by Greg Valliere, AGF Management Ltd.
OBSCURED BY THE DIN over the Omicron variant and U.S. fiscal dysfunction is a growing dispute between Washington and Beijing over a controversial amendment in the pending defense spending bill. China is threatening aggressive retaliation.
AT THE CENTER OF THIS DISPUTE is Chuck Schumer’s “U.S. Innovation and Competition Act,” or USICA, which would spend $250 billion to aid U.S. manufacturers that compete with China. Politico and others have cited warnings from trade experts that China could respond by deliberately disrupting imports of imported parts supplies for U.S. manufacturers. and by curbing Chinese purchases of U.S. exports.
SCHUMER’S PROPOSAL COMBINES SEVERAL OTHER amendments from both political parties into a 2,276-page bill designed to preserve a competitive technological edge over China through the injection of tens of billions of taxpayer dollars for various initiatives, including U.S. semiconductor manufacturing and “buy American” requirements for federally funded infrastructure projects, Politico reports.
THIS IS A TOUGH BILL, DESIGNED TO TARGET CHINESE PRACTICES that members of Congress believe are directly hurting the U.S., including state-directed intellectual property theft, forced technology transfers and malicious cyberattacks on U.S. government and corporate entities.
THE BILL also would ban government agency purchases of Chinese manufactured drones as well as prohibiting the use of government hardware to download TikTok. Experts on U.S.-China trade believe retaliation from Beijing could include a halt in the shipment of parts used to manufacture electric vehicles.
FINAL PASSAGE OF THE $780 BILLION DEFENSE SPENDING BILL is probably a week away, at best. Republicans are angry that dozens of amendments have been added in recent weeks, without floor debate — including potential new sanctions against Russia if Moscow advances in Ukraine.
OUR BOTTOM LINE is that something like USICA will eventually pass — if not before Christmas, then later in the winter. It has bipartisan support, and talking tough on China is a given in both parties as the 2022 elections approach.
JOE BIDEN AND XI JINPING had a constructive talk earlier this month, but there was no agreement on issues like this. We don’t anticipate a tariff war, but a further disruption of the supply chain is possible; it may persist well into next year as
China retaliates if the USICA provision is passed.
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This post was first published at the AGF Perspectives Blog.