the Trump administration has been trying to halt plans to invest federal employee retirement funds in Chinese companies that Washington suspects of human rights abuses or threatening U.S. security (Note 30). In response, the Federal Retirement Thrift Investment Board, which administers the Thrift Savings Plan for federal employees, announced that a plan for investments in Chinese equities on May 13, 2020, would be postponed indefinitely.

On Chinese companies' fundraising on the U.S. stock market, the Trump administration on August 6, 2020, recommended a plan to force Chinese companies to give up their listings on U.S. stock exchanges unless they comply with U.S. audit requirements. Under the plan, Chinese companies listed on the New York Stock Exchange or NASDAQ market would be delisted unless they comply with the requirements by 2022. Chinese auditors would be required to share audit papers with U.S. auditing authorities. Chinese firms planning initial public offerings in the United States would fail to be listed on the New York Stock Exchange or NASDAQ market unless they comply with the requirements (Note 31).

The United States has also been developing law for sanctions on Chinese financial institutions. For example, the Hong Kong Autonomy Act provides for sanctions not only on individuals contributing to violating Hong Kong's autonomy but also on financial institutions that do business with these individuals. Sanctions on a financial institution include (1) refusal of credit from any U.S. institution, (2) prohibition from acting as a primary dealer in U.S. debt, (3) prohibition from acting as an agent of the U.S. government for U.S. public funds, (4) prohibition from participating in foreign-exchange transactions, (5) prohibition on the financial institution from entering into financial transactions with other financial institutions, (6) prohibition on the financial institution from holding, using or dealing with any property, (7) prohibition on the export of commodities or software to the financial institution, (8) prohibition on any U.S. person from investing in equity or debt of the financial institution, (9) excluding officers or controlling shareholders from the United States, and (10) imposition of any sanctions (1) to (8) above on the individual officers of the financial institution.

As the preservation of the "one Country, two Systems" principle becomes a volatile point of friction between the United States and China, global banks risk being caught between Beijing-backed penalties and sanctions being debated in the United States (Note 32). Article 29 of the Hong Kong national security law forbids sanctions, blockades or hostile activities against Hong Kong as the financial hub and China while the United States is inching closer to enacting rules that would require banks to comply with sanctions against Chinese officials and entities. Running afoul of the legislations puts banks at risk of fines or losing their license to do business.

In the meantime, it is feared that Chinese banks penalized by United States under financial sanctions would be cut off from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) financial messaging service and other international settlement systems (Note 33). In preparation for such event, BOC International, the investment banking unit of the Bank of China, has proposed that China increase use of its Cross-Border Interbank Payment System (CIPS) for cross-border transactions in Mainland China, Hong Kong and Macau (Note 34).

4. Attention-attracting U.S. presidential election and direction of the next U.S. administration

As the U.S.-China confrontation intensifies, with COVID-19 infections expanding, Americans' views of China have deteriorated persistently. According to a poll released by the Pew Research Center in July 2020, American adults having an unfavorable view of China accounted for 73% of respondents in the latest poll, the highest share since the poll was launched in 2005 (Chart 2). Those viewing China as unfavorable commanded 83% of Republican Party supporters and 68% of Democratic Party supporters, indicating that Americans' unfavorable views of China have expanded on a bipartisan basis. It is believed that towards the November 2020 presidential election, both Republican candidate Trump and Democratic candidate Joseph Biden should take tough attitudes against China to attract voters. In particular, Trump on the back foot may be required to emphasize his anti-China attitude.

Chart 2 Unfavorable Views of China Reach New Highs in U.S.
Chart 2 Unfavorable Views of China Reach New Highs in U.S.
Note 1: Don't know responses not shown.
Note 2: 2020 (summer) data are based on a poll of American adults between June 16 and July 14.
Source: Compiled by the author from Laura Silver, Kat Devlin and Christine Huang, "Americans Fault China for Its Role in the Spread of COVID-19," Pew Research Institute, July 30, 2020

Usually, U.S. presidential election campaigns focus on domestic economic issues. Foreign policy is not so significant for ordinary voters. Naturally, domestic economic performances are the key to President Trump's reelection. Due to the COVID-19 expansion and the government's insufficient response to that, however, the Trump administration's economic achievements in its first term have been lost. Trump has no choice but to focus presidential election campaigns on China-bashing.

Biden for his part indicates his readiness to cooperate with China in some fields while calling for enhancing the United States' partnership with allies to check China, as shown below (Note 35).

