China competition bills progress through US Congress

“Renewed concerns about investor protection and deepening US-China tensions have led to calls for even quicker delisting, with the possibility that Chinese firms will be delisted from early 2024.”

Key pieces of US legislation aimed at boosting home-grown technology and reducing reliance on China are currently progressing though congress. They will have two likely impacts: firstly, they will lead to more state intervention and financial support for US semiconductor manufacturing; and secondly, they’ll put pressure on Chinese firms to delist from US exchanges.

Negotiations are currently underway to merge the $250 billion US Innovation and Competition Act (USICA) passed by the Senate in 2021, and the America COMPETES Act passed by the House in February. Both bills appropriate $52 billion to support domestic semiconductor production.

Firms operating in the tech sector can expect the resulting legislation to impact their business in myriad ways. In the first instance, passage of USICA/COMPETES will add to the Biden administration’s increased focus on domestic supply chain resilience throughout 2021 with executive interventions in ports, semiconductors, and meat processing, among others. This could reduce supply chain disruption and possibly long-term inflation, but also increase the government’s role in key markets.

A final bill will provide new government funding for US semiconductor production, just as some large-scale private sector investments are already moving forward, such as TSMC’s planned $12 billion Arizona factory and Intel’s $20 billion Ohio plant, which could both receive support from this legislation. But while investments in US semiconductor production are increasingly attractive, a current surge in semiconductor investment risks creating a supply glut in three to five years.

There is also a bipartisan appetite for removing Chinese firms from US exchanges, leading to the Holding Foreign Companies Accountable Act passing in December 2020. Since then, renewed concerns about investor protection and deepening US-China tensions have led to calls for even quicker delisting, with the possibility that Chinese firms will be delisted from early 2024. As a consequence, top Chinese firms are increasingly listing in Hong Kong or on the mainland.

Meanwhile, tariff changes to the Generalized System of Preferences (GSP), which provides tariff-free access to US markets for 119 developing countries, could be highly impactful. The Senate bill (most likely to survive the conference process) extends GSP to 2027 and grants retroactive relief to GSP expiration at end-2020, benefiting firms importing from top recipients like Thailand, Indonesia and Brazil.

The Miscellaneous Tariff Bill (MTB) – which eliminates tariffs on certain imports – is aimed at supporting American manufacturing, and the Biden administration and House Democrats will oppose Senate amendments to the bill that would serve to benefit Chinese importers. Importers with exposure to GSP and /or MTB tariffs could benefit substantially from inclusion of these items in the final legislative package.

In addition, changes to the de minimis threshold value (below which imports can enter without paying a duty) in the House bill, have potentially important impacts. Under current rules, goods valued under $800 can enter the US duty-free. House language stipulates that goods from non-market economies (eg China, Vietnam) or items subject to US tariffs are not eligible for de minimis rules. If the language survives, it could extend shipping times and raise import costs for high-volume importers such as e-commerce firms.