SinoTech: Trump Announces New Tariffs, Mulls Restrictions on Chinese Investment

By David Stanton, Wenqing Zhao
Wednesday, June 27, 2018, 4:35 PM

President Trump has apparently decided to limit Chinese investment in American tech companies through congressional reform to the Committee on Foreign Investment in the United States (CFIUS), rather than pursue more aggressive restrictions through executive action under the International Emergency Economic Powers Act (IEEPA). Reports earlier this week indicated that Trump might instruct the Treasury Department to block any companies with at least 25 percent Chinese ownership from buying U.S. firms with “industrially significant technology” under the IEEPA, but more recent statements suggest that he will instead rely on the Foreign Investment Risk Review Modernization Act (FIRRMA) to target Chinese investment. FIRRMA is working its way through Congress, where the latest Senate and House versions differ in several respects. The Senate is seeking to include it as part of this year’s National Defense Authorization Act (NDAA), while the House on Tuesday passed a stand-alone version, 400-2.

The latest progress toward new restrictions on investment in U.S. technology comes less than two weeks after the Trump administration announced 25 percent tariffs on $50 billion in Chinese tech products. The Office of the U.S. Trade Representative stated that the first wave of those tariffs—under development since March—would target $34 billion of the $50 billion total and would come into effect on July 6, with the remaining $16 billion undergoing further notice and comment review. After China pledged to retaliate with its own $50 billion in duties, Trump directed U.S. Trade Representative Robert Lighthizer to consider an additional $200 billion in tariffs against Chinese imports, albeit at a lower rate of 10 percent.

President Xi Jinping promised at a conference with American and European executives last week that China would “punch back” against U.S. tariffs, reflecting a hardened stance against Trump administration antagonism. China's Ministry of Commerce declared that it would “impose tariffs with the same size and force” as the White House’s $50 billion opening salvo in order to “strike back to defend the interest of our country and its people.” Like the Trump administration, the Chinese Commerce Ministry’s plan is to begin on July 6 with tariffs against $34 billion of an overall $50 billion in targeted goods. Chinese trade officials have consistently threatened tit-for-tat retaliation against American trade actions, but they will soon run out of American imports to levy tariffs against, though they have many other strings to pull. But Chinese officials have also recently begun to downplay "Made in China 2025," their ambitious industrial policy to rapidly modernize the national economy that has become a lightning rod for American trade hawks. Bloomberg reports that some in the Chinese government are even second-guessing whether the country is prepared for an extended trade war, suggesting reexamination as the trade conflict approaches the half-year mark with no end in sight.

The Trump administration’s announcements also appeared to upset American allies in the European Union, who agreed to form a joint committee with China to strengthen the World Trade Organization against unilateral trade action. The EU and China also pledged to take further steps toward a multilateral investment agreement, though European opposition to China’s industrial and trade policies remains substantial. The EU implemented its own retaliatory tariffs against Trump’s steel and aluminum tariffs last week but has not been targeted by the administration’s tech-focused duties.

White House and Senate wrestle over ZTE deal

The White House and Senate continue to tangle over President Trump’s deal to save beleaguered Chinese telecom ZTE from a Commerce Department denial order that would prevent the company from purchasing any American components. On June 13, just hours after the White House pledged to fight any plan to block the deal, a bipartisan group of senators pushed for passage of an amendment to the NDAA that would repeal ZTE’s reprieve and prevent the executive from amending future penalties without evidence that the infringer was complying with U.S. law. Senate staffers also insisted that they be “better informed about the how’s and why’s of the ZTE deal.”

The Senate approved a version of the NDAA on June 18 that included the ZTE penalty provision by an 85-10 vote. The bill was sent to the House, which had passed its own version, without the penalty, in May. The House and the Senate will now reconcile the differences between the two bills, during which time Trump will try to persuade representatives to remove the penalty provision before final action. A conference meeting between Trump and Republican lawmakers on June 20 was overshadowed by debate about the controversial separation of immigrant children and parents along the southern border, and the two groups appeared unable to break the deadlock. Trump framed the reprieve as “part of a broader geopolitical negotiating strategy” that could help to achieve other foreign policy goals, including those concerning North Korea, and some Republican senators appeared willing to compromise to avoid undercutting Trump’s leverage with China and North Korea. Senate Democratic leader Chuck Schumer urged Republican senators not to weaken the Senate’s position on ZTE in the defense bill, however, and several prominent Republican senators remain opposed.

