U.S.–China Week: First ‘D&SD’ this Wednesday, DPRK pressures, CFIUS changes, cybersecurity reviews, trade talks (2017.06.19)

Welcome to Issue 103 of U.S.–China Week. This Wednesday brings the first meeting the new partial replacement for the Strategic and Economic Dialogue (S&ED), the Diplomatic and Security Dialogue (D&SD). It will take place in Washington, with the United States represented by Secretary of State Rex Tillerson and Secretary of Defense Jim Mattis. The Chinese delegation will be chaired by State Councilor Yang Jiechi, with Chief of the PLA Joint Staff Department Gen. Fang Fenghui “also attending,” according to the Foreign Ministry.

Tillerson had said in May that “so far it appears we will get people at the Politburo level and at much higher levels of the government within China to participate in these dialogues.” Compared with the S&ED, the D&SD is minus-one Politburo member (Vice Premier Wang Yang, who led the economic track) but plus-one high-level PLA officer. Still, Fang is outranked on the Central Military Commission by its Vice Chair Gen. Fan Changlong, who is a Politburo member and was framed as counterpart to the U.S. secretary of defense during a 2015 U.S. visit. It will be interesting to see what if any detailed outcome documents emerge this week, and how U.S. and Chinese messaging either harmonize or conflict. Of course, there is also the question of alignment between President Donald Trump and his cabinet secretaries.

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INVESTMENT + SECURITY
U.S. national security reviews could tighten for Chinese investments with proposed CFIUS changes

If a proposal to change the way the U.S. government reviews foreign investments for security concerns is implemented, China might be added to a list of countries deemed deserving of increased scrutiny, Bloomberg reported. Senator John Cornyn’s proposal would reshape the Committee on Foreign Investment in the United States (CFIUS), the body that approves, denies, or requires changes in foreign acquisitions for national security reasons. From Bloomberg: “Cornyn’s legislation would require CFIUS to create a list of countries whose companies merit extra scrutiny, such as China, a [Cornyn] spokeswoman said. The bill would also broaden the scope of the committee to include technology joint ventures and real estate transactions near military bases or other national security facilities, she said.” At present, only when a foreign entity gains a controlling stake in a U.S. firm may CFIUS review the transaction. Bloomberg also reported that Treasury Secretary Steven Mnuchin is pushing changes to CFIUS, which he chairs, and wishes to include China on a new list of what the report called “hostile nations.”

Reuters reported that an unreleased Pentagon report “warns that China is skirting oversight and gaining access to sensitive technology through transactions that currently don’t trigger CFIUS review.” Mattis called CFIUS “outdated,” and a Cornyn aid told Reuters the proposed bill would provide a mechanism for the Pentagon to lead efforts to identify specific technologies that require extra focus. Of particular concern, according to Reuters sources, is artificial intelligence and machine learning technology, and the risk that, “When the Chinese make an investment in an early stage company developing advanced technology, there is an opportunity cost to the U.S., since that company is potentially off-limits for purposes of working with the [Department of Defense].” Foreign Ministry spokesperson Lu Kang said, “We believe there should not be undue political dimensions imposed on commercial takeovers, let alone political intervention.” / Meanwhile: The U.S. Department of Energy said it would invest $258 million over three years in a supercomputing race in which China is the main competitor. And a fund reportedly backed by Chinese government money is making a third bid to get CFIUS approval to acquire acquire the microchip company Lattice.

ANALYSIS: Reforms to CFIUS have been a topic of discussion for years, with some concerned that the committee lacks the power to stop or modify investments that could impact national security but don’t fit the current criteria for review, and others concerned that the present regime is unnecessarily opaque and results in an effective barrier to mutually beneficial investment flows with China and other countries. The particular reforms being proposed would call into question the legitimacy of the CFIUS reviews as narrowly focused on national security, especially with the proposal to maintain a list of countries that would receive special scrutiny. While no one doubts that China-linked transactions would receive scrutiny, making a list of countries subject to unequal treatment seems unnecessary and problematic in trade diplomacy. There is a good case to be made for updating the CFIUS process, but the current proposal seems to me to be on the wrong track and likely to create more difficulties then it would solve.

KOREAN PENINSULA
Trump aides reportedly question China’s willingness to help with N. Korea; Pressure mounts on Chinese firms

NYT reports that U.S. officials are questioning the prospects of initial Trump administration hopes that China would pressure North Korea. A source said China’s actions on North Korea could even affect whether Trump and Xi meet at the G20 in Hamburg next month. NYT also reported that Chinese officials “among those most interested in” a Trump meeting with North Korean leader Kim Jong-un, a prospect somewhat less likely following the return of an apparently brutalized U.S. prisoner.

