Can Regulatory Diplomacy Reset Relations with China?
Regulatory diplomacy that replaces political provocation with cooperation on technical issues, such as securities fraud, antitrust, and illicit trade, could be a first step toward restoring a measure of stability in the U.S.-China relationship. Photo by the U.S. Department of the Treasury
By Andrew Rennemo
It is no secret that America’s approach to China in recent years has become unsustainably confrontational and overly reliant on punitive diplomacy.[1] The Trump administration, ever hungry for quick wins but unable to implement a China strategy,[2] spent four years looking for leverage in transactional deals with Beijing. Such piecemeal posturing was met with more assertive Chinese leadership, producing a spiral of sanctions and a near total rupture in dialogue. Bilateral forums disappeared,[3] regulators hesitated to meet,[4] and military safety meetings fell through.[5] Officials on both sides increasingly flew blind to each other’s actions and intentions.
A return to relationship-based diplomacy and a more integrated, whole-of-government approach to engaging China should be a foreign policy priority for President Biden. Regulatory diplomacy that replaces the political provocation with cooperation on technical issues, such as securities fraud, antitrust, and illicit trade, could be a first step toward restoring a measure of stability. For this approach to work, though, it is critical to first define where Beijing can be a regulatory partner, and where it must remain a target of U.S. regulatory enforcement.
The possibilities for partnership start with a shared fight against securities fraud. Technology companies in China and elsewhere have unique traits that make their true financial state difficult to discern. Chinese internet businesses are often heavily involved in investment ecosystems that render their finances opaque. Their many corporate acquisitions and disposals each year, combined with transactions with other entities in their ecosystem, obscure underlying cash flows. While these are often features of innovative businesses, they can also hide financial fraud. And when they do, the costs to retail investors can be steep.[6]
Last June, tacitly acknowledging that risk, the chairman of China’s Securities Regulatory Commission proposed joint inspections of U.S.-listed Chinese firms and a coordinated law enforcement mechanism to pursue cross-border securities crime. For the benefit of investors in both countries, it is time for American regulators to take him up on his offer.
More broadly, Washington should position recent legislation threatening to delist Chinese companies from U.S. exchanges as the start of extended talks aimed at making Chinese public accounts more transparent. Hard-line implementation of the law would derail a diplomatic reset with China even before it begins. It would put $2.2 trillion of market value on American exchanges[7] at risk and undercut U.S. institutions actively supporting China’s integration into global financial markets.[8]
American exchanges, long a contributor to national power, could also bleed influence to foreign rivals, as universally sought-after Chinese stocks seek listings elsewhere. But that does not have to happen. Beijing has ample incentive to ensure its firms maintain access to America’s deep and diversified investor base, making a compromise feasible so long as it supports mutual benefit that China’s leaders can sell to their people back home.
In parallel, there is potential for common cause on antitrust. Even as Washington and Beijing compete fiercely over technology, they are equally wary of its excesses and distortions. Washington continues to accuse America’s tech leaders of monopoly power,[9] and Beijing recently issued new rules[10] to curb anti-competitive practices by China’s own technology giants. In both countries, collusion to share sensitive consumer data is a concern. Given such parallels, American and Chinese officials could benefit from exchanging approaches to designing competition laws while building the groundwork for case-specific cooperation.
Biden would also do well to partner with Beijing on trying to stop illicit trade. Counterfeit merchandise now exceeds 3 percent of global trade, with the United States among the countries most adversely affected. While China remains the largest producer of pirated products, counterfeiting increasingly harms its inventors too.[11] To combat that growing risk, in January 2020, Trump agreed with China on the phase one trade deal, which includes a provision to jointly fight counterfeit goods sales in e-commerce. It could serve as a useful framework for restarting relations between American and Chinese law enforcement on an issue of shared concern.
An enduring cliché of diplomacy suggests that extremes are easy, but the center is hard. After years of taking the easy way out with its China engagement, the United States now needs to put in the hard yards to rediscover common ground with its main strategic rival. Competition will continue, as will the need for leverage, but contrary to the conventional wisdom of China skeptics, conflict is not inevitable. China can be, in former Secretary of State Henry Kissinger’s words, a partner in the construction of world order, and the goal should be to seek solutions to the problems that concern us both.
About the Author
Andrew Rennemo is a member of Chatham House. He has held roles in U.S. government focused on transnational threats and as a management consultant with PwC for risk and compliance and forensic investigation.
Endnotes
Andrew Rennemo, “With China Sanctions, America Pushes the Limits of Its Financial Power,” The Diplomat, June 19, 2020, https://thediplomat.com/2020/06/with-china-sanctions-america-pushes-the-limits-of-its-financial-power/.
Josh Rogin, “The Trump administration had a China strategy after all, but Trump didn’t follow it,” The Washington Post, January 14, 2021, https://www.washingtonpost.com/opinions/global-opinions/the-trump-administration-had-a-china-strategy-after-all-but-trump-didnt-follow-it/2021/01/14/846e97d4-56ad-11eb-a817-e5e7f8a406d6_story.html.
Christopher Anstey and Peter Martin, “Trump-Xi Rift Plays Out With Some 100 Canceled Exchanges, Talks,” Bloomberg, September 4, 2020, https://www.bloomberg.com/news/articles/2020-09-04/trump-xi-rift-plays-out-with-some-100-canceled-exchanges-talks.
John Liu, Evelyn Yu, and Dingmin Zhang, “China Calls for Talks With U.S. on Spat Over Stock Listings,” Bloomberg, August 26, 2020, https://www.bloomberg.com/news/articles/2020-08-26/china-makes-concessions-in-call-for-talks-on-u-s-audit-standoff.
Chun Han Wong, “China a No-Show at Joint Military Safety Meeting With U.S.,” Wall Street Journal, December 17, 2020, https://www.wsj.com/articles/u-s-stood-up-by-china-at-military-safety-meeting-11608199871.
Evie Liu, “Luckin Coffee Stock, Facing Delisting, Begins Trading Again. It Isn’t Pretty,” Barrons, May 20, 2020, https://www.barrons.com/articles/luckin-coffee-stock-facing-delisting-begins-trading-again-it-isnt-pretty-51589986826?mod=article_inline.
U.S.-China Economic and Security Review Commission, Chinese Companies Listed on Major U.S. Stock Exchanges, October 2, 2020, https://www.uscc.gov/research/chinese-companies-listed-major-us-stock-exchanges.
Nicholas R. Lardy and Tianlei Huang, “Despite the rhetoric, US-China financial decoupling is not happening,” Peterson Institute for International Economics Blog, July 2, 2020, https://www.piie.com/blogs/china-economic-watch/despite-rhetoric-us-china-financial-decoupling-not-happening.
U.S. Sub-Committee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, Investigation of Competition in Digital Markets, Majority Staff Report and Recommendations, October 2020, https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf.
Yujing Liu and Daniel Ren, “China drafts new antitrust guideline to rein in tech giants, wiping US$102 billion from Alibaba, Tencent and Meituan stocks,” South China Morning Post, November 10, 2020, https://www.scmp.com/business/china-business/article/3109188/china-drafts-new-antitrust-guideline-rein-tech-giants.
Organization for Economic Cooperation and Development, Trends in Trade in Counterfeit and Pirated Goods, March 2019, https://www.oecd-ilibrary.org/docserver/g2g9f533-en.pdf?expires=1612023306&id=id&accname=guest&checksum=B31DB4FAC29E2C9F798EFC43EA6B816B.