Trump's recent hawkish moves on China policies and personnel

Recent announcements and forced resignations may be especially bad news for semiconductor firms and US-listed PRC firms.

There is still much uncertainty about what President’s policy towards the PRC will be. Will there be a big Trump-Xi deal? Will there be an attempt at a “reverse Nixon” to split Putin away from Xi?

Looking at recent personnel moves and policy announcements one can make the argument that the Trump Administration is gearing up for a tougher approach to the PRC, in spite of backing down from the promise of 60% tariffs as soon as he took office and ignoring the law while trying to reach a deal for TikTok.

Recent announcements and forced resignations may be especially bad news for semiconductor firms and US-listed PRC firms.

Over the last ten days there have been several moves that could signal quite a tough approach towards the PRC from the Trump team. I emphasize “could signal” because the implementation details matter and Trump himself is the decider, and he has a demonstrated track record from his first term of being a capricious decider about all things China.

On February 12th Reuters reported that Landon Heid is the nominee for assistant secretary of Commerce for export administration, overseeing the Bureau of Industry and Security (BIS), which is the key bureaucracy for the chip-related export controls. Heid is known for being quite hawkish on China, having worked at the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party and before that at the Department of State on China-related technology policy issues.

On February 21st Reuters reported that the “Trump administration has forced out a senior Commerce Department official overseeing export restrictions on China”. Matt Borman, principal deputy assistant secretary of commerce for export administration, is leaving government, as is Eileen Albanese, “the longtime director of the office that processes licenses for semiconductors and other national security-controlled item” (Reuters). The semiconductor industry can not be happy about these removals.

Also on February 21st the White House released the America First Investment Policy memorandum. It is primarily about PRC-related investment into the US and US investment into PRC-related firms. Section one of the memorandum sets the background:

Investment at all costs is not always in the national interest, however. Certain foreign adversaries, including the People’s Republic of China (PRC), systematically direct and facilitate investment in United States companies and assets to obtain cutting-edge technologies, intellectual property, and leverage in strategic industries. The PRC pursues these strategies in diverse ways, both visible and concealed, and often through partner companies or investment funds in third countries.

Economic security is national security. The PRC does not allow United States companies to take over their critical infrastructure, and the United States should not allow the PRC to take over United States critical infrastructure. PRC-affiliated investors are targeting the crown jewels of United States technology, food supplies, farmland, minerals, natural resources, ports, and shipping terminals.

The PRC is also increasingly exploiting United States capital to develop and modernize its military, intelligence, and other security apparatuses, which poses significant risk to the United States homeland and Armed Forces of the United States around the world. Related actions include the development and deployment of dual-use technologies, weapons of mass destruction, advanced conventional weapons, and malicious cyber‑enabled actions against the United States and its people. Through its national Military-Civil Fusion strategy, the PRC increases the size of its military-industrial complex by compelling civilian Chinese companies and research institutions to support its military and intelligence activities.

Those Chinese companies also raise capital by: selling to American investors securities that trade on American and foreign public exchanges; lobbying United States index providers and funds to include these securities in market offerings; and engaging in other acts to ensure access to United States capital and accompanying intangible benefits. In this way, the PRC exploits United States investors to finance and advance the development and modernization of its military.

The memo states that the term “foreign adversaries” includes “the PRC, including the Hong Kong Special Administrative Region and the Macau Special Administrative Region; the Republic of Cuba; the Islamic Republic of Iran; the Democratic People’s Republic of Korea; the Russian Federation; and the regime of Venezuelan politician Nicolás Maduro.”

The memo, as Matt Turpin wrote, has as a goal to “incentivize global trade and investment flows to advantage the United States while simultaneously disadvantaging the PRC”:

(b) Yet for investment in United States businesses involved in critical technology, critical infrastructure, personal data, and other sensitive areas, restrictions on foreign investors’ access to United States assets will ease in proportion to their verifiable distance and independence from the predatory investment and technology-acquisition practices of the PRC and other foreign adversaries or threat actors.

(c) The United States will create an expedited “fast-track” process, based on objective standards, to facilitate greater investment from specified allied and partner sources in United States businesses involved with United States advanced technology and other important areas. This process will allow for increased foreign investment subject to appropriate security provisions, including requirements that the specified foreign investors avoid partnering with United States foreign adversaries.

The memo says the US government will “will review whether to suspend or terminate the 1984 United States-The People’s Republic of China Income Tax Convention. That tax treaty, along with the PRC’s admission to the World Trade Organization and the related undertaking by the United States to accord unconditional Most Favored Nation treatment to goods and services of the PRC, led to the deindustrialization of the United States and the technological modernization of the PRC military. We will seek to reverse both those trends. United States investors will invest in the future of America, not the future of the PRC”.

It also says the government will review “the variable interest entity and subsidiary structures used by foreign-adversary companies to trade on United States exchanges, which limit the ownership rights and protections for United States investors, as well as allegations of fraudulent behavior by these companies”.

If the US determines that VIE structure for US-listed PRC firms is not acceptable, then those companies will have to delist.

The implementation details matter, and these personnel and policy moves do not mean there may not be some broader US-China deal, but the bureaucracy at least does seem to be gearing up for tougher policies toward and a more difficult relationship with the PRC.