"The United States does need to get tough with China. If China has its way, it will keep robbing the United States and American companies of their technology and intellectual property. It will also keep using subsidies to give its state-owned enterprises an unfair advantage—and a leg up on dominating the technologies and industries of the future. The most effective way to meet that challenge is to build a united front of U.S. allies and partners to confront China's abusive behaviors and human rights violations, even as we seek to cooperate with Beijing on issues where our interests converge, such as climate change, nonproliferation, and global health security."

Biden has also vowed to repeal tariffs imposed by President Trump on Chinese imports, which he claims effectively amount to tax on U.S. consumers and companies (Note 36).

Biden views China as a threat as Trump does, but he indicates a more flexible China policy than Trump. Therefore, China is viewed as hoping to see Biden elected president.

"There are no illusions about restoring relations back to the good old days, but a new president at least provides a chance to reset relations," a Chinese official told Reuters, indicating such hope (Note 37). William R. Evanina, director of the United States National Counterintelligence and Security Center, gave an assessment that China sees Trump as "unpredictable" and prefer that he does not win reelection (Note 38).

Even if Trump is reelected, however, he could ease pressure on China. As noted by his former National Security Adviser John Bolton, Trump has toughened his attitude against China for the purpose of winning reelection and would turn conciliatory to China and get back into a big trade deal negotiation if the purpose is achieved (Note 39).

As a matter of course, no excessive optimism can be warranted. Depending on future course of U.S. actions and China's reaction in a run-up to the U.S. presidential election, the U.S.-China confrontation could escalate further into a contingency situation. Even if their tensions ease after the presidential election, the United States and China may remain on a path to economic decoupling.

The original text in Japanese was posted on September 7, 2020.
Updated on May 13, 2020.

  1. ^ "Remarks by President Trump on Actions against China," Remarks, White House, May 29, 2020.
  2. ^ Foreign Ministry Spokesperson Zhao Lijian's Regular Press Conference on June 1, 2020
  3. ^ Fred Deveaux, "Democracy Perception Index 2020," Dalia Research, June 15, 2020.
  4. ^"The Transatlantic Trends 2020," The Bertelsmann Foundation, the German Marshall Fund of the United States, and Institut Montaigne, June 30, 2020.
  5. ^ Kurt M. Campbell and Rush Doshi "The Coronavirus Could Reshape Global Order," Foreign Affairs, March 18, 2020.
  6. ^ "G7 Foreign Ministers' Statement on Hong Kong," June 18, 2020.
  7. ^ "The President's Executive Order on Hong Kong Normalization," Executive Orders, White House, July 14, 2020.
  8. ^ In response, the Chinese Foreign Ministry in its statement on July 15, 2020, said: "The (Hong Kong Autonomy) Act maliciously denigrates the national security legislation for Hong Kong, and threatens to impose sanctions on China. It seriously violates international law and the basic norms underpinning international relations. It constitutes gross interference in Hong Kong affairs and China's internal affairs." It also indicated that China would "make necessary response and sanction the relevant individuals and entities of the United States."
  9. ^ Chinese Foreign Ministry spokesperson Zhao Lijian's regular press conference on August 12, 2020.
  10. ^ Chinese Foreign Ministry spokesperson Zhao Lijian's regular press conference on July 14, 2020.
  11. ^ "United States Strategic Approach to the People's Republic of China," White House, May 26, 2020.
  12. ^ Michael R. Pompeo Secretary of State, "U.S. Position on Maritime Claims in the South China Sea," Press Statement, State of the United States.
  13. ^ "U.S. Targets Chinese Individuals, 24 Cos amid South China Sea Dispute," Reuters, August 26, 2020.
  14. ^ Chinese Foreign Ministry spokesperson Zhao Lijian's regular press conference on July 14, 2020.
  15. ^ "United States Strategic Approach to the People's Republic of China," White House, May 26, 2020.
  16. ^ In response, the Chinese Foreign Ministry announced that the Chinese government decided to impose corresponding sanctions on U.S. Ambassador-at-Large for International Religious Freedom Sam Brownback and three U.S. lawmakers. (Chinese Foreign Ministry Spokesperson Hua Chunying's regular press conference on July 13, 2020.)
  17. ^ Christopher Wray, "The Threat Posed by the Chinese Government and the Chinese Communist Party to the Economic and National Security of the United States," Remarks at the Hudson Institute, July 7, 2020.
  18. ^ "Information about the Department of Justice's China Initiative and a Compilation of China-related Prosecutions since 2018," U.S. Department of Justice, Last updated August 4, 2020.
  19. ^ In retaliation for the U.S. order for China to close the Houston consulate-general, China ordered the United States to close its consulate-general in Chengdu.
  20. ^ China's imports from the United States in the first seven months of 2020 declined 3.5% year on year, indicating that, at the current pace, China would fail to accomplish a promised target for the whole of the year.
  21. ^ On August 24, 2020, the Office of the U.S. Trade Representative announced that U.S. and Chinese cabinet members participated in a call to discuss implementation of the bilateral Phase 1 agreement. The parties discussed the significant increases in purchases of U.S. products by China as well as future actions needed to implement the agreement. ("Statement on Call Between the United States and China," Press Releases, Office of the United States Trade Representative, August 24, 2020.)
  22. ^ Thilo Hanemann, Daniel H. Rosen, Cassie Gao and Adam Lysenko, "Two-Way Street - US-China Investment Trends – 2020 Update," Rhodium Group, May 2020.
  23. ^ "United States Strategic Approach to the People's Republic of China," White House, May 26, 2020.
  24. ^ On May 15, 2019, the BIS of the U.S. Department of Commerce announced that it would issue a temporary general license authorizing four types of transactions, including those for maintaining and supporting networks and equipment operated under existing contracts with Huawei and its affiliates.
  25. ^ "Commerce Department Further Restricts Huawei Access to U.S. Technology and Adds Another 38 Affiliates to the Entity List," U.S. Department of Commerce, August 17, 2020.
  26. ^ "Commerce Department Further Restricts Huawei Access to U.S. Technology and Adds Another 38 Affiliates to the Entity List," U.S. Department of Commerce, August 17, 2020.
  27. ^ "Executive Order on Addressing the Threat Posed by TikTok," Executive Orders, White House, August 6, 2020; "Executive Order on Addressing the Threat Posed by WeChat," Executive Orders, White House, August 6, 2020.
  28. ^ China's Ministries of Commerce, and Science and Technology announced rules on artificial intelligence technology exports on August 28, 2020. As the rules were likely to cover some technologies used for TikTok, negotiations with U.S. companies on the sale of TikTok operations were slowed. (Georgia Wells and Cara Lombardo, "TikTok Deal Talks Are Slowed over New China Rules," The Wall Street Journal, August 30, 2020.)
  29. ^ "Secretary Michael R. Pompeo at a Press Availability," Remarks to the Press, State Department of the United States, April 29, 2020; "Announcing the Expansion of the Clean Network to Safeguard America's Assets," Press Statement, State Department of the United States, August 5, 2020.
  30. ^ Alexandra Alper, "Trump Pressed to Halt Federal Pension Investments in China's ZTE, Hikvision," Reuters, April 21, 2020.
  31. ^ Dave Michaels, "White House Seeks Crackdown on U.S.-Listed Chinese Firms," The Wall Street Journal, August 6, 2020.
  32. ^ Cathy Chan, "Global Banks Risk Breaching China Law by Complying with U.S.," Bloomberg, July 10, 2020.
  33. ^ Karen Yeung and Zhou Xin, "Hong Kong Security Law: China Weighs Risk US Will Go for ‘Nuclear Option' and Cut Beijing from the Dollar Payment System," South China Morning Post, June 1, 2020.
  34. ^ "Chinese Banks Urged to Switch Away from SWIFT as U.S. Sanctions Loom," Reuters, July 29, 2020.
  35. ^ Joseph R. Biden, Jr., "Why America Must Lead Again Rescuing U.S. Foreign Policy after Trump," Foreign Affairs, March 2020.
  36. ^ Remarks by Joseph R. Biden, Jr., at the Combined Convention of the National Association of Black Journalists and the National Association of Hispanic Journalists, August 6, 2020
  37. ^ Keith Zhai, Michael Martina and Tony Munro, "Ahead of U.S. Election, China Braces for Rocky Ride, Potential Change," Reuters, July 25, 2020.
  38. ^ "Statement by NCSC Director William Evanina: Election Threat Update for the American Public," The National Counterintelligence and Security Center, August 8, 2020.
  39. ^ "Bolton Says Trump's Tough Stance on China Likely Election Calculation," Kyodo News, July 30, 2020.

October 27, 2020