Aug 18, 2020

Axios China

Happy Tuesday and welcome back to Axios China. Today, we've got trade ties, the great U.S.-China tech decoupling, salty egg yolk ice cream, and a whole lot more.

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Today's newsletter is 1,580 words, a 6-minute read.

1 big thing: Trade is now the relative bright spot in U.S.-China ties

Illustration: Eniola Odetunde/Axios

Trade is the last major area where the U.S. is still relying on traditional diplomacy to work through problems with China.

Why it matters: U.S.-China relations are at their lowest point in decades, as both sides have taken an increasingly harder line over Hong Kong, Xinjiang, the South China Sea and other issues. The desire to keep the trade deal alive seems to be keeping the relationship from unraveling entirely.

  • “The one area we are engaging is trade,” White House economic adviser Larry Kudlow said at a press briefing last week.

Driving the news: The U.S. and China were scheduled to meet over the weekend to review the phase one trade deal signed in January, but the meeting was delayed.

  • Beijing may welcome the delay because it provides more time to catch up on import commitments, the South China Morning Post reported.
  • China agreed to increase its purchases of U.S. goods and services by $77 billion this year under the terms of the phase one trade agreement.
  • It has so far fallen short of this commitment, though Chinese officials have attributed this to the coronavirus outbreak and the resulting lockdowns and economic slowdown.

Background: For the first part of Trump's presidency, trade was the primary target of his ire, echoing his rhetoric during the 2016 presidential race, when he railed against China's unfair trade practices.

  • But the Trump administration has increasingly adopted a fiercely hawkish stance on the Chinese Communist Party, and since the coronavirus outbreak, Trump has made countering China a key cornerstone of his re-election campaign.
  • In the past few months alone, the U.S. closed the Chinese Consulate in Houston, levied several rounds of sanctions on Chinese officials and entities deemed complicit in human rights abuses, urged allies to exclude Huawei from their 5G networks, issued an executive order restricting Chinese social media companies TikTok and WeChat, and declared China's activities in the South China Sea to be illegal.

Amid this onslaught of unilateral moves, trade negotiations remain the only major area in which the White House is still publicly engaging in meaningful high-level diplomacy with Beijing.

  • In fact, it seems as though hopes for further progress on trade negotiations played a role in initially delaying the U.S. from taking some of these actions.
  • President Trump told Axios' Jonathan Swan in a June interview that trade negotiations were the reason that he didn't sanction China for human rights abuses in its northwestern region of Xinjiang.

What's next: A phase two deal doesn't seem to be in the cards right now — even Trump has said he's not thinking about a second phase right now — so the focus is on preserving the phase one agreement and ensuring both sides are keeping their commitments.

The bottom line: The massive efforts put into the phase one trade deal over more than two years by Beijing and Washington have made both sides reluctant to allow the deterioration of relations to claim this part of the relationship as well.

2. A U.S. university insured itself against a drop in Chinese students

Illustration: Eniola Odetunde/Axios

In 2017, the University of Illinois at Urbana-Champaign took out an insurance policy to cover the $60 million in tuition that Chinese students paid to the university, in case an unforeseen event precipitated a sudden drop in Chinese student enrollment.

Why it matters: School administrators recognized the risks associated with becoming overly reliant on student tuition from a single foreign country — and amid a global pandemic, their fears have proved justified.

  • This is believed to be the first time a school has insured itself for such a possibility.
  • Back in 2017, Jeffrey Brown, dean of the business school and the main proponent of the insurance policy, was worried about the potential for "a big flu scare that caused none of the students to show up on campus.”

Brown now appears prescient. In the early months of the coronavirus pandemic, many Chinese students returned to China, where many will stay as schools have turned to online-only models for the fall semester.

  • The Trump administration has stated it will deny visas to first-year international students if their universities offer online-only classes, potentially barring tens of thousands of Chinese students from entering the U.S.

"That insurance policy raised a lot of eyebrows when it was first reported on a few years ago, but it started to look smarter and smarter as the trade war heated up. Then it looked brilliant when coronavirus happened," Eric Fish, author of "China's Millennials: The Want Generation," told Axios.

  • "People have been warning universities for years about a financial over-reliance on one country. Not many have seemed to do a whole lot about it."

What to watch: If Chinese student numbers drop significantly, the University of Illinois may try to make a claim this year, according to a report by Reuters.

Bonus chart: How Russia gets paid for its exports to China

Experts are again sounding the alarm that the dollar could lose its role as the world's reserve currency. This is a frequent and historically unconsummated concern — but things may actually be different this time, writes Axios' Dion Rabouin.

