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CFIUS weekly news roundup: June 1

June 1, 2018 by in News

It’s all about the trade war this week. The administration followed through on its threat to impose a 25% tariff on steel and a 10% tariff on aluminum products from EU, Canada and Mexico after negotiations with each failed to result in new deals. It would be an understatement to say that our trading partners were angry, both because of the steel and aluminum tariffs and because of the administration’s announced intention to place additional tariffs on auto imports.

Mexico and EU immediately announced their plans to retaliate by placing tariffs on a number of U.S. agricultural products, as well as meat, bourbon and a handful of other goods. Harley-Davidson will also get whacked, and the struggling outlaw-branded motorcycle manufacturer is not happy about it. Separately, Canada responded with reciprocal tariffs of 25% on U.S. steel and 10% on U.S. aluminum. Canadian Prime Minister Justin Trudeau said, “The American administration has made a decision today that we deplore . . . they don’t quite understand this is going to harm Americans.”

Separately, little more than a week after placing the trade war with China “on hold,” the administration announced that it was following through with tariffs on $50 billion of Chinese imports, focusing now on high-technology goods that are part of China’s “Made in China 2025” state sponsorship program. The administration is also restricting Chinese investments in the U.S. tech sector, continuing to pursue WTO litigation against China, and calling for China to remove “all of its many trade barriers, including non-monetary trade barriers, which make it both difficult and unfair to do business there.”

Finally—yes, there’s more—the administration launched a trade probe relating to automobile imports, under national security pretenses, that could result in tariffs on the global automotive industry.

As we discussed last week when the administration was criticized for going soft on Chinese telecom giant ZTE (over bipartisan objections in Congress and against the unanimous recommendation of national security officials), there are a number of tactics at the administration’s disposal to put trade pressure on another country, and it appears that the administration is zeroing in on tech goods from China as the real trade battleground.

For its part, China, which was set to return to the negotiating table with the U.S. this weekend, is reconsidering whether to attend those discussions. Hard-line anti-American forces within China are emboldened, and China continues to court our erstwhile allies to coordinate responses to American demands across the globe. Despite the surprise, the official Chinese position was measured, ranging from something along the lines of “Trump likes to pretend to be unpredictable” to “We expected this” to “We don’t want a trade war but will fight one if we must.”

The view at this firm is that China has recognized an opportunity to appear publicly as the calm and rational global trading partner, an indirect diplomatic strategy that contrasts it against a U.S. president who has angered the world through rash and unpredictable actions. This provides other nations domestic political cover to cut more favorable trade deals with China, whereas world political leaders whose populations feel insulted or coerced by U.S. leadership are now less free to accommodate U.S. positions in trade negotiations (see, for example, the upcoming Mexican elections).

The conservative-leaning Wall Street Journal (which is owned by the Fox News owner, Rupert Murdoch) published this succinct analysis of the President’s recent trade actions. Spoiler alert: they’re not impressed. By their analysis, he has favored quotas (which raise prices but send the additional revenue to the foreign company) over tariffs (which provide taxpayers additional revenues instead of the foreign supplier); targeted our allies instead more than our adversaries; and focused his efforts on old technologies like steel, coal and automobiles at the expense of future-oriented technologies (although his recent moves, discussed above, against the Chinese tech sector would seem to blunt this last criticism).

The U.S. Chamber of Commerce warned that the tariffs could threaten up to 2.6 million U.S. jobs, while other analysts believe the tariffs on China will ultimately rebound worse back on U.S. firms. Republicans and business groups are incensed at the widening of the trade war to include automobiles, and there is plenty of analysis criticizing the general execution of whatever strategy the administration is pursuing.  

The view here is that there is considerable risk in aggressively challenging our allies at the same time we are seeking to re-engineer our trade relationship with China. Our allies know that China has a huge and growing economy, and China is working hard to curry favor with them. Allies who don’t like living under the threat of unpredictable aggression by Washington may naturally deepen their trade ties with China to counterbalance the effects of U.S. aggression. It bears mentioning that the general discord and strained relations between Washington and Europe align perfectly with Vladimir Putin’s goal to divide the two.

It’s illustrative and noteworthy that a significant aim of the congressional CFIUS reform effort is to harmonize our national security investment review processes with those of allied nations. Just recently, stories surfaced that, facing tougher scrutiny in the U.S., China has increasingly sought to buy emerging technologies from other countries, away from the U.S. regulatory apparatus. Meanwhile, Canada recently blocked the acquisition of its third-largest construction company, Aecon, by a Chinese government-owned purchaser on national security grounds, and China responded that the decision was not “good news for the investment cooperation between China and Canada.”  What’s striking about that quote is that it seems to acknowledge that outbound investment is a pillar of Chinese diplomatic strategy.

Similarly, striking details emerged this week about Australia’s rejection two years ago of Chinese-government-owned State Grid’s bid for Ausgrid, Australia’s largest energy grid. Of particular note was how actively the Australian national security community accounted for American interests when intervening in the deal, once they woke up to the risks. In recent years, Chinese investment in Australia has fallen, in part as a result of much tighter controls over investment in Australian critical infrastructure. Relatedly, after Australia blocked the sale to State Grid, a new sale proceeded at a 20% lower price (approx. $20 billion, rather than State Grid’s $25 billion offer), again underscoring that state-directed outbound investment appears to be a pillar of Chinese diplomatic and security strategies.

One can only wonder if the national security apparatuses of our allies will remain as responsive to U.S. interests if our position on trade issues isolates the U.S. and alienates our allies—or, worse, causes them to rebalance their relationships with our adversaries (which, as we’ve discussed before, is already happening). In that regard, the administration’s continued blending of trade and national security issues may end up becoming a self-fulfilling prophecy.

This is to say, caution, nuance, a detailed understanding of our trade and strategic relationships and a coordinated strategy are each absolutely necessary before we can successfully engage in significant policy changes. Lacking that, don’t have high expectations for the outcomes.

More next week.

One final PSA: Reboot your home router. The FBI believes Russians infected it with malware. Best if you can figure out how to do a factory reset (which usually involves holding the reset button down for 10 or 20 seconds).

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