You are here

Can China and Trump find exit from trade war?

CHINESE and US negotiators are reported to be meeting this Wednesday and Thursday in the latest bid to avoid a potential all-out trade war. While markets have been buoyed by the news, the political backdrop to the session is inauspicious given the recent uptick in bilateral tensions over foreign investment.

Last Monday, US President Donald Trump signed legislation requiring the US Commerce Secretary to deliver a "Report on Chinese Investment" in the United States 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 2025" plan.

The reaction in Beijing has been predictably furious, although it appears that this week's talks, which will reportedly be led by Vice-Commerce Minister Wang Shouwen and Treasury Undersecretary David Malpass, will go ahead. Last Tuesday, for instance, the Chinese Defence Ministry asserted 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 in on perceived national security risks around inward and outward investments. Since 1990, there have been only five cases where US presidents have blocked big commercial mergers involving US firms: two of these have been under Mr Trump, including his order in March blocking Broadcom from merging with US-based Qualcomm.

For Mr Trump, there is a clear political narrative around his actions in this area that he sees as a key plank of his "Make America Great Again" agenda. This programme 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 that there is a political benefit to doing so, and key foreign countries resist his calls for trade renegotiations.


The new legislation also gives CFIUS - which is 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 investments 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, mandating a review for any foreign purchases of property near US military installations, or sales of real estate located in US ports.

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 if 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 been able to 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 modernise its powers in this area.

For instance, Europe 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 scrutinise investments on national security grounds may well be needed. Across these nations, 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 that the new US legislation is just the latest part of a wider, grand strategy under Mr Trump to thwart the nation's rise as a global superpower.

In this context, any increased US veto of foreign investment and mergers could therefore see China - and indeed other countries - respond in a like-minded way. While increasing protectionism through tariffs (a second tranche of US and Chinese retaliatory sanctions officially take effect this week) and tougher security of investment is easy to initiate, this can be difficult to control and unwind; and it remains highly unclear if the latest US actions will fundamentally modify China's policies, or simply trigger a further deterioration in bilateral relations.

While markets appear to believe that a decisive breakthrough is possible in this week's talks, this therefore seems optimistic in the current context. However, given incentives that both sides have to eventually resolve the escalating economic disputes, a roadmap could emerge to help resolve them that may ultimately require final negotiation by Mr Trump and Chinese President Xi Jinping when they are next scheduled to meet in November at the G-20 and Apec forums.

  • The writer is an associate at LSE IDEAS at the London School of Economics