China ‘Stakes Couldn’t Be Higher’, Deputy Secretary Of State Warns Senate

Days after a China surveillance balloon was shot down over the South Carolina coast, the No. 2 at the State Department told the Senate Foreign Relations Committee that the “stakes couldn’t be higher” when it comes to U.S.-China relations.

Deputy Secretary of State, Wendy Sherman, told the Senate in her opening remarks at a hearing held on Feb. 9 that, “The Peoples Republic of China is the pacing geopolitical challenge of our era, one that touches nearly every facet of our Department’s leadership on a daily basis and one that will test American diplomacy like few issues in recent memory.”

She added that China is the only competitor the U.S. has that could seriously reshape trade relations and soft power globally.

Soft power is things like diplomatic relations, commercial relations and cultural relations. It is most simply measured in the number of corporate brands and pop cultural elements popular in a foreign country. TikTok in the U.S. is an expression of Chinese soft power, just as KFC or Disney are expressions of U.S. soft power in China.

Sherman said the spy balloon was a visible example of our new, high-stake tensions.

The U.S. military first detected the balloon over the Alaskan island chains, then tracked it as it moved east, and ultimately shot it down.

She said the recovered wreckage is still being examined and that Congress will be briefed on its contents in a classified setting.

Coping with China: ‘Invest, Align, Compete’

The Biden administration has taken the baton from the Trump administration on China. Biden has poked some holes in Trump-era China policies but has also tightened screws.

The Section 301 tariffs against China, launched in 2018, are still in place, with a few exemptions added. The Section 201 solar safeguards are still in place, with a few tweaks that favored imports. Capital market sanctions started by Trump were increased under Biden. Wall Street is now banned from investing in dozens of Chinese defense contractors. And U.S. companies like IntelINTC
face growing restrictions as to what they can and cannot sell to Chinese firms on the Commerce Department’s “Entity List” — a blacklist of Chinese companies that U.S. companies need approval for exports. The New York Times reported on Thursday that Biden is expanding this list.

For Sherman, the U.S. can best cope with China by investing at home and working with allies, a favorite euphemism used by the Biden team to differentiate from Trump since taking power.

Sherman lauded Congress for passing some bills into law that she says will help the U.S. compete with China.

“We are investing in the foundations of our strength on our shores, with funding from bills like the CHIPS and Science Act, the Bipartisan Infrastructure Law, and the Inflation Reduction Act,” she said of new laws signed in Biden’s first two years.

“We are aligning with like-minded partners around the world to strengthen our shared interests and values and to address the challenges posed by China,” she told the Senate. “Investing in ourselves and aligning with our partners gives us a stronger hand to compete with China.”

The “work with allies” approach has given way to new terminology likened by DC lobbyists — “friend-shoring.”

Here is a recent example from a House Financial Services Committee meeting on supply chain risks: Rep. Roger Williams (R-TX) asked the five witnesses what the U.S. should do to incentive companies to move out of China. “We need more local supply chains,” Williams said, meaning domestic sourcing.

“We need a competitive tax rate and regulations. I’d look at friend-shoring first,” responded Clete Willems, a partner at the massive Akim Gump lobby firm in Washington.

Sherman and others are right to want to coordinate with allies.

For instance, if Intel is banned from selling computer hardware to Huawei, a blacklisted China telecom company, what is stopping a Norwegian company from selling it to them instead? Or Taiwan, where China has some leverage due to Foxconn’s position in mainland China. Foxconn is an important Taiwanese tech manufacturer.

No one in Washington can define “friend-shoring,” of course. So Americans keener on reshoring the industrial base should take “friend shoring” to mean any country that is not China, Russia, North Korea, Iran or Cuba.

China is friend-shoring, meanwhile. To Mexico.

