There were plenty of big developments in international trade negotiations this week, and the effort to reform CFIUS appears to be picking up speed. Here’s a summary of the big events:
The frenzied zone: At the outset of the week, Europe was beginning to come to grips with Trump’s proposed tariffs while the May 1 deadline for final decisions approached. In a midnight hour almost-reversal, the President gave himself a reprieve until June 1 to make his decision (a move any solo practitioner should enjoy) on steel and aluminum tariffs on Canada, EU and Mexico. Separately, the administration reached agreements on permanent exemptions for Argentina, South Korea and likely Australia. It was reported that an agreement was also struck with Brazil, which Brazil denied, and the talks ruptured. The dynamic with Brazil is especially worth watching, as Brazilian soy is seen as the major competitor to the U.S. soy industry. When China retaliated against U.S. steel tariffs by placing tariffs on U.S. soy, Brazil was seen as the big winner. The dramatics indicate that Brazil is deftly wielding its leverage.
“I do not think it means what you think it means.” In connection with the deferred decision on EU steel and aluminum, the U.S. demanded that EU countries adopt “voluntary export restrictions,” pursuant to which they would “voluntarily” cap their exports to the U.S. of steel and aluminum at 90% of the average of 2016 and 2017 export levels. This would enable them to escape more onerous, U.S.-imposed tariffs. Notwithstanding the extended deadline for a decision, the outlook is not so good that the sides will come together.
Next time send thirteen? While the negotiations with friendlies enjoyed (if one can call it that) a reprieve, the main event this week was in Beijing, where President Trump sent seven senior officials for formal discussions. The sheer size of the delegation, and competing views within it, signaled to some that the intention was not to find common ground with China. Some are reporting that the President himself still does not know what he would consider a “good” deal. Trade deficits, Chinese state subsidies for advanced technologies, foreign investment restrictions and forced technology transfers all appear to make the list of “must haves,” all of which, for better or worse, are central to China’s economic policies.
At the trade session, the U.S. delegation demanded that China reduce its trade surplus with the U.S. by $200 billion a year by 2020, a figure double what President Trump typically cites. The U.S. additionally—and far more importantly—demanded that Beijing drop its plan to subsidize several emerging sectors of its economy, from Artificial Intelligence to microprocessors. Essentially, the U.S. asked China to abandon its Made in China 2025 plan—the cornerstone of President Xi’s economic policy. For its part, Beijing demanded that the U.S. drop its ban on high-tech exports to ZTE, and treat Chinese investments in U.S. businesses as it would treat investments from any other nation (a near impossibility based on the very design of the Committee on Foreign Investment in the United States and the policy underpinning it).
In a very measured summation of the discussions, Xinhua News Agency, the state-run news agency of China, reported that the sides reached agreement on some issues, but that, “Both sides recognized that given that considerable differences still exist on some issues, continued hard work is required for more progress. The more hawkish China Global Times quoted a Chinese U.S. studies professor as saying, “Trade frictions were caused by unilateral actions by the US which violated international rules, and China’s previous responses were based on international rules. Although the US delegation included several hardliners, China still welcomes the communication and agreements, which shows China was sincere in avoiding a trade war.” U.S. sources were not much more optimistic about the outcome, if staking out a different perspective on the cause of the tensions.
Going into the discussions, China had signaled its willingness to wait this out. It believes its economy is strong enough to withstand the U.S. challenge, and, as we noted a month ago, President Xi Jinping is no longer subject to term limits, so he has the political flexibility, and indeed, having fostered an invigorated sense of nationalism within China, possibly even a mandate, to buck the U.S.’s demands.
We will stay tuned.
Firming up FIRRMA: Several sources are reporting that the CFIUS reform bill, the Foreign Investment Risk Review Modernization Act (FIRRMA) is gaining steam in Congress, with policy leads still hoping to advance the bill before the August recess, and in any event before the end of the year. A key sticking point has been exactly how to limit the scope of the bill to avoid sweeping every commercial transaction a technology company engages in under CFIUS jurisdiction. Treasury officials recently met with key business groups to provide guidance on the direction of the bill. There is bipartisan consensus that the current policy needs to be strengthened; at this point FIRRMA’s passage seems to be inevitable—a dangerous word in Washington—and only a question of when.
It’s all about AI: A great piece by the Financial Times, the first in a series of reports about AI, describes the competition between the U.S. and China in the race to dominate AI. While the discussions about steel tariffs and export restrictions dominate the headlines, the real action is playing out at the bleeding edge: Beijing is aggressively funding a state-sponsored AI initiative, while the U.S. private sector has a huge head start on all other players in the field. China’s ready access to huge sources of data (via its massive population) and its political freedom to collect data on its citizens, are helping it close the gap. The piece includes a juicy quote from Vladimir Putin on the subject, “Whoever becomes the leader in this sphere will become the ruler of the world.”
History, schmistery: The furor that sparked the last round of CFIUS reform came when Dubai Ports World, a UAE government-owned company, sought to take over management of six major U.S. ports. The deal was originally approved, then, after the controversy caught attention, DPW abandoned the transaction. That transaction in 2006 prompted the Foreign Investment and National Security Act of 2007, the current CFIUS authorization statute. While less causally connected to the current CFIUS reform effort, it’s noteworthy that Chinese government-owned COSCO Shipping Holdings is now in discussions with CFIUS to carve out the Long Beach Port from its proposed acquisition of Orient Overseas International Lines.
Not-Quite Live Fire: A team of NATO participants took the top prize at Locked Shields 2018, the world’s largest “live-fire” cyber attack exercise, which challenges participants to respond in countering high-intensity attacks on a fictitious country’s IT systems and critical infrastructure networks.