What a US Government Shutdown Might Mean for China Commercial Relations

Erin Ennis

For readers working inside the Washington beltway, the impending US government shutdown is dominating the news, with the minutiae of budget rules parsed daily. For readers outside of Washington, however, some context of the implications of the US budget gridlock may be useful to understanding the potential impact on US-China commercial relations.

The most pressing issue now is funding for the US government—which will close tomorrow unless the impasse is resolved—though soon after that discussion is completed or postponed, depending on the outcome, the US debt limit will become the next battle. As Washington Update goes to press, Senate Minority Leader Mitch McConnell (R-KY) is working on a one-week extension of the current budget to give negotiators more time to work on a broader compromise. It is unclear if those efforts will be successful.

This March, Congress passed a short-term funding measure that lasts until September 30, the end of the fiscal year. That date runs right up to the October 1 implementation date of the Affordable Care Act (ACA), also known as Obamacare, which will require all Americans to have health insurance. The mandates in the ACA will go forward regardless of what happens with the US budget, but the two issues have been politically linked by opponents of the healthcare mandate. To try to halt the ACA, the Republican-majority House of Representatives last week and this weekend passed funding bills that bar use of US government funds for the mandate’s implementation or, more recently, delay implementation of the ACA for a year.

Senate Majority Leader Harry Reid (D-NV), backed by the Democratic caucus in the Senate, stated repeatedly that the Senate will not pass a bill that defunds or delays the ACA. Last Friday, the Senate passed a funding bill that retained funding for the ACA; today it is expected to pass a bill that does not include the House’s proposed one-year delay of implementation. This will send the bill back to the House for consideration again, since for a bill to become a law, it has to pass both House and Senate with exactly the same text.

Why does this matter? If a funding bill does not pass both chambers of Congress by October 1, the US government will partially stop operating because of lack of funds. The shutdown will be “partial” in that essential functions, such as air traffic control and national security, will continue, but all other offices will be closed and the federal employees who work there will be on unpaid leave. The Washington Post has a summary of what some US agencies have indicated they will do under the shutdown.

At this point, it is not clear what impact a shutdown might have on US trade and commercial relations, but active plans for China engagement in the period ahead could be affected. The administration and its agencies will need to determine what functions are deemed “essential” and can continue as planned. As of this writing, there is no change to President Obama’s scheduled travel to Bali for the October 7-8 Asia-Pacific Economic Cooperation (APEC) Leaders’ Summit. Provided Obama feels he can leave Washington at such a critical time, the multilateral nature of APEC may mean the United States will participate rather than be absent from the discussions, which will go on with or without the United States. However, bilateral meetings—whether involving China or other trading partners—may not be deemed essential and could be rescheduled. For example, there are numerous scheduled meetings in October related to the upcoming Joint Commission on Commerce and Trade discussions between the United States and China that could be impacted, as well as ongoing negotiations with the European Union on the Trans-Atlantic Trade and Investment Partnership (TTIP). News reports indicate that most embassies and consulates will remain open for American citizen services, but visa processing could be affected. 

Even if Congress reaches an agreement on the budget, the issue of the US debt ceiling still looms. The Treasury Department announced last week that the United States will reach its cap on debt by early- to mid-October – earlier than had been expected even a few weeks ago. The debt ceiling’s primary impact is on US debts – that is, payment of interest on bonds, etc. that are used to finance the deficit. Without an increase, the US government would only be able to spend cash as it comes in through taxes, customs fees, and other revenue. Treasury would have to prioritize what gets paid first. Most analysts assume Treasury would continue to pay the interest on US debts, but other obligations such as Social Security may not be funded. That too could force a temporary shutdown of some government functions, since the United States does not take in sufficient revenue on a daily basis to cover its all of its expenses. Given the timing of the budget and debt ceiling deadlines, a shutdown of longer than a few days could merge the two issues for dealmakers seeking to come up with a compromise solution on both.

On China-specific matters, it should be noted that as long as Congress continues to fund the US government by extending the measure it first passed in March, it is also extending a provision tucked away in the measure that has become an irritant in the US-China relationship. The March spending measure requires Commerce, Justice, NASA and the National Institutes of Health to do a cybersecurity risk assessment before purchasing IT systems produced in China. The provision, which singled out China, was written in a way that does little to address the full scope of cyber concerns and was opposed by the US-China Business Council (USCBC) and many member companies and other associations. The provision, which would have ended on September 30, 2013 if 2014 appropriations had been passed, will thus continue as long as the US government is funded by temporary measures.

USCBC will alert its membership on the specific China-related implications of the budget and debt debates in Washington as events unfold.