Categories
China Climate

Climate Trade Wars: China’s WTO Dispute with the E.U.’s Carbon Border Tax

Background

In July 2021, the European Union proposed to implement a Carbon Border Adjustment Mechanism (CBAM), otherwise known as a carbon border tax. The goal of the CBAM is to increase the cost of importing six categories of carbon-intensive goods from foreign nations: steel, iron, cement, aluminum, fertilizers, and electricity generation. This policy was introduced as part of the E.U.’s legislative mandate to reduce 55% of its emissions by 2030 and reach carbon neutrality by 2050[1].

After the announcement, several countries complained that the measure created discriminatory barriers for World Trade Organization (WTO) members to access the E.U. market. The nation most affected is China – the E.U.’s biggest trading partner, and the world’s largest exporter[2].  

When questioned about the CBAM proposal, Liu Youbin, a spokesman for the Chinese Ministry of Ecology and Environment, said that it was “essentially a unilateral measure to extend the climate change issue to the trade sector. It violates WTO principles … and will seriously undermine mutual trust in the global community and the prospects for economic growth.”[3]

If the CBAM enters into force on January 1st, 2023, as is currently proposed[4], China could choose to retaliate by imposing their own tariffs against European goods and sue the E.U. through the WTO’s Dispute Settlement Body to acquire legal relief from complying.

China’s Own WTO Compliance and its Legal Case Against CBAM

Despite valid concerns about the CBAM, China does not have much credibility to levy accusations of unilaterally flouting international trade law. Since joining the WTO in 2001, China’s compliance has been popularly described as “mixed” or “complex.”[5]

Though they have liberalized the economy in some areas, there remain a range of issues where China has not met its commitments, including industrial subsidization, intellectual property protection, forced joint ventures and technology transfer, and market access to the services industries[6]. Between 2009 and 2015, China-related complaints accounted for 90% of the cases brought to the WTO by the U.S., E.U. and Japan[7].

There are three issues where China could allege the CBAM violates the WTO[8], but its own practices also run afoul of those same trade principles.

First is Article I’s most-favored-nation treatment rule, which requires that any advantage granted to an imported product from one WTO member must be granted to all other members.

China could argue that the E.U. is discriminating against them by selectively choosing an arbitrary set of products it must buy emission certificates for based on how dirty its manufacturing process is compared to other countries.

At the same time, China has spent decades selectively treating intellectual property (IP) owned or developed by other WTO members in a different way from IP developed in China. The result is coerced joint ventures with Chinese firms which result in involuntary IP transfer and a siphoning of technology and trade secrets from other countries[9]. A 2019 report found that one in five North American companies had their IP stolen from China just that year[10].

Second is Article II’s tariff schedule which lays out the maximum level of tariffs that a country can apply against another country’s exports.

If the cost of the CBAM emission certificates exceeds the ceiling on customs duties that the E.U. agreed to, also known as the bound rate, then China could argue this would be a violation of Article II. While the final certificate costs have not yet been finalized, it’s likely that the price will rise over time to meet the E.U.’s ambitious emission targets.

However, Chinese tariffs on U.S. imports today already exceed the bound rate on more than 128 products, breaching its obligations under Article II[11]. Moreover, China’s expansive use of subsidies effectively undermines its tariff reduction commitments by offsetting the cost of domestic production.

Last is Article III’s national treatment rule which requires that imported products not be given less favorable treatment than domestic products.

Today, almost 43% of the E.U.’s emission certificates are given for free to the manufacturing, power, and airline industries[12] – sectors which are harder to abate, but whose free allocations are expected to decline and be phased out. European industries are lobbying hard to keep their free allocations, but if they are not phased out before the CBAM goes into effect then China can argue its products are at a competitive disadvantage by paying a carbon price that the E.U.’s manufacturers aren’t paying.

Again, China provides massive subsidies to its domestic industries including semiconductors, solar panels, steel, aluminum, glass, and auto parts. That also provide an unfair advantage to its domestic products. For example, 95% of Chinese technology firms received R&D subsidies in 2015 accounting for almost a quarter of their total R&D investment[13]. Since joining the WTO, subsidies have financed nearly 20% of China’s manufacturing capacity every year[14].

CBAM and China’s Approach to International Law

The contradictions between China’s potential legal case against the CBAM with its own trade practices fits into its larger approach towards international law: a set of norms and practices to be obeyed when practicable and overlooked when they cannot[15]. By accusing the E.U. of doing that which it is also guilty of, China would continue a trajectory of acting as a “selective revisionist” in the international system looking to promote its own economic interests through exceptions and special conditions[16].

If the CBAM is taken to court, the E.U. could seek justification under Article XX’s general exceptions, arguing that the CBAM is “necessary to protect human, animal or plant life or health,” by tackling climate change[17]. But even if the WTO rules in favor of the E.U., China has a long history of either failing to adhere to decisions or creatively interpreting them in way that thwarts thwart the purpose of the ruling itself[18].

In the context of CBAM, this could look like Chinese manufacturers obfuscating or falsifying the total extent of carbon emissions for their products, as has been done before[19], and artificially buying a lower number of emission certificates.  These actions would further reinforce the tension between China’s desire to promote its own interests and its desire to be seen as a responsible member of the multilateral order.

Conclusion

The E.U.’s CBAM would be the first carbon border tax implemented at an international level, but it has already set off discussions in Germany, Japan, the U.S. and Canada about implementing similar policies. In response, it looks likely that China will contest CBAM policies as unilateral actions that violate international trade law, if nothing to buy time as they hopefully push Chinese firms to quickly decarbonize their manufacturing processes.

While China could make a number of valid legal arguments against the CBAM, it will be throwing stones from a glass house. Given China’s complex track record of compliance with past WTO rulings and conditions for entry, many of the complaints China could allege would apply to several of its own trade practices.  

Contradictions notwithstanding, the WTO represents the only arena of international relations where China has agreed to resolve foreign conflicts through an international court[20]. Thus, how the China-E.U. CBAM dispute gets settled will have significant ramifications on the ambition of future carbon reduction policies and the cooperation of the world’s largest trader and carbon emitter to support these efforts.


[1] Council of the European Union, “Council agrees on the Carbon Border Adjustment Mechanism (CBAM)”, March 15th, 2022, https://www.consilium.europa.eu/en/press/press-releases/2022/03/15/carbon-border-adjustment-mechanism-cbam-council-agrees-its-negotiating-mandate/ .

[2] Eurostat, “China-EU – international trade in goods statistics,” February 2022, https://ec.europa.eu/eurostat/statistics-explained/index.php?title=China-EU_-_international_trade_in_goods_statistics.

