Trump's Tariffs Could Crush China's Ambitions

June 28, 2018 Topic: Security Region: Asia Tags: ChinaAsiaXi JinpingTechnologyDonald Trump

Trump's Tariffs Could Crush China's Ambitions

China is not in a position to prevail over a determined American leader.

President Donald Trump on Wednesday handed a reprieve to ravenous Chinese acquirers looking for U.S. tech companies by  issuing a statement that he will not put in place across-the-board rules blocking certain investments from China.

On May 29, the White House in a  statement promised by June 30 to “implement specific investment restrictions” barring Chinese parties from acquiring “industrially significant technology.”

Instead of using authority granted by the International Emergency Economic Powers Act of 1977 to issue such investment restrictions, the president on Wednesday endorsed legislation, now working its way through Congress, expanding the authority of the Committee on Foreign Investment in the United States. CFIUS, as the Treasury-led interagency body is known, can block certain acquisitions of U.S. businesses by foreign parties.

“China will closely monitor the legislation process and evaluate its potential impact on Chinese companies,” Commerce Ministry spokesman Gao Feng  said on Thursday in Beijing to reporters. “China does not agree with tightening foreign-investment conditions using national security as reasons.” The official reaction was, considering the circumstances, mild, an indication Chinese leaders were relieved by Trump’s decision not to act.

Yet Beijing, which has been behind many recent tech acquisitions, should not be too happy. Trump is determined to stop China from scooping up America’s “crown jewels,” the term he used in his Wednesday statement. As some observers are now saying, the United States and China are entangled in a tech war, not a trade one.

In that tech war, in reality an all-encompassing struggle, China is not in a position to prevail over a determined American leader.

The House of Representatives is certainly determined. Tuesday night the body approved the Foreign Investment Risk Review Modernization Act by a 400–2 margin. The bill, like a Senate version passed earlier this month, gives CFIUS the ability to look at—and stop—a broader range of transactions. The two bills now head to reconciliation.

Alan Tonelson, a trade expert based in Washington, DC told the National Interest on Wednesday that he would have liked to see specific regulations—Trump’s original plan—but that improving CFIUS rules is a necessary first step “to better protect from Chinese predation.”

CFIUS legislation, when it is enacted, will probably create a category of “countries of special concern.”

There is no country of greater concern to the United States than the People’s Republic of China. Xi Jinping, the assertive Chinese ruler, is determined to make his country the world’s tech leader, and he does not feel constrained by China’s World Trade Organization obligations.

Xi’s Made in China 2025 initiative, announced in 2015, is a collection of blatant trade violations. CM2025, as the initiative is known in China, seeks near self-sufficiency in ten crucial industries, including aircraft, robotics, electric cars, semiconductors, and wireless communications. The plan is comprehensive, including assistance for the purchase of foreign-tech companies.

Beijing is obviously determined to build “national champions” that will face little competition at home. With little competition at home, they will be able to use their financial resources to compete abroad.

That pits China’s best against America’s giants. “In the saga of the U.S.-China economic rivalry,”  writes Lorand Laskai of the Council on Foreign Relations, “Made in China 2025 is shaping up to be the central villain, the real existential threat to U.S. technological leadership.”

Chinese officials, however, are now beginning to understand they have pushed the United States too far. Hong Kong’s South China Morning Post  reports that the Chinese central government has “instructed Chinese state media agencies to avoid mentioning Made in China 2025 in their reports.”

Similarly, a “senior western diplomat” speaking to Reuters  said “Chinese officials have recently begun downplaying Made in China 2025.” Beijing’s new line is that “the aspects that have raised the most ire abroad were simply proposals by Chinese academics.”

That assertion, of course, is patently false because, among other reasons, Beijing won’t drop CM2025. In fact, Chinese officials have told American negotiators the program is nonnegotiable.

Xi Jinping evidently thinks his country is sufficiently advanced to challenge the United States at this time for tech leadership. Many Chinese, however, are not so sure. The normally assertive Global Times in an  editorial published Sunday noted that China has become “overconfident” about its tech capabilities.

Some Chinese agree. Liu Yadong, editor-in-chief of Science and Technology Daily, struck a nerve recently when  publicly proclaiming that the country’s leadership had been, in the words of the South China Morning Post, “hoodwinked” into believing China will soon become the world’s tech leader.

A hoodwinked Xi may not think so, but U.S. restrictions will impact China. “It’s going to be a big handicap for Chinese technology development,”  said Jingzhou Tao of law firm Dechert to the Wall Street Journal, on expected U.S. investment prohibitions.

Furthermore, Robert Blohm, a Toronto-based China expert who spent a decade in Beijing, raises a more fundamental point about Chinese aspirations: the shortcomings of the Chinese state-driven model. “Five-thousand years of state failures still haven’t taught them,” he told the National Interest .