In this week's edition:

• EU-China EV Tariffs
• U.S. Condemns China over South China Sea Friction with Philippine Ships
• Trump’s National Security Advisor Advocates Further Economic Decoupling from China
• China Has No Preference in the Winner of the U.S. Election
• U.S. Urges Allies to Help in Curbing Chinese AI Progress
• Pelosi and U.S. Lawmakers Meet with Dali Lama, Aggravating China
• U.S. and India Commit $90 Million to AI and Semiconductor Research
• China Outpacing U.S. in Nuclear Exports
• China Explores Laws Targeting Taiwanese President
• TikTok Battles U.S. Government Over Ban and Privacy Allegations
• New Bill Bars Chinese Equipment in U.S. Chipmaking Projects Funded by Federal Act

China retaliated against the European Union (EU) last week and launched an anti-dumping investigation into EU pork prices. This comes shortly after the EU threatened to increased tariffs to 38.1% on Chinese electric vehicles (EVs), covered previously by ACG Analytics last week. These continued tit-for-tat actions are a result of the EU’s new approach to countering China's trade practices – coercing Chinese EV manufacturers to set up joint ventures in the EU and share technology under threat of tariffs, in addition to addressing China’s domestic subsidization. The goal is to bolster the European EV industry, which has fallen behind China, by securing fresh investment and expertise. Already, companies like Stellantis and Spain's EBRO-EV are partnering with Chinese firms to integrate supply chains and enhance competitiveness. However, many Chinese firms have experienced decreased sales and confidence in Europe because of the recent EU’s subsidy investigations and looming tariffs. A recent survey conducted by the China Chamber of Commerce to the EU and the China Economic Information Service revealed that 82% of Chinese vehicle and industry chain firms reported reduced confidence in investing in Europe, while 73% experienced a decline in sales. The investigation has also delayed or reduced collaborations with European partners and damaged the brands' images, making it harder to attract top European talent.

On Friday, Beijing warned that escalating frictions with the EU over EV imports could trigger a trade war. This warning coincided with Germany's Economy Minister Robert Habeck's visit to China. His 3-day trip, the first by a senior European official since Brussels proposed the hefty penalties on Chinese-made EVs, aimed to address these proposed tariffs and mitigate the risk of retaliation from China.

Germany, Europe's largest economy, has a significant interest in resolving these tensions with its considerable trade ties with China. German car manufacturers, heavily dependent on the Chinese market, have vociferously opposed the EU tariffs and called for negotiations and compromise. In 2023, nearly 1/3rd of their sales came from China, which have become considerably more vulnerable to potential Chinese retaliatory measures. Although Habeck's visit was not expected to resolve the trade tensions fully, it was seen as an opportunity to explain the EU's tariff announcement and seek a more balanced trade relationship. He met with several key Chinese officials, including Premier Li Qiang, Industry Minister Jin Zhuanglong, and Commerce Minister Wang Wentao to discuss these issues. In these discussions, Wentao proposed that Germany's luxury car manufacturers could benefit if Berlin persuades the EU to drop their planned tariffs on Chinese EV exports. In exchange, China would lower its tariffs on large-engine European cars. While Germany attempts to sway the EU’s consensus, the current situation has strained trade relations with the wider EU and China, plunging their bilateral ties and partnerships to a new low. Chinese state media saw Habeck's visit as a chance to defuse tensions and encourage consensus.

At the same time, Europe and China recently agreed to initiate talks as a first step towards resolving the trade dispute. The decision to begin discussions was confirmed during a video conference between China's Commerce Minister Wang Wentao and EU Trade Commissioner Valdis Dombrovskis, coinciding with Habeck's. The open attitude of both parties might lead to lower tariff rates than initially proposed and reflects a mutual willingness to find a solution.

Despite these discussions among the EU, Germany, and China, however, the economic and political landscape thus far increasingly favors a stronger U.S.-German/EU relationship. German exports to China fell 14% in May compared to the previous year, while exports to the United States increased by 4.1%. While the U.S. continues to contain Chinese EV dominance with its own tariffs, the EU is struggling with its collective identity and place in the trade war, balancing domestic competitiveness with maintained relations. Although the bilateral discussions are expected to cool tensions, all parties involved will seek to maintain their positions and further domestic priorities.