Chinese companies are investing in manufacturing in Mexico to game the USMCA deal, aka NAFTA 2. Mexico’s Secretariat of Economy data shows that foreign direct investment (FDI) from China into Mexico has increased to about $225 million annually, nearly quadrupling the average annual investment from the decade prior from 2007 to 2016, according to a report by economist Andrew Heritage of the Coalition for a Prosperous America.

In 2021, China FDI in Mexico was $385 million. The increase in foreign direct investment corresponds with the levy of tariffs imposed by the Trump administration in 2018, Heritage said.

Back in the Senate, Sherman said the U.S. does not seek conflict with China. This is something many Americans, the media, and much of Congress often ponder. Why is that?

If that were a Russian spy balloon over Alaska, floating across amber waves of grain to reach the beach towns of the Carolinas, it would have been blown up instantly. The world would have stopped as generals and the president held press conferences about the apparent provocation. European allies would have been asked to impose sanctions in line with new Washington sanctions. Oil prices would have risen $10 a barrel. The media would be prognosticating whether the U.S. would bomb the Russian airfield that launched the balloon, complete with sad faces of gloom and doom.

But there is a sense that China is handled with kid gloves.

One reason might be that the Pentagon, while willing to poke the Russian bear, knows that the U.S. military-industrial base is too dependent on China. Everything from rare earth minerals used for specialty magnets and navigational equipment to electronic components is sourced from China. They shut that off, and the U.S. has to scramble for material. The U.S. is only just starting to realize this and is indeed scrambling.

China is as important to American supply chains today as they were before the “trade war” began five years ago.

Earlier this month, the Bureau of Economic Analysis put out December and year-ending trade figures. The deficit with China increased $29.4 billion to $382.9 billion in 2022, our second biggest trade gap with them since the $400 billion-plus deficit in 2018. We have not reshored, near-shored, or friend-shored much out of China.

Sherman said the U.S. is not only competing with China but is cooperating with China on numerous fronts. But the issues she mentions in her testimony get D grades. Maybe a C- on a good day.

“Our cooperation is vital on climate change and public health, narcotics and more,” Sherman said.

Three years after the worst pandemic since the Spanish Flu and yet no one can agree what SARS-CoV-2 is, or how it came to be. That alone is a stunning admission of failure in that China-U.S. public health relationship.

Just as bad is action on the narcotics front. The China fentanyl to Mexico drug trade is going strong, much to the detriment of once iconic American cities like San Francisco.

China gets an F on fighting fentanyl traffickers, but so does the State Department and the U.S. intelligence apparatus, in general. We can drone a wedding somewhere in the Middle East to snipe at a suspected terrorist but cannot find fentanyl labs in Mexico to shoot up with a drone.

The Senate hearing, titled “Evaluating U.S. China Policy in the Era of Strategic Competition,” is one of many China-centric topics circulating in Washington these days. It is a bipartisan issue.

The House voted unanimously on Thursday to condemn China for letting its surveillance balloon traverse American airspace without warning or apology.

Senator Mitt Romney (R-UT) said the U.S. needs a more comprehensive strategy in dealing with China. He said such a strategy must include new trade arrangements and economic measures, like processing the minerals the U.S. defense industry needs domestically.

“You get where I am going? We need a comprehensive strategy that requires dozens upon dozens of tactics. It can be classified. Truman and Reagan did it; how did they deal with the Soviet Union? It drives me nuts watching China, and we have no strategy. Everyone is off in different directions,” he said, warning the U.S. risks its leadership position, especially in Asia, the market all of Wall Street and Corporate America loves to love.

In a separate hearing on China in the House Financial Services Committee on Feb. 7, California Representative Brad Sherman said the U.S. needed “an automatic 25% tariff on all China goods. China hands out access to its markets like I hand out dog treats to my pets. I represent Hollywood. Let me give you an example of my constituent’s issues with China. Hollywood is told they can only get 40 movies into China each year. That means if you make a movie critical of China, that doesn’t go to China. But it also means that none of your movies are going to China,” he said. “They control what goes there and they do it with lobbyists, and that means China can control what Congress does.”