President Donald Trump de-escalated a confrontation with China on Wednesday, dropping plans to impose strict limits on Chinese investment in U.S. technology companies and instead urging Congress to strengthen existing laws that apply to all foreign countries.
The administration’s more conciliatory stance raised at least the possibility that the two sides could work toward a negotiated end to the punishing tariffs they’re set to impose on each other’s goods beginning July 6. And it fueled a rally in financial markets, which had been reeling on fears of an escalating trade war, before stocks fell later in the day.
It was unclear whether the Trump team’s policy shift would lead to a truce between the world’s two biggest economies or whether any formal negotiations might soon begin. But the top White House economic adviser said the two sides are “in communication.” And analysts said they took heart that the administration had offered some semblance of an olive branch to Beijing.
“It seems like this move is being undertaken with the goal of coming to a resolution ultimately on the trade policy issues the U.S. has with China,” said Stephen Ezell, who manages global innovation policy at the Information Technology and Innovation Foundation.
Last month, the White House said that by the end of this week, it would announce tight new curbs on Chinese investment. The idea was to prevent state-owned or politically connected Chinese companies from buying advanced U.S. technology. Beijing is seeking such technology as part of its “Made in China 2015” initiative, a roadmap to its goal of becoming a global tech leader.
But Wednesday, the Trump administration announced a less-draconian approach: It would work with Congress to strengthen reviews of foreign investment under the existing Committee on Foreign Investment in the United States (CFIUS), led by Treasury Secretary Steven Mnuchin. CFIUS applies to all countries and its reviews are on a case-by-case basis.
“It makes eminent good sense,” said Christopher Brewster, a senior member of the CFIUS practice at Stroock & Stroock & Lavan. “Defining technology that is ‘off limits’ is an exceedingly difficult task. For this reason, broad-scale investment restrictions are a clumsy tool that inherently run the risk of being over-inclusive or under-inclusive. Using the CFIUS process is a more nuanced approach.”
The House has approved a bill to strengthen CFIUS law, and the bill will likely be considered by a House-Senate conference committee for a Senate-approved defense measure.
Trump’s top economic adviser, Larry Kudlow, told reporters the administration remains in communication with its Chinese counterparts.
“The president is unsatisfied with their response on the trade talks, so he put out there the possibility of an additional tariff measure,” Kudlow said. “The ball’s in their court. I’m always the optimist, but I have to be realistic.”
James Lewis, who studies technology policy at the Center for Strategic and International Studies, said he foresees no quick resolution to the dispute.
“Both sides are dancing around; they know a trade war is too expensive,” Lewis said. But there’s “going to be brinksmanship. The Chinese don’t want to play by the rules. We needed to start pushing back. This is going to be a long fight.”
The debate within the administration on how to deal with China had reportedly intensified — between hard-liners like Peter Navarro, a top trade adviser, and moderates led by Mnuchin who favored a less confrontational stance.
“Peter Navarro lost, and Steve Mnuchin won, and we ended up with what’s actually a good policy,” said Rod Hunter, a lawyer who served as an economic official on the National Security Council in President George W. Bush’s administration.
But Hunter noted that Trump’s approach to policymaking is so mercurial that it’s impossible to say whether the conciliatory approach will last or whether the Navarro camp will stage a comeback.
It’s difficult, Hunter said, “to figure out who’s got their hands on the steering wheel.”
Mnuchin told reporters that the differences among Trump’s advisers had been overblown. He said there was unanimous backing for the new approach when it was presented to the president for his final approval earlier this week.
“At the end of the day, all the president’s advisers were 100 percent unanimous when we sat down with the president,” Mnuchin said.