Friday News Roundup — July 7, 2023 — Center for the Study of the Presidency and Congress

Friday greetings to you from Washington. We hope that you have had a wonderful Independence Day holiday. The Biden administration is hoping that voters are thinking about today’s payroll and slowing inflation, not the scandals that the GOP House is investigating or will investigate. Still, despite that and positioning for 2024, whether Congress can meet the September 30th spending deadlines remains to be seen.

While Secretary Yellen is in Beijing, which Dan Mahaffee covers below, we remain focused too on President Biden’s upcoming trip to the UK, NATO summit in Vilnius, and US-Nordic summit in Helsinki.

In The Diplomatic Courier Veera Parko and Ethan Brown lay out some suggestions for the future of the European order following the Ukraine War’s impact.

As we mentioned Dan Mahaffee looks at the context of the Yellen visit, and Robert Gerber covers the next steps for Europe in derisking from China. Hidetoshi Azuma reflects on the tumultuous one year of domestic Japanese politics following the assassination of the former prime minister Shinzo Abe on July 8, 2022.

Export Licensing & Yellen Visit: The US-China Tit-for-Tat?

Dan Mahaffee

The US-China relationship appears to be on a tit for tat path now, alternating between efforts to reduce tensions and foster dialogue and actions that illustrate how “decoupling,” “derisking,” and other measures raise economic and technological tensions. With Secretary Yellen visiting China we see the former, but with export controls going up on either side of the Pacific Ocean, we see the latter. The danger of this tit for tat is that we are drawn into a counterproductive cycle of economic countermeasures, which absent a strategic approach to these policies, leaves the private sector and allies facing greater uncertainties — and higher costs for all of us.

Secretary Yellen’s visit reflects the underlying importance of the US-China economic relationship and the growing pressure the Chinese economy faces. However Secretary Yellen arrives as the party continues to double down on the principles of Xi Jinping Thought — moving away from economic openness and entrepreneurialism — while party media also continues to squarely blame US leaders for any deterioration in relations. On the US side, any relaxation of tariffs before an election year is electoral malpractice despite being economic snake oil.

As Yellen arrives, Beijing is also putting forward its additional restrictions on the exports of two critical minerals: germanium and gallium. Both are important for semiconductor manufacturing and this reflects Beijing’s existing playbook of trade and resource embargoes. How this is applied remains to be seen but the lesson of past mineral cut offs cannot be forgotten: they more often encouraged US and allied efforts to find alternative sources and lessen dependence on China.

Other measures remain to be seen in terms of the economic back and forth. Further US restrictions on chips related to AI hit Nvidia’s stock while China has targeted Micron. Outbound investment review continues to be mooted, further debated, and questions abound still about scope and staffing.

A tit for tat often leaves us responding to China’s actions or leaves us with fewer policy options — many with unintended consequences. Allies and private sector players are left with unpredictability or the false binary of the status quo or a total decoupling from China. Having a comprehensive approach to categorize which technologies are the priority for protections as well as what permissible trade and investment can continue allows for us to both better hone the tools of economic protection while better empowering whomever is the envoy to China. For business decisions and building trade partnerships and common economic security strategies with allies, such a strategy provides predictability and certainty for decision making. We are recognizing the scope of the challenge and starting to reshape the tools we have and hone new ones — what we still need is the strategic linkage of these economic and technological elements with all the tools of national power.

EU Strategy Portends Closer Transatlantic Alignment on “De-Risking”

Robert W. Gerber

Inside the European Commission in 2017 (Photo credit: Author)

The European Commission issued a “joint communication” on June 20 for the purpose of starting a process of consultation with EU member states that would produce a common framework across the EU to “de-risk and protect the Union’s economic security.” The Commission cites the need for risk mitigation in four areas: supply chains, cyber and physical infrastructure, economic coercion, and “technology leakage to those who seek to undermine peace and security.” Proposed action items include bolstering innovation and industrial capacity, diversifying both supply chains and export markets, enhanced screening of foreign direct investment (FDI), countering economic coercion, bolstering 5G/6G security, and consideration of “new tools” like export controls and curbs on outbound investments for a narrow set of key enabling technologies with military applications.

