US, EU and China: further escalation

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12/05/2019_While President Trump personally probably still hopes to conclude a partial agreement in the “trade war” with China, it seems Congress has already overtaken him. Both the Democrats and the Republicans want to turn up the heat on China. Trump’s statement on Dec 3 that an agreement may not be reached until after the 2020 presidential elections is open to two interpretations: 1) Trump recognizes that even a partial agreement on agricultural exports is no longer possible in the short term or 2) Trump tries to maximize pressure on the Chinese to make a deal with him now instead of waiting till after the elections: for if Trump would lose the elections, the chances for Xi Jinping to reach any deal with a Democratic president would even be smaller.

In the meantime, Chairman Xi has come under attack by the American Congress via new legislative proposals:

A) The entire House of Representatives supports a bill calling for tougher sanctions against China because of the Chinese oppression campaign against the Uyghurs. The so-called “Uyghur Human Rights Policy Act”, which the Senate has yet to approve, calls for concrete action against Beijing because of the imprisonment of ~ 1-2 million (!!) Muslims in political re-education camps in Xinjiang. Such sanctions should target specific members of the Chinese Communist Party. The export of American goods to involved state organizations or enterprises in Xinjiang should also be curbed.

B) On November 19 2019 the entire Congress (House and Senate) adopted a bill (“Hong Kong Human Rights and Democracy Act of 2019”) calling for strict compliance to the agreement with China on Hong Kong’s “one country, two systems”. In addition, the US government is asked to evaluate each year if Hong Kong’s special trade status should remain in force. The bill also calls for sanctions against Chinese officials who commit human rights violations against Hong Kong citizens.

Not surprisingly, Beijing considers these two bills a gross American interference in Chinese domestic affairs. China must be relieved that (for the time being) the EU and the parliaments in the various Europe member states have not yet followed their American counterparts and turned so openly against the Chinese government. Yet all these actions of the American Congress together with the growing geopolitical technology tensions and the (unpredictable) behavior of Trump will force the EU and the European member states to take to a stance too….

Yesterday Brussels fired a first shot. In the 5G roll-out saga, the EU member states’ telecom ministers formally acknowledged for the very first time that in the assessment of the suppliers of 5G equipment EU governments should not only look at technical aspects, but also at the political and legal context, as I had already pre-alerted in my post of November 28.

To cite the EU decision: …. the technological changes introduced by 5G will increase the overall attack surface and require particular attention to the risk profiles of individual suppliers…In addition to the technical risks related to cybersecurity of 5G networks, also non-technical factors such as the legal and policy framework to which suppliers may be subject to in third countries, should be considered… the importance for the Member States to consider the need to diversify suppliers in order to avoid or limit the creation of a major dependency on a single supplier….. while standardization and certification may be able to address certain security challenges related to 5G networks, additional security measures are required to effectively mitigate the risks…a swift and secure roll-out of the 5G networks is key for enhancing the competitiveness of the EU and requires a coordinated approach in the EU without prejudice to Member States competences in matters of network roll-out and national security

The agreement made in Brussels doesn’t mention the Chinese tech giant Huawei by name, because -as before- the EU formally sticks to its “country neutrality” for the 5G rollout. How the EU is going to ensure a coordinated approach in this roll-out remains a big mystery: there is already an immense difference between European member states in the relationship with and dependence on Huawei …

“Critical components of telecom networks such as 5G should only come from reliable suppliers,” said Dutch State Secretary Mona Keijzer (Economic Affairs). “To ensure its safety, we must work together at EU level.” Those critical components will face stricter security measures, which only the telecom operators will be informed about. Keijzer is expected to announce the rules for the 5G frequency auction later this week.

The EU and the Dutch government still prefer to distinguish between the critical components aka the centre and the periphery of the 5G network. It is currently unclear which exact parts are critical in the view of the Dutch government. Telecom experts strongly disagree on whether a difference can or should be made between core and periphery in terms of security. T-Mobile and KPN in the Netherlands have said they can’t respond to the latest decision in Brussels, and Huawei does not want to comment … In Germany, Deutsche Telekom has immediately put “on hold” all its 5G deals/initiatives with Huawei, awaiting further clarifications from Berlin (Merkel!)

Dutch Minister of Foreign Affairs Stef Blok is supposed to present his revised China strategy, I have no idea if it will happen before Christmas. It is likely that under the influence of the events in the American Congress Dutch political parties will reconsider and push for more (Dutch / European) action against China, especially if severe human rights violations in Xinjiang or Hong Kong would not stop or happen again . . It will also be interesting to see whether Ajax and its Chinese sponsors, Huawei and especially HikVision, the latter closely involved in surveillance in the re-education camps in Xinjiang, will be further scrutinized at national or local political levels in the Netherlands …

In an earlier blog post I highlighted ASML scheduled export of its most advanced lithography equipment (EUV) to SMIC, the pure-play semiconductor foundry in China, is meanwhile being questioned. This week (?) / month there is a meeting in Austria of the members of the Wassenaar Arrangement on export controls, which prevents the spread of conventional weapons and so-called dual-use equipment (civilian equipment that could be used for military purposes). The list of strategic goods is revised / adopted by all Member States in December each year.

EUV semiconductor equipment is on the list of strategic goods for which a special export license is required. The United States, which is not happy that advanced semiconductor machines are about to be sent from the Netherlands to China, is no doubt exerting strong pressure on Rutte and Blok to not only keep EUV equipment on the control list but to also not issue the export license … Let’s see what the Dutch cabinet will decide…

I doubt that President Trump did foresee the “trade war” would pan out this way when he unleashed it about 18 months ago. His initial goal probably was to quickly reach an agreement on the export of agricultural products to China, which would satisfy part of his “base”, the farmers. He was/is less concerned with or interested in the geopolitical, technical and strategic aspects of the dispute with China. But in the US Congress, the military and the intelligence services, a consensus had already arisen under Obama that China does pose a serious threat to America and the current world order. Congress members from both political parties and advisors around Trump demand a fundamental reform of China’s political system and economic structures and want the CCP to scale down its ambitions. Even if Trump wouldn’t be re-elected, these American demands and sentiments will live on in Congress…

The next escalation is likely to follow soon: around mid-December Trump is expected to sign off a new round of US tariffs against China… And the American President is also about to put more levies on Europe. Though a joint American – European front vis-à-vis China doesn’t seem to be in the cards yet, China is likely to come under more fire from the US and the EU…. Turbulent times …