April 05, 2018

Issue Brief: Trump's New Tool To Punish China Economically

By Peter Harrell

This week President Donald Trump announced that he would use a long-dormant trade policy tool, Section 301 of the 1974 Trade Act, to impose tariffs on $50 billion of Chinese imports to the U.S. But recent press reports indicate that in the coming weeks President Trump plans to use a different tool to implement new restrictions on Chinese investment in the U.S.: the International Emergency Economic Powers Act (IEEPA). Using IEEPA, long regarded as the U.S. “sanctions statute” and a tool traditionally used to counter national security rather than economic threats, to restrict Chinese investment in the U.S. raises important policy issues that the Trump administration needs to address as it develops specific investment.

These issues include scoping the specific restrictions, coordinating the new IEEPA-based restrictions with expected legislative efforts in Congress to overhaul the Committee on Foreign Investment in the United States (CFIUS), which is the existing national security review for certain foreign investments in the United States, deciding whether or not to negotiate with China over the restrictions, and ensuring that U.S. regulators have the capacity to administer the new restrictions and make adjustments and exceptions as needed.

Congress enacted IEEPA in 1977 as part of an overhaul of presidential emergency powers. The statute authorizes the president to declare a national emergency “to the national security, foreign policy, or economy” of the United States and to impose a wide variety of economic measures to address the threat. Since Jimmy Carter, American presidents have used IEEPA as the legal basis to impose sanctions on countries as diverse as Iran, Russia, Syria, and Venezuela. Presidents have never before, however, used IEEPA to impose restrictions due to the threat posed by a primarily economic competitor such as China.

When presidents have used IEEPA to impose sanctions, they have generally used IEEPA to freeze adversaries’ assets in the United States and to prohibit U.S. companies from doing business with sanctions targets. In more recent years, President Obama and President Trump have used IEEPA to craft more narrowly targeted sanctions that restrict U.S. companies from buying certain kinds of Russian and Venezuelan debt while allowing most other transactions with Russia and Venezuela. Trump is likely to use IEEPA to prohibit certain kinds of new Chinese investment in the United States and could also choose to create a review process to make exceptions to the prohibition if certain conditions are met.

While Trump’s use of IEEPA is novel, both the text and history of the statute make clear that Trump can use IEEPA to legally restrict investment from China. As he does so, Trump and his team will need to address four major policy considerations.

First, Trump needs to tailor an appropriate scope to the new investment restrictions. Trump is likely to impose restrictions on Chinese investments in U.S. sectors that China is targeting with its Made in China 2025 initiative, Beijing’s signature initiative to upgrade the Chinese economy into higher-end, higher-technology sectors, which Trump views as posing a long-term threat to the U.S. economy and to U.S. strategic dominance. Target sectors include IT, clean energy vehicles, and robots. But Trump will need to answer basic questions about the extent to which he wants to restrict U.S. investments in China in those sectors as well as Chinese investments in the United States, about how to handle Chinese minority investments in the United States, and whether investment bans in the targeted sectors will be total, or whether deals will be subject to case-by-case review. The administration has announced its intent to consult closely with U.S. industry in developing specific restrictions, which is an appropriate move given the potential that the restrictions will have significant impacts on U.S. business.

Second, Trump needs to figure out how to coordinate—or at the very least, deconflict—the new investment restrictions with ongoing legislative efforts in Congress to overhaul the Committee on Foreign Investment in the United States (CFIUS). CFIUS is the existing review process for the U.S. government to consider whether a foreign investment in the U.S. poses a national security threat. Trump has already used it to block a Chinese bid for a semiconductor firm and, more recently, Broadcom’s $117 billion bid for U.S. chip maker Qualcomm. For the past year, a bipartisan group of Senators led by Sen. John Cornyn (R-TX) has been developing legislation to expand and overhaul CFIUS, primarily with an eye to expand government oversight of Chinese investment in the United States and U.S. investments in China. Many of the investment restrictions that Trump appears to be considering implementing under IEEPA would be included in a CFIUS reform package, and Trump will need to determine how to avoid simply creating two parallel sets of restrictions on Chinese investments.

Third, Trump needs to decide what investment restrictions he will be prepared to negotiate over with China and which he will not. Trump’s March 28 announcement of amendments to the U.S.-Korea free trade agreement shows that the president is willing to negotiate over restrictions imposed on foreign trade in exchange for better terms from U.S. trading partners. China, meanwhile has signaled in recent weeks that while it will retaliate for Trump’s new trade and investment restrictions, Beijing would prefer a negotiated resolution to the trade dispute over a steadily escalating trade war.

At a basic level, Trump needs to decide whether his goal is to create leverage with China to encourage China to open its market to greater U.S. investment or if his goal is to limit China’s access to U.S. technology. Trump sees China as an inherent competitor and limits on China’s access to technology can help the U.S. maintain its technological edge. If Trump wants to encourage China to open its market, the president should implement relatively more expansive restrictions to maximize leverage but make clear that he is prepared to negotiate and quickly reduce the new restrictions if China makes appropriate concessions toward opening its market to the United States. If, however, Trump’s goal is to restrict China’s access to technology over the long term, he should keep his restrictions narrowly targeted to minimize collateral costs on U.S. business.

Finally, Trump will need to make sure that the Treasury Department has the resources it needs to implement the new restrictions, which are likely to add to the workload of an already over-burdened department. Treasury’s CFIUS workload has increased significantly in recent years and implementing new investment restrictions will increase that workload further. Trump needs to make sure that the Treasury Department has appropriate staffing and resources to implement the sanctions effectively.

Trump’s announcement of new trade and investment restrictions on China marks the start of a new, tougher line on Beijing. And Trump’s plan to use IEEPA to implement the restrictions marks the new use of a statute that has long been used for national security purposes, but not to promote a U.S. economic agenda. Over the next two months, Trump will need to answer a number of questions about his plans, which will have important implications for the future of the U.S.-China economic and strategic relationship.