Weaponizing Commerce: Trump, China, and CFIUS

Since U.S. President Donald Trump launched an investigation into Beijing’s unfair trade practices concerning intellectual property (IP) last August, economic relations between China and the United States have turned increasingly tense. Most of the attention has been attracted by the aluminum and steel tariffs imposed in March as well as the IP tariffs worth up to $50 billion introduced on Chinese goods. An aspect that has sometimes gone unnoticed, however, is Trump’s increasing anti-Chinese turn on U.S. industrial policy.

Over the last five years, Chinese acquisitions in the United States boomed. As reported by the Rhodium Group, during this period Chinese companies invested $116 billion in the United States, raising the overall investments in the country to $138 billion. This sharp increase has produced several concerns in Washington, leaving many questioning the real intentions of the investors and their possible connections to the Chinese government.

A good share of these investments, indeed, have been directed toward strategic sectors with a high concentration of advanced technologies. Concerns stemmed from the possibility that these acquisitions could enable China to transfer cutting-edge technologies to its own companies, reinforce its high-tech industry, and pose a significant challenge to Washington’s technological supremacy. This gloomy perspective has therefore pushed Trump’s administration to take a more assertive stance on its industrial relationship with Beijing.

Central to the reshaping of the relationship is the Committee on Foreign Investment of the United States (CFIUS), an interagency committee tasked with reviewing inbound investments for national security concerns. Among its members, CFIUS includes the heads of the Department of Treasury (who chairs it), Commerce, Energy, State, Homeland Security, Defense, and other offices. Although usually working behind closed doors, it has the power to block multibillion dollar deals if they are judged detrimental to national interests.

The first evidence of the administration’s change of approach came last September, when CFIUS did not approve the acquