GP Short Notes

GP Short Notes # 909, 23 May 2024

The New US Sanctions on China: Bilateral and Global Fallouts of US-China Trade War
Lakshmi Karlekar

What happened? 
On 14 May, President Biden announced an increase in tariffs on specific Chinese imports amounting to USD 18 billion to force China to curtail its unfair trade practices, including government subsidies and preferential treatment given to domestic manufacturing. 

On 09 May, the US Commerce Department added 37 units of China Electronics Technology Group Corporation (CETC) to the Entity List. Earlier, on 01 May, the US also placed sanctions on 20 Chinese and Hong Kong-based companies, including Jiangxi Xintuo Enterprise, which supported Russia's military by developing, acquiring, and distributing Russian drones and satellite systems. 

What is the background? 
First, the ongoing US-China trade war that began in 2018. Former US President Donald Trump started imposing tariffs and other trade barriers as sanctions on China, intending to pressure China to alter its unfair trade practices and intellectual property theft. Since then, China has been subject to sanctions by the US over issues including violations of human rights, its involvement in espionage, and backing of Russia's military operations in Ukraine. The US sanctions aim to limit China's technological prowess by restricting access to important tech suppliers.

Second, the complaint over China's subsidies. The Chinese government has been pouring state funds into various industries for years: semiconductors, electric cars, solar panels, steel, aluminum, and essential medical supplies like masks and gloves. These products have received significant subsidies from China, forcing Chinese businesses to produce far beyond what the rest of the world can use. Furthermore, other manufacturers worldwide are in trouble due to these excess products being pushed onto marketplaces at unfairly low prices. 

Third, the national security and human rights concerns relating to the US's sanctions. President Biden declared that additional tariffs would target particular goods and industries. The US Department of Commerce reports that 721 Chinese companies have been placed on an "entity list" that limits their capacity to buy products from the US. 

Fourth, Beijing's response to the sanctions. China has recently implemented several measures, including the following. The Unreliable Entity List (UEL) and the Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Laws and Other Measures were established by two orders issued by China's Ministry of Commerce (MOFCOM) in September 2020 and January 2021, respectively. China also enacted the Foreign Relations Law in June 2023 and the Anti-Foreign Sanctions Law ("AFSL") in June 2021, which gave the Chinese government the power to retaliate against sanctions from the US. 

What does it mean?
First, the fallout of US sanctions on China. The sanctions have increased producer expenses, consumer pricing, and financial hardships for US farmers. The trade conflict in China exacerbated a downward trend in the country's already diminishing industrial and economic output growth rate. Stock market volatility was another result. There are concerns that the trade war may cause the US and Chinese economies to "decouple" due to the relocation of many American companies' supply chains to other parts of Asia. Increasing tariffs can significantly harm economic activity in a globalized society with global value chains. Global sourcing by businesses generally suggests that higher tariffs typically applied to safeguard domestic industries may result in higher input costs for domestic producers. It debunks the essence of liberal trade with no barriers to the free flow of goods and services.

Second, the Blocking Statues outside the US. The European Union, Canada, and the United Kingdom have enacted blocking statutes in response to the secondary sanctions, complex enforcement, and compliance issues that the United States has created for China. These statutes usually permit companies to violate US laws but also mandate that companies notify the appropriate authorities of any US sanctions enforcement actions. Certain companies in the United States and China might take a pragmatic stance towards the sanctions and carry on with their business dealings, directly or indirectly. Yet, they risk paying a fine to US authorities for doing so. Alternatively, they might attempt to evade these penalties and countersanctions by collaborating with companies in other nations, or they might devise alternate strategies to inoculate themselves against these sanctions.

Third, the rise in Chinese Nationalism. Wang Yi, the Foreign Minister of China, declared that Washington's "lengthening" list of unilateral sanctions had reached "bewildering levels of unfathomable absurdity" and charged that Washington was "devising various tactics to suppress China." Wang lauded China's growing relationship and recorded trade with Russia, which would continue despite the actions, in sharp contrast to his remarks about the US China's determination to increase its "self-reliance and strength in science and technology," with Beijing signalling that it will do so rather than do nothing and wait for US tech-related tensions to subside. The Chinese retaliation may take the form of currency devaluation of the Yuan, export restrictions on US product exclusions, or tit-for-tat counter-tariffs.

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