[3] Muyu Xu and David Stanway, “China says EU’s planned carbon border tax violates trade principles,” Reuters, July 26th, 2021, https://www.reuters.com/business/sustainable-business/china-says-ecs-carbon-border-tax-is-expanding-climate-issues-trade-2021-07-26/.

[4] Ibid. 1.   

[5] Timothy Webster, “Paper Compliance: How China Implements WTO Decisions,” Michigan Journal of International Law, Volume 35, Issue 3, 2014, https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1064&context=mjil.

[6] Stephen Ezell, “False Promises II: The Continuing Gap Between China’s WTO Commitments and Its Practices,” Information Technology & Innovation Foundation (ITIF), July 26th, 2021, https://itif.org/publications/2021/07/26/false-promises-ii-continuing-gap-between-chinas-wto-commitments-and-its.

[7] Mark Wu, “The ‘China, Inc.’ Challenge to Global Trade Governance,” Harvard International Law Journal, vol. 57, no. 2, Spring 2016, https://harvardilj.org/wp-content/uploads/sites/15/HLI210_crop.pdf.

[8] James Bacchus, “Legal Issues with the European Carbon Border Adjustment Mechanism,” CATO Institute, August 2021, https://www.cato.org/briefing-paper/legal-issues-european-carbon-border-adjustment-mechanism.

[9] Ibid. 6.   

[10] Eric Rosenbaum, “1 in 5 corporations say China has stolen their IP within the last year: CNBC CFO survey,” CNBC, March 19th, 2019, https://www.cnbc.com/2019/02/28/1-in-5-companies-say-china-stole-their-ip-within-the-last-year-cnbc.html.

[11] United States Trade Representative (USTR), “CHINA – ADDITIONAL DUTIES ON CERTAIN PRODUCTS

FROM THE UNITED STATES,” May 2nd, 2019, https://ustr.gov/sites/default/files/enforcement/DS/US.Sub1.(DS558).(public).pdf.  

[12] European Commission, “Free Allocation,” https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets/free-allocation_en.  

[13] Ibid. 6.  

[14] Ibid. 6.  

[15] Michael J. Mazarr, Timothy R. Heath, Astrid Stuth Cevallos, “China and the International Order,” RAND Corporation, 2018, https://www.rand.org/content/dam/rand/pubs/research_reports/RR2400/RR2423/RAND_RR2423.pdf.

[16] Ibid. 16.

[17] Gary Clyde Hufbauer, Jisun Kim, Jeffrey J. Schott, “Can EU Carbon Border Adjustment Measures Propel WTO Climate Talks?” Peterson Institute for International Economics, November 2021, https://www.piie.com/publications/policy-briefs/can-eu-carbon-border-adjustment-measures-propel-wto-climate-talks.

[18] Ibid. 5.  

[19] Muyu Xu and David Stanway, “China slams firms for falsifying carbon data,” March 15th, 2022, Reuters, https://www.reuters.com/world/china/china-slams-firms-falsifying-carbon-data-2022-03-14/.

[20]Gregory Shaffer and Henry S. Gao, “China’s Rise: How It Took on the U.S. at the WTO,” Singapore Management University School of Law Research Paper No. 14/2017, March 20th, 2017, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2937965.

Categories
China Climate

The Geopolitics of China’s Energy Future

Abstract

China is the world’s largest consumer of energy and emitter of CO2 emissions – nearly double that of the United States[i],[ii]. Amidst global pressure to decarbonize its economy, China is concurrently ascending as the world’s pre-eminent industrial superpower. The Chinese Communist Party’s (CCP) 14th Five Year Plan (2021-2025) makes binding directives to shrink carbon emissions while also forecasting new energy requirements for “high-quality” development and economic growth[iii]. China made a monumental 2060 net-zero pledge that stands as an ideal vision rather than a detailed roadmap, with specifics that will take years to formalize, much less implement[iv]. Along the way, China will have to reconcile its pledge with being the world’s largest consumer of coal and second-biggest consumer of oil and gas.

These contradictions in China’s energy strategy are explained by the imperative for China to maintain economic growth in order to sustain the CCP’s legitimacy. The Party set a very optimistic GDP growth target of around 5.5% this year which they seem unlikely to meet[v]. This will continue a trend of year-on-year growth slowing. If China wants to be the world’s dominant power, it needs to continue to grow. And a growing economy, one on pace to become the largest in the world by the next decade[vi], will require much more energy. Indeed, China’s GDP growth remains tightly coupled with its energy consumption which puts pressure on the CCP to acquire as many sources of energy as it can.

Source: Michael Meiden, “Unpacking China’s 2060 Carbon Neutrality Pledge,” The Oxford Institute for Energy Studies, December 2020.

The fundamental constraint for the Chinese today is that they are energy insecure. A near term forecast as indicated by Figure 1 sees the CCP continuing to get these sources from coal, oil and natural gas. China’s energy portfolio today is highly dependent on both high polluting and imported energy sources – a vulnerability that has been well acknowledged by Chinese policymakers for years. This has driven many of China’s flagship geostrategic projects including the Belt and Road Initiative (BRI) which aim to secure maritime trade routes and transportation infrastructure across Africa, Asia, and Europe to guarantee energy access[vii]. However, a green transformation is in the cards over the next 40 years. China’s overall economic diplomacy and foreign policy will increasingly include discussions of energy and can help relieve some of their constraints for relying on fossil fuels.  The government has a familiar playbook of interventions that is used to shore up its actual growth metrics and perceptions of its strengths, using its economic heft for both business leverage and geopolitical gain. 

Thus, this paper sets out to answer the question: how can China’s energy policy help them meet their growth aspirations and achieve energy security while working towards their emission reduction targets? There are four dimensions of China’s current plans for their energy mix that will be analyzed to answer this question along with their geopolitical implications: clean energy, critical minerals, oil and gas, and coal. These represent the principal levers through which China will control their energy future. After framing the current state of these energy sectors, policy recommendations are provided on how best they can leverage the clean energy, critical minerals, and fossil fuel portfolios to achieve their triple aim of energy security, economic growth, and emission reduction.

Presentation


[i] Center for Strategic and International Studies, “How Is China’s Energy Footprint Changing?”, March 17th, 2022, https://chinapower.csis.org/energy-footprint/.  

[ii] Ritchie, Hannah, Roser, Max “CO2 Emissions”, Our World in Data, 2020 https://ourworldindata.org/co2-emissions/.  

