China/US trade war looms as Trump administration pivots

President Donald Trump, second left, first lady Melania Trump, left, Chinese President Xi Jinping, second right, and his wife Peng Liyuan, right, tour the Forbidden City. Photo / AP

Donald Trump's mantra before and since his tour of Asia earlier this month touted the need for countries to accept each other's unique characteristics to ensure prosperity for the world's great civilisations.

The message of harmony might have offset discordance caused by Trump's harsh criticism of multilateral trade and investment deals during the trip. When it comes to civilisation, however, the course in Washington appears set for a clash rather than cooperation and mutual respect.

Multiple investigations launched by Trump's administration targeting China amid a push by lawmakers to apply greater scrutiny to Chinese investments in the US threaten to destabilise Sino-US close economic and cultural ties, which have underpinned prosperity for the Asia-Pacific region for decades, trade officials and analysts interviewed by the South China Morning Post said.

At one time, a "Washington consensus" had assumed closer economic integration with China would encourage Beijing to open its markets and provide greater opportunities for foreign companies. That concordance has now changed. Many policymakers in the US capital today say carrots are useless when it comes to dealing with China.
Republicans and Democrats now are wielding sticks.

"We understand there are some strategic concerns about China, but we should not be hijacked by this extreme thinking," He Yafei, China's vice-minister of foreign affairs, said in an exchange with the Post. US lawmakers "should listen to all segments of the American people, not just the defence department".

The vice-minister was referring to a recently declassified US defence department study which mobilised lawmakers on both sides of the aisle with its assertion that China's investment activity in the US "will directly enable key means of foreign military advantage".

"Washington has been struggling for a long time about what is the best way to get China to adapt and change, what would work and what would also preserve the system, the global trading system that we have," Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Washington-based think tank Centre for Strategic & International Studies, said in an interview.

"Trump is less risk adverse than all of his predecessors," Kennedy said. "The logic of the president [when negotiating with US companies operating in China] is that, 'Yes, maybe you'll lose some sliver of that current piece of cake that you have access to, but if you want to expand the size of the cake then you might potentially have access to China or elsewhere, then you have to be willing to put this current slice at risk'."

Proposed changes to the way the US government reviews foreign investment gained more urgency owing to the defence department's study, a 49-page document called "China's Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable A Strategic Competitor to Access the Crown Jewels of US Innovation".

The report, initially circulated among US lawmakers a few weeks after Trump took office in late January, addressed the government's concerns about China at a very high level, even suggesting that potential existed for a civilisational clash that Trump, in Asia, said countries could avoid if they played by mutually agreed-upon rules.

The Foreign Investment Risk Review Modernisation Act, co-authored by Senate Majority Whip John Cornyn, a Republican, and Dianne Feinstein, a senior Democrat, has broad support in Congress. If enacted, the legislation would expand foreign investment review procedures overseen by the Committee on Foreign Investment in the United States (CFIUS), which is chaired by the Treasury Secretary and seeks input from the departments of defence and homeland security.

Significant changes to the CFIUS review process include giving it authority to review all "non-passive" investments by foreign entities and suspend pending transactions and impose new conditions, retroactively, on completed transactions. Currently, CFIUS only reviews transactions wherein a foreign party wants a controlling interest in a US company and makes recommendations to the president on the national security threat posed by a proposed transaction.

New requirements in the bill "have the practical effect of subjecting many Chinese acquisitions to mandatory review", according to an analysis by US law firm Strook & Strook & Lavan LLP, which represents companies facing CFIUS reviews.

"The proposed [Cornyn-Feinstein] bill would constitute the most significant change in the last 10 years to US review of foreign investment and merits close attention, especially in the current environment where there is an increasing degree of protectionist rhetoric," according to a memo by Wachtell, Lipton, Rosen & Katz, another law firm representing foreign companies investing in the US.

While CFIUS is designed to halt the transfer to US adversaries of advanced "dual-use" technologies - those that can be adapted for military use -, lawmakers are calling for the process to cover transactions that would give Chinese companies control over large pools of personally identifiable data. Such data, analysts and other observers warn, could make government officials and active members of the US military vulnerable to blackmail or offers to engage in espionage.

The concern over access to data partly explains the delay in US government approval for Ant Financial's US$1.2 billion takeover of US money transfer service MoneyGram. The buyer has been trying to secure the approval since April.

Many analysts and policymakers have pointed out that MoneyGram would not be allowed, under China's laws, to acquire Ant Financial, further pushing the effort to crack down on Chinese investments in the US.