While ZTE recently paid the settlement fine, replaced its board and senior executives, and started working on the required escrow agreement (and its share price bounced back ahead of Trump’s Wednesday meeting), its future is still clouded by uncertainty. U.S. Commerce Secretary Wilbur Ross recently promised to assess ZTE’s espionage threat, and, despite pushing for a reprieve, the White House seemed to support Congress’s attempt to bar ZTE from doing business with the federal government.

In Other News

  • Cybersecurity firm Symantec announced last week that it had detected a “wide-ranging” cyber-espionage campaign primarily targeting “satellite, telecoms, and defense companies” in the U.S. and Southeast Asia. Symantec pinned the attacks on China-based hacking outfit Thrip. Several U.S. representatives, including John Ratcliffe, chairman of the Homeland Security Subcommittee on Cybersecurity and Infrastructure Protection, expressed concern that the attack or similar instances could compromise U.S. communications security.
  • A bipartisan group of five American lawmakers urged Google to reevaluate the extent of its collaboration with Chinese telecom company Huawei in a public letter published last week. Responding to Google’s recent cancellation of an AI partnership agreement with the Defense Department, the letter expressed disappointment that “Google apparently is more willing to support the Chinese Communist Party than the U.S. military.” The letter came a day after a separate but similarly bipartisan group of 26 lawmakers asked Education Secretary Betsy DeVos to look into Huawei’s involvement with American research institutions by compelling federally funded universities to hand over contracts and partnerships arranged with Huawei. Sen. Marco Rubio, a signatory to both letters, told attendees at a national security conference that the government had also been privately warning companies that collaboration with Huawei and ZTE could risk security vulnerabilities in their products.
  • Ford China and Chinese tech giant Baidu announced a strategic partnership on June 26 to cooperate in the areas of artificial intelligence, connectivity and digital marketing. They will work together on in-vehicle digital services incorporating Baidu’s DuerOS conversational AI platform with features such as voice recognition and natural language understanding. A joint connectivity lab will also be built to investigate innovation opportunities and explore cloud computing.

Analysis & Commentary

Elsewhere on Lawfare, Nicholas Weaver outlines how Chinese supply-chain attacks could threaten U.S. security. In an Aegis Series paper, Tim Maurer calls for Sino-U.S. cooperation to defend the global financial system against emerging threats. Bobby Chesney analyzes the NDAA’s push toward a more active cyber-deterrence posture and discusses the act’s provision for a Cyberspace Solarium Commission that would comprehensively analyze U.S. cyber policy. Garrett Hinck reviews recent private-sector attempts to forge norms for cyberspace in the context of persistent intergovernmental failure. Last week’s Cyberlaw Podcast touches on the Senate’s attempts to stymie the ZTE deal (at 1:15), CFIUS reform (8:15), and renewed attacks by Chinese hackers (14:45).

At the Center for Strategic and International Studies, James Andrew Lewis argues that aggressive attempts to drive ZTE out of business would likely backfire. At New America, Jeffrey Ding and Paul Triolo have partially translated and, with Samm Sacks, have analyzed the Standardization Administration of China’s January 2018 White Paper on Artificial Intelligence Standardization. At the Council on Foreign Relations, Brad Setser asks “What Would Happen If China Started Selling Off Its Treasury Portfolio?” For more audio analysis, check out last week’s episode of Trade Guys at CSIS, or Monday's CFR roundtable, featuring Elizabeth Economy and Brad Setser.

At Foreign Policy, Amy Cheng, Humza Jilani, Keith Johnson and Amy Mackinnon have posted a fantastic summary of American tariffs and international retaliation. In the Wall Street Journal, Justin Lahart suggests that the early indicators of economic hurt caused by the trade conflict may already be arriving. In the New York Times, Jim Tankersley and Cade Metz write that President Trump’s emphasis on protecting emerging tech companies from foreign acquisition may ignore the conditions necessary for those companies to grow. In Bloomberg, Xiaoqing Pi and Miao Han [DS2] point out that the Chinese government had agreed to increase imports of several of the goods targeted in the Trump administration’s $50 billion list during last month’s now-abandoned détente. In the Atlantic, Samm Sacks details China’s attempts to export its "cyber sovereignty" model abroad.