[iii] Murphy, Ben “Outline of the People’s Republic of China 14th Five-Year Plan for National Economic and Social Development and Long-Range Objectives for 2035”, Georgetown Center for Security and Emerging Technology (CSET), May 12th, 2021, https://cset.georgetown.edu/wp-content/uploads/t0284_14th_Five_Year_Plan_EN.pdf

[iv] Meidan, Michal “Unpacking China’s 2060 carbon neutrality pledge,” The Oxford Institute for Energy Studies, December 2020, https://www.oxfordenergy.org/publications/unpacking-chinas-2060-carbon-neutrality-pledge

[v] Yao, Kevin and Woo, Ryan “China targets slower economic growth as headwinds gather,” Reuters, March 5, 2022: https://www.reuters.com/markets/asia/china-cuts-2022-gdp-growth-target-around-55-2022-03-05/

[vi] Rapp, Nicolas and O’Keefe, Brian, “This chart shows how China will soar past the U.S. to become the world’s largest economy by 2030,” January 30th, 2022, https://fortune.com/longform/global-gdp-growth-100-trillion-2022-inflation-china-worlds-largest-economy-2030/

[vii] Bassler, Christopher and Noon, Ben, “Mind the Power Gap: The American Energy Arsenal and Chinese Insecurity”, Center for Strategic and Budgetary Assessments (CBSA) , August 25th, 2021, https://csbaonline.org/uploads/documents/CSBA8274_(Mind_the_Power_Gap)_FINAL_web.pdf

Categories
China Foreign Policy Short Form

Understanding Modern China Through Mao

Mao Zedong, the father of the Chinese Communist Party, casts a long shadow on modern day China despite his death nearly a half century ago. Like any shadow, China and its current president Xi Jinping trail alongside the towering figure in both form and substance.

Understanding politics in modern China requires reckoning with two of the most significant legacies of the Mao era – the Anti-Rightist campaign of the late 1950s and the cult-of-personality developed around Mao himself through mass media and propaganda during the Cultural Revolution in the 1960s. One could draw a straight line from these foundational events to Xi Jinping’s current attack on intellectualism, his brutal suppression of dissenting voices, and attempt to exert singular control over Chinese society through ideological indoctrination.

The Anti-Rightist campaign began in 1957, less than ten years after Mao and the CCP founded the People’s Republic of China. It was in response to the Hundred Flowers Movement launched the year before when the CCP encouraged Chinese citizens and intellectuals to openly express their opinions and criticize the government to help the party correct its mistakes.

This brief liberalization of political expression in China proved to be a bridge too far. Mao found the overwhelming criticism from the masses to represent a threat to the party’s control of Chinese society and responded by ordering a brutal purge of so-called “rightists”.

Anyone who favored capitalism over collectivization or had criticized the CCP was accused of plotting to overthrow the government. An estimated 550,000 people were rounded up and either publicly criticized through “struggle meetings”, sent to prison camps for re-education, or even executed[1]. The actual number of victims may be between 1-2 million or more[2].

Up to one million Uyghers are currently being held in re-education camps in Xinjiang, China to prevent religious “extremism” and “terrorist activities”, and to ensure “ethnic unity” and national security.

The Anti-Rightist campaign was a game-changer not only because of how arbitrary the persecutions were – indeed nearly 98% of all who were labeled “rightists” may have been wrongly applied[3] – but that it was aimed at the mainstream, intellectual class not the fringes of Chinese society[4]. It effectively shuttered intellectual dissent and turned China into a de-facto one party state.

Today, Xi Jinping is echoing the legacy of the Anti-Rightist campaign through a similarly repressive crackdown on intellectual discourse. In 2013, Xi’s comprehensive reform plan effectively banned any discussion of constitutional democracy and universal values – it was the biggest ideological campaign to restrict speech since Mao’s death[5].  

As a result, hundreds of professors, lawyers, and activists have been targeted for promoting so-called Western concepts like a free press, civil society, and rule-of-law – acts that have resulted in their harassment, jailing, exiling, and disappearance for “subversion of state power”[6],[7]. Access to China itself has shriveled with scholarly researchers facing surveillance, intimidation, and restrictions on entering the country or accessing archival research materials[8].

Xi is merely borrowing Mao’s suspicion of the intellectual class – if left free to protest or critique the party then they would risk unraveling the hegemonic control of the CCP over the Chinese people.

How were both leaders able to pull off this repressive form of governance? One of Mao’s enduring legacies is the extent to which he was seen a veritable demi-god in the eyes of the public – an infallible, heroic leader who rescued China from the imperialist West[9].

Students carry Mao’s banner and sing songs in his praise during the Cultural Revolution of the 1960s.

The deification of Mao saw its fever pitch during the Cultural Revolution when he urged young people to purge China of the capitalist and revisionist elements in society and impose “Mao Zedong Thought” as the dominant ideology of the country[10].

The People’s Liberation Army deployed expansive propaganda and mass media to build a cult-of-personality around Mao. Songs glorifying him were sang in schools and played in loudspeakers in public, the “Little Red Book” of Mao’s quotations was almost mandatory to be held by everyone and quoted extensively, even a loyalty dance was created for people to express their love and devotion to Mao[11].

Xi is now in the process of leveraging the party’s vast propaganda apparatus to create his own god-like image as a way to engender support from the public in the face of totalitarian control.

In 2019, the CCP launched a mobile app some have dubbed as the “Little Red App” to promote Xi’s ideology where party members and civil servants must log points in every day[12]. Starting in August 2021, “Xi Jinping Thought” has been integrated into the Chinese school curriculum from primary school through college with Xi’s ideology being taught to “cultivate love for the country, the Communist Party of China, and socialism.[13]” At the most recent Central Committee meeting of the CCP, Xi’s ideology was declared the “essence of Chinese culture.[14]

After having eliminated term limits for himself, Xi now stands as ruler-for-life of China[15]. Equipped with the lessons from Mao, he stands ready to quash political dissent, expand the party’s control on every facet of Chinese society, and cement his legacy in the same strain of revolutionary immortality that Mao Zedong imprinted into generations of Chinese citizens.


[1] Roderick MacFarquhar, “The Politics of China: Sixty Years of The People’s Republic of China”, pg. 82, Cambridge University Press, 2011, https://ebookcentral.proquest.com/lib/jhu/detail.action?docID=803133.

[2] Christine Vidal, “The 1957-1958 Anti-Rightist Campaign in China: History and Memory (1978-2014)”, HAL Archives, April 25th, 2016, https://halshs.archives-ouvertes.fr/halshs-01306892/document.

[3] Roderick MacFarquhar, “The Politics of China: Sixty Years of The People’s Republic of China”, pg. 83, Cambridge University Press, 2011, https://ebookcentral.proquest.com/lib/jhu/detail.action?docID=803133.

