WSJ: US Retreats From Strict Limits on Chinese Investment

The Wall Street Journal: President Donald Trump backed away from plans to create tough new restrictions on Chinese investments in the U.S. and U.S. technology exports to China, defusing one fight with Beijing as American business officials try to head off a looming battle over tariffs.

The White House opted for a less confrontational approach with the U.S. economic rival and closer cooperation with Congress. The strategy was hotly debated within the administration for several days leading up to the decision, said administration officials. Among the factors in Mr. Trump’s decision: his own reservations about discouraging investment in the U.S. and his pique with a Wall Street Journal article reporting that the administration was moving toward a crackdown on China, the officials said.

China experts say the White House decision to back away from a fight on investments and U.S. exports could provide an opening for renewed negotiations. With a July 6 deadline for tariffs approaching, prominent U.S. business executives are trying to ease the way for new discussions between Treasury Secretary Steven Mnuchin and China’s top economic envoy, Liu He.

Among those urging talks is former Treasury Secretary Henry Paulson, who used to be Mr. Mnuchin’s boss at Goldman Sachs Group Inc. and meets regularly with Mr. Liu. Blackstone Group Chief Executive Stephen Schwarzman is also acting as a back channel between the two governments, said people familiar with the discussions.

For now, no negotiations are planned before the deadline when the White House will impose the first round of tariffs on $34 billion of Chinese imports. Beijing says it will retaliate dollar for dollar.

Chinese President Xi Jinping has instructed various levels of government to prepare for a trade war, said Chinese officials. Northeastern provinces of Heilongjiang and Jilin, for instance, are stepping up efforts to encourage farmers to grow more soybeans—one of the biggest U.S. exports to China that would be subject to punitive Chinese levies.

The Trump administration has complained that Beijing is forcing U.S. companies to transfer technology to Chinese firms. It has tried to use trade and investment measures to prevent China from advancing its goal of becoming a world leader in industries such as information technology, aerospace, electric vehicles and biotechnology.

The White House said on May 29 it would go through with twin plans to use new investment restrictions and U.S. export controls against China and Mr. Trump’s advisers were preparing to move forward with the policies. But Mr. Mnuchin prevailed in a decision this week to rely on existing authorities to restrain Chinese investment into U.S. high-tech industries.

Mr. Trump was angered by news stories, particularly a Wall Street Journal article on Sunday, saying the administration was moving ahead with separate investment restrictions aimed at China. The article was based on interviews with administration officials from agencies taking differing views on the investment question, but some in the administration say Mr. Mnuchin viewed it as a leak aimed at pressuring Mr. Trump to make a decision Mr. Mnuchin opposed.

On Monday, Mr. Trump told Mr. Mnuchin to “push back” on the reports and that he wasn’t “leaning in that direction,” according to a White House official. In a subsequent tweet, Mr. Mnuchin called the articles “fake news.” During the day, the stock market fell sharply, providing additional impetus to ease off on China, said individuals familiar with the administration’s thinking. “Those leaks were not helpful to the markets or not helpful to the process,” Mr. Mnuchin said on CNBC.

Instead of creating new investment restrictions, the White House said it will continue to rely on an interagency group, the Committee on Foreign Investment in the U.S., or CFIUS, which screens foreign investments to see if they endanger national security. As part of this, the administration is throwing its support behind plans in Congress to widen the powers of CFIUS.

Mr. Trump punted as well on toughening export controls on Beijing. The White House had planned to announce new policies by Saturday. Instead, the White House asked the Commerce Department to study “issues related to the transfer of export of critical technologies,” with no date to report its findings.

Mr. Mnuchin sought to play down U.S. tensions with China. “Our objective is not to single out China or treat them differently,” Mr. Mnuchin said at a Treasury briefing. “We have the necessary tools to protect U.S. investments, on the one hand, to encourage an open investment system.” The reversal was greeted with relief in Beijing, said Chinese officials, who said they saw no immediate need to respond.

Two weeks ago, administration officials met privately in the White House’s Situation Room to consider options. Discussions broke down along familiar lines, with hard-line trade hawks, including White House trade adviser Peter Navarro, calling for a tough approach on investments, and others calling for a softer approach. Mr. Mnuchin tried to steer the advisers toward a consensus recommendation that aides could take to the president.

One problem with the hard-line approach was that the investment restriction plan called for using the International Emergency Economic Powers Act of 1977, or IEEPA, which gives the president broad authority in the case of an “unusual and extraordinary threat,” said people familiar with the internal debate. The law has been widely used for sanctions over terrorist acts and using it in a trade dispute could be seen as overkill.

It also was difficult to figure out how to apply the law to broad areas of business like artificial intelligence or biotechnology without hitting products that are far from the cutting edge. “There’s a clear challenge,” an official said. “There’s not a way to design a system without another series of loopholes that are easy to exploit.”

Mr. Trump had qualms about striking China too hard with investment restrictions, for fear it could dampen overall investment into the U.S. and might be hard to implement, U.S. officials said. The White House also faced pressure from lawmakers not to strike with aggressive investment curbs. With a bill to strengthen CFIUS making its way through Congress, lawmakers lobbied the administration against creating an entirely separate structure for blocking investments. “I’ve been talking to Secretary Mnuchin about this for quite some time,” said Senate Majority Whip John Cornyn, a Texas Republican. “It might be confusing to people to do both.”

The White House has been dealing with a rebellion among lawmakers on other trade issues. On June 19, the Senate rebuffed Mr. Trump by voting, 85-10, to reinstate a ban on selling U.S. parts to Chinese telecommunications company ZTE Corp. Lawmakers also have been pouring on criticism of Mr. Trump’s tariffs on steel imports from Canada the European Union and other allies, which prompted counter-retaliation from those nations.

Rather than fight with Congress, Mr. Trump decided to embrace a strengthened CFIUS, which would apply to China and other nations. Shortly before he made his decision in a White House meeting on Tuesday, the House voted 400-2 for the CFIUS bill.

The fight over China policy is far from settled. Democratic Minority Leader Chuck Schumer said the investment-restriction decision showed Mr. Trump didn’t have the stomach for a China fight. “Once again the president blinked and President Xi is outfoxing him,” said the New York Democrat.

Mr. Trump’s advisers say one thing that can get Mr. Trump to change direction and take a tougher approach is being seen as weak on China.