In this week's edition:

• The Big Picture 
• U.S. and Chinese Commerce Ministers Hold Talks
• U.S. and China to Explore Renewal of Tech Cooperation Deal 
• New U.S.-China Climate Deal 
• Blinken Says China Should Expect Candid Statements After Biden calls Xi a “Dictator” 
• Report to Congress Indicates Deterioration in U.S.-China Relations
• Lawmakers Introduce Bill on Restricting Investments into Chinese Technologies
• IPEF Partner Countries Release Joint Statement 
• Vice President Harris and Philippines President Marcos Meet
• Chinese Tech Giants Feel Repercussions of U.S. Chip Bans and Outline Plans to Minimize Impacts on Cloud Computing 
• Automotive Industry Concerned Over China’s Graphite Controls 
• U.S. and Indonesia to Explore Semiconductor Supply Chain Opportunities

Last week was billed as a momentous moment in the U.S.-China relationship after Presidents Biden and Xi met in San Francisco. Among the list of outcomes, the 2 leaders agreed to resume military-to-military communications and curb fentanyl production and distribution in China. Xi then sat down with U.S. business leaders to emphasize that China is open to foreign business despite measures over the last several years to crack down on such business. Those in the room said that the talk was as frank and open as they can remember and very business-friendly. However, there was also plenty of skepticism about Xi’s desire/ability to follow through with many of the promises and the direction of China’s economies.

In other public comments, Xi signaled a less confrontational posture, saying that China is not expecting the imminent demise of the United States and expressing his wish for the U.S. and China to work together on the international stage. It is clear, however, that Xi now sees China as a global player on par with the United States, not merely a regional player. On this track, Biden played to China’s greater global role in asking for his support to calm global tensions and urge Iran to not intensify the Israel-Hamas war. He also was dovish towards Taiwan despite again reiterating that he wants to see a Taiwan unified with the mainland. For his part, Biden reaffirmed the “One China” policy.

As expected, the meeting did not include any tangible/significant announcements (the U.S. and China have signed fentanyl deals before) but appears to have managed to turn down the temperature.

In our view, the way to view these developments is as a short-term détente rather than a full-scale turn in the relationship. The remaining question is for how long does this relative détente last and will it turn market sentiment towards China? The successful meeting, as well as the announcement of a joint, pro-China, Presidential ticket in Taiwan, certainly have reduced geopolitical risk surrounding China in the near-term. It is similarly clear that the Biden-Xi meeting failed to produce any breakthroughs on the “micro” level irritants, notably technology supply chains and trade more generally. Xi appealed to Biden on this, but predictably failed to make any progress.

As China’s stimulus takes hold and the economic downslide potentially reaches its trough, sentiment could become more optimistic. This was evident in the lead-up to the summit, as China rallied on sentiment and then sold post-meeting. The incentive for the 2 sides to keep relations at their current, calmer level from the 30,000 foot perspective, remain intact at least through the 2024 U.S. elections.

U.S. Secretary of Commerce Gina Raimondo and China’s Minister of Commerce Wang Wentao met in San Francisco and engaged in productive discussions on U.S.-China economic and trade relations and other concerns. Plans were also established for an additional in-person meeting in early 2024.

These outcomes reflect the mutual desire for enhancing economic and trade collaboration amid global uncertainties. However, challenges remain in U.S.-China economic relations, as the U.S. shows little inclination to ease restrictions on China’s high-tech sector.

"Generalization and politicization of national security affects normal trade and investment exchanges between the two countries, and it is very important for both sides to discuss the boundary of national security on the trade front," Wang told Sec. Raimondo.

China and the U.S. have agreed to initiate discussions on renewing a technology cooperation agreement and restarting the U.S.-China joint commission on agriculture, Chinese Foreign Minister Wang Yi told media after President Biden and Xi’s meeting. Wang also announced a mutual commitment to advance and initiate negotiation mechanisms on a range of critical issues, including export controls, APEC affairs, arms control, and non-proliferation.

The U.S. and China have also revealed a new climate agreement. The agreement was announced this week by U.S. climate envoy John Kerry and his Chinese counterpart, Xie Zhenhua, and involves commitments to triple the global renewable energy capacity by 2030, reduce fossil fuel emissions, and incorporate all greenhouse gases in the climate proposals submitted under the Paris Agreement.

U.S. Secretary of State Antony Blinken stated that China should expect candid statements after President Joe Biden called President Xi Jinping a “dictator” after meeting with him.

When asked about President Biden’s description of President Xi, Sec. Blinken stated “The president always speaks candidly, and he speaks for all of us. Look, it’s clear that we will continue to say things and continue to do things that China doesn’t like, just as I assume that they will continue to do and say things that we don’t like.”

A report to Congress outlined that despite renewed diplomatic engagement, tensions between the U.S. and China have escalated, with Beijing exhibiting little inclination to make significant concessions.