[4] Andrew Mertha, “Lecture – The Anti-Rightest Movement and the Great Leap Forward”, Module 3 – Maoism and Its Legacy.

[5] Cai Xia, “The Party That Failed: An Insider Breaks With Beijing”, Foreign Affairs, January/February 2021, https://www.foreignaffairs.com/articles/china/2020-12-04/chinese-communist-party-failed.

[6] Tom Phillips and Ed Pilkington, “No country for academics: Chinese crackdown forces intellectuals abroad,” The Guardian, May 24th, 2016, https://www.theguardian.com/world/2016/may/24/academics-china-crackdown-forces-intellectuals-abroad.

[7] Human Rights Watch, “China: On “709” Anniversary, Legal Crackdown Continues,” July 7th, 2017, https://www.hrw.org/news/2017/07/07/china-709-anniversary-legal-crackdown-continues.

[8] Sheena Chestnut Greitens and Rory Truex, “Repressive Experiences among China Scholars: New Evidence from Survey Data,” The China Quarterly, 242, June 2020, pp. 349–375, https://www.cambridge.org/core/journals/china-quarterly/article/repressive-experiences-among-china-scholars-new-evidence-from-survey-data/C1CB08324457ED90199C274CDC153127.

[9] Ian Buruma, “Cult of the chairman,” The Guardian, March 7th, 2001, https://www.theguardian.com/world/2001/mar/07/china.features11.

[10] Ronald McLeod, “The Great Proletarian Cultural Revolution: Mao Zedong’s Quest for Revolutionary Immortality”, Dissertations, Theses, and Masters Projects, 1990, https://scholarworks.wm.edu/cgi/viewcontent.cgi?article=4378&context=etd.

[11] South China Morning Post, “How Mao Zedong built up his cult of personality – from new Frank Dikötter book How to be a Dictator,” October 13th, 2019, https://www.scmp.com/lifestyle/arts-culture/article/3032488/how-mao-zedong-built-his-cult-personality-new-frank-dikotter.

[12] Iza Ding and Jeffrey Javed, “Why Maoism still resonates in China today,” The Washington Post, May 29th, 2019, https://www.washingtonpost.com/politics/2019/05/29/why-maoism-still-resonates-china-today/.

[13] BBC, “China schools: ‘Xi Jinping Thought’ introduced into curriculum,” August 25th, 2021, https://www.bbc.com/news/world-asia-58301575.

[14] NPR, “China’s Communist Party, with eye on history, gives Xi Jinping the same status as Mao,” November 11th, 2021, https://www.npr.org/2021/11/11/1054646063/china-xi-jinping-communist-party.

[15] James Doubek, “China Removes Presidential Term Limits, Enabling Xi Jinping To Rule Indefinitely,” NPR,  March 11th, 2018, https://www.npr.org/sections/thetwo-way/2018/03/11/592694991/china-removes-presidential-term-limits-enabling-xi-jinping-to-rule-indefinitely.

About The Author

Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.

Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.

He is a native of Atlanta, GA and attended the University of Georgia.

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Categories
China Economics and Trade Short Form

The Legacy of China’s Economic Transformation

Through the lens of government revenues and expenditures, China is the most decentralized country in the world[1]. With 31 provinces, 334 prefecture units, 2,851 county-level administrative units, and more than 41,000 township level units[2], these subnational governments have significant autonomy in governing the world’s largest population. In fact, local government accounts for almost 70-80% of all government spending in China, double that of other OECD countries[3].While China might appear to have a top-down, hierarchical command-and-control government, fragmentation of authority is actually at the heart of China’s political system[4].

It has not always been this way. Decades of political reform that began in the 1970s have led to waves of centralization and de-centralization of government control. Understanding this dynamic is crucial to make sense of China’s future – in particular, its ability to carry out the economic reforms it promised to make when it joined the World Trade Organization (WTO) in 2001. China’s economy is the lynchpin on which social stability hinges, and Xi Jinping plans to drive future growth not through the free-market reforms which made it into the economic juggernaut it is today, but through re-imposing central control on key parts of the economy.

The fragmentation of China’s contemporary political and economic system began in 1978, when Deng Xiaoping inaugurated a period of “reform and opening up”. Agriculture was de-collectivized, large state-owned enterprises (SOEs) were privatized, and government interference in economic forces like employment and inflation were relaxed[5]. The result was double-digit growth and the lifting of roughly 800 million people out of poverty[6]. As China pushed to join the WTO, the central government began to slash tariffs, strengthen intellectual property rights, and welcome in foreign companies. However, regional governments, who retained substantial control over their local economies, did not always share Beijing’s enthusiasm for this paradigm shift.

China’s decision to join the WTO and the ensuing threat of foreign competition produced a range of regional reactions, some in lockstep in Beijing while others resisted, fearing that competition would slow their efforts to maintain ambitious growth. For example, the prefecture of Yanbian in northeast China began to consolidate its cement industry in 2003. Rather than allowing market forces decide which firms should stay in business, the local government handpicked the winners and took away business licenses and machinery from firms they felt were inefficient[7]. This type of regional subversion against the market liberalization that China had promised the world reflected a wider divergence between the interests of Beijing and its ability to influence the sprawling network of subnational entities to follow their lead.

This regional subversion, however, was also responsible for China’s infrastructure boom. In 1994, the central government centralized tax collection and effectively starved regional governments of their revenue. In order to meet their growth targets, local governments turned to a new source of revenue – land. They began leasing millions of acres of land to real estate developers which was turned into highways, subways, high-rise apartments, and associated urban infrastructure[8]. The result was a doubling of the length of China’s highways between 2007 to 2017 – enough to go around the world three times – as well as ha ving 8 of the world’s 12 longest metro-rail systems.

The global economic crisis of 2008 turned the tide in Beijing’s interest to fulfill the hopes of its accession to the WTO. To China’s leaders, the crisis exposed America’s model of free-market capitalism to be fundamentally weak[9]. The solution, they argued, was a re-centralization of economic power and an anti-corruption drive to rid the nation of crony capitalism. Since Xi Jinping came to power, SOEs have become significantly stronger and larger, taking on leading roles in China’s Belt and Road Initiative to build infrastructure around the world and ultimately export their form of state capitalism[10]. This has corresponded with a retreat of the private sector through a crackdown on financial technology firms like Alibaba and Tencent as well as a recalibration of center-local revenue sharing to reduce debt accumulation[11].

