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The Export-Import Bank of the United States (US Exim) has announced an “historic” change to its domestic content rules, as it bids to finetune its fledgling programme on China and boost support to key battleground sectors such as 5G and quantum computing.

As part of the new policy, US Exim has agreed to cut the minimum local content required from 85% to 51% for projects it backs through its ‘Program on China and Transformational Exports’.

US Exim was instructed by Congress to set up the China programme in late 2019 to neutralise Chinese export subsidies and bolster support to 10 key sectors – including telecommunications, quantum computing and renewable energy.

The congressional bill outlined that US Exim had to ringfence at least 20% of its support for these sectors.

At the same time, US Exim was also given the mandate to support the extension of loans, guarantees and insurance at rates and terms fully competitive with those of China and other competing countries.

Now, with this latest policy change, the bank has moved to widen the scope of the China programme, and boost the number of projects it can support.

Exporters can even apply for support if their project fails to meet the 51% threshold, though companies will have to convince US Exim that the transaction will “advance the comparative leadership” of the US vis-à-vis China in the relevant sector.

They will also have to provide an actionable plan demonstrating that the deal will meaningfully boost American jobs within three to five years.

“The aggressive nature of China’s state-driven, heavily-subsidised, export business is increasingly putting US firms and workers at a disadvantage. Today’s targeted approach focuses on 10 transformational export sectors, as outlined by Congress, that are imperative to the national security and economic prosperity of the United States,” says US Exim board member Spencer Bachus.

US Exim has long railed that Chinese export credit agencies (ECAs) are acting “aggressively”, dwarfing the financing and support on offer from other nations, while also offering concessionary packages with favourable terms and conditions.

According to US Exim’s latest competitiveness report, China’s medium and long-term export credit activity from 2015 to 2019 was at least equal to 90% of that provided by all G7 countries combined.

 

A boon for 5G

The bank’s latest move promises to allay fears from some quarters that US Exim’s existing local content requirements would hinder the impact of its China programme in one key sector – 5G.

Michael Liebsch, managing director at Juniper Financial Services, the financing arm of US technology company Juniper Networks, noted in a US Exim call in May that the firm’s supply chain relies acutely on companies based outside the US.

Liebsch added that US Exim should work alongside US companies like Juniper, but also non-American firms, specifically radio access network (RAN) providers such as Samsung, Nokia or Ericsson.

“I think there’s a huge opportunity for all of us in a partnering mode to put together… very competitive solutions in conjunction with Exim to start taking market share in other parts of the world,” he said.

Meanwhile in mid-December, prior to the announcement, Microsoft said that US Exim’s content policies at the time did not “offer US exporters of 5G technology the necessary flexibility to compete globally on a level playing field”.

The firm added: “Exim’s current content policy is unsuited to supporting 5G technology exports.”

The latest policy change promises to remedy these issues, at least in part, and help US exporters compete with Chinese telecommunications firms such as Huawei and ZTE.

Security consulting company Jones Group International has welcomed US Exim’s decision to modernise its policies in order to “counter competition from China”.

“The specific inclusion of 5G equipment in the wireless communication category opens the door to levelling the playing field for the speedy replacement of Huawei equipment in our partners,” the organisation said.

Meanwhile, speaking during an open board meeting in the hours after the policy announcement, Keith Krach, under secretary at the US department of state, said that the move would expand the “scope of US financing available for 5G deals”.

 

Trump keeps pressure on China

When Joe Biden enters the Whitehouse in the coming weeks, analysts expect the former vice-president to retain a tough stance on China, albeit through a more measured approach than his predecessor.

The Trump era has been largely defined by the president’s willingness to keep pressure on China by imposing sanctions at a record pace.

Trump’s trade war with China saw the two sides exchange tit-for-tat tariffs on billions of dollars’ worth of goods from mid-2018 to January 2020. And while the dispute officially came to an end with the signing of a phase one trade agreement that month, tensions between Washington and Beijing remained high throughout 2020, and analysts widely cast doubt on China’s willingness to meet certain import quotas specified in the agreement.

As part of the phase one deal, the US agreed to reduce tariffs on certain Chinese goods, and, in return, China pledged to purchase more US-made farm, energy and manufactured products.

Beijing also promised to address some of the Trump administration’s concerns about intellectual property practices.

Yet, the Peterson Institute for International Economics’ (PIIE’s) trade deal tracker finds that through November 2020, US exports to China of covered products were US$82bn, compared with a year-to-date target of US$141.7bn.

“Through the first eleven months of 2020, China’s purchases of all covered products were thus only at 58% of their year-to-date targets,” PIIE adds.

For its part, the Trump administration has continued to pile pressure on Chinese trade, and tensions have frayed since early 2020.

Trump has frequently antagonised Beijing by referring to Covid-19 as the China virus, and sought to punish China for its involvement in Hong Kong.

In May, Trump signed an executive order ending Hong Kong’s preferential trade status in response to Beijing’s decision to enact a new security law there.

The Whitehouse also took steps last year to limit Huawei’s global influence in the 5G space, updating an export rule and effectively banning chip manufacturers in any country around the world from selling semiconductors to Huawei if US technology was involved in any part of the production process.

Just this week, with mere days left in the Oval office, Trump signed an executive order banning transactions with eight Chinese software applications, including Ant Group’s Alipay mobile payment app.

When Joe Biden takes the oath of office on January 20, the new president will be faced with a raft of decisions, not least the battle to control the Covid-19 pandemic.

But the US’ relationship with China is likely to be high up on the new president’s agenda, and Biden will have to balance maintaining a relationship with the rival superpower while, at the same time, proving to the US electorate that he’s no soft touch.