Commentary on Political Economy

Sunday 28 April 2024


New Eight-Person US Group Helps Fight China Economic ‘Coercion’

    A team within the US State Department is providing advice to other nations on how to prepare for or mitigate economic pressure from China.
    A team within the US State Department is providing advice to other nations on how to prepare for or mitigate economic pressure from China. Photographer: Ng Han Guan/AFP/Getty Images


    When South Korea decided to host a US anti-ballistic missile system, the lucrative flow of tourists from neighboring China suddenly dried up. When Australia accused Beijing of meddling in its domestic politics and demanded answers over the origins of Covid-19, China stopped buying exports like coal, wine and beef.

    It wasn’t until Beijing tried to punish Lithuania for opening a liaison office with Taiwan in 2021 that Washington intervened.

    A key outcome from that episode was the creation of a team inside the US State Department to help when Beijing responds to political disputes with economic and trade weapons — what the US and its allies call economic coercion. Demand for that help has been strong, according to the US official in charge of the program.

    “Countries are coming in, and many are coming in saying ‘We want the Lithuania treatment,’” Jose Fernandez, under secretary for economic growth and the environment, said in an interview, referring to a package of trade finance, procurement deals and market access Washington offered the Baltic nation.

    Since then, about a dozen other nations in Asia, Africa, Latin America and Europe have sought guidance on how to prepare for or mitigate economic pressure from China, according to people familiar with the program, who asked not to be named discussing private information.

    Lithuanian Exports to China Slumped in 2022 On Tensions

    Exports to the US, Asia-Pacific economies rose on diversification efforts

    Source: International Monetary Fund, Taiwanese data

    Note: 10 APAC economies are Australia, Japan, India, Indonesia, Malaysia, Singapore, South Korea, Taiwan, Thailand and Vietnam

    Beijing is “using their economic clout to entice or isolate countries,” said Jose Manuel Romualdez, the ambassador to the US from the Philippines, which is being advised by the State Department on potential new export markets and other support for its agriculture sector in the case of a Beijing boycott. Those measures could include the deployment of cold storage facilities to the Philippines for agricultural products that China might boycott.

    The eight-person State Department group, known informally as “the firm” and led by Melanie Hart, the China policy coordinator in Fernandez’s office, operates like a consultancy. Among the first steps for its “clients” is an analysis of trade vulnerabilities to China by the department’s economists. It then looks for ways to help diversify export markets away from China and, if requested, offer a public show of support. The team has also conducted table-top exercises to game out different responses to Beijing, the people said.

    One driver for this strategy is a recognition that the US didn’t sufficiently support South Korea or Australia when China tried to coerce them, according to the Asia Society’s Wendy Cutler, a former US trade negotiator, who co-wrote a recent report on Chinese actions against Lithuania.

    “We decided that we had seen this movie before and that it was time to stop the tape,’ Fernandez said. Asked about the perception that the US hadn’t done enough in earlier cases, Fernandez said “I think that is a fair criticism.”

    The US government also leverages its economic power in foreign affairs, with China lobbing the “economic coercion” accusation back at Washington. The US has increasingly sought to deploy economic and trade tools in its competition with China, including sanctions, tariffs and export controls, promoting “friendshoring” to bolster supply chains and stepping up scrutiny of investments and data flows.

    They also point out that internal political divisions also mean that the US mostly can’t craft new trade agreements, the prized deals that would open up domestic markets to friendly nations.

    “It is a challenge for the United States because it does not have an offensive trade agenda,” said Deborah Elms, the founder of the Asian Trade Center in Singapore. “There just isn’t a whole lot that Washington is offering to current or potential partners on the economic side.”

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    Even if there were an active trade policy, it’s “become increasingly difficult for parties to believe that the United States would follow through and deliver,” she said, noting that Asian nations have watched the US under former President Donald Trump pull out of an Asia-Pacific trade deal and then watched the current administration fail to finalize the trade “pillar” of its own Indo-Pacific Economic Framework.

    China’s Ministry of Foreign Affairs didn’t respond to a question about the allegations of economic coercion, including against Lithuania.

    In the case of Lithuania, China ramped up pressure on Vilnius after it allowed a new Taiwanese trade office in the country to use the word “Taiwan” in its name, rather than the Beijing-approved “Taipei.”

    In a few months, Beijing blocked trade, including by deleting Lithuania from its customs system, pressured multinationals in the country to stop sourcing there, canceled trade credits and voided the official identity cards of Lithuanian diplomats in Beijing.

    Fernandez secured a trade credit offer worth $600 million from the US Export-Import Bank, a reciprocal procurement deal with the Defense Department, and improved access to the US market for agricultural products like eggs.

    There was also a series of diplomatic gestures, including high-level meetings and statements, and efforts to help Lithuanian firms sell more to US allies in Asia. The US also signed onto the European Union’s complaint at the World Trade Organization in January 2022.

    “The reaction was very swift, really very swift,” Gabrielius Landsbergis, Lithuania’s foreign minister, said in an interview, praising the support from the US and other Group of Seven nations as sending a strong signal. “I would say that the biggest assistance was political, because in most of the cases it was a political issue.”

    He also offered a warning to other nations.

    “I am 100% sure that we are not the last case,” he said. “If you’re dependent, know that it can become a weapon and most likely it will be a weapon one day.”

    Tesla’s vehicles have been banned from China’s military compounds and some other government venues in the past over data-collection concerns. The US’s top auto-safety regulator also just opened a probe into the company’s less-capable Autopilot system, citing 20 crashes that have occurred since December involving vehicles that received an over-the-air software update.

    Tesla is coming off its first year-over-year decline in quarterly revenue since 2020, having sold fewer cars even after slashing prices. The company is cutting headcount by at least 10% and looking to accelerate new models, including less-expensive vehicles, that could be ready by early 2025, if not before year-end, Musk said last week.

    China’s No. 2 official met Musk in Beijing hours after the billionaire touched down in the city. Li said the nation is always open to foreign companies, adding that Tesla is a successful example of China-US cooperation, according to China Central Television.

    Musk is paying a visit to China shortly after postponing a trip to India that was going to include a meeting with Prime Minister Narendra Modi. The CEO called off his journey on short notice, citing “very heavy Tesla obligations.”

    Musk told Li that Tesla is willing to deepen cooperation with China, CCTV said. The CEO earlier met the head of the China Council for the Promotion of International Trade, Ren Hongbin, according to the broadcaster.

    Elon Musk’s private jet arrives in Beijing on April 28.Photographer: Danny Lee/Bloomberg

    Advanced driver-assistance systems are becoming increasingly common in China, where Tesla is losing share of the EV market. Many local players including Xpeng Inc.Xiaomi Corp. and Huawei Technologies Co., use such features as a selling point for vehicles.

    Musk also has put more emphasis on FSD, instituting a requirement when the first quarter was ending that Tesla staff needed to demonstrate the features to every customer in North America before handing over cars.

    The CEO said during Tesla’s earnings call last week that FSD “actually works pretty well without modification in almost any market,” so the company planned to release the system wherever it can get regulatory approval, including China.

    “It’s just like a human — you can go rent a car in a foreign country and you can drive pretty well,” Musk said. “Obviously, if you live in that country, you’ll drive better. And so, we’ll make the car drive better in these other countries with country-specific training. But it can drive quite well almost everywhere.”

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