Xi’s anti-corruption drive, the longest and widest in the CCP’s history, can also be understood through the lens of reigning in the autonomy of subnational governments. One of the primary mechanisms of central influence through the fragmented system is by the CCP and the state appointing a nested hierarchy of cadre leaders. These are bureaucrats placed at all levels and are supposed to be trained in the party’s ideology and carry out the will of the central government[12]. So far, Xi’s campaign has ensnared 1.5 million officials, both high level and low level, who will ultimately be replaced with those who will more closely hew the line of the central government, and Xi himself[13].

Under Xi’s reign, China is returning to an era that it is most familiar with – command and control. To deliver economic reforms and continued growth, China will grapple with its structure of fragmented authoritarianism through centralized crackdowns in an attempt to execute a uniform agenda and vision. Will it work? History has shown that decentralization has led to China’s most explosive growth, but perhaps Xi will continue to defy all odds.


[1] Michael Davidson, “Creating Subnational Climate Institutions in China,” Harvard Project on Climate Agreements, December 2019, https://www.belfercenter.org/sites/default/files/files/publication/davidson-china-paper%20designed-version-3.pdf.

[2] Andrew Mertha, “Lecture – Disaggregating the State”, Module 8 – Center-Local Relations. Johns Hopkins University, Blackboard.  

[3] Michael Davidson, “Creating Subnational Climate Institutions in China,” Harvard Project on Climate Agreements, December 2019, https://www.belfercenter.org/sites/default/files/files/publication/davidson-china-paper%20designed-version-3.pdf.

[4] Kenneth Lieberthal and Michael Oksenberg, “Policy Making in China: Leaders, Structures, and Processes. Princeton University Press”, pg. 137, Princeton University Press, 1988.

[5] Jacques Delisle and Avery Goldstein, “China’s Economic Reform and Opening at Forty: Past Accomplishments and Emerging Challenges,” The Brookings Institution, April 2019, https://www.brookings.edu/wp-content/uploads/2019/04/9780815737254_ch1.pdf.

[6] Maria Ana Lugo, Martin Raiser, and Ruslan Yemtsov, “What’s next for poverty reduction policies in China?”, The Brookings Institution, September 24th, 2021, https://www.brookings.edu/blog/future-development/2021/09/24/whats-next-for-poverty-reduction-policies-in-china/.

[7] Yeling Tan, “How the WTO Changed China: The Mixed Legacy of Economic Engagement,” Foreign Affairs, March/April 2021, https://www.foreignaffairs.com/articles/china/2021-02-16/how-wto-changed-china.

[8] Yuen Yuen Ang, “The Robber Barons of Beijing: Can China Survive Its Gilded Age?” Foreign Affairs, July/August, 2021, https://www.foreignaffairs.com/articles/asia/2021-06-22/robber-barons-beijing.

[9] Rana Mitter and Elsbeth Johnson, “What the West Gets Wrong About China,” Harvard Business Review, May-June 2021, https://hbr.org/2021/05/what-the-west-gets-wrong-about-china.

[10] Yeling Tan, “How the WTO Changed China: The Mixed Legacy of Economic Engagement,” Foreign Affairs, March/April 2021, https://www.foreignaffairs.com/articles/china/2021-02-16/how-wto-changed-china.

[11] The Economist, “Xi Jinping’s crackdown on Chinese tech firms will continue,” November 8th, 2021, https://www.economist.com/the-world-ahead/2021/11/08/xi-jinpings-crackdown-on-chinese-tech-firms-will-continue.

[12] Maria Edin, “State Capacity and Local Agent Control in China: CCP Cadre Management from a Township Perspective,” The China Quarterly, March 2003, No. 173 (Mar., 2003), pp. 35-52.

[13] Yuen Yuen Ang, “The Robber Barons of Beijing: Can China Survive Its Gilded Age?” Foreign Affairs, July/August, 2021, https://www.foreignaffairs.com/articles/asia/2021-06-22/robber-barons-beijing.

Categories
China Climate Change Foreign Policy Policy Memo

Three Ways China Can Tackle Its Emissions

Executive Summary

China is the world’s largest emitter of CO2 emissions, by far. It represents nearly a third of all emissions by itself – more than double the U.S. and the next seven nations combined[1]. As a result, China is under intense pressure to meet its emission targets set out in Glasgow at COP26. Achieving these targets will hinge on the ability for the central government in Beijing to influence a sprawling network of provincial and sub-provincial governments to make emission reductions in their local areas.

China’s emissions come from three primary sources: industrial production (50%), the power sector (40%), and the transportation sector (8%)[2]. Here, we lay out a roadmap to inform diplomatic negotiations on how the Chinese government can reduce emissions from these sectors through center-local coordination on policy reforms in energy investment, production, and consumption. These reforms include stronger permitting rules against coal plants, synchronization of their national emissions trading system, and incentives for electric vehicles (EVs).

Background

By some fiscal measures, China is the most decentralized country in the world[3]. Its “quasi-federal” system was born out of decentralization reforms in the late 1970s which have created a constellation of central and local institutions with varying, sometimes conflicting, responsibilities and mandates for energy and climate decisions[4]. The strength of these mandates largely depend on which agency is issuing and enforcing them.

Historically, regulating GHG emissions originates with China’s most salient environmental concern – air pollution. This fell under the purview of the National Development and Reform Commission (NDRC) until 2018 when the government transferred its climate related responsibilities to the Ministry of Ecology and Environment (MEE)[5]. In July 2021, China reinstated the NRDC as the primary planning body on climate change and has tasked it with creating a roadmap for how China can meet its emission targets.

Since 2007, China had established energy intensity reduction targets whose enforcement has been handed down to local governments and are factored in their performance evaluation[6]. There has been significant geographic variation in local enforcement due to competing incentives for economic growth and development. 

Reform Recommendations

In its roadmap, the NRDC should recommend that the central government:

Reclaim authority on permitting rules for new coal-fired power plants. Authority to permit new coal plants was decentralized to the provinces in 2014 which resulted in a rapid increase in coal permits across the country[7]. China is now the world’s largest consumer and producer of coal[8]. By reclaiming permitting authority, Beijing can restrict new plants and set capacity reduction plans in line with the global pledge to “phase down” coal[9]. China can expect resistance from coal mine owners and provinces with coal dependent economies as they are highly dispersed and enjoy autonomous control – the central government will face substantial difficulty without credible punishments for permitting violations.