The initiative should be seen in the context of a noteworthy March 2023 speech by European Commission President Ursula Van der Leyen during which she laid out the risks of continued “business as usual” with China and called for a new EU approach to economic security. It also builds a set of EU measures in the pipeline, including a new foreign direct investment screening policy, a regulation on dual-use export controls, the recently agreed Anti-Coercion Instrument, and the precepts in the EU’s Common Foreign and Security Policy. The EU is also developing new tools in parallel: a Chip Act, the Net Zero Industrial Act, and the Critical Raw Materials act.

The communiqué reflects a marked shift in EU attitudes toward China, despite the fact the document does not mention the PRC by name, using instead the phrase “geopolitical concerns” as a synonym. Europe has been alarmed by the PRC’s recent behavior, especially its pledge of unwavering support to Putin, unilateral measures against Lithuania, the belligerence of Chinese ambassadors in Europe, and the PRC military’s harassment of Taiwan. Individual EU member states have taken steps to control export of strategic technologies, screen investments and reduce dependencies on Chinese manufacturing and raw materials inputs, and the EU realized it was time for a collective effort that harmonized policies across the Union.

The initiative, should it be implemented, would narrow the gap between the U.S. de-risking/friendshoring strategy — which is well underway — and the EU’s approach, which has been fractured and slow. Better alignment between the EU policy landscape and what is happening in Washington will produce dividends for both parties, and is important given the PRC’s desire to undermine transatlantic unity. This is something that a majority of EU member states — even those like France that have called for European “strategic autonomy” — have come to realize is necessary and urgent. In fact, the communiqué underscores that the Commission intends to partner with countries that share the EU’s concerns and to utilize established bilateral and plurilateral tracks including the G7, the U.S.-EU Trade and Technology Council (TTC), the EU-India TTC, the EU-Japan economic dialogue, the Global Partnership for Infrastructure Investments, and the Critical Minerals Club. One quote from the communiqué mirrors the message that has come out of the Biden Administration in recent months, “More than ever, our security is deeply intertwined with our ability to make ourselves more resilient and reduce the risks arising from economic linkages that in past decades we viewed as benign.”

Patience will be a virtue as the EU’s initiative will take time to come on line because it needs to harmonize member state interests. Furthermore, Europe’s economy is more closely integrated with the Chinese economy when compared to the United States. This makes it more difficult for Brussels to legislate export controls or outbound investment curbs. But political momentum supporting the initiative will continue to build: just this week the PRC blocked export of two critical minerals (reported by Dan Mahafee in this week’s Roundup), not bothering to hide the fact this was a retaliatory show of strength, and Beijing canceled the visit of the EU’s foreign affairs lead Josep Borrell. A question remains: did Beijing do this in response to the Communiqué?

More Budget Headaches Ahead for House Speaker Kevin McCarthy

Ryan Bender

The House is poised for a divisive couple months of appropriations debates, not just between the competing Republican House majority and Democratic Senate majority, but between more loyal party Republicans and hardline Freedom Caucus members.

After a win on the debt ceiling suspension, House Speaker Kevin McCarthy (R-CA) has had little time to rest on his laurels. Instead, he has had to contend with members of the right-wing Freedom Caucus who launched a spontaneous protest on the House floor, voting down rules to stall legislation on the House floor. That act of obstruction was meant as a protest of the recent debt ceiling agreement, with Freedom Caucus members complaining that the suspension of the debt ceiling conceded too much to Democrats and the Biden administration, while excluding rank-and-file members from the deliberation process.

With the deadline for a possible government shutdown approaching on September 30, House Republicans must agree among themselves on the 12 appropriation bills in order to present a unified front to Senate Democrats. Currently, hardline House Republicans are calling for a budget proposal that brings spending down to fiscal 2022 levels. McCarthy has agreed with this target, but he is currently working to achieve it with stopgap measures and rescissions. Hard right Republicans oppose the use of rescissions, seeing them a thinly veiled attempt to leave room for negotiation with Democrats.