The United States has condemned China for its "aggressive" actions following a collision between a Chinese vessel and a Philippine supply ship early Monday morning, resulting in numerous injuries for Filipino sailors. This collision near the Second Thomas Shoal is part of a long timeline of similar sea vessel contestations in the South China Sea. Both nations involved blamed each other for the collision, while Washington's Ambassador to Manila, MaryKay Carlson, and U.S. State Department officials, expressed support for the Philippines and reiterated the mutual defense treaty between the 2.

Then on Thursday, the Philippines accused China’s Coast Guard of yet another violent attack, claiming Chinese officers used “bladed weapons” against Filipino soldiers during a recent clash. Footage showed Chinese personnel brandishing an axe and other tools, damaging a Philippine rubber boat. China’s recent actions aim to test the responses of the Philippines and the U.S. These incidences are part of China asserting its vast territorial claims in the South China Sea and are likely to continue.

Robert O’Brien, former National Security Adviser to former President Trump, in a recent opinion piece, advocates for a complete economic decoupling from China if the former President is re-elected, proposing 60% tariffs on Chinese goods and stringent export controls on technology beneficial to China. However, the feasibility and economic impact of such measures are under question, as decoupling the world’s 2 largest economies could harm the U.S. more than China and is impractical without international cooperation. The interconnectedness of global supply chains and the roles of 3^rd countries make complete decoupling a significant challenge. While the Biden Administration pursues targeted decoupling in strategic sectors, there is skepticism about Trump's ability to fully implement O’Brien's recommendations due to potential economic repercussions and global resistance. Trump has long held the domestic economy as a paramount concern, and the moves O’Brien suggests could have substantial negative impacts on the already cooling U.S economy. Although indicative of what former Trump advisors will advocate for in a 2^nd administration, this opinion piece should be viewed as just that, opinion.

U.S. intelligence agencies have assessed that China sees no clear preference between President Joe Biden and former President Donald Trump in the upcoming presidential election since both are expected to pursue and deepen the negative trajectory in U.S.-China relations. Beijing views both candidates as determined to contain China's rise, albeit with different means. Trump is likely to rekindle his trade war against China and possibly raise 60% tariffs on Chinese goods, yet he could also further weaken America's alliances in ways that create opportunities for Beijing.

In contrast, Biden will further the regional partnerships, including both the Quad and AUKUS, to mitigate Chinese assertiveness in the region and contain Beijing. Yet, concerns notwithstanding, Biden's imperative of consulting with his allies could have some strategic upsides for China, which encourages caution and moderation. Chinese leaders also recognize that a second term of the Trump Administration could bring impulsive, unpredictable policymaking and provocative statements, but also more potential ways to negotiate on sensitive topics like Taiwan. A Biden Administration would also be expected to continue the recent trend of reducing China's access to technology and expanding U.S. semiconductor production, a deepening irritant in the bilateral relationship.

Although there is a threat of Chinese influence in the U.S. election, officials from the Office of the Director of National Intelligence (ODNI) suggest that Beijing is cautious, as it is aware of the implications and possible reactions from Washington. Whether Trump wins or Biden wins, both Washington and Beijing are preparing for worsening bilateral relations. As former Chinese diplomat Gao Zhikai put it, “Whoever wins, China needs to deal with them as they are, rather than hoping for the unrealistic.”

U.S. Under Secretary of Commerce for Industry and Security, Alan Estevez, visited Japan and the Netherlands last week, as the United States urges its allies to impose further restrictions on China's semiconductor sector —particularly high-bandwidth memory (HBM) chips critical for artificial intelligence (AI). The visit aims to limit Dutch company ASML and Tokyo Electron of Japan from operating in the Chinese mainland. This move is part of ongoing efforts to curb China’s technological progress for national security reasons. The U.S. seeks global cooperation, but both Japan and the Netherlands have been resistant, preferring to assess current export bans and the potential impact of the upcoming U.S. presidential election in November. China opposes these U.S. efforts, characterizing them as coercive and urging countries to protect their own interests. Despite this, the U.S. has become concerned over the chipmaking equipment strides that China has been making, and new legislation may further tighten restrictions on using Chinese tools in U.S.-funded chip factories in a new Congress.