Harmonize local emissions trading system (ETS) pilots to transition into the new national carbon market. In 2013, China launched seven provincial/municipal ETS pilots in preparation for the rollout of their national carbon market in 2020 which is to be run by the national MEE department. In these pilots, local governments found ways to bypass fees and lessen the impact of carbon prices on their preferred investments like coal. Thus, in rolling out the national market, MEE will need to contend with those local governments skirting the rules by standardizing and closing loopholes around carbon allowance allocations, compliance, and data measuring, reporting, and verification (MRV) systems.

Require local governments to expand license plate quotas to encourage uptake of electric vehicles. Local governments have broad control over the transportation sector which they have used to limit emissions by forbidding certain types of cars from entering city centers each day through license plate requirements[10]. The central government can require provinces to expand the scope of these requirements in two ways – (1) only allowing cars with EV license plates at certain times, days, and lanes and (2) allowing cities to waive license plate restrictions all together for EVs so they’re not subject to any driving restrictions compared to gas-powered cars[11]. Beijing could complement these regulations with expanded central tax incentives to further increase uptake of EVs on China’s roads.

Taken together, these reforms give China a significant boost in their efforts to slow climate change as they directly take on local resistance to cutting major sources of emissions. At Glasgow, China pledged to peak its CO2 emissions before 2030[12], thus it has roughly eight years to course correct the diverging local interests of the world’s largest population. Failure to do so will likely sink global efforts to avoid a 2°C rise which will precipitate severe environmental deterioration.


[1] BBC, “Report: China emissions exceed all developed nations combined,” May 7th, 2021, https://www.bbc.com/news/world-asia-57018837.

[2] Columbia University In The City Of New York, “Guide to Chinese Climate Policy: Emissions by Sector and Sources,” https://chineseclimatepolicy.energypolicy.columbia.edu/en/emissions-sector-and-source.

[3] Michael Davidson, “Creating Subnational Climate Institutions in China,” Harvard Project on Climate Agreements, December 2019, https://www.belfercenter.org/sites/default/files/files/publication/davidson-china-paper%20designed-version-3.pdf.

[4] Ibid. Davidson

[5] David Stanway, “China shake-up gives climate change responsibility to environment ministry,” Reuters, March 13th, 2018, https://www.reuters.com/article/china-parliament-environment/china-shake-up-gives-climate-change-responsibility-to-environment-ministry-idUSL3N1QV23P.

[6] Ibid. Davidson.

[7] Ibid. Davidson.

[8] Sara Schonhardt, “Energy crunch raises questions about China’s devotion to coal,” E&E News, October 13th, 2021, https://www.eenews.net/articles/energy-crunch-raises-questions-about-chinas-devotion-to-coal/.

[9] Connor Perrett, “World leaders at COP26 strike agreement to ‘phase down’ unabated coal and call on wealthy nations to double funding to vulnerable nations,” November 13th, 2021, https://www.businessinsider.com/cop26-concludes-with-agreement-to-phase-down-coal-2021-11.

[10] Wang, Rui, “Shaping Urban Transport Policies in China: Will Copying Foreign Policies Work?” Transport Policy, 17(3), 147–152, 2010, https://doi.org/10.1016/j.tranpol.2010.01.001.

[11] Sandalow, David, “Guide to Chinese Climate Policy,” Columbia University Center on Global Energy Policy, 2018, https://energypolicy.columbia.edu/sites/default/files/pictures/Guide%20to%20Chinese%20Climate%20Policy%207-27-18.pdf.

[12] Climate Action Tracker, “China,” November 3rd, 2021, https://climateactiontracker.org/countries/china/targets/.

About The Author

Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.

Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.

He is a native of Atlanta, GA and attended the University of Georgia.

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China Climate Change Decision Memo

Lessons for U.S. – China Climate Cooperation After COVID-19

MEMORANDUM TO THE NATIONAL SECURITY ADVISOR

FROM: Chetan Hebbale

SUBJECT: U.S. – China Disaster Response Cooperation After COVID-19

Executive Summary
COVID-19 has opened a window to understand the crisis management strategy of the modern Chinese Communist Party (CCP). As climate change exacerbates natural disasters as well as infectious diseases[1], China will likely deploy their successful pandemic response tactics of regional containment, mass mobilization, and population control to deal with these issues. However, the CCP will also likely continue a tactic that was unsuccessful – the suppression of information domestically and internationally about the severity of the crisis.

The U.S. has an opportunity to improve its relations with China with a package of policies that establish mutual support mechanisms for dealing with future emergencies. These policies could include establishing emergency hotlines to improve transparency, deepening institutional collaboration and best practices for developing health technologies and rapidly scaling up new infrastructure, and promoting public-private environmental stewardship.   

Background

The first “unknown pneumonia case” was documented in Wuhan on December 8th, 2019. On January 20th, 2020, Chinese president Xi Jinping declared that China was experiencing a disease outbreak from a novel coronavirus[2]. In those intervening 43 days, the number of suspicious cases began increasing exponentially with doctors in Wuhan warning friends on social media about the emerging threat.

The authorities of Wuhan and Hubei Province attempted to suppress these reports and punished eight doctors for “rumor-mongering.” They deliberately provided the public with false information on the number of cases and that no human-to-human transmission was occurring[3]. It was only after the first case appeared outside of China in Thailand on January 13th,2020, that leaders in Beijing were compelled to recognize that they may be dealing with a possible pandemic.

Once emergency measures were activated, the government quickly marshalled resources from the civilian and military sectors on a massive scale to dispatch medical equipment, construct overflow hospitals, and enforce lockdowns on nearly half a billion people[4]. In addition, state-owned enterprises like Sinopharm were given substantial resources to begin developing a vaccine. China’s aggressive measures were a global success with less than 5,000 deaths, the second lowest deaths per 100,000 people in the world[5], and producing half the vaccine doses delivered globally[6].

Discussion

Lesson #1: Information authoritarianism will be an enduring feature of the Chinese state.  The U.S. should establish lines of transparency with Chinese citizens.  

  • Local Chinese officials will continue to have an incentive to suppress negative information, not only regarding disease outbreaks, but natural disasters, financial frauds, and industrial accidents[7], because of the CCP’s performance evaluation and responsibility attribution pressures in the cadre management system[8]
  • Recognizing the vulnerabilities of this approach, the Chinese government has an incentive to prevent future disasters from affecting the global community. The U.S. could work with China to establish encrypted digital hotlines whereby Chinese citizens can anonymously report disasters and hot spot events to avoid retribution by local officials for revealing damaging information.

Lesson #2: The Chinese state is capable of quick mobilization on massive scales. The U.S. should conduct joint exercises with China to exchange best practices on rapidly standing up emergency infrastructure and scaling medical breakthroughs.

