Breaking Up With China Is Hard to Do

Also: Why record-breaking temperatures sent gas prices soaring this summer, and how some right-of-center groups continue to deny effects of climate change.

Breaking Up With China 

Can’t the world’s two largest economies just get along?

In case you hadn’t noticed, relations between the U.S. and China have been abysmal. But if the pandemic has taught us anything, it is that both countries are well aware neither can afford to lose the other as a trading partner, treat the other as an adversary – or risk the crippling cost of an altercation.

Even if one of them appears to have sent a spy balloon over the U.S. just in time for Valentine’s Day – which was swiftly shot down.

So, amid a lot of diplomatic feints, America is undertaking the delicate process of “de-risking” – after discarding the “decoupling” language that turned off some of its European allies – by imposing investment and technology restrictions on China while, simultaneously, making nice noises and talking reassuringly about keeping that trade conveyor belt humming.

The shift in recent months, however, has been dramatic, with the latest trade data showing China’s exports to the U.S. plummeting by 23.7 percent in June to $42.7 billion, marking a six-month low, according to the U.S. Census Bureau, which tracks foreign trade balances. Demand for goods from China has weakened globally, as central banks boosted interest rates to cool inflation, putting its economy on the defensive as it struggles to regain traction, post-Covid.

The pullback in goods from China flowing to the U.S. (American goods to China also are down, by 4.1 percent, in the latest data), reflects a move by American corporations to rely less on Chinese suppliers, even as the Biden administration attempts to maintain trade ties and iron out tensions. 

Among those pivoting away from China are retailers like Walmart and Target, as well as companies such as HP, Lego and Stanley Black & Decker.

And while many missed it, Mexico burst out of the gate during the first four months of this year to score $263 billion in trade with the U.S., making it America’s biggest trading partner. Other countries chipping away at China’s dominance include Vietnam and Thailand, although China still reigns supreme for its top-notch manufacturing and infrastructure. 

Prior to Mexico’s rise as a manufacturing behemoth, China eclipsed Canada to clinch the top spot as America’s trading partner in 2014. But with U.S. tariffs imposed on Chinese goods in 2018 and the pandemic supply disruptions of 2020 to the present day, those dynamics have rapidly changed for China, along with international trade and investment flows.

In another sign of the magnitude of the shift, President Biden is expected to issue an executive order that’s been in the works for some time to restrict American investments in China as soon as next week. 

The executive order likely will compel U.S. companies to notify the government of new investments in sensitive Chinese technologies and technology firms and prohibit certain deals in critical sectors like artificial intelligence (AI), semiconductors and quantum computing.  

A detailed report from Bloomberg released late Tuesday, citing people familiar with the matter, revealed that Biden’s plan to screen U.S. investment in China likely will focus on Chinese companies receiving at least half of their revenue from AI and quantum computing.

The scope of the executive order would focus primarily on prohibiting investments in Chinese cutting-edge technology, such as AI, for military end-users, according to Bloomberg. For instance, the rule would let U.S. investors bet on major Chinese conglomerates that have artificial-intelligence units, but receive most of their revenue from other sources. It also would require the U.S. government to be notified of investments in other AI technology.

The proposal is expected to ban investments in certain quantum computing applications, according to Bloomberg, including high-level encryption and sensing technologies and advanced semiconductors. The executive order would not take effect immediately and is expected to take a year or so for rule-making and industry comment. The order will not be retroactive, so investments in China during the comment period won’t apply.

Much is at stake. China is one of the world’s largest military and economic powers, second only to the U.S., so neither country can reasonably consider imperiling the other without doing damage to themselves – which includes risk of recession or economic tailspins. 

While anti-China sentiment has been at fever pitch this year among U.S. lawmakers due to the “spy balloon” incident, Biden’s team has reportedly been torn over how to rein in China’s technological and military rise. 

The White House isn’t commenting on the details of the executive order or exactly when it will drop, but it appears its purpose is to protect America’s national security and keep U.S. investment and expertise from further emboldening China and speeding up its development of key technologies that would allow it to accelerate the modernization of its military. 

In April, Treasury’s undersecretary for international affairs, Jay Shambaugh, said that while the U.S. may “take targeted national security actions” toward Chinese firms, the policies are not being undertaken “to benefit the U.S. economically vis-a-vis China.” Shambaugh has said that America “must maintain as large a lead as possible” in high-tech sectors versus China, underscoring national security concerns.

Although America’s de-risking tactics have been repeatedly downplayed by the Biden administration, China remains chagrined by the president’s new export rules last year, which sought to curb the Chinese microchip sector in favor of cementing America’s hold on emerging and high-tech industries. 

Whether this strategy of conscious uncoupling will succeed remains to be seen, but Biden is giving it his very best shot, engaging in what The Economist this month called “high-level summitry” to rebuild relations with China — within limits. As national security adviser Jake Sullivan put it, the U.S. aims to protect its “foundational technologies with a small yard and a high fence.” 

