For US and Chinese regional officials, economic summit was a chance to heal frayed ties. For the White House, it rang alarm bells.

Owen Churchill and John Power

In May, around 400 governors, mayors, government officials and business figures from the United States and China descended on Lexington, Kentucky.

They were there not for the bourbon or the horse races, but for a three-day economic summit for US and Chinese regional leaders, an annual gathering that began in 2011 with the backing of the Obama administration.

Eight years on, relations at the national level have been battered by an ever-escalating trade war and have made the forum " the US-China Governors Collaboration Summit " all the more important, say its supporters.

But among its detractors this year, according to previously unseen documents obtained by the South China Morning Post and sources familiar with the matter, was the White House.

Before this year's summit, the Trump administration raised concerns about the event's courting of Chinese investors and the involvement of an organisation believed to have ties to Beijing's overseas propaganda wing " the Chinese People's Association for Friendship with Foreign Countries (CPAFCC), which co-hosted the conference along with the US National Governors Association (NGA).

One email sent between Maryland state government staff members, which was obtained through US Freedom of Information requests, described the White House as "not happy" with the event.

A marker of Washington's rising hawkishness against China, White House displeasure with the summit came as US President Donald Trump and his administration remain locked in an expensive trade dispute with Beijing, rocking global markets, eviscerating American agricultural exports and raising consumer prices.

But to Kentucky's Republican governor, Matt Bevin, the trade war was a "blip" that would be resolved, he told attendees at the close of the conference, which brought together leaders and deputies from the US states of Washington, Kentucky, Colorado, Tennessee and Michigan; the Chinese provinces of Shaanxi, Jiangxi and Gansu; and the city of Chongqing.

"When China is strong, it is good for America; when America is strong, it is good for China," said Bevin, adding that suspicion and misunderstandings would vanish "when people talk".

Those remarks were somewhat contrary to the current reality of bilateral relations at the national level. They were delivered after more than a year of failed trade talks and Trump's recurring accusations that China's economic rise has come at the expense of the US, which last week saw the president announce fresh tariffs on US$300 billion of Chinese goods. Beijing retaliated on Monday, allowing its currency, the yuan, to fall below seven to the US dollar and halting the purchase of American agricultural products.

Kentucky Governor Matt Bevin, whose state played host to the US-China Governors Collaboration Summit in May. Photo: AP alt=Kentucky Governor Matt Bevin, whose state played host to the US-China Governors Collaboration Summit in May. Photo: AP

Reflecting the administration's aggressive strategy regarding China, and the tension such an approach has caused at the local level, internal communications among Maryland government staff indicate that the White House had its concerns about the Kentucky summit before it took place.

In one email from April, Maryland Secretary of State John Wobensmith wrote that he had been told by staff at the National Security Council (NSC), the US president's chief advisory body on national security issues, that the White House was "not happy about this event".

In his email, Wobensmith said he expected the executive branch not to participate in the summit; ultimately, though, two deputy assistant secretaries attended, plus a video message from the US ambassador to China, Terry Branstad.

Emails regarding this year's US-China Governors Collaboration Summit that were acquired through a Freedom of Information request. alt=Emails regarding this year's US-China Governors Collaboration Summit that were acquired through a Freedom of Information request.

Among the White House's worries, the Maryland governor's director of federal relations, Tiffany Waddell, wrote in a subsequent email, were the scheduled roundtable sessions for Chinese investors on Opportunity Zones, economically distressed areas around the US where, in order to stimulate growth, investors can enjoy tax breaks.

A source familiar with the matter, speaking on condition of anonymity, said that concerns from the White House revolved around whether states should be courting investors from China for the zones, given the increasing scrutiny over Chinese capital flowing into the US under tightening foreign investment regulations.

The Committee on Foreign Investment in the United States (CFIUS), an inter-agency body tasked with screening foreign transactions for national security implications, is currently undergoing an expansion of its powers. Though country-agnostic on paper, the changes are widely regarded as targeting China, which the Trump administration has accused of stealing trade secrets via investments and acquisitions.

Officially, there are no limits on whether a foreign entity can make use of the Opportunity Zone tax breaks.

Still, after discussions with the White House, summit organisers "scaled back" the breakout sessions, said the person.

In a statement, the NGA said it was in "regular contact with the White House and administration officials on a wide range of matters, including the US-China Governors Collaboration Summit".

"Concerns from administration officials were limited to a private breakout session," the statement added, "which we took into account in structuring the format and goals for the session."

But more than just the investor session, White House concerns extended to the ties between co-host organisation CPAFFC and the Chinese Communist Party (CCP).

Those concerns were aired directly with the governors association by the National Security Council, a senior US administration official said.

Nominally a civic organisation, CPAFFC is believed by both Western observers and the US administration to be a subsidiary " or at least fulfil the mandate " of the CCP's United Front Work Department, a wing of the party that oversees foreign propaganda and influence operations.

Though it claims to be non-governmental, CPAFFC is listed on the Chinese foreign ministry's website as one of the country's three primary foreign relations bodies, established in the 1950s to conduct outreach to countries with which China did not have diplomatic relations.

About 400 governors, mayors, government officials and business figures gathered for the conference in May in Kentucky. Image: Handout alt=About 400 governors, mayors, government officials and business figures gathered for the conference in May in Kentucky. Image: Handout

After a lull in activity in the 1980s as China established official diplomatic ties with many of the world's nations, the association has had a resurgence under the rule of President Xi Jinping, China scholar Anne-Marie Brady wrote in a 2017 paper for the Washington-based Wilson Centre.

In a sign of its proximity to the upper echelons of the party, leaders of the association have been traditionally drawn from CCP princeling families, including the current head Li Xiaolin, who is the daughter of former Chinese president Li Xiannian and who attended the summit in Kentucky.