However, as Senate committees begin to release their own budget proposals the timelines for House Republicans to reach agreement are getting tighter. For instance, while talks stalled in the House Energy and Commerce Committee, they proceeded in the Senate Health, Education, Labor, and Pensions Committee. The Senate committee is working through a proposal from Senator Bernie Sanders (I-Vt) to require prescription drug companies in the United States to price their drugs at the lowest price available to other G7 countries if the drug was created with support from U.S. federal agencies. This clause, known as the “most favored nations” clause, is expected to prompt the most debate in the Senate committee. If Senate Democrats reach an agreement before House Republicans it will give them valuable leverage in negotiations.

Overall, growing tensions within the House Republican caucus remains the largest wildcard in appropriations deliberations. McCarthy, facing battles with both Democrats and his own right flank, risks losing significant bargaining power if he fails to unify his members before Democrats complete their proposals.

McCarthy’s speakership has already proven unusual for employing unconventional methods to unite his fractious party and pass legislation. So far McCarthy has kept his party in check with a much looser grip than previous House leaders, for instance, choosing to provide symbolic concessions that appease his most conservative members without compromising his policy objectives or resorting to punishments for defectors. During his fight for the speakership, McCarthy managed to limit concessions on major rules changes yet still satisfy Freedom Caucus members with important committee assignments. He also managed to sideline rank-and-file members during the debt ceiling battle with a bill drafted primarily by the party leadership, with closed rules to prevent further floor amendments.

However, embracing concessions and neglecting punishments is a risky strategy, as shown by the recent floor revolt and the recent addition of two new members to the Freedom Caucus. Further concessions to defectors will make maintaining the balance of power within his own party more difficult, allowing his opposition to slowly amass more power. Sooner or later, as budget deliberations become more heated, McCarthy is likely to face even stronger pushback from Freedom Caucus members. The most notable battlefield is likely to be the Rules Committee, where Freedom Caucus members could side with Democrats to block proposals from reaching the floor, or even force a vote to oust the speaker. If McCarthy is going to continue making progress, he will likely have to come to terms with the fact that his current strategy has a limited lifespan.

The Abe Assassination One Year On

Hidetoshi Azuma

The former Japanese Prime Minister Shinzo Abe bows at the end of the press conference in which he announced his resignation in August 2020 (Photo Credit: Wikimedia Commons)

The former Japanese prime minister Shinzo Abe’s unlikely assassination on July 8, 2022 caused a political earthquake in Japan, threatening the internal cohesion of the ruling conservative Liberal Democratic Party (LDP). The immediate upshot was the disruption of the LDP’s internal balance of power previously held by Abe. While having struggled to adjust to Tokyo’s new political reality at first, the incumbent Japanese prime minister quickly seized his windfall opportunity to expand his intra-party clout, leading him to introduce several signature policies, especially the defense spending increase. Yet, Kishida’s seemingly expanding clout is a far cry from Abe’s, only underscoring the LDP’s inexorable decline.

Abe’s assassination last July opened the Pandora’s Box of the LDP’s internesene power struggle previously checked by the slain prime minister and his faction for two decades. Abe’s faction, the Seiwakai, dominated the LDP between 2000 and 2020, effectively exercising monopoly over the intra-party dynamics. As a result, the old factional rivalry all but ceased to exist for the last two decades, ensuring Abe’s unprecedented long second term. Abe’s sudden demise accorded an unexpected opportunity to his rival faction, the Kochikai, ironically led by Kishida himself. Kishida viewed the chaotic aftermath of his predecessor’s untimely exit as an existential factional struggle for the LDP’s ruling status.

