Trump Decides Against Harshest Measures on China Investments

The announcement tamped down fears of an abrupt escalation in the trade war between the U.S. and China that had roiled financial markets on Monday. Stocks in the U.S. and Europe rallied after the announcement, with the S&P 500 index up 0.7 percent at 11:00 a.m New York time on Wednesday.

The administration decided not to employ the International Emergency Economic Powers Act of 1977, or IEEPA, that would give the president broad authority to curb Chinese investments in the country. That option was favored by trade hawks inside the administration, including White House adviser Peter Navarro.

Reports that administration officials were considering IEEPA were refuted by Treasury Secretary Steven Mnuchin and Trump Monday after the market swoon. The Treasury Department moved ahead announcement of its plans to address investments two days earlier than scheduled.

The decision comes amid U.S. government allegations that China engages in widespread theft of intellectual property. The inter-agency CFIUS panel, if bolstered by Congress, can address those concerns while maintaining an open investment climate, Trump said in a statement.

Measured Strategy

The president’s choice shows that he is favoring a more measured strategy that requires coordination with Congress, rather than working solely through the executive branch. It’s also a win for proponents of a conciliatory tone in negotiations with China such as Secretary Mnuchin, who told reporters on Wednesday that moves to strengthen CFIUS aren’t intended to single out Beijing.

“This is not intended to target China,” he said. “It’s fair to say that certain countries will get a heightened review — I don’t think we need a list of special countries.”

Read more from QuickTake on CFIUS

While the action does not single out China, the president is still very much focused on Beijing’s practices that were outlined in the U.S. Trade Representative’s Section 301 report, according to an administration official who briefed reporters on the condition of anonymity. The report alleged China engages in infringement of intellectual property and forces companies to transfer technologies.

Mnuchin has been closely involved in drafting the CFIUS legislation. Trump on Wednesday increased pressure on Congress to approve the legislation, officially known as the Foreign Investment Risk Review Modernization Act, or FIRRMA, saying lawmakers must act fast.

“Should Congress fail to pass strong FIRRMA legislation that better protects the crown jewels of American technology and intellectual property from transfers and acquisitions that threaten our national security — and future economic prosperity — I will direct my administration to deploy new tools, developed under existing authorities, that will do so globally,” Trump said.

Broadcom, Qualcomm

Only five takeovers of American firms have been blocked by U.S. presidents on national security grounds since 1990. Trump has blocked two since he became president, most recently in March when he rejected Broadcom Ltd.’s hostile takeover of Qualcomm Inc.

That move sent a clear signal to overseas investors that any deal that could give China an edge in critical technology will be swatted down in the name of national security.

Implementation of the new CFIUS law may take up to 18 months because separate bills in each chamber of Congress need to be reconciled, and the government needs to write regulations, according to Derek Scissors, a China analyst at the American Enterprise Institute in Washington.

Asked about the timing of legislation, Mnuchin declined to provide a specific timeline but said the administration “will have a pilot program up and running quickly that will address critical technology.” The Treasury chief also acknowledged that the executive branch depends on the legislation for more resources and funding for implementation.

“The new congressional legislation strengthening CFIUS could still have a chilling effect on Chinese investment depending on how it is implemented,” said Robert Kahn, a professor at American University who previously worked at the International Monetary Fund.

Source:BLOOMBERG  By Saleha Mohsin and  Jenny Leonard  ,Justin Sink