U.S. midterm elections and China policy

Below is a complete transcript of the China Corner Office Podcast with Rory Murphy:

Chris: Hi, everyone. Thanks so much for joining us today on China Corner Office, a podcast powered by The China Project, the New York based news and information platform that helps the West read China between the lines. I’m Chris Marquis, a professor at the Cambridge Judge Business School. And today, we’re joined by Rory Murphy, Vice President of Government Affairs at the U.S. China Business Council, to discuss implications of the U.S. midterm elections for U.S.-China trade relations.

We start the episode by discussing recent policy initiatives that result from the tough on China rhetoric that is one of the few areas of alignment between both Republicans and Democrats. In particular, we go over the provisions and implications of the CHIPS Act, the National Critical Capabilities Defense Act, and the Uyghur Forced Labor Prevention Act. Relying on decades of experience working as a staff member on the Senate Finance Relation Committee, Rory unpacks these policies. The CHIPS Act, for instance, well supported by both parties, would establish new industrial policy in this important industry. The National Critical Capabilities Act would create a review process for outbound foreign investment, like CFIUS is for inbound investment, and as formulated, this act would have sweeping effects on U.S. firms internationalization. The Uyghur Forced Labor Prevention Act just went into effect. So, it is still too early to tell the effects, but we’ll be keeping an eye on it.

We then discussed the convergence and divergence between attitudes of the Democrats and Republicans on China, as well as within the parties themselves. We also talk about the midterm election campaign strategies and whether rhetoric on China is being used as a prop in campaigns, specifically in the states of Pennsylvania and Ohio. Irrespective of campaign rhetoric, Rory reflects on the implications of losing two senators in those states whom themselves and their staffs brought tremendous knowledge and an even hand perspective on international trade.

We end the discussion by talking about possible results of the midterm election and how those would affect international trade. In particular, Rory speculates on, if Republicans take charge of the House and Senate, what implications that will have for U.S.-China business relations. Thanks so much for listening, and enjoy the show.

Chris: Rory, welcome to China Corner Office.

Rory: Chris, it’s great to be here. Thanks for having me.

Chris: Really thought the report that you wrote had a lot of insight in it that’d be great to unpack and learn about it. I guess the first thing I’m interested in talking about is some of the policy initiatives that have gone on over the past number of years. There’s been the “tough on China” rhetoric, starting with Trump and sort of continuing to Biden. Would you mind kicking us off on some of the key policy initiatives that are under consideration now and what some of the implications of them are?

Rory: Tough on China, it’s one of those things where there’s a lot of agreement between Democrats and Republicans. And we’re seeing, as a result, there’s very few issues that those two parties agree on. But because there is agreement, we’re seeing some really meaningful policies been enacted since 2017. Specifically, we’ve seen essentially a full ban on imports of any product from or made with inputs from the Xinjiang region. There’s been a massive restructuring of U.S. CFIUS and export control laws, tariffs imposed on hundreds of billions of dollars worth of goods from China, strong sanctions against yeah, all sorts of Chinese companies, Huawei, ZTE.

Those are things that’ve gone in, in fact, just the past five years. There’s more on the way, Chris, under this big China bill that Congress has been debating for a year and a half now. There’s a proposal to give over 50 billion in funding to import the domestic manufacturing of semiconductors here in the United States. There are some other provisions in there, the creation of an outbound investment review, a mechanism here in the United States is one in particular, but there are real policies being pursued.

Chris: Great summary. A couple of the things I would love to just take piece by piece, one was the CHIPS Act, and the other was the National Critical Capabilities Defense Act. First, we’ll start with the CHIPS Act. Can you describe a little bit about the provisions of that, how potentially it would be enacted, visions that would occur? And then also, more generally, I’m interested in learning, to all of these, about any response or retaliation from China.

Rory: Going back to the beginning of this Congress, early 2021, Senate majority leader, Chuck Schumer, made it a priority that he wanted to do some form of China bill. It’s gone through all sorts of different names that you’ve likely read in the press, Endless Frontiers Act, USICA, the Make it in America Act, the America COMPETES Act. Right now, it’s all under this umbrella of what’s known as the Bipartisan Innovation Act. The Senate passed their bill, the House passed their bill.

The two bills are quite different, but the one area where there is a lot of overlap, a lot of agreement is this CHIPS act. As I mentioned, it’s real money. It’s not authorized money. It’s money that would be made available to companies, $52 billion to support the expansion and creation of semiconductor manufacturing here in the United States. That provision is extremely popular.