Therefore, Kishida has spent the last 12 months painstakingly seeking to undo the Seiwakai’s monopoly over the LDP. In doing so, he has delivered a crippling blow to Abe’s allies by attacking their troubled relationship with the Ministry of Finance and their conservative base. Indeed, Kishdia’s decision on a comprehensive tax hike masquerading as a defense spending increase irreversibly destroyed the LDP’s old balance of power held by Abe, paving the way for the ascendancy of the incumbent prime minister’s Kochikai faction and its offshoots. Kishida then hammered the last nail in Abe’s coffin by zeroing on the Korean Christian cult, the Unification Church, and forcing the passage of the contentious LGBT legislation. The spectacle of his submission to the US Ambassador Rahm Emanuel’s indefatigable pressure over Japan’s LGBT question ironically contributed to the facade Kishida’s invincibility vis-a-vis the Seiwakai.

This by no means signifies Kishida’s actual indomitability. Indeed, Kishida is now essentially a lame-duck following his aborted snap election agenda last month. Moreover, his forceful leftward shift in the LDP’s ideological persuasion since Abe’s passing has undeniably alienated the party’s conservative base. While this will not immediately threaten the LDP’a ruling status due to its substantial group votes deriving from various special interests across Japan, the ongoing conservative exodus will most likely strengthen the Opposition in the long-term. In other words, Kishida has essentially cancelled the LDP’s future for his own survival.

The visceral shock of Abe’s assassination is no longer palpable in Japan, let alone overseas. Indeed, Japan appears to be a rising regional power boosted by growing military might and international prestige as reflected in its host status in the historic Group of Seven (G7) in Hiroshima this past May. Yet, such an appearance scaresly masks the LDP’s growing crisis. The irony here is that Japan and the world demand a strong leader, but such a figure can only rise at the expense of the LDP’s internal cohesion. Such a reality is ultimately the incurable symptom of the LDP’s sickness into death.

News You May Have Missed

Black Sea Grain Deal in Jeopardy

Kremlin spokesperson Dmitry Peskov recently revealed on July 3rd that Russia is “pessimistic” about renewing the Black Sea grain deal as its expiration date approaches. Established in July 2022, the UN-sponsored grain deal, created in partnership with Russia, Ukraine, and Turkey, sought to assure that grain ships can transit safely to and from Ukrainian ports without intervention from Russian forces. After Russia’s invasion of Ukraine in February 2022, grain shipments from Ukraine had stopped, prompting a global food crisis. The deal was thus essential in preventing famine and stabilizing global food prices, and it allowed the World Food Program to continue feeding impoverished populations in countries such as Afghanistan, Ethiopia, Kenya, Somalia, and Yemen.

Despite the Black Sea grain deal’s continued importance, Russia is threatening not to renew it because of its frustrations with economic sanctions imposed after its invasion in Ukraine. One of the conditions of the agreement was an understanding that the United Nations would facilitate the readmission of the Russian Agricultural Bank to the international banking payment system known as SWIFT. According to the Kremlin, Western countries have failed to fully comply with this condition, though the European Union is reportedly considering allowing a subsidiary of the Russian Agricultural Bank to reconnect to the global financial market. If approved, Moscow may be persuaded to renew a Black Sea grain deal that is essential to global food security.

EU and Japan Deepen Chip Cooperation

European Union (EU) commissioner Thierry Breton announced on Monday that the union has forged a strategic relationship with Japan to empower the bloc’s chip manufacturing capacities. The partnership will include close monitoring of the chip supply chain and an open exchange of scientists between the two countries. According to Breton the partnership will allow Japanese semiconductor manufacturers to operate more easily within the EU, representing a major victory for companies such as Panasonic that wish to expand their chip production capabilities.

In recent years Japan has worked to revitalize its chip industry after losing significant global market share. To recover Japan launched a subsidy program to deepen investments in chip manufacturing, and the government is supporting the newly established semiconductor manufacturer Rapidus. Rapidus will team with EU-based imec and IBM in research projects. The proposed collaboration between the EU and Japan promises to help both sides diversify their supply chains and rely less heavily on China. The EU-Japan partnership will initially focus primarily on semiconductors, cybersecurity, and undersea cable connectivity. In early 2024, Japanese and EU officials plan to meet in Brussels to discuss the additional challenges posed by AI.

The views of authors are their own and not that of CSPC.