China Hits Back as U.S. Trade War Looms --- Moves on Nvidia, critical minerals, drones signal array of retaliatory measures

 

"During Donald Trump's first administration, China learned that it couldn't match the much larger U.S. economy's tit-for-tat when it came to tariffs, and found other ways to try to inflict pain -- often by borrowing from his playbook.

Now, as Trump's second term approaches, Beijing is brandishing an expanded arsenal of countermeasures that it is likely to draw upon as the president-elect threatens across-the-board tariffs and levies of as high as 60% on Chinese-made goods.

Beijing recently launched a regulatory probe into U.S. semiconductor champion Nvidia, threatened to blacklist a prominent American apparel maker, blocked the export of critical minerals to the U.S. and squeezed the supply chain for drones, offering clues into how non-tariff measures are likely to dominate China's tool kit.

Because the U.S. buys so much more from China than the other way around -- roughly three times as much -- Beijing can't hit back dollar for dollar when it comes to tariffs. Doing so would also risk exacerbating the myriad woes in China's economy.

Instead, as with any fight against a larger foe, it pays to find unique points of leverage to exploit -- with many of its efforts to inflict pain on the U.S. coming from Washington's own strategies.

On Monday, Chinese market regulators announced an antitrust investigation into Nvidia, roughly a week after the Biden administration stepped up restrictions on China's access to high-end semiconductors. Beijing says the California-based chip giant might have violated the terms of a conditional approval it received from Beijing in 2020 for its acquisition of an Israeli networking firm.

The timing of the regulatory investigation -- nearly five years after the deal took place -- and the high-profile target -- a U.S. technology juggernaut at the forefront of technological innovation -- underscores Beijing's willingness to use legal tools to target even the biggest U.S. heavyweights.

The strategy was first employed during the first Trump administration, said Angela Zhang, a law professor at the University of Southern California. She pointed to China's withholding of approval for a proposed merger between Qualcomm and NXP Semiconductors in 2018, at the height of the initial U.S.-China trade war -- effectively turning the deal into a bargaining chip in trade talks. The pact never won China's approval and collapsed.

In that case, China's leverage comes from the power it has to scrutinize global mergers -- even for deals that don't seem closely related to the country.

Chinese regulators didn't say what Nvidia might have done wrong or explain why it was raising the issue so long after their conditional approval, but industry watchers have little doubt about the message it sent about China's willingness to hit back at the U.S.

Beijing must be careful not to overreach when it is still actively seeking foreign investment. Obstructing or refusing to do business with certain U.S. entities could prompt Washington and foreign businesses to find alternatives that could weaken Beijing's longer-term position.

That cautiousness can be seen in China's efforts to set up an "unreliable entity list" composed of foreign companies, organizations and individuals that would face extra hurdles in doing business with the country. The move, first announced in 2019, borrowed from actions that the U.S. Commerce Department had taken against Chinese telecommunications giant Huawei Technologies and its affiliates, requiring suppliers to procure licenses before doing business with those on the "entity list."

China's list, however, remained empty until early 2023, when Beijing designated two U.S. defense contractors as unreliable entities after the U.S. military shot down a suspected Chinese spy balloon.

Murkiness is a key feature of China's unreliable entity list. There is no time limit on how long an entity can remain there, and criteria for inclusion and removal are far vaguer than the U.S. version. But such uncertainties arguably make it more effective, giving Beijing wide latitude to exert pressure on the U.S.

Beyond legal maneuvers, China is turning to other sources of asymmetric strength to strike back at the U.S., such as its advantage in the supply chain for drones and the production of certain critical minerals that play a key role in semiconductors, batteries and defense equipment.

Last week, Beijing said it would in principle ban the export of gallium, germanium and antimony to the U.S., and conduct stricter reviews on graphite sales. China has come to dominate the production of an array of minerals, owing in part to superior technology and low operating costs. While Washington and allies have pushed to increase mining and processing of critical minerals, Western companies have struggled to compete with Chinese prices, and Beijing's control over many strategic minerals has grown.

In the case of gallium, a soft silvery metal used in chips, China produces about 98% of low-purity forms of the mineral. Before China's ban, a study published by the U.S. Geological Survey found that a total restriction of China's gallium and germanium exports could reduce U.S. economic output by $3.4 billion.

Such countermeasures, while potentially painful for Washington, bring diminishing returns. Earlier Chinese restrictions on some of these minerals to the U.S. meant that export volumes plunged, rendering the impact of last week's announcement "largely symbolic rather than practical," said the Washington-based think tank Center for Strategic and International Studies.

One area where China is pressing its advantage is in mass-market drones, where it is the world's biggest player. Efforts by other countries, including Ukraine, face challenges in procuring batteries, cameras and electric motors, whose supply chains run through China. Beijing has announced sanctions against more than a dozen U.S. drone-technology firms, including some that supply drones to Ukraine." [1]

1. World News: China Hits Back as U.S. Trade War Looms --- Moves on Nvidia, critical minerals, drones signal array of retaliatory measures. Feng, Rebecca; Somerville, Heather; Emont, Jon.  Wall Street Journal, Eastern edition; New York, N.Y.. 12 Dec 2024: A.9.