"We are not commenting on the CFIUS process, but we are continuing to work with the various regulatory agencies and remain focused on closing the transaction by the end of the year," Ant Financial said in September. The company is a financial affiliate of Alibaba Group, which also owns the South China Morning Post.

Other threats to the US-China bilateral economic relationship include an investigation under section 301 of the US Trade Act of 1974 into Chinese regulations that force US companies operating in China to transfer technology and intellectual property rights to local business partners.

The investigation could lead to unilateral US trade remedy actions such as tariffs meant to compensate the US for losses American companies have sustained from Beijing's trade regulations or a dispute settlement process within the World Trade Organisation.

"The outstanding question is, after the investigation concludes, if there are adverse findings, how our government handles these findings, whether they go forward with consultations to resolve the problem, or go with [a] dispute settlement in the WTO, or take unilateral actions like sanctions against China," said Anna Ashton, director of business advisory services at the Washington-based US-China Business Council.

"If the government were to take unilateral actions, then there will be a risk that we will be out of compliance of our international obligations," she said. "Then we will be starting a trade war, perhaps."

In addition to CFIUS legislation and the section 301 investigation, the US Commerce Department since March has been looking into the impact on national security of imports of steel and aluminium, an initiative aimed at imports from China more than any other country.

Commenting on these investigations in July, Trump said of China: "They're dumping steel and destroying our steel industry. They've been doing it for decades, and I'm stopping it. It'll stop. ... There are two ways: quotas and tariffs. Maybe I'll do both."

Since Trump returned to Washington, there's been no official effort on the part of China to defuse the concerns behind Cornyn's and Feinstein's bill or the government investigations.

"I don't think there are so many projects Chinese are investing in here related to national security," Li Bin, who heads the economic affairs section of China's embassy in Washington, said in an interview. "In the past there were a few cases but not many.

"Recommendations by the US Congress to strengthen the CFIUS examinations or assessments of Chinese investments, they are not very constructive," Li said.

The counsellor for economic affairs urged Chinese enterprises and CFIUS to engage more often in discussions that would reveal more "about the nature" of a project and its intentions. "Communication is very important," Li said, adding that he is not aware of any effort so far to open such dialogue.

Spokesmen for the US chapter of the China General Chamber of Commerce, which represents more than 1,500 mainland Chinese enterprises operating in the country, said they could not find any CGCC members to comment on possible changes to CFIUS or other potential trade action by the US against China.

"The Chinese don't want to be seen as directly lobbying on American legislation," said CSIS's Scott Kennedy. "They also know that the course of legislation is never straightforward and that there is a vigorous debate within the United States. If they are seen as overly poking their fingers into this, they could get burned."

Still, China has many options when it comes to retaliation, and analysts expect Beijing to use them.

"If there's trade tension, US companies will face certain risks on a number of grounds, including anti-monopoly laws, anti-corruption laws and consumer protection laws," Sherman Chu, a DLA Piper lawyer who advises companies undergoing CFIUS reviews, said in an interview. "Authorities in China have more discretion over how they go about interpreting the rules than they do in the US.

"China's leaders have said that many international rules were set by other countries when China was weak and had little input. So it's not a surprise that China hasn't always been willing to live up to the spirit of these rules," Chu said.

"There's a risk of miscalculation resulting in a trade war, and the real question is whether the Trump and Xi administrations will be adroit enough to avoid it."

Not all of Washington's "China hands" agree that it is in the US's interests to ratchet up trade action against Beijing.

"The impression I have is there are still unresolved disagreements within the Trump administration of how to deal with these [bilateral trade-friction] questions," J. Stapleton Roy, US ambassador to China under former presidents George H.W. Bush and Bill Clinton in the early 1990s, said in an interview.

Roy, who was born in China and raised there during World War II and the communist revolution, is Founding Director Emeritus of the Kissinger Institute on China and the United States at the Woodrow Wilson International Centre for Scholars, a Washington think tank.

"If we take unilateral actions against China, China will retaliate with unilateral actions against us," Roy said. "Where is the net benefit? Who gains from that?"

Speaking at a lunch at the New York-based China Institute last week, vice-minister He addressed the geo-strategic concerns around China's new ranking among global powers.
"China wants to invest much more in the United States, but we've met quite strong political resistance," He said. "I can understand the strategic anxiety on the part of the US about China's growth. We are ready to move from prosperity to become a powerful nation, one of the global powers.

"For the US to feel anxious about China is understandable, but we should not let that anxiety take over, to become the sole guideline for foreign policy."

- Additional reporting by Zhenhua Lu