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After an all too typical White House struggle and confusion over the proper response to Chinese mercantilist protection, last Wednesday President Trump signaled a retreat from bolder moves by announcing that the main tool in combating Chinese mercantilist protectionism would be the Committee on Foreign Investment in the United States (CFIUS) process, now being upgraded and reformed by Congress. He stated: “This legislation . . . will enhance our ability to protect the United States from new and evolving threats posed by foreign investment” and “will provide additional tools to combat predatory investment practices that threaten our critical technology leadership, national security, and future economic prosperity.”
Treasury Secretary Steve Mnuchin followed by avowing that the United States’ objective is not to “single out China or treat them differently.” This public shift was a mistake, both from a point of accuracy and from a larger policy perspective. On the former, the $34 billion tariffs that are scheduled to go into effect Friday, as well as recent moves to block Chinese companies from entering the US market (i.e., China Mobile), render Mnuchin’s claim absurd.
But the Trump administration’s move to rely almost solely on CFIUS — and, counterproductively, on tariffs — is also misguided for larger strategic and practical reasons. We actually should be singling out China. And in that regard, neither the tariffs nor an updated CFIUS will allow the US to precisely target the main pillars of Beijing’s authoritarian state capitalism that both protect and subsidize emerging technologies, particularly in the information and telecommunications sectors. (There are rumors that at some point the administration may go beyond CFIUS, but the White House has downplayed them as only “early deliberative” discussions.)
There will be more time and space to analyze CFIUS as details emerge on the compromise between the House and Senate bills legislating updates and reform to the process. But at this point the major outlines are fairly clear. Both versions of the pending legislation would expand the authority of the existing body (the interagency Committee on Foreign Investment in the United States). It would be able to review minority holdings, as well as transactions near military bases or other sensitive geographic areas. The legislation would also expand the analysis beyond national security to oversight of the United States’ competitive edge in emerging technologies. In conjunction with a reformed export control program, the legislation provides for updating the list of “critical technologies” and creates special scrutiny for a group of nations of “special concern” (read: China and Russia).
A more focused agenda
One can debate whether the CFIUS reforms will constrain Chinese high-tech investment both in the US and around the world. But even if successful, CFIUS is only a partial answer to the maze of anticompetitive regulatory barriers and prohibitions already hampering US and foreign high-tech firms.
Unfortunately, the Trump administration is determined to start a tariff war with China as an opening move. But as my AEI colleague Derek Scissors has predicted, it is likely that the tit for tats will lead to further negotiations down the road.
At that point, the Trump administration should stick to the reforms it outlined in its March report on Section 301 of the Trade Act of 1974. As I noted at the time, for once, the administration had done its homework and had laid out a set of potential negotiating goals that represented a valid negotiating agenda — even if Beijing refused to budge on some issues.
One of my earlier blogs set out such an agenda in more detail, but the following are highlights:
These negotiating points are not merely a wish list: They are vital for US and foreign high-tech firms to compete on more even terms with Chinese state-owned or -directed enterprises.
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