Trump and China need a route away from trade war
Markets have been buoyed by a planned meeting this week of US and Chinese negotiators in an effort to avoid an all-out trade war, but the political backdrop to the meeting is inauspicious.
US President Donald Trump signed legislation last week requiring the Commerce Secretary to deliver a report on Chinese investment in the US to Congress and the Committee on Foreign Investment in the United States (CFIUS) every two years up to 2026. While the bill focuses on military capabilities, not just of China but also Russia and Iran as “potential adversaries,” it singles out Chinese investment as a security threat and zeroes in on Beijing’s “Made in China 2015” plan.
The reaction in Beijing was predictably furious, although it appears that this week’s talks, led by Vice Commerce Minister Wang Shouwen and Treasury Undersecretary David Malpass, will go ahead. The Chinese Defense Ministry, for example, complained that the new law “abounds in Cold War thinking, exaggerates the level of the China-US confrontation ... undermines the atmosphere of development of China-US military ties, damages China-US mutual trust and cooperation.”
What the legislation certainly underlines is how much the Trump administration is focusing on the perceived national security risks of investment, both inward and outward. Since 1990, there have been only five cases in which US presidents have blocked big commercial mergers involving US companies, and two have been under Trump, including his order in March blocking Broadcom from merging with US-based Qualcomm.
For Trump, there is a clear political narrative to his actions in this area, which he sees as a key plank of his “Make America Great Again” agenda. This program includes reducing the US global trade deficit and cracking down on trade practices perceived to be unfair. Especially with the new law, the president is only likely to become more activist in this area — at least as long as he perceives a political benefit to doing so, and key foreign countries resist his calls for trade renegotiations.
The new legislation also give CFIUS — an inter-agency, Treasury-led committee with nine Cabinet members, two ex-officio members and members appointed by the president — authority to review any transaction involving foreign investment in US “critical infrastructure or technology companies”, even when they do not involve the foreign entity acquiring a controlling stake. The act also expands CFIUS’s scrutiny to include real estate deals, requiring a review for any foreign purchases of property near US military installations, or sales of real estate in US ports.
What is striking about the US approach is the degree to which China has been singled out by Washington policymakers; so much so, in fact, that some in Beijing already perceive the new US legislation as just the latest part of a wider, grand strategy under Trump to thwart China’s rise as a global superpower.
These are significant new powers for CFIUS, which was established in 1975, but gained increased traction after the September 2001 terrorist attacks. Even before the new law, CFIUS had the power to examine any takeover bid by a foreign company deemed to pose a national security threat; intervene to change parts of proposed deals, for instance excluding part of a US firm from an agreement; and negotiate with the parties to a proposed deal.
Of course, legitimate US concerns do exist about some overseas foreign investment. And the United States is by no means the only country that is looking to modernize its powers in this area.
For instance, policymakers in Germany, France and the United Kingdom are also debating this topic as technological, economic and geopolitical changes mean that reforms to public powers to scrutinize investments on national security grounds may well be needed. Governments are looking at the best way to combine a broadly open approach to international investment while having appropriate security safeguards.
Compared to these European powers, however, what is striking about the US approach is the degree to which China has been singled out by Washington policymakers; so much so, in fact, that some in Beijing already perceive the new US legislation as just the latest part of a wider, grand strategy under Trump to thwart China’s rise as a global superpower.
In this context, any increased US veto of foreign investment and mergers could therefore lead to China — and indeed other countries — responding in a like-minded way. While increasing protectionism through new tariffs and tougher security of investment is easy to initiate, it can be difficult to control and unwind and it remains unclear if the latest US actions will fundamentally modify China’s policies, or simply trigger a further deterioration in relations.
While markets appear to believe a decisive breakthrough is possible in this week’s talks, that seems optimistic in the current climate. However, given incentives both sides have to eventually resolve the escalating economic disputes, a roadmap could emerge to resolve them that may ultimately require final negotiation by Trump and Chinese President Xi when they are next scheduled to meet in November at the G20 and APEC forums.
• Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics