U.S.-China Economic and Security Review Commission’s 2023 Annual Report to Congress
Background
The U.S.-China Economic and Security Review Commission (“USCC”) is an advisory body created by the United States Congress in October 2000 pursuant to the National Defense Authorization Act for Fiscal Year 2001, to annually monitor and investigate the impact of the U.S.-China trade and economic relations on the national security and provide recommendations on China-related legislation and policies. The recommendations made by the USCC are usually proposed as bills and have a significant effect on the U.S. policies toward China, playing a crucial role in constructing future Korea-U.S. and Korea-China relations.
The USCC submitted its 2023 annual report to the 118th U.S. Congress on November 14, 2023. The report especially garnered more attention this year, given that the year 2023 experienced ongoing trade tensions between the U.S. and China due to the U.S.’ strengthened export controls on advanced semiconductor equipment and artificial intelligence chips and China’s export controls on germanium, gallium, and graphite, and the U.S.-China summit, which was held on November 15, was to be held the day after the submission of the annual report.
In this annual report, the USCC examined a comprehensive range of sectors, including the security between the two countries, the economy, supply chains, and international relations. The report provided 30 recommendations to the Congress and prioritized ten of those recommendations. This issue report will focus on the trade-related recommendations among the ten key recommendations.
Summary of Trade-Related Analysis in the 2023 Annual Report
The USCC analyzed the trends of the international economic and trade relations of the U.S. and China during the past year and outlined the following key issues:
- Impact of the U.S. Semiconductor Export Controls
The U.S. government announced export controls in 2022 that comprehensively restricted the export of advanced semiconductor equipment and artificial intelligence chips that utilized U.S. technology to China. These restrictions caused a 50.7% drop in the annual amount of U.S. semiconductor exports (from $6.4 billion to $3.1 billion) as of August 2023 compared to the same period last year.
The USCC expressed the opinion that such export controls have little practical effect, considering the fact that it is difficult to control the imports of mass-produced semiconductors and that there are already similar semiconductor facilities in China. Moreover, the list of export restrictions is rendered ineffective if imports are made by third-party intermediaries that are not on the list. The USCC pointed out that to make export controls effective, there needs to be multilateral coordination rather than the unilateral export control of the U.S., but such coordination can be challenging to achieve due to realistic complications.
- Impact of Tariff Imposition on Chinese Imports (Section 301 of the Trade Act 2018)
The USCC evaluated that the U.S.-China trade relationship underwent extreme changes over the past five years due to the introduction of Section 301 of the Trade Act1 during the Trump administration. In addition, despite the fact that U.S. companies have begun separating themselves from China’s influence, Chinese suppliers have expanded operations to third countries, such as Mexico, to circumvent U.S. export restrictions. Consequentially, the U.S.’ actual dependence on China still remains high.
- Trends in U.S. Foreign Direct Investment (FDI) Towards China
The USCC observed that the Chinese government made considerable efforts to improve China’s global image over the past year, especially focusing on attracting investments from Central and South America, Africa, and Europe. However, U.S. companies have postponed or reconsidered investing in China, apprehensive of the country’s uncertain economic outlook. This has resulted in a continuous decline in the scale of foreign direct investment (FDI) in China since it fell to its lowest level on record in 2022.
Summary of Eight Trade-Related Recommendations Among the Ten Key Recommendations
The USCC proposed 30 recommendations to the U.S. Congress and prioritized ten of these recommendations, which are outlined below.
① Enact Legislation on Corporate Disclosure Requirements for Companies’ Exposure to China
The USCC urges the Congress to enact legislation regarding corporate disclosure requirements to inform investors of the risks caused by listed companies’ exposure to China. The USCC recommends the disclosure requirements to include: (i) the proportion of its assets located in China; (ii) the details of joint investments with Chinese companies; (iii) the scale of research and development conducted in China; and (iv) the influence of the Chinese government on decision-making within the company.
② Evaluate National Security Threats Posed by Electronics Imported from China
The USCC recommends the Congress to establish a risk management framework (RMF) to assess the threats to national security posed by electronics imported from China. The USCC also urges using all trade means, such as tariffs, to eliminate or mitigate such threat factors.
③ Direct the U.S. Department of Defense to Prevent the Tracking of U.S. Military Goods
The USCC recommends the Congress to oversee and direct the U.S. Department of Defense to cooperate with European nations to protect U.S. military equipment, materials, and labor force movements from surveillance by China-operated logistics platforms such as Logistics Public Information Platform (LOGINK).
④ Enact Legislation to Restrain the Chinese Government’s Oppression on U.S. Companies through Lawsuits
The USCC recommends the Congress to enact legislation to promptly reject lawsuits brought by the Chinese government against U.S. companies, preventing its strategic suppression, such as causing heavy legal costs that can suppress growth of U.S. companies. The legislation should include provisions to ensure that high-cost discovery procedures are not initiated until a dismissal decision.
⑤ Request a Government Accountability Office (GAO) Assessment on the Effectiveness of Semiconductor Export Control Regulations
The USCC recommends the Congress to request the Government Accountability Office (GAO) to conduct an audit to assess the effectiveness of recent semiconductor export control regulations implemented by the U.S. Department of Commerce. The audit content should specifically include: (i) whether key allied governments are cooperating with U.S. export regulations; (ii) whether U.S. and foreign companies are cooperating with U.S. export regulations; and (iii) what efforts are being made by Chinese companies to circumvent and nullify export controls.
⑥ Strengthen Authority of the Committee on Foreign Investment in the United States (CFIUS)
The USCC recommends the Congress to delegate to the Committee on Foreign Investment in the United States (CFIUS) the authority to review foreign investments in U.S. companies that could threaten the economic and technological competitiveness of the U.S., such as investments from China. The USCC explained the investments that can have potential threats to the U.S. competitiveness include: (i) foreign investments in U.S. companies in the technology sector prioritized by China; (ii) foreign investments in U.S. companies that are receiving subsidies from U.S. government agencies to enhance national security; and (iii) other foreign investments that can provide access to critical expertise that are essential for maintaining U.S. economic and technological competitiveness.
⑦ Create a Public Database on China Led by the Office of the Director of National Intelligence (ODNI)
The USCC explained that U.S. businesses, universities, and individuals face difficulties in assessing the risks regarding transactions with Chinese companies due to a lack of information and transparency. The USCC recommends the Congress to establish a public database on the relations between the Chinese military and intelligence agencies, and Chinese companies and research institutions, aiming to support U.S. businesses, universities, and individuals in conducting thorough inspections on potential Chinese partners more smoothly.
⑧ Instruct the U.S. Administration to Engage in Pre-discussions with European Partners Regarding Economic Sanctions on China
The USCC recommends the Congress to instruct the U.S. administration to engage in pre-discussions with European partners regarding economic sanctions on China in cases where China expands its support to Russia.
Impact and Implications of the Annual Report
As usual, the U.S. Congress will review the recommendations in this annual report and determine whether to legislate specific bills. While these recommendations do not have effect by themselves, they reflect issues raised by the Congress and the administration over the past five years, and many recommendations from the USCC have been proposed as bills.
As the Biden administration is also actively expanding sanctions on the technology transfer to China, closely investigating cross-border investments to prepare for national security threats, and actively working to establish frameworks for overseas investment examination, the administration’s future policies are expected to align closely with the key content of this annual report.
This annual report recommends the U.S. Congress to enhance the effectiveness of the export controls on China and suggests measures to strengthen the U.S. national competitiveness in preparation for risks posed by China. Given these recommendations, the conflict between the U.S. and China is anticipated to persist in the long term. While the leaders of both countries agreed to resume and expand cooperation in certain sectors during the summit on November 15, 2023, they were unable to reconcile the discrepancy on key issues, such as advanced technology, export controls, supply chains, economic security, Taiwan, and global security.
Korean businesses can be significantly influenced by the changes in the policies related to U.S.-China export controls and supply chains due to their high dependence on Chinese imports and exports. Therefore, domestic companies should closely monitor policy changes in both the U.S. and China amidst the ongoing U.S.-China conflict.
DR & AJU’s Comments
The annual report of the USCC can significantly help businesses and investors predict and prepare for changes in U.S. policies towards China and resulting shifts in U.S.-China relations. Domestic companies should closely monitor the developments of the U.S.-China relationship by checking the content of the annual report and continuously stay informed of relevant government policies.
DR & AJU’s Global Compliance Group, Washington, D.C. Liaison Office and D&A Advisory, Inc. deliver accurate and crucial information to help domestic companies effectively and promptly respond to changes in the U.S. and China’s trade policies and establish effective strategies to ensure compliance with applicable laws by providing comprehensive advisory on internal control strategies.
DR & AJU will continue to closely monitor developments in international trade policies to respond expeditiously through close cooperation with businesses when necessary.
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- The Act authorizes the U.S. president to take tariff and non-tariff measures to eliminate unfair and irrational practices of overseas governments.
