US restrictions on Chinese investment next front in trade dispute

by Heather SCOTT
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The White House imposed 25 percent tariffs on $34 billion of Chinese products from July 6, triggering an instant tit-for-tat response from Beijing

President Donald Trump this week is due to launch the next phase of his economic confrontation with Beijing, with new restrictions possible on Chinese investments to clamp down on access to sensitive American technologies.

That could open US firms like Apple and General Motors up to new forms of retaliation from China and experts worry it also marks another step in government intervention in the free market, a "radical departure" for the United States that could prove mutually destructive.

But contradictory statements Monday from senior US officials have muddied the waters on what path the White House will take.

Trump has threatened to strike back against China's retaliation to the US tariffs that are due to take effect July 6 -- potentially escalating the tariffs to $450 billion in Chinese goods.

Meanwhile, later this week, the Treasury Department is due to unveil a proposal on investment and export restrictions.

Trump in late May announced plans to impose steep tariffs on Chinese goods, and to follow up by June 30 with "specific investment restrictions and enhanced export controls" on Chinese companies and investors in "industrially significant technology."

According The Wall Street Journal, the measures likely would target investments in the United States by any firm that is 25 percent Chinese held, although that threshold could drop if the investment is considered sensitive.

US Treasury Secretary Steven Mnuchin vehemently denied the reports by Bloomberg and The Journal as "false, fake news."

"The leaker either doesn't exist or know the subject very well. Statement will be out not specific to China but to all countries that are trying to steal our technology," Mnuchin said on Twitter, noting he was responding for Trump.

However, that contradicts the White House's own May 29 statement which specified that new measures would target China.

US stocks on Monday briefly fell more than two percent from Friday's close and senior White House economic adviser Peter Navarro appeared on television to try to calm investor fears about a possible trade war.

However, his confusing interview to CNBC did little to clarify the situation, as he said the administration was "not singling out China" but also that Treasury would release a report on Friday on the issue of investment restrictions on China.

He said investors should be bullish on the US economy, claiming Trump's aggressive trade maneuvers had created new domestic investment.

The economy "is going to a beautiful place right now," Navarro said on CNBC. "It's something you could only dream about."

After his comments, stocks recovered some ground and the benchmark Dow Jones Industrial Average closed with a loss of 1.3 percent, or 325 points.

- China 2025 -

Trump has blamed past US administrations for being soft on China and allowing the country to become dominant in manufacturing, and for failing to protect sensitive technologies.

The administration could expand existing authorities for the Committee on Foreign Investment in the United States, or CFIUS, which is led by the Treasury and which already has blocked some Chinese investments in ports and semiconductors.

Even the hint of a possible CFIUS review can kill a potential investment. Congress also is looking at ways to tighten the investment review process.

According to the Rhodium Group, a research firm, Chinese investment in the United States fell 35 percent in 2017 from the record $45.6 billion in 2016, and has slowed to a trickle, just $1.4 billion in the first quarter of this year.

New export controls would make it more difficult for US firms to sell technology to China if Washington deems it to be "industrially significant."

US officials have highlighted Beijing's "Made in China 2025" industrial development plan as a source of concern since they say it is a map for dominating key high tech industries from space to telecommunications to robotics to electric cars.

- Few 'off ramps' -

As tensions continue to escalate, trade experts warn there are fewer options to resolve the dispute.

"I think that there are very few remaining off ramps for rising tensions," said China expert Martin Chorzempa of the Peterson Institute for International Economics.

"There are serious structural concerns about Chinese practices that cannot be resolved without trust between the negotiating partners" and that trust is eroding in the current confrontation, he told AFP.

He warned that Beijing had an "enormous array of tools to put pressure on American companies" like Apple and GM, companies that really depend on China. That could include holding goods in ports or hold up approvals.

The decision of the government to take a direct hand in corporate investment decisions under the pretext of national security is "a radical departure from the way we have engaged in economic governance," Chorzempa said.

Goods from China are offloaded June 20 at a California port. Trump is due to announce new investment and export restrictions this week.

Beijing has an 'enormous array' of tools to put pressure on US firms like Apple and GM