This week, the U.S., Japan, and South Korea will hold a trilateral Industry Ministerial meeting in Washington on issues concerning supply chains, technology security, and export control measures against China. The meeting follows an agreement struck at Camp David during a Leaders' Summit to have regular discussions with U.S. Commerce Secretary Gina Raimondo, Japan's Trade Minister Ken Saito, and South Korea's Industry Minister Ahn Duk-geun.

The U.S. and India have agreed to jointly invest $90 million over the next 5 years to research artificial intelligence and semiconductor technologies. The announcement follows a meeting between U.S. National Security Adviser Jake Sullivan and Indian counterpart Ajit Doval. Another key area of collaboration in this agreement includes the U.S. supporting American business investments to help meet the growing demand in India's semiconductor industry due to advances in generative AI. This comes as part of President Joe Biden's efforts to strengthen ties with India to counter China’s growing influence in the Indo-Pacific.

According to a report from the Information Technology and Innovation Foundation, China's rapid expansion of its domestic nuclear energy capabilities is positioning it to dominate global nuclear reactor exports, well ahead of the United States’ market share. With ambitions to build 150 new reactors by 2035, including small modular reactors (SMRs), China leverages its “dual-circulation" strategy, combining domestic growth with international competitiveness. In contrast, U.S. nuclear development has lagged, with only 2 reactors launched in the past decade. The report recommends that U.S. policymakers adopt a “one-stop-shop"—one that increases domestic nuclear deployment and globally supports exporters through government coordination, strengthened financing, and international collaboration—so that the United States does not fall further behind China, which is already deploying SMRs commercially.

China has intensified pressure on Taiwan's new President. On Friday, Beijing listed specific laws, underlining punishments for activities supporting an independent Taiwan, detailing “support” as promoting Taiwan's membership in international organizations, official exchange, and military contact and cooperation activities with foreign countries. Punishments for these infringements range from prison sentences to the death penalty. While the guidelines do not name Taiwan's ruling Democratic Progressive Party President Lai Ching-te or former President Tsai Ing-wen, both have pushed to promote Taiwan internationally and to strengthen the island's military, often with U.S. and international backing. The laws target a small group of “die-hard separatists” rather than the majority of the people in Taiwan, suggesting that Beijing may continue to target prominent media figures who challenge its stance on Taiwan's status, particularly in politics, education, culture, history, and news media.

TikTok and its parent company ByteDance have argued that the U.S. government disregarded their national security agreement and has instead opted for the ban where ByteDance is required to divest from TikTok by January 19^th. TikTok disclosed it had come up with a 90-page comprehensive agreement, incorporating multi-layered safeguards in a bid to address the U.S. governments’ issues over security. Despite these assurances to ensure the protection of user data, lawmakers were not satisfied and pointed out that there remained a risk with China's control of the platform. TikTok claims “There is no proof,” and that the ban would be an attack on free speech and detrimental to content creators on the app. The Justice Department is defending the ban as necessary to oppose threats from autocratic nations. The Department said it will file responses by July 26^th and has set an expedited case schedule that could allow a resolution by December 6^th.

Tangentially, the Justice Department will drop 1 of the 2 proposed claims against ByteDance and TikTok, preferring to focus on allegations related to children's privacy. Expected to be filed in December, the lawsuit will center on the alleged violations of the “Children's Online Privacy Protection Act” (COPPA), a Federal law prohibiting collecting data from children under 13. Dropped from this lawsuit were the claims that TikTok misled the public about how much personal and financial information its employees based in Beijing had access to. The FTC had referred both matters to the Justice Department, which decided to proceed only with the alleged children's privacy transgression, about which TikTok had earlier agreed to pay $5.7 million in 2019 to resolve FTC allegations that it illegally gathered children's data.

A new bill aims to prevent companies receiving Federal chipmaking funds from using Chinese-made equipment in U.S. facilities, part of efforts to curb Beijing’s influence on domestic chip production. It would apply to companies like Intel and Taiwan Semiconductor Manufacturing, banning them from making purchases of chipmaking equipment from China, Russia, North Korea, and Iran for their U.S.-based projects funded by the 2022 Chips and Science Act. The Act included $39 billion in grants and $75 billion in credits and loans to help expand the domestic semiconductor industry.

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