In its annual report to Congress, the U.S.-China Economic and Security Review Commission stated “The result of high-level meetings between the United States and China has been merely the promise of further meetings — that is, of more talk rather than concrete actions. China has shown an increased willingness to engage with the United States, but there is little evidence that it intends to make concessions or modify its own policies to improve relations.”

The report also recommended that Congress should consider consolidating programs from the Commerce and Defense Departments into a single export licensing system to enhance export control enforcement. Furthermore, it urged lawmakers to advocate for a review by the Government Accountability Office (GAO) to assess whether semiconductor controls designed to impede China’s technological progress are effectively achieving the objective.

Rep. Michael McCaul (R-TX), Chair of the Foreign Affairs Committee, and Ranking Member Gregory Meeks (D-NY) introduced “The Preventing Adversaries from Developing Critical Capabilities Act,” which would require the Treasury Department to expand on President Biden’s executive order (EO) to limit outbound investments in 3 sensitive technology sectors in China. The EO addresses the semiconductor, artificial intelligence, and quantum science sectors, while the new legislation would restrict investment into critical and emerging Chinese technology companies.

“We know Beijing is developing technological capabilities with the intent to endanger our national security, and U.S. dollars should not help those efforts. Our bill applies outbound investment restrictions to Russia, Iran, and North Korea in addition to the People’s Republic of China, and expands the technology sectors covered by the Biden administration’s executive order to include hypersonics and high-performance computing,” they said in a statement.

Additional legislation concerning U.S. investment into Chinese technology sectors is expected as Congress determines its next steps for its annual defense authorization bill.

The U.S. with the 13 other members of the Indo-Pacific Economic Framework (IPEF) signed onto a supply chain agreement as they met on the sidelines of APEC. The Biden Administration planned to use the agreement, as well as the IPEF as a whole, as a means to project U.S. power in the region. However, IPEF members are unsure if the U.S. will commit to trade rules being established under the trade pillar due to opposition from lawmakers, including Senate Banking Chairman Sherrod Brown (D-OH). For countries in the region, the United States’ reluctance to enter into a multilateral trade agreement echoes the events of the last decade in which the U.S. negotiated but ultimately did not join the Trans-Pacific Partnership. Senior Vice President for International Policy at the U.S. Chamber of Commerce, John Murphy, said “Collapse of the IPEF trade pillar would deal a blow to US standing in the region…To follow President Trump’s withdrawal from the TPP with President Biden’s capitulation on his own trade arrangement would be a dreadful setback for US leadership.”

During remarks to the IPEF leaders’ summit, President Biden spoke about the trade pillar saying, “We have more work to do. We’ve made progress in high-standard trade rules that include strong labor and environmental standards.” President Biden also announced a “critical minerals dialogue” with IPEF members “to further strengthen our supply chain and create clean energy jobs.”

Vice President Kamala Harris and Philippines President Ferdinand Marcos Jr. restated their dedication to preserving international rules, particularly in the context of the South China Sea, according to a White House statement. The 2 engaged in talks regarding the enhancement of security alliances and the broadening of commercial and economic collaboration during the APEC gathering in San Francisco. Vice President Harris announced a new collaboration with the Philippine government aimed at expanding and diversifying the global semiconductor industry.

Vice President Harris also met with Papua New Guinea Prime Minister James Marape to discuss exploring pathways to enhance bilateral security cooperation, fortify economic collaboration, and intensify efforts to combat climate change.

Chinese tech giants, such as Alibaba Group Holding and Tencent Holdings, are feeling the repercussions of the most recent U.S. chip export controls but have plans to reduce their impacts. The 2 companies cautioned investors about the potential consequences on their cloud computing business due to increased U.S. export controls. The controls limit the sale of specific advanced semiconductors and chip-making equipment to China.

In its third-quarter earnings call, Alibaba announced the abandonment of its initial plan to fully spin off its cloud computing unit because of “uncertainties” arising from U.S. restrictions. In a separate earnings call, Tencent announced that the limitations would impact its capability to provide AI chips to customers through its cloud services.

This is the first time China’s big tech companies have publicly acknowledged the U.S. export controls.

Representatives from the North American automotive industry have expressed concerns that China may employ new export controls to limit the access of graphite to electric vehicle producers.

Last month, the U.S. increased controls on semiconductor exports and Beijing announced that graphite producers will need to obtain permits to continue exporting specific products crucial for the manufacturing of electric vehicle batteries. The method for issuing these permits and the potential for supply chain restrictions is still uncertain but has raised concerns among electric vehicle producers. It is also unclear whether the Chinese government intends to deny exports.

The State Department released a press statement saying that it will work with the Indonesian government in exploring possibilities to diversify the global semiconductor industry. The partnership will begin with an examination of Indonesia’s existing semiconductor ecosystem, regulatory framework, and infrastructure and workforce requirements. The outcome of the review will determine potential future collaboration.

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