  • At the beginning of the response, China established a leadership small group (LSG) to be the nation’s top decision-making body for COVID-19 prevention and control[9]. The LSG enabled swift, decisive, and coordinated national action to deploy military and medical staff to quickly build makeshift hospitals and distribute medical supplies. While state-owned enterprises were directed to develop therapeutics, the Sinopharm vaccine has overall seen lower efficacy than the American-made vaccines[10].
  • The U.S. can learn from China’s organizational mobilization and China can learn from U.S. medical innovations. Joint exercises to prepare for rapidly building sea walls, flood shelters, and fire-proof infrastructure will be mutually beneficial for both countries to improve their disaster resilience. Facilitating more medical and academic collaboration on vaccine and therapeutics research from leading U.S. institutions will enhance the speed and efficacy of future medical treatments.       

Lesson #3: China has a cooperative citizenry that’s willing to make shared sacrifices for the greater good. The U.S. should work with China to leverage this public cooperation into community environmental action to reduce carbon emissions

  • Most of the world faced severe challenges in enforcing social distancing and quarantine measures both due to civil resistance as well as weak administrative coercive capacity. In contrast, China faced little resistance to their rigid lockdown measures. The collectivist values and communist ideologies of the Chinese people have conferred a remarkable degree of social discipline as well exercising self-restraint when personal interests clash with collective ones[11].  
  • Today, China is the world’s largest emitter of CO2 emissions – more than all developed nations combined[12]. The U.S. could help establish public-private partnerships with civil societies in China to leverage the spirit of collectivist values to install solar panels on homes, conserve and protect ecosystems, and reduce household fossil fuel use.

[1] Renee Cho, “How Climate Change Is Exacerbating the Spread of Disease,” Columbia University Climate School, September 4th, 2014, https://news.climate.columbia.edu/2014/09/04/how-climate-change-is-exacerbating-the-spread-of-disease/.

[2]  Alex Jingwei He, Yuda Shi & Hongdou Liu, “Crisis governance, Chinese style: distinctive features of China’s response to the Covid-19 pandemic,” Policy Design and Practice, July 19th, 2020,  https://www.tandfonline.com/doi/full/10.1080/25741292.2020.1799911.

[3] Chunyan Ding and Fen Lin, “Information Authoritarianism vs. Information Anarchy: A Comparison of Information Ecosystems in Mainland China and Hong Kong during the Early Stage of the COVID-19 Pandemic,” China Review, February 2021, https://www.jstor.org/stable/27005556.

[4] Emily Feng, “Restrictions And Rewards: How China Is Locking Down Half A Billion Citizens,” NPR, February 21st, 2020, https://www.npr.org/sections/goatsandsoda/2020/02/21/806958341/restrictions-and-rewards-how-china-is-locking-down-half-a-billion-citizens.

[5] Johns Hopkins University Coronavirus Resource Center, “Mortality Analyses,” https://coronavirus.jhu.edu/data/mortality.

[6] Smriti Mallapaty, “China’s COVID vaccines have been crucial — now immunity is waning,” Nature, October 14th, 2021, https://www.nature.com/articles/d41586-021-02796-w.

[7] Associated Press, “China exonerates doctor reprimanded for warning of virus,” March 19th, 2020, https://apnews.com/article/virus-outbreak-accidents-ap-top-news-international-news-arrests-6f2e666485e9abae4bb112251eca77be.

[8] Ran Ran and Yan Jian, “When Transparency Meets Accountability: How the Fight against the COVID-19 Pandemic Became a Blame Game in Wuhan,” China Review, February 2021, https://muse.jhu.edu/article/784425.

[9]Alex Jingwei He, Yuda Shi & Hongdou Liu, “Crisis governance, Chinese style: distinctive features of China’s response to the Covid-19 pandemic,” Policy Design and Practice, July 19th, 2020,  https://www.tandfonline.com/doi/full/10.1080/25741292.2020.1799911.

[10] Sui-Lee Wee, “They Relied on Chinese Vaccines. Now They’re Battling Outbreaks.” The New York Times, September 16th, 2021, https://www.nytimes.com/2021/06/22/business/economy/china-vaccines-covid-outbreak.html.

[11] Alex Jingwei He, Yuda Shi & Hongdou Liu, “Crisis governance, Chinese style: distinctive features of China’s response to the Covid-19 pandemic,” Policy Design and Practice, July 19th, 2020,  https://www.tandfonline.com/doi/full/10.1080/25741292.2020.1799911.

[12] BBC, “Report: China emissions exceed all developed nations combined,” May 7th, 2021, https://www.bbc.com/news/world-asia-57018837.

Categories
China Economics and Trade Short Form

Chinese Digital Currency and the Future of the Dollar

There are billions of financial transactions happening right now between consumers, businesses, and governments around the world. The vast majority of these transactions are denominated in U.S. dollars. As the world’s reserve currency, the dollar serves as the unit of account for most global trade and foreign exchange transactions. Simply put, there is no currency more important to the functioning of the world economy than the dollar.


As a result, the U.S. has spent the last 75 years in the driver’s seat of the global financial system incurring a range of economic and geopolitical advantages. U.S. consumers have enjoyed low interest rates and cheap imports for decades, spawning one of the world’s highest standards of living. In turn, the U.S. government has been able to sustain large trade deficits without inflation and successfully advance its national security interests through economic sanctions which prevent nations from accessing the dollar for cross-border transactions. For years, adversaries have sought to bypass the Western financial system with little success.

However, the reign of dollar supremacy is not guaranteed. China is now preparing to take the most ambitious step yet to internationalize an alternative currency to the dollar. In April, China’s central bank became the first to pilot a national digital currency for the renminbi, known as the e-RMB. The renminbi represents the most viable currency to dethrone the dollar due to the size of China’s economy and its integral role in the global supply chain. If successful in its vision to create an alternative to the dollar, China could shift the paradigm of the global economy into a new era – one with a duopoly of reserve currencies that would have a significant impact on international competition.

China has begun piloting their digital currency, known as the e-RMB, in five cities

In this new era, imagine that the U.S. comes to learn that North Korea is trying to acquire uranium from Iran for its nuclear weapons program. The U.S. would issue new sanctions, but North Korea and Iran would have shifted much of their global trade into using the new Chinese digital currency thus allowing them to circumvent the dollar payments system. Now the sanctions are ineffective at damaging North Korea or Iran’s economy in order to change their calculus, and the U.S. no longer has the visibility to track and shut down illicit financial flows going to purchase nuclear materials.