"It's widely acknowledged by academics and policymakers alike that CPAFFC is a United Front organisation that operates in close coordination with China's ministry of foreign affairs," said the US official, speaking on condition of anonymity.

At the governors association's request, the NSC provided a selection of publicly available materials, which included resources to inform members of "certain risks in working with some entities that are Chinese state-sponsored actors", said the official.

It is not clear whether the governors association took action based on the information about CPAFFC, which went on to play a prominent and public role in the event.

Governor Bevin, who did not respond to requests for comment, said in remarks at the conference that he was grateful for the Chinese association's support. And, according to a CPAFFC press release, he accepted the organisation's invitation to attend the next summit in China.

US President Donald Trump remains locked in an expensive trade dispute with Beijing. Photo: AP alt=US President Donald Trump remains locked in an expensive trade dispute with Beijing. Photo: AP

There was a "certain naivety" among some US officials to assume that organisations like the CPAFFC were equivalent to the foreign outreach organisations of other countries because they shared a similar outward structure, said John Dotson, an analyst who heads the China Brief at the Jamestown Foundation.

"They're totally different animals," Dotson said. "And they might think they're dealing with a representative of a civic organisation but they're not. They're actually dealing with people who are functionaries of the Chinese Communist Party, and who are carrying out the marching orders of the Chinese Communist Party."

There are differences of opinion among experts as to whether CPAFFC, which did not respond to requests for comment, is officially enshrined under the auspices of the United Front Work Department or is a separate entity tasked with fulfilling the department's mission.

"From the US government's perspective, the distinction is irrelevant," said the administration official.

Though he emphasised that in no way did he support the prohibition of such exchanges, Dotson pointed to a heightened risk among officials from trade-war-stricken regions to delude themselves "more than they otherwise might to the identity of the organisations that they're dealing with".

One American attendee, however, said he was not troubled by the potential ties between CPAFFC and the CCP because of the open role China played in helping organise the conference.

While acknowledging the "blurry" lines between China's civic organisations and government, Washington state's lieutenant governor, Cyrus Habib, said the likely links were not a matter of concern, since Beijing's involvement was evident by the attendance of local officials.

"If the friendship association is wrapped up with the government, so too is the governor of Hunan province," Habib said. "We already knew that we were having a meeting with representatives of the regime."

Another attendee, former Missouri governor Bob Holden, understood the administration's concerns about CPAFFC's involvement but said the world's "rules of engagement" were changing.

The situation calls for the US to be flexible in how it interacts with other countries in order to preserve cultural ties, said Holden, who served as the Midwestern state's Democratic governor from 2001 to 2005.

"We've got to do what's in our self-interest to protect our sovereignty and our way of life, but at the same time we've got to understand the issues of other countries that may or may not be in line with us politically in understanding those relationships," said Holden, who now heads the US Heartland China Association.

When asked recently about the participation of CCP-tied interlocutors in subnational relations, the Democratic governor of Oregon, Kate Brown, who is a member of the NGA but did not attend this year's summit, said she decided which organisations to engage with "depending upon their philosophies".

Brown did attend the summit in 2015, also co-hosted by CPAFFC.

Oregon Governor Kate Brown is a member of the National Governors Association but did not attend the China-focused event in Kentucky. Photo: AP alt=Oregon Governor Kate Brown is a member of the National Governors Association but did not attend the China-focused event in Kentucky. Photo: AP

From within China, the response to the summit in Kentucky was resoundingly positive, with the foreign ministry lauding the event as proof that "the dialogue and cooperation yearned for by the US and China was the trend of the times".

Xin Qiang, a professor at Fudan University's Center for American Studies in Shanghai, said Beijing believed such people-to-people exchanges "avoid disruption between the two states and slow down the deterioration of bilateral relations".

Such events also conformed to Beijing's belief that "the tough and confrontational policy towards China advocated by Washington politicians is not welcomed and supported by US local governments, who regard China as more an opportunity than a threat," Xin said.

Certainly, US governors and local leaders have been generally disapproving of Trump's use of tariffs as a negotiating tool, citing increased prices for consumers and plummeting exports as a result of retaliatory measures by Beijing.

"What is happening nationally has had a chilling effect on commodity prices and our ability to sell goods to China," said Brown, the Oregon governor.

Her state bucks the national trend by enjoying a goods surplus with China, with US$4.74 billion of exports topping its US$3.33 billion of imports from the country in 2018.

Speaking at a recent Brookings Institution event on subnational relations between the US and China, Brown said that other non-tariff barriers like lengthened inspection processes at Chinese ports were having a "killer impact" on Oregon's fresh produce exports.

Beyond high-profile events like May's governors summit, Chinese officials have also moved behind the scenes to call on governors to lobby for a more moderate approach from the Trump administration.

After the president imposed the first tranche of tariffs on US$34 billion of Chinese goods in July last year, Hong Lei, China's consul general in Chicago, wrote to Iowa Governor Kim Reynolds asking her to "exert your influence and work with us to bring US-China economic and trade cooperation back to a healthy track".

"Escalating trade restrictions on China will not force China to recoil, but will only incur China's countermeasures," Hong warned in the letter, obtained through a US Freedom of Information request.

In the face of such escalation, which has driven tensions on a number of fronts beyond trade, many agree that new strategies to navigate the bilateral relationship are needed, said Cheng Li, director of the Brookings Institution's John L Thornton China Centre.

"But few agree on what those should be," Li said at the think tank's recent event on US-China relations at the regional level.

Suggesting that a renewed focus on subnational relations should be a component of any new approach, Li said: "Washington may not be reflective of the entire country, just as Beijing does not reflect all of China.

"US-China relations are too important to be decided exclusively within the Beltway."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.