Trump drops new restrictions on China investments

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Donald Trump has dropped plans to impose new restrictions on Chinese investment  in the US, bowing to pro-business advisers within his own administration who warned it would damage the economy by chasing away foreign businesses.

The decision was a blow to China hawks in the White House, who had advocated a new system that would have allowed US regulators to bar Chinese acquisitions in technology and other strategic industries.

Instead, Mr Trump threw his weight behind legislation currently in Congress that would strengthen the existing national security review process, but only at the margins.

“This legislation . . . will enhance our ability to protect the United States from new and evolving threats posed by foreign investment while also sustaining the strong, open investment environment to which our country is committed,” Mr Trump said in a statement. 

Financial markets, which have become increasingly spooked by the burgeoning Sino-American trade war, were cheered by the decision, with investors seeing it as a signal Mr Trump is ultimately seeking to strike a deal with Beijing rather than engage in a protracted and damaging conflict.

Germany’s Dax index, which had fallen nearly 7 per cent in the last two weeks on fears the country’s export-oriented economy would be damaged by a trade war, rallied nearly 1 per cent on Wednesday. The S&P 500 rose 0.8 per cent in early New York trading in the aftermath of Mr Trump’s announcement before paring gains.

Steven Mnuchin, the US Treasury secretary and an advocate for using existing foreign investment reviews and a negotiated solution with China, said the new legislation would address Washington’s concerns over Beijing’s efforts to vacuum up sensitive US technologies. 

“One of the problems . . . before was we could block an acquisition but then a company could go form a joint venture and we couldn’t block that,” he told CNBC. The new statutes would allow the US to block such joint ventures and any resulting transfer of technologies, he said.

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Under the existing system, a Treasury-led panel, called the Committee on Foreign Investment in the US, reviews all Chinese acquisitions on national security grounds.

The new legislation — versions of which have passed both houses of Congress, but must be reconciled before Mr Trump can sign it into law — would broaden the scope of investments subject to Cfius review to include minority investments in start-ups in key sectors and real estate transactions.

It would also toughen and potentially widen the US export controls that govern the trade in sensitive technologies, particularly those with potential military applications.

Those changes, senior officials said, would give Mr Trump a “strong and effective mechanism” to police Beijing’s investments in key sectors such as artificial intelligence and robotics. The White House has said it sees such investments as a strategic play by China to acquire the US’s technological “crown jewels”.

Once the bill becomes law, Mr Trump said he would direct officials to implement the new statute “promptly and enforce it rigorously” in line with White House accusations that China regularly steals intellectual property. He also ordered officials to conduct a review of US export controls, as called for in the legislation.

White House trade adviser Peter Navarro and Robert Lighthizer, the US trade representative, were pushing for Mr Trump to go further by invoking a 1970s statute used to govern sanctions against rogue states such as Iran and North Korea and to declare a national economic emergency. They also were seeking to extend US scrutiny of investments beyond national security threats to “industrially significant” sectors.

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Administration officials and people briefed on the internal discussions said the hardliners appeared to be winning the debate as recently as late last week. They added that questions over how a new regime would work and whether it would withstand legal challenges dogged the idea.

But Mr Trump, after initially seeming to back it, also appeared to have been spooked by the reaction of financial markets to reports that it was due to be announced this week. US officials insisted, however, that backing new legislation rather than hardliners’ separate new regime did not represent a softening in their approach to China.

The move still marks an escalation in Mr Trump’s trade war with China. The US is set to begin imposing tariffs on $34bn in imports from China on July 6 and Beijing has promised to retaliate in similar fashion. Mr Trump has also threatened to levy additional tariffs on up to $400bn more in goods from China.

Cfius, which is supposed to review foreign investments in the US only for potential threats to national security, has long been a target of Beijing’s complaints with officials arguing it discriminates against Chinese investors. 

It remains unclear whether China, which has fired back at all of Mr Trump’s trade threats so far, will appreciate what some in the administration saw as a potential olive branch in the announcement. 

“Strengthening the Cfius process rather than setting up new procedures means no additional hurdles but the existing hurdle will become more daunting,” said Eswar Prasad, a former China mission chief for the International Monetary Fund. “Chinese investments into the US, especially in high-tech sectors, will no doubt face considerable additional scrutiny in the period ahead.” 

Partly as a result of increased scrutiny from Cfius, Chinese foreign direct investment in the US has fallen in recent years. According to the Rhodium Group, a consultancy, Chinese FDI in the US plunged more than 90 per cent to just $1.8bn in the first half of 2018 from the same period last year. In 2016, Chinese companies made a record $46bn in foreign direct investment in the US. 

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