The U.S. is currently unprepared for a scenario like this. As COVID-19 accelerates the digitalization of the world economy, the U.S. cannot afford to fall behind China in the sphere of digital currency. China’s brand of techno-authoritarianism, if successfully applied to money, would pose a fundamental threat to the rules-based world order that the dollar underpins. The U.S. must act now by developing a “digital dollar” – a new national, central bank digital currency issued by the Federal Reserve.

Rather than letting other nations dictate the terms of a digital world economy, the U.S. would lead the way by modernizing the dollar’s underlying technological infrastructure. Advancements that enable the programmability of money could unleash innovative new functions like customized privacy and data ownership (e.g. preventing the selling of payment data), consumer wallets for the unbanked (e.g. direct government assistance payments), or frictionless peer-to-peer cross-border payments and currency conversions (e.g. remittances).

Amidst the global economic turmoil caused by the pandemic, the dollar’s role as an anchor of economic stability is more important than ever. A digital dollar presents an opportunity to future-proof the dollar’s role as the world’s reserve currency by spurring new innovations and operational efficiencies while also reinforcing U.S. values of transparency, rule of law, and privacy in a world soon to be dominated by competing digital currencies.

About The Author

Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.

Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.

He is a native of Atlanta, GA and attended the University of Georgia.

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China Economics and Trade Policy Summary

How The Trade War With China Is Changing The Rules For Foreign Investment In The U.S.

Over the last few years, Congress as well as U.S. businesses have raised concerns over the risks to U.S. technological leadership, national defense, and economic security due to growing foreign direct investment (FDI), primarily by Chinese firms, in U.S. high-tech companies.

The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee authorized to review certain transactions involving foreign investment in the United States in order to determine the effect of such transactions on the national security of the United States. 

CFIUS is chaired by the Secretary of the Treasury and includes representatives from 16 U.S. departments and agencies, including the Defense, State and Commerce departments, as well as the Department of Homeland Security.

Just recently, Congress passed the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) to reform and modernize the CFIUS review process. It represents the first update to the CFIUS statute in more than a decade and implements a number of major institutional and operational changes to CFIUS so the U.S. can better keep pace with changes in the national security environment that have increased the risks created by some forms of foreign investment.

Changes to CFIUS

Institutional Changes
  • FIRRMA allows the chairperson to centralize certain CFIUS functions in the Treasury Department
  • Two new Senate-confirmed positions in the department were created that are responsible for overseeing CFIUS operations, and there must be a dedicated CFIUS staff, including an assistant secretary or equivalent position, at all other member agencies.
  • The bill requires CFIUS to establish procedures for members to recuse themselves in the case of a conflict of interest and to publish dissenting opinions if CFIUS cannot reach consensus
  • The bill significantly increases the reporting requirements for CFIUS, including addressing both finance and intelligence Congressional committees
  • No later than 180 days after the bill’s enactment (February 9th, 2019), the CFIUS chair must submit a report to Congress and provide in-person testimony that describes the timeline and process for implementing the bill, as well as any additional staff and resources required
  • Biennial reports, through 2026, on Chinese investment in the U.S., including how it comports with the objectives of the Made in China 2025 plan, how it compares to U.S. investment in China, and any data collection difficulties
  • A report, within a year, assessing national security threats related to foreign direct investment in the U.S. by foreign-state-owned or -controlled entities in manufacturing assets required for rail systems, and how CFIUS can respond to any such threats
  • A briefing to the congressional finance committees on CFIUS investigations in the past five years that would have allowed foreign persons to influence domestic and foreign democratic institutions and processes and any actions taken as a result of those investigations.
Operational Changes

FIRRMA identifies several factors that Congress wants CFIUS to take into account when considering the national security risks posed by foreign investments. These include:

  • Whether a transaction involves a country of special concern that has a strategic goal of acquiring technologies that would affect U.S. technological leadership in that area
  • The national security effects of cumulative market share control by foreign persons
  • Whether a foreign person involved in a transaction has a history of complying with U.S. law
  • How the control of U.S. industries and commercial activity affects the capability and capacity of the United States to meet the requirements of national security, including the reduction in employment of United States persons whose skills are critical to national security and the continued U.S. production of items necessary for national security
  • The extent to which a transaction is likely to expose sensitive data of U.S. citizens to exploitation by foreign persons and governments
  • Whether a transaction exacerbates cybersecurity vulnerabilities or allows a foreign government to gain new capabilities to engage in malicious cyber activities against the U.S., including activities designed to affect the outcome of any federal election.
  • One of FIRRMA’s most substantial changes is to the scope of “covered transaction,” which defines much of CFIUS’s jurisdiction. The bill expands covered transactions to include:
    • The purchase or lease by foreign persons of certain U.S. real estate near a U.S. port, military facility, or other “sensitive” government property;
    • All non-passive foreign investments in any company that deal with “critical technology,” “critical infrastructure,” or “sensitive personal data of United States citizens that may be exploited in a manner that threatens national security.” Covered investments are those that provide corporate control, any position on the board of directors, a role in sensitive decision-making, or access to “material non-public technical information,” with detailed exemptions for investment funds;
    • Changes in existing ownership rights that could result in foreign ownership or control of a U.S. business
    • Any other transactions structured to evade CFIUS review.
  • The also bill amends the CFIUS process in several ways, including extending the timeline (e.g. initial review is extended from 30 calendar days to 45 calendar days), adding a new “declarations process” for companies to notify CFIUS of transactions and offer a path to expedited approval, and expanding CFIUS’s authority to mandate reviews or take unilateral action

Considerations for User Fee Implementation

  • The bill establishes a CFIUS fund which may receive both appropriated funds and fees for a variety of CFIUS-related functions. Between FY19 and FY23, $20,000,000 will be appropriated to this fund.
  • Any fees are to be deposited into a fund exclusively for CFIUS use, although the chair may transfer money to CFIUS member agencies if necessary for them to perform CFIUS duties.
  • The total amount of fees collected from administering Sec. 1723 cannot exceed the cost of administering said section, the committee will periodically reconsider and readjust to ensure that the fee does not exceed the cost of administering the section
  • The fee amount charged must be less than the lesser of either a) 1% percent of the value of the transaction, or b) $300,000 (adjusted for inflation)
  • The fee will take into account the burden on small businesses, the expenses of the Committee in conducting activities mandated in this section, the impact of foreign investment, and other matters deemed appropriate by the committee
  • The bill also authorizes CFIUS to study the implementation of a “prioritization fee” which no later than 270 days after the passage of the act (May 10th 2019), the Chairperson to the committee will complete a study on the on the feasibility and merits of establishing a fee or fee-scale, and will submit a report on the findings of said study to Congress

About The Author

Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.

Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.

He is a native of Atlanta, GA and attended the University of Georgia.

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