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The Shifting Landscape of US-China Competition and What it Means for Your Organization

by Neil Suri, U.S. Analyst, FiscalNote

The U.S. is entering an era of strategic competition with China. Read on to better understand how the U.S.-China relationship is changing and the risks and uncertainties your organization must navigate in this new normal.

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Competition between the U.S. and China is reaching an inflection point. Compared to 2022, this year has already seen a 45 percent increase in bills introduced at the federal and state levels targeting China. With both countries locked in a technology arms race, this wave of policymaking — which includes sweeping measures ranging from investment restrictions to sanctions and platform regulations — will transform the U.S.-China relationship.

As competition intensifies, businesses are facing new vectors of economic and geopolitical uncertainty. Government affairs professionals should focus on the following three areas of China policy to understand how changes in U.S.-China relations may impact their organizations.

1. Technology Competition

Artificial intelligence (AI) is the new frontier of great power competition. As AI becomes increasingly important to economic growth and military strength, countries at the cutting edge of AI innovation will wield enormous influence over the international order. Across all key indicators (capital investment, patents, research output), the U.S. and China are the global leaders in funding and developing AI technology. The race for AI supremacy will be the defining narrative around U.S.-China competition for years to come.

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China is optimizing its AI strategy toward maximizing military power, pursuing investments in defense technologies such as unmanned combat and early warning systems. By comparison, the U.S. is better positioned to take advantage of AI as a tool to accelerate growth. Generative AI use cases are proliferating across the private sector, from chatbots like ChatGPT to personal assistants. Overall, private investment in AI in the United States is three times higher than in China.

Semiconductor Manufacturing

The critical advantage that the U.S. holds in the AI race is in advanced semiconductor manufacturing. The U.S. has a significant edge over China in producing highly specialized, top-of-the-line semiconductor chips that power AI technologies. Every part of this supply chain runs through either the U.S., its treaty allies, or Taiwan. As a net importer of chips, China is currently running a deficit of $262 billion in semiconductor trade.

Doubling down on this advantage, the U.S. is targeting China’s semiconductor industry through export controls. In October, the Biden administration implemented a set of broad controls that prohibited the sale of specific chips (as well as chip design software and manufacturing equipment) to China. New investment restrictions announced in early August prohibit venture capital and private equity firms from investing in Chinese technology sectors, including semiconductors and other microelectronics.

Building off of the CHIPS and Science Act — a historic, $53 billion investment in the domestic semiconductor industry — the U.S. will continue to use industrial policy as a vehicle to spur innovations in chipmaking and further scale manufacturing. Regulators will also be more vigilant in enforcing export control laws, cracking down on intellectual property theft and smuggling of semiconductor chips.

2. Trade Policy and Supply Chain Risks

While the U.S. has an edge in semiconductors, China’s key strategic advantage lies in its control over global mineral supply chains. China is the dominant player in refining and processing rare earth minerals, controlling 60 percent of the world’s mineral production. As a result, it occupies a key node in supply chains for technologies such as batteries, computers, and solar panels. For example, China is responsible for refining 80 percent and 60 percent of the world’s cobalt and lithium supplies (respectively), both of which are critical inputs for manufacturing electric vehicles.

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Protectionism and US Tariffs

To mitigate China’s advantage, the Biden administration has attempted to build up the United States’ manufacturing capacity through a combination of subsidies and price incentives. The Inflation Reduction Act (IRA) authorized $2.8 billion in grant funding to expand the manufacturing of electric vehicle batteries and mineral production. The act includes a tax credit for vehicles that meet domestic sourcing requirements for the critical minerals and components contained in the battery. The Biden administration has also maintained a steep Trump-era tariff of 27.5 percent on Chinese-made cars, which has prevented Chinese manufacturers from penetrating U.S. markets and displacing domestic automakers.

The U.S. has taken other measures to curb Chinese imports. It imposed new human rights sanctions through the Uyghur Forced Labor Prevention Act, which heavily restricted imports from the Xinjiang region in China. The Biden administration has also kept in place tariffs on over $300 billion worth of Chinese consumer goods, textiles, and industrial components. As the U.S. looks to further reduce dependency on China, businesses should expect more protectionism focused on reshoring supply chains and strengthening key domestic industries, such as the clean energy sector.

3. Foreign Investment Law

As tensions with China rise, U.S. scrutiny over Chinese investments does too. The Biden administration’s outbound investment regime is rigorous, targeting Chinese sectors that threaten U.S. national security. Its key components are restrictions on private equity and venture capital investments in sensitive technologies, disclosure requirements for American businesses investing in China, and a trade blacklist that includes over 600 Chinese companies.

The administration has also directed regulators to exercise more oversight of foreign acquisitions and investments in U.S. businesses. The key regulator with oversight powers is the Committee on Foreign Investment in the U.S. (CFIUS), a federal interagency board that reviews inbound foreign investments for potential national security risks. Since 2020, the number of CFIUS filings by Chinese investors has more than doubled, suggesting greater scrutiny over Chinese transactions.

At the state level, several governments have moved to restrict Chinese investments in real estate. Many Chinese real estate holdings are close to military installations and critical infrastructure sites, presenting a potential national security threat. In 2023, at least 15 states enacted legislation imposing restrictions on foreign ownership of real estate. Some state laws, such as South Dakota’s, mandate disclosure of foreign ownership. Others, like Utah and Tennessee, outright prohibit it and may require divestiture of foreign-owned land.

Against this policy backdrop, financial ties between the U.S. and China have weakened significantly. With even tighter investment controls potentially on the horizon, organizations have already begun to price this uncertainty into their decision-making. For the first time in 25 years, China is not a top three investment priority for the majority of U.S. firms. As the investment climate worsens, businesses will face additional pressure to diversify away from China and enter other markets.

The Future of US-China Relations and What it Means for Your Organization

Increasing U.S.-China competition poses heightened regulatory risks for organizations, especially those with supply chains routed through China or investments in sensitive technologies like AI. Although a full decoupling is unlikely, businesses should expect more legislative activity and rule-making focused on industry protection and national security.

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