What's happening: New data from the Bank of Russia shows that the country now receives more euros than dollars for its exports to China, with the share of goods purchased in euros rising from 0.3% at the start of 2014 (and just 1.3% in the second quarter of 2018) to nearly 51% at the end of Q1 this year.

  • The share of euros Russia receives for exports to the European Union increased to 43% from 38% at the end of last year, the data show.

Why it matters: Efforts by Russia and China to increase the euro's use could make the continental currency a serious challenger to the dollar.

3. Catch up quick

1. The U.S. placed further restrictions on Huawei, adding to its export blacklist 38 Huawei affiliates the Trump administration says the company used to evade its own earlier blacklisting. Go deeper.

2. A former CIA officer has been arrested and charged with allegedly sharing classified information with China, the Justice Department announced Monday. Go deeper.

3. Tencent, the Chinese parent company of WeChat, hired a former Supreme Court clerk as its first U.S. lobbyist, Politico reports.

4. U.S. lawmakers are demanding answers from the World Bank about its continued operation of a $50 million loan program in Xinjiang. Go deeper.

4. The great tech decoupling is here

Illustration: Aïda Amer/Axios

Long-standing threats from both the U.S. and China to claw apart the two countries' interdependent tech economies are finally giving way to reality, writes Axios' Ina Fried.

Why it matters: A divorce is going to be messy, with lots of near-term pain on both sides. And the end result may be a diminished, more fractured world compared to the one that existed just a couple of years ago.

Where it stands: China has long manufactured a great deal of the parts and hardware used in U.S. tech products.

  • It has also become a major consumer market for certain American tech giants, including Apple.
  • The U.S. provides the software and semiconductors that much Chinese tech runs on. Chinese firms benefiting from this arrangement include conglomerates like Tencent and Baidu as well as device makers like Xiaomi, Lenovo and Oppo.

Now, through action from both countries, the arrangement is breaking down.

  • A sometimes muddled push to attack Chinese telecom giant Huawei is starting to have global impact. Several U.S. allies have set limits on Huawei's role in supplying 5G networking gear, and Huawei now says it's running out of the chips it needs to make phones because it's cut off from doing business with U.S. suppliers.
  • U.S. companies including Apple, Disney and Walmart are warning the White House that its planned ban on Tencent-owned WeChat could hobble their entire Chinese businesses. WeChat is a multipurpose platform with total ubiquity in China, used not just for messaging, but also payments, social media and a raft of other functions.
  • The Trump administration's Clean Network proposal seeks to sever the reach of Chinese technology so it ends at China's borders, calling for a range of initiatives including blocking Chinese devices from running American apps and pressuring other countries against using China's undersea internet cables.

Context: It's not the first time barriers have gone up between the two countries' tech economies.

What's next: Both countries are already looking inward to make plans for greater tech independence. Much of that has centered around the semiconductors that power high technology, with each country trying to onshore the entire chipmaking process, from research to manufacture.

5. What I'm reading

Of course: ByteDance censored anti-China content in Indonesia until mid-2020, say sources (Reuters)

  • "Local moderators were instructed by a team from ByteDance’s Beijing headquarters to delete articles seen as 'negative' about Chinese authorities on the Baca Berita (BaBe) app," according to Reuters.
  • Maya Wang, senior China researcher at Human Rights Watch, recommends also reading this Wall Street Journal article to understand Beijing's comprehensive strategy to keep Indonesia silent on China's repression of Uighur Muslims.

Small fish: The Sino-Norwegian Relationship (Wallace Institute)

  • "Over the objections of local officials, Norway’s state highway department greenlit the Chinese state owned Sichuan Road and Bridge Group’s construction of Narvik’s Hålogaland Bridge. Federal officials feared that Chinese retaliation for a rejected bid would affect the two countries’ pending free-trade agreement."

An answer to aggression: How to push back against Beijing (Foreign Affairs)

  • Princeton political science professor Aaron Friedberg lays out a strategy to realistically counter China under Xi Jinping.
6. 1 food thing: The latest boba innovation

Photo credit: Twitter account of Amy Qin

I thought we had hit peak tapioca with Taiwan's boba pizza. But I was wrong.

  • New York Times reporter Amy Qin, currently based in Taiwan, posted these photos of a new frozen delicacy — a popsicle made with a combination of salty egg yolk, a traditional Chinese savory snack, and black tapioca balls, known as boba.
  • Honestly, these look delicious. I haven't tried them myself, but I'm envisioning flavors of custard and salted caramel.

Why it matters: Taiwan's soft power knows no bounds.

P.S. I'm looking for a good Chinese-language politics podcast. What do you like to listen to? Send me your recommendations.