At G7, Biden Stands Up to China. New ‘Restrictions’ Coming

President Joe Biden stood firm against a general European consensus not to rock any boats in Beijing regarding human rights at last week’s G7 meeting. In the end, he got them to agree in the final communique that they need to address China’s non-market economic practices and forced labor issues.

CPA is pleased to see Biden maintaining a relatively seamless approach in White House China policy after taking the baton from the Trump administration.  Or as Foreign Policy columnist and author of “Failure to Adjust: How Americans Got Left Behind in the Global Economy”, Edward Alden, wrote on Friday, somewhat begrudgingly, “the revolution that Trump started is alive and well—and continuing in abler hands.”

During his press conference on June 17, National Security Adviser Jake Sullivan said China can expect to see some trade restrictions from G7 countries soon because of forced labor practices in Xinjiang, home to the Uyghur Muslims.

“We expect other G7 partners will look at various forms of restrictions on goods that are proven to be produced with forced labor,” Sullivan told reporters on Thursday, citing cotton and apparel made from cotton in Xinjiang as well as actions taken against individual companies like Hefei Bitland Information Technology, makers of graphics cards for Lenovo and HP laptops.

U.S. Customs has bans on dozens of companies selling everything from computer parts to hair extensions and was a first-mover on this as Europe watched from the sidelines, at first.  Sullivan believes Europeans’ attitudes are changing on human rights matters as Biden continues to push his “work with allies” rhetoric to set him apart from the previous administration. The EU in March joined with the United States on sanctioning Chinese officials responsible for the massive Uyghur population control operation in Xinjiang.

It’s been a tough slog for both U.S. and European companies coping with charges by the State Department of genocide in Xinjiang. Many of them in the fashion apparel business have been highly wishy-washy, at best, in taking on China for their treatment of the Uyghurs; a people subject to forced imprisonment, and physical torture that includes forced abortions. China never denies these things, and in turn, says that its program of forced birth control is good for women because they don’t have to stay home all day to take care of children.

Such is the company many American (and European) companies keep in China.

Over the weekend, American multinational clothing maker, VF Corp. out of Denver, backpedaled on their criticism of Xinjiang and is now back to saying they are against human rights violations. North Face sales may suffer. But is that not a small price to pay? There are tens of millions of people from other countries they can sell to.

Meanwhile, Sullivan said he didn’t know what the actual restrictions would be from Europe, which has been calling China a “systemic rival” and imposing various restrictions of their own. He said that restrictions “will vary country by country” and that the timing on them will vary country by country, as well. “But our expectation is that we will align in a broad approach to take tangible action against or related to the supply chains emerging from forced labor,” Sullivan said.

Restrictions: Here’s an Idea

Restrictions against China are not expected to be targeted to individuals but will ban commerce with companies involved in human rights abuses in Xinjiang and elsewhere. Beijing says that the Uyghurs, which constitute a large portion of the population in the region, are in “re-education camps” as part of China’s own “war on terrorism”.

To date, the only restrictions on China for its human rights abuses in Xinjiang have been targeting companies reasonably believed to be engaging in forced labor. Customs and Border Protection also banned product lines – in this case cotton and tomato derivatives.

Still, China knows it can benefit from the profit motive of both American and European corporations. China doubts these companies will turn away from its market.

What’s another way to restrict China?

On June 3, Biden followed in Trump’s footsteps yet again by issuing Executive Order 14032 targeting some 43 Chinese companies backed in some way by its military. Companies like China Mobile, a defense contractor, were delisted from the U.S. stock exchange along with China Unicom and China Telecom.

Biden’s EO states that it is designed to “ensure that U.S. investments are not supporting Chinese companies that undermine the security or values of the United States and our allies.”

Does the non-market principles aspect of China also undermine the U.S. and its allies?

We think so.

The banning of China Mobil from the NYSE means no U.S. investor can own their shares, including those listed in Hong Kong, Shanghai or Shenzhen.

But Chinese corporate human rights abusers are unphased. They have full access to U.S. financial markets. Some of these companies are part of the egregious human rights violations in Xinjiang. If they are not listed here, there is nothing stopping BlackRock and State Street from investing in these companies. Both are major investors in recently sanctioned Chinese companies.

One solution is prohibiting U.S. persons from buying or selling shares of certain Chinese companies, much like prohibitions now in place on the Chinese Military Industrial Complex list. U.S. nationals have to divest from those companies, most of which are listed in China.

Currently, effective U.S. penalties toward human rights abusers, especially those involved in Xinjiang, are dealt with through the Commerce Department’s “Entity List” or through Customs import bans. Companies on the Entity List are restricted from doing business with U.S. firms, but Wall Street firms are not restricted from investing in Chinese companies on that list.

Wall Street can continue to invest in Chinese companies that profit from the surveillance state apparatus across China from Tibet to Hong Kong, for instance.

Biden’s EO number 14032 maintains key provisions of the Trump-era EO number 13959. It institutionalizes bipartisan support for the first-ever capital market sanctions against Chinese corporate “bad actors” in the military primarily.

But, are only the companies working as defense contractors “bad actors”?

Going forward, the White House should consider adding to its China securities ban a number of companies that are part of the infrastructure of Uyghur prison camps. The Chinese Military-Industrial Complex list needs a companion; call it the “Chinese Corporate Human Rights Abusers” list. This would make it so Wall Street can’t invest in companies involved in wanton human rights violations. Xinjiang would be a good starting point.

Biden is expected to talk with Chinese President Xi Jinping in the next few months, Sullivan said. “Soon enough, we will sit down to work out the right modality for the two presidents to engage,” he said. “Now, it could be a phone call; it could be a meeting on the margins of an international – another international summit; it could be something else.”

The G20 leaders summit is in Italy in October, Sullivan noted, and Xi and Biden are expected to attend.