If it were to be put on the floor tomorrow, it would pass with big bipartisan majorities. But as of right now, the plan is not to move it on its own. Instead, attached to it have been lots of other programs, lots of other priorities, and that’s really muddied the water. We’re recording this on July 8. We think the deadline for Congress to come up with a deal to move the bigger package is likely to be August 5. That means they need to come up with an agreement very soon, so they have all sorts of time to draft and get it on the floor, voted on.

If that doesn’t happen, and it’s looking increasingly like that won’t happen, the CHIPS Act is still quite popular. And by the time you’re listening to this, maybe there is a path where they try to move that bill on its own, they try to attach that bill to some other must pass piece of legislation. But again, it is extremely popular, and so hopefully there’s a path forward for it.

Chris: You mentioned both the House and the Senate have some proposals under the way, but they’re different. How are the House and Senate proposed broader packages varying such that they can’t converge on something they both agree on?

Rory: It’s important to note that the Senate bill was the result of a very extensive and messy process. There were several committees that had pieces to it. It was fully amended, which is unusual in a modern Congress, but the end result got strong bipartisan support. There’s Democrats, Republican supported this final package. And that’s important because the House bill was a Democrat driven initiative. Without Republican support, Democrats included a lot of environmental language, labor language that was a little trickier for Republicans to support.

Those are kind of like the big structural differences of this bipartisan bill, a Democrat-only bill. In terms of specific policies, the one that really stands out is the NCCDA, that outbound investment review mechanism. That’s in the House bill. It would essentially create a reverse CFIUS. So, if you are a U.S. company making investments in doing covered activities, so transactions in certain countries, including China, you would have to notify this CFIUS type entity that you plan to do it. That entity would have the ability to modify your transaction, to block your transaction.

It’d be a pretty big policy change for the United States. And it’s on the table right now, kind of unclear where that stands in the broader debate of the Bipartisan Innovation Act, but there is clearly a lot of support for this concept. So, if it doesn’t pass now as part of this bigger China bill, this is something that folks should expect to see debated in the coming months and years.

Chris: It seems like a total sea change almost in American policy. What are some of the boundaries around that? I mean, is it certain industries? What kind of impact that might have on? Looking historically, is there any way to think like, okay, if this was in place from 2017 to 2022, would it really impede a lot of the deals that ended up happening?

Rory: As currently drafted, the version that passed the House is quite broad. The Rhodium Group did a study on the language of this. So, what types of transactions would you need to notify the executive branch on? The Rhodium Group looked into this and found that had this law been in place over the past 20 years, 43% of all U.S. investments into China would’ve required this notification process, the potential where this committee would be able to modify or block the investment.

We have lots of issues with the House passed version of the bill. We have been encouraging lawmakers to think of this as a, if this is a policy, that “tall fence around small gardens” approach, if there are specific industries that you care about, let’s focus on those. If you look at the Venn diagram or the different interests of what the different stakeholders here want to see covered, it varies by a large degree, but few of the technologies that all of them agree on are things like AI, quantum computing, hypersonic, biotech, semiconductors. I think that’s what the lawmakers are hoping to cover, but the details here are important. And as currently drafted, the House passed version would just be very, very broad.

Chris: You mentioned also, in your opening comments, restrictions on products from Xinjiang. The Uyghur Forced Labor Prevention Act just went into effect. Can you say a little bit about, is there any news on that being enforced? How is that being received?

Rory: In the United States, you’re not allowed to import goods that are made with forced labor. This bill that was passed in December, went into effect just a couple weeks ago, creates a rebuttable presumption that any good from Xinjiang is made with forced labor, so therefore not eligible for import. And there’s rebuttable presumption, but not a lot of information on how to actually rebut that presumption. So, the law’s been in effect for about two and a half weeks. We are still waiting to kind of see how it’s been enforced.

We’ve heard anecdotally of some shipments. There’s been some reporting on a few shipments that have been stopped. It’s gonna get trickier. Right? I think we, as a business community, were under the assumption this would be a quick burn. On day one, there’d be a lot of things stopped, to the extent that we’ve been able to observe it. There’s no publicly available data, but to the extent of what we’ve heard, it has not been an immediate impact, but we suspect that it’s gonna be more and more enforcement as this goes. And so, we’re in wait and see mode that, yeah, the messier this enforcement gets, the more complicated it’s gonna get for supply chains and potential impacts on inflation. And there’s all these other ripple effects we’ll have to learn as process goes.

Chris: Another topic that you mentioned in comparing the two different packages under consideration in the Senate and House were differences between Democrats and Republicans. I’d like to hear a little bit more about how the two parties vary in their assessment of China and what policy towards China should be.

Rory: Sure. And maybe if I can take a step back, because I think it’s important to really highlight where the parties do agree when it comes to China, why they are really pursuing an aggressive China policy, but then also to highlight the differences in the party and what that can mean for policy going forward.