The U.S. government does have specific demands of China, according to reports. Officials told WSJ that the Treasury Department could impose sanctions on Chinese entities that trade with North Korea and have asked the Chinese government to pressure them. “‘We’ve told the Chinese we hope they’ll act against certain companies and people,’ said a senior U.S. official briefed on North Korea policy. ‘But we’ve also said that we’re prepared to act alone and can reach North Korea if we choose.'” U.S. prosecutors also reportedly “accused a Chinese company…of laundering money for North Korea and said they would seek $1.9 million in civil penalties.” According to NYT, the $1.9 million comes from an amount the company allegedly transferred for North Korea, clearing the funds through the United States.

ANALYSIS: Direct legal action against Chinese targets, combined with the threat of sanctions, is a strong echo of what Obama administration officials have said was a winning playbook in bringing Chinese officials to the table over state-linked commercial hacking. The big “win” in that case was a public statement by Xi forswearing support for internet-enabled theft of business secrets for commercial gain. When it comes to commercial hacking, however, the Chinese government already had reason to rein in PLA hackers who might have been freelancing or acting without central approval. In this case, it is hard to imagine threats to name and shame a few Chinese firms and individuals would change China’s fundamental calculus regarding pressure on North Korea.

CYBERSPACE + TECHNOLOGY
Chinese IT security examiner explains details of national security review process, clarifies Windows 10 status

Following the provocative essay translated and featured here last week that called for a moratorium on use of the new Windows 10 China Government Edition unless and until it passes China’s national security review, one of the experts involved in conducting those reviews gave an interview (later translated by Rogier Creemers, Paul Triolo, and me) to the same outlet. Wang Jun, lead engineer of the China Information Technology Security Evaluation Center (CNITSEC), argued that the new Windows edition was developed to be “secure and controllable” in the Chinese government’s view and described important details about how the national security reviews are to function. (Ni Guangnan, author of the initial piece arguing against using the new Windows edition, had another piece on the topic this week, arguing for the importance of “indigenous and controllable” operating systems.)

Among several important insights in the new interview, Wang describes the role of source code examination in determining whether a product meets government requirements: “Operating system source code can run as long as 100 million lines. How much to look at, what part to look at, and how to judge the code are decided according to objectives of the technology evaluator in the third party evaluation process. Reading every single line is perhaps ideal, but doing so would require an enormous amount of time and resources. On the other hand, from the perspective of a technology evaluator’s methods, looking at every line may not be necessary. But as evaluators we ask for 100 percent of the source code and then, starting from a foundation of analyzing the program’s structure and how it integrates with the user’s machine, we decide which modules specifically require examination and verification.”

Meanwhile:

TRADE
Commerce secretary says moving on from ‘easier deliverables’ in China talks; Beef, chicken, dairy deals reported

Calling the news of implementing a long-discussed deal to reopen U.S. beef exports to China one of “the easier deliverables” in the 100-day timeline following the Trump-Xi meeting in Florida, Commerce Secretary Wilbur Ross told a WSJ forum, “We’re now working on another list. We generally have two conference calls a day, one early in the morning our time and one late at night with the Chinese. That’s five, six, seven days a week. … We’re interested in very specific, very tangible achievements. And we’re finding a very, very sensible give-and-take with the Chinese right now.”

Meanwhile:

#USChinaWeek1967
‘Peking Test Blast a Surprise to U.S.: Size of Explosion and Speed of Nuclear Development Were Not Foreseen’

“WASHINGTON, June 17[, 1967]—The Atomic Energy Commission, confirming that Communist China had exploded a hydrogen bomb, said today that the blast had an explosive force equal to several million tons of TNT. United States officials were somewhat surprised by the Chinese test, which was viewed as further evidence of the unexpectedly rapid progress being made by Peking in developing a nuclear arsenal. While China was known to be working on the design of a thermonuclear device, the test came sooner than had been generally predicted by United States intelligence officials. … Senior military analysts in Washington believed that the Chinese announcement of the successful test would intensify political pressure for the deployment of a missile defense system around the United States. But they felt there would not be an actual threat to American cities until the Chinese have built up a force of intercontinental ballistic missiles.”

(Source: The New York TimesThis entry is part of an ongoing feature of U.S.–China Week that follows U.S.–China relations as they developed in another era of change and uncertainty, 50 years ago.)

ABOUT U.S.–CHINA WEEK

U.S.–China Week is a weekly news and analysis brief that covers important developments in U.S.–China relations and features especially insightful or influential new policy analysis.

Graham Webster is a senior research scholar, lecturer, and senior fellow of the Paul Tsai China Center at Yale Law School, where he specializes in U.S.–China diplomatic, security, and economic relations through research and Track II dialogues. He is also a fellow for China and East Asia with the EastWest Institute. His website is gwbstr.com.

Disclaimer: Opinions expressed here are my own (and I reserve the right to change my mind).

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Contact: Follow me on Twitter at @gwbstr. Send e-mail to [email protected].