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China blowback looms for Schumer’s Innovation and Competition Act

After months of discord and delay, the House will soon be moving ahead on Senate Majority Leader Chuck Schumer’s China-targeted $250 billion U.S. Innovation and Competition Act, bolstered by a bipartisan consensus that the U.S. government needs to act decisively to better compete with China.

But Beijing isn’t taking this lying down: Its officials have warned that reprisals are coming, should the bill become law, and experts caution that the effect could be severe on key U.S. economic sectors.

Schumer and House Speaker Nancy Pelosi earlier this month began to remove hurdles to USICA’s consideration, hoping to advance it through the House and put it on President Joe Biden’s desk “as soon as possible.” The bill passed the Senate with bipartisan support in June.

Beijing has promised retaliation if the bill makes it through Congress but has not given specifics. China experts say those reprisals may include deliberate disruptions in imported parts’ supplies for U.S. manufacturers and curbs on Chinese purchases of U.S. exports. With supply chains already strained to the breaking point, Beijing’s response could test Biden and Chinese leader Xi Jinping’s resolve to create a less-rancorous U.S.-China relationship.

“Given our mutual dependency, it’s impossible to completely insulate [U.S.] businesses and consumers from [Chinese] reprisals in the near term,” said Sen. Todd Young (R-Ind.), whose Endless Frontier Act, designed to “outcompete China” in emerging technologies, was incorporated into Schumer’s bill in May. “Ultimately passing USICA and ensuring U.S. leadership in these critical areas is the best way we can insulate our businesses and consumers in the longer term … and demands that we assume some risk in the short term.”

USICA integrates multiple China-targeted bills — the Endless Frontier Act, the Strategic Competition Act of 2021 and the Meeting the China Challenge Act among them — into one massive 2,276-page piece of legislation. It’s designed to preserve a competitive technological edge over China through the injection of tens of billions of taxpayer dollars for various initiatives, including U.S. semiconductor manufacturing and “buy American” requirements for federally funded infrastructure projects.

“We have been clear publicly and privately with [China’s government] that we intend to strengthen our own competitive hand, and the investments outlined in this legislation do just that,” a senior administration official told POLITICO.

But USICA also includes multiple provisions that specifically address Chinese threats to the U.S. economy, including state-directed intellectual property theft, forced technology transfers and malicious cyberattacks on U.S. government and corporate entities. The bill’s reach extends to a ban on government agency purchases of Chinese manufactured drones as well as prohibiting the use of government hardware to download TikTok, the Chinese video social network platform.

U.S.-based business groupings view Chinese retaliation as unavoidable and are bracing for it with a mixture of dread and resignation. “China is becoming much more aggressive. … They will go all the way to win,” said a representative of a business organization linking Chinese and U.S. companies, who asked to remain anonymous for fear of angering Chinese interests.

A spokesperson for a China-focused D.C.-based international business association expressed hope for a moderate Chinese response in the interests of a longer-term improvement in the U.S.-China relationship: “If it’s not muted, [retaliation] will be calibrated, meaning not excessive, though the rhetoric may be.”

Retaliation is likely to be more subtle than an imposition of fresh tariffs, given the recent efforts of U.S. Trade Representative Katherine Tai and her Chinese counterpart, Vice Premier Liu He, to untangle the U.S.-China trade relationship. Tai has announced the U.S. will reopen a process to allow U.S. firms to seek exemptions from tariffs on certain Chinese imports and will restart talks with China on its failure to comply with conditions of the Phase One U.S.-China trade deal implemented in January. “Another round of tariff wars” is unlikely, said Kelly Ann Shaw, a former senior trade adviser to President Donald Trump. “Trade talks are occurring in a separate lane.”

Instead, the Chinese government is likely to signal its anger by tapping the brakes on select exports essential to key U.S. industries, such as the automotive sector. Such intentional disruption of targeted supply chains will allow Beijing to retaliate with a degree of plausible deniability while avoiding the blunter weapon of an escalating series of tit-for-tat tariffs.

“China does not have many ways to hurt the U.S. now without damage to itself, but reducing the flow of strategic inputs for electrical vehicles would be a possible avenue for retaliation,” said Mary Lovely, senior fellow at the Peterson Institute for International Economics. “China could use those supply chains to try to inflict pain, and [because] the Chinese leadership sees the West as moving to reduce their dependence on China, adding uncertainty about Chinese supply won’t be overly costly for China because the U.S. policy direction is mostly set.”

Such retaliation should come as no surprise. The Chinese government has bristled at USICA since it passed the Senate in June. The foreign affairs committee of China’s National People’s Congress slammed USICA on June 9 as an attempt to “contain China’s development under the banner of ‘innovation and competition.’”

Victor Gao Zhikai, chair professor at Soochow University and a frequent echo of Chinese government positions, two days later described USICA as a geopolitical “Tonya Harding syndrome — whacking the kneecaps of China trying to put China out of commission.” Gao warned that the blowback from USICA includes “a real possibility that down the road the China market is completely closed off for U.S. manufacturers.”

In August, the Chinese ambassador to the U.S., Qin Gang, complained that USICA was one of 260 bills circulating in Congress “with negative China content” that if passed would “hijack China-U.S. relations and gravely damage America’s own interests.”

Qin’s staff has already acted to derail USICA with an arm-twisting campaign designed to rally U.S. business organizations, companies and executives to lobby against its passage and other China-targeted legislation on Capitol Hill. Those tactics included warnings that those bills pose a threat to corporate revenues or market share.

The Chinese Embassy in Washington declined to comment on how China will respond to USICA’s passage. But the official rhetoric from Beijing telegraphs a targeted response.

“When China says ‘tit-for-tat,’ it means ‘tit-for-tat,’” said Min Ye, associate professor of international relations at Boston University. “China’s [retaliatory] policy tools include purchasing orders, targeted sanctions against individuals and companies or a pause on ongoing [bilateral] dialogues.”

Schumer, however, says he’s not bothered by the threat of Chinese retaliation to his bill. “No one will stand in the way of America strengthening our innovation capacity and domestic production so that we can launch a new era of leadership,” he said in a written statement to POLITICO.

The House has yet to pass the anchor of its legislative package — the Ensuring American Global Leadership and Engagement Act — and Pelosi has given no indication when that may happen.

Staff with Pelosi and Schumer spent Thanksgiving week on preliminary plans for a conference committee to discuss the bill, said two aides with knowledge of the talks. But they have yet to settle on a schedule for the meeting or when the conferees from each chamber will be named.

Lawmakers will need to move fast if they are to pass the China bill, raise the debt ceiling, approve annual defense spending and address Biden’s reconciliation spending package — all items on the agenda before the end of the year.

Despite the recent virtual meeting between Biden and Xi to stabilize the relationship, the trend lines are pointing toward a frosty winter.

“The political headwinds in the United States are blowing in a hawkish direction, which means that both the administration and Congress are going to continue to push for tough policies on China, especially as we head into the 2022 election year,” said Shaw, who is also a partner in global law firm Hogan Lovells’ international trade practice. “How the United States and China plan to manage their relationship moving forward without it totally falling off a cliff is an open question and one that a lot of people are concerned about.”

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