Looking from a big picture perspective, both U.S. government officials, American voters seem to be moving hand in hand in their view on China that’s to a more unfavorable direction. We have numbers to back that up, right? There’s a recent Pew Research Center poll that found that 82% of American voters have an unfavorable view of China. That’s astonishingly high. For context, just under half of Americans, 47% had a similar view in 2017, President Trump’s first year in office. And when you look at Congress, it’s tougher to measure how Congress views China.

But one metric we like to point to and like to look at is the number of bills that are introduced that mention China, Taiwan, or other key words. It’s a really telling metric. From 2001 to 2017, there was a lot of consistency in the types of bills, the number of bills related to China that were introduced, around 200, 250 per year give or take. Last Congress that went from 2019 to 2020, the number of China related measures was 639.

This Congress, we’re almost at 700. So, there’s a lot of interest between the parties. How do they differ? I think it’s a good question and I think it’s one that is worth really understanding. Both Democrats and Republicans, when they talk about China, all of them are talking about trade. They’re all talking about the economy, cyber security. Those are issues that really, they can agree on.

I would say that Republicans are far more likely to use fiery language when it comes to China, focus on issues like the origins of COVID-19, China’s role in the production of fentanyl, and the issues that we’re having with that here in the United States. Democrat’s tone tends to be a little more measured. We can kind of measure that. We put out a report that’s on our website. I encourage everyone to check out uschina.org. Democrats tend to focus on things more like human rights.

But really, there’s a lot of overlap in what the two parties care about. One resource is the China data lab project from UC San Diego. They’ve done some really great work talking about how Congress is messaging China on Twitter. Literally read and categorized hundreds of thousands of tweets to find different themes. They have a lot of resources, blog posts. I encourage you and your listeners to go check it out.

Chris: Yeah, that sounds really interesting. How about within the party, how are they sorting through what to do with tariffs?

Rory: There are differences in the Republican party. And those differences are pretty similar to what you see in the Democratic party. Republicans are traditionally better free trade advocates. It’s been a bedrock of their party for years, and years, and years. And there are some members who still stand by that. There’s a growing group of more protectionist or extremely anti-China members in the Republican party. The latter camp, not exclusively, but to a large extent is following the playbook of candidate and then President Trump, when it comes to talking about China.

In January of last year, there was some hope that Republicans would revert back to their free trade routes once President Trump had left office, but that’s not been the case. Part of that is that the message is resonating with voters. It’s clearly a successful message. But the other part of it is that former Trump administration officials are weighing in with lawmakers and lobbying members to maintain President Trump’s policies, specifically weighing to maintain the section 301 tariff.

It’s a huge priority in a legacy item for the previous administration. Democrats are largely split along similar lines, and that split’s been around for decades. It’s nothing new for Democrats. There’s a lot of folks who are very skeptical of trade. But I would say the difference is, instead of former USTR, Robert Lighthizer, pressuring a member to keep the China tariffs in place, it’s interest within organized labor making the same request. So, different pressure points, but kind of the same outcome with the divisions of the two parties.

Chris: I’d love to hear about how China’s being positioned in some of these midterm elections, and particularly Pennsylvania. Maybe we’ll start with that given that’s where I spent a lot of time.

Rory: Yeah. It’s a race where China has been a huge focus during the primary. Dr. Oz made it through the primary and it’s now facing John Fetterman. It’s gonna be a very tight race. China has been a big point of messaging from both parties. It’s not a surprise. The debate over China during the primary in Pennsylvania has not been super sophisticated. It’s a lot of pointing to investments and business ties to China and trying to paint an opponent as anti-American for having investments overseas.

Probably the bigger repercussion in this outcome is who Dr. Oz or John Fetterman will be replacing. Pat Toomey has been a Senator for Pennsylvania, a Republican for a long time, the past two Senate cycles. He’s a really thoughtful member when it comes to trade policy. We definitely don’t agree with Senator Toomey on everything, but he’s a principled lawmaker. He has a very talented staff and I think the business community, or at least the U.S.-China Business Council, really believes that they’re trying to get the policy right. We may not agree with where they land, but there’s always a good faith actor on the other side of the table. So, it’s a big loss to lose Senator Toomey.

I think there’s also a similar comparison to what’s happening in Ohio. Rob Portman is another thoughtful Republican member who is retiring. He’s very focused on trade policy. The race to be his successor is between author, J. D. Vance, who is a fairly heavy favorite to win that race. He’s really aligned himself with President Trump’s messaging on China. The Democrat in the race, Tim Ryan, he’s a longtime House member, huge support with labor, a long time skeptic of trade. I would say that neither candidate has really articulated a China agenda, but neither has been shy about speaking critically of China on the campaign trail. And I think, regardless of who wins that race, there’s one less thoughtful voice when it comes to trade and China policy in the Senate.

