Mnuchin suffers setback in US plan to limit China investments

[WASHINGTON] The Trump administration's plan to deploy some of the most restrictive investment limits in its economic arsenal against China marks a setback for Treasury Secretary Steven Mnuchin's effort to take a less confrontational approach toward Beijing.

Under the plan, the White House would use one of the most expansive legal tools available to declare China's investment in US companies involved in technologies such as new-energy vehicles, robotics and aerospace a threat to economic and national security, according to eight people familiar with the plans.

Mr Mnuchin has been working on the plans since as early as December, but has consistently urged a less aggressive approach that is negotiated with the Chinese behind closed doors, the people said. In the end, he was persuaded by the president and other Cabinet members to use blunt tools to address risks from Chinese investments, they said.

Some administration officials are concerned that restricting Chinese investments on the grounds of a supposed national economic emergency could rattle the US stock market or trigger reprisals against US firms operating in China, they said.

Brewing Trade War

The move would also dovetail with an internal European Union memo obtained by Bloomberg, which said Mr Trump's aggressive approach to longstanding US partnerships could unwind decades of progress and force nations back into a system where might prevails.

It's a move that would put Washington's brewing trade war with Beijing on a potentially irreversible course, even as Chinese authorities have looked for ways to reach a detente with the US.

Mr Mnuchin, in a report scheduled to be released on June 29, will suggest administering that law through an inter-agency government panel called the Committee on Foreign Investments in the US, or CFIUS, the people said, requesting anonymity to discuss the plans.

One concept under review would be to create a two-tracked CFIUS process to review investments, with one specifically for China, two of the people said.

A Treasury spokesman didn't reply to a request for comment.

Aggressive Approach

The Treasury chief has kept a low profile in recent weeks. People familiar with Mr Mnuchin's thinking said that after he lost an internal battle on how to handle the trade dispute with Beijing, he's signaled his disagreement with the president's approach through silence.

Mr Mnuchin lost a free-trade ally earlier in the year when Gary Cohn, Mr Trump's first White House economic adviser, left the administration. Mr Cohn, a former president of Goldman Sachs Group, warned this month that trade disputes could wipe out the benefits of Republican tax cuts passed in December. His successor, Larry Kudlow, is a self-proclaimed "free-trader", and is recovering from a heart attack.

In the wake of losing ground in steering US economic relations with China, a key job description of a US Treasury secretary, Mnuchin has chosen silence in an effort to preserve his personal credibility with financial markets and even allies.

"Authorities around the world will see the secretary as someone to go to for a thoughtful, rational, reasonable conversation about challenges that we face mutually or changes in the business cycle or multi-lateral policy changes," said Tim Adams, a former Treasury undersecretary in the George W Bush administration. "They see him as something of a point of stability."

The US, as the world's largest economy, may be the initial winner under such a regime, but an escalating battle still poses risks of a slowdown.

Emergency Law

The national emergency law, called the International Emergency Economic Powers Act of 1977, will target prospective investments, meaning existing ones cannot be undone, according to four of the people. It's unclear what would happen to deals that have been announced but not yet completed. Treasury officials are also trying to settle on a legal definition of "Chinese entities'' that would be affected.

Mr Trump's top trade adviser in the White House, Peter Navarro - author of a book called "Death by China" - has been laying the groundwork to escalate what he's so far called a "trade dispute.''

Mr Navarro's office last week issued a 36-page report with the blunt title, How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World. The report is seen as part of the evidence the administration will use to justify the investment curbs on economic security grounds.

'Economic Aggression'

Much of China's behaviour "constitutes an economic aggression,'' Mr Navarro said last week during a phone briefing with reporters. "It is critical both for the interests of the United States as well as for the integrity and proper functioning of the global economy that the Chinese cease these kinds of behaviors.''

Treasury's move is part of the Trump administration's actions taken under Section 301 to respond to China's alleged theft of US intellectual property and follows rounds of tit-for-tat tariff threats between the two largest economies.

The IEEPA statute allows the president to unilaterally impose the investment limits. Congress, in parallel, is working on reform legislation to CFIUS that would scrutinise inbound investment in the US on national security grounds.

Treasury's investment limits are seen as complementing the CFIUS reform efforts, which are not only focused on China and don't limit investments on economic security grounds, said people familiar with the administration's plans.

The Treasury limits will be rolled out in phases, meaning not all Made in China 2025 sectors will be covered at once, said people briefed on this week's action.

BLOOMBERG