U.S. Treasury Secretary Janet Yellen, along with a procession of Biden’s top aides, have visited Beijing throughout the summer, hoping to ameliorate rising tensions over investment, sanctions and export controls. The executive order in the works, she said in July, will be “narrowly targeted” and would not have a “fundamental impact” on overall investment in China. “I think there is a way to resolve, to establish, a working relationship with China that benefits them and us,” Biden said, as Yellen wrapped her meetings.

Propounding the risk of America’s stance toward China, Shambaugh told the U.S. Senate Foreign Relations Committee in late July that an economic decoupling, aside from being virtually impossible to do, would be “disastrous” for both the U.S. and China.

He urged, instead, for using “a suite of tools to achieve our economic security goals,” emphasizing that protecting America from national security risks, while also “clearly communicating our position and intent to China to reduce the risk of understanding” is the goal. 

None of that changes how perilous these crossroads are. Has any nation ever successfully embraced one of its greatest – and most threatening – economic and military competitors as an ally?

Heat, Hurricane Season and Soaring Gas Prices

Why record-breaking summer temperatures can cause higher energy prices.

Gasoline has been shooting higher, with the national average at $3.83 a gallon — a nine-month high. This week, market participants told Power Corridor they are expecting tight fuel inventories, refinery outages and a potentially active hurricane season to keep prices elevated.

One of the main reasons for the rising cost of fuel: Outrageous summer heat that’s broken multiple records and made it virtually impossible for the nation’s fuel refineries to keep up with summer driving season demand.

“The whole summer has been defined by refinery problems,” said one director at a bank in New York who oversees energy hedge funds and investor flows. With the nation’s refineries running full-tilt at more than 90 percent of capacity in the blistering heat “things are breaking, especially in Texas,” which leads the nation in both crude oil production and refining.

“I think we’re going to continue to see tight gasoline inventories going into autumn,” he said. “We came into the summer with these low inventories and they’re still tight due to the refinery outages.”

Energy companies have been recalibrating their production, as refineries aren’t able to run in temperatures above 95 degrees. Nearly 40 percent of U.S. petroleum refineries reside in Texas and Louisiana, where temperatures this summer have, at times, breached 100 degrees.

Another factor keeping gas prices propped up is that energy hedge funds are betting on an active hurricane season this autumn, with the earth’s oceans hitting the hottest temperatures in modern history. Some of the warmest temperatures have been measured in the North Atlantic.

According to weekly data from the U.S. Commodity Futures Trading Commission, money managers’ bullish gasoline bets have reached the highest level since the Russian invasion of Ukraine. Gas prices could go higher if the Atlantic Ocean’s heat pulls a hurricane into the Gulf of Mexico and damages refineries. Already, retail gasoline prices are at the highest level since November, although below the nation’s peak average of $5.02, notched in June 2022, according to AAA.

The Atlantic hurricane season runs every year from June 1 to November 30, with 97 percent of all tropical storms and hurricanes in the Atlantic falling within this period, according to the U.S. National Hurricane Center.

Still, a hurricane doesn’t always mean higher prices.

“The thing about hurricanes is that there is often a reactionary move up, but they can also drive prices down and be a demand-killer,” the bank director said. “If there’s a hurricane, people will stop driving, they will stay inside. When the hurricane hits, it may damage refineries, but gas is not being used.”

Even Now, Still Downplaying Climate Change

Dozens of right-of-center groups take aim at plans to slow global warming.

If there has ever been a summer of such oppressive heat that Americans are finally forced to confront the reality of climate change, it would be this one.

And yet some groups are doubling down on the notion that climate change continues to reside not in scientific data or fact, but political talking points and hyperinflated rhetoric.

Alongside the increasingly politicized ESG movement (an acronym that stands for “environmental, social and governance”), some conservative organizations, such as the Heritage Foundation, are working to dismantle efforts and programs that seek to mitigate the impact of climate change.

In a wide-ranging strategy called Project 2025, the Washington think tank makes a series of propositions intended for the next Republican administration, bringing together dozens of right-of-center organizations that “are ready to get into the business of restoring this country.”

Among some of the plan’s biggest changes would be to rewrite federal policy on energy and climate, if a Republican should retake the White House in 2024. The plan aims to scrap regulations to rein in greenhouse gas emissions for power plants, oil and gas wells and automobiles, while upending most federal clean energy programs and increasing fossil fuel production and consumption, which directly contributes to global warming.

Speaking favorably of the plan this week, Mandy Gunasekara, the U.S. Environmental Protection Agency's chief of staff under Trump, backed the idea of slashing the size and scope of the EPA.

“A lot of the rhetoric that the public sees and experiences is based on a picture that's not consistent with what we've seen with observed climate data and that the forecasts actually suggest a mild and manageable climate change in the future,” Gunasekara told NPR, citing scientific research. When pressed for the names of the scientists on which she based her conclusions, she declined to provide them.

Thanks for reading — and may your week be mild and manageable!