Chris: Since President Trump’s election, there has been so much negative sentiment communicated by the government around China. What’s your sense about all of this discourse, just furthering the perception of regular American people of China as a place in the US’s business interest in China?

Rory: On the one hand, China poses real challenges to the United States, the second biggest economy. And hopefully those challenges can be addressed in a competitive nature and in a good faith nature. But we can’t be naive that there needs to be policy shifts when it comes to China. And it makes a lot of sense for members to pursue. I think though, as voters, the one thing that we should insist of candidates is that they go beyond the talking points and try to get the policy right.

To your point, there’s real consequences to this rhetoric when it comes to the awful things we’ve seen with the Asian American community here in the United States and the backlash to that. That’s a real consequence to how the tone in this debate has changed over the years. It’s also a real economic consequence. The most recent data that we have, we put out an annual report, the United States exported $149 billion worth of goods to China last year. The most recent available data we have for services is $37 billion in services to China. Those are real jobs.

Chris: Wow.

Rory: 850,000 jobs nationally supported by U.S. trade to China, 30,000 in Ohio, 20,000 in Pennsylvania, roughly. Candidates get elected and seek to pursue policies related to China. We can only encourage them as voters to keep these in mind, keep these ideas in mind, and really properly weigh the costs and benefits of those policies. Because for the Asian-American community, there’s real consequences that’s tough to measure, but it’s certainly there. There’s real data to show the economic consequences of potentially getting the policy wrong.

Chris: Beyond Pennsylvania, Ohio, are there other midterm elections that have a particularly important China focus?

Rory: Those are the two that will have, I think, the biggest consequences, just because we’re losing two members that talk about trade, which is an inherently tricky issue in politics. I think the bigger question, Chris, will be the totality of the races. Who is going to win in November, Republicans or Democrats? Republicans are clearly favored to win the House or slight favorites to win the Senate. And we’ve started to think through, what does that mean for policy going next year? I’m happy to get into that a little bit.

Chris: Definitely would love to get into that.

Rory: Sure. Let’s assume Republicans take at least one chamber of Congress. They’ve made it quite clear that China is not going to go away as an issue. The House Republican Task Force on China put out a report, I believe, last September. Outlines a lot of their priorities, what they would like to pursue should they be in charge. I think I would encourage all of you to read through that. There’s a lot of ideas in there and I think all of them are on the table. Anchoring that effort in the House next year would be this assuming the outbound investment proposal we discussed earlier does not make it into a final China package this year.

It’ll likely be the anchor of some legislative effort on China next year. That is our expectation. From a business perspective, there’s a constant political risk, reputational risk doing business. There’s an increase of interest, it seems, among lawmakers of both parties, but I’d say probably more so Republicans to call out companies, call out institutions on issues related to China. You have in the Senate, regardless of who seemingly every Senate Republican is positioning themselves to run for the White House in 2024, and that creates a dynamic where lawmakers are trying to position themselves as the toughest on China.

And so, there’s arms race of policies that we’ll need to contend with. From a business perspective, that creates a lot of uncertainties. There’s a dynamic where it’s hard to push back on bad policies, even if you are a lawmaker who wants to get the policy right. The second that somebody puts out a policy that’s objectively bad, and there’s a lot of good policies, right policies that should be pursued, but some are, we would say objectively bad, it’s hard to question it, let alone oppose it because you’re at risk of being labeled as “weak on China.”

From a political calculus, it just makes things really tricky. So, there’s a reputational risk for businesses that there could be an increase of them being called out outside of the legislative process. Then this constant uncertainty of what bills are going to be introduced, and how will they be enacted into law? It’s harder to forecast what will be approved, what won’t be than it was five, six years ago.

Chris: The last question I have is I would be interested to hear some about China’s reaction.

Rory: I think China has been fairly measured in their response. Going back to the Trump administration, when the United States imposed all those tariffs, China obviously retaliated with tariffs. But on something like the UFLPA, there wasn’t a retaliatory reaction from China. I think that they, like us, are watching to see how it’s implemented. We’re not aware of imminent retaliatory actions from China on that bill, but it all depends on how it’s implemented.

I think there’s a lot of hope. Both the United States and China have some political constraints that they’re facing for the next few months, us with our midterms, China with the National Party Congress. I think there’s an incentive for both sides to keep things as less rocky as possible. And hopefully when we get to the other side of our two political actions, that maybe there’s an opportunity to smooth some of these things out.

Chris: Let’s hope so.

Rory: I got all my fingers crossed.

Chris: Really appreciate you taking the time. I thank you so much, Rory, for joining us on China Corner Office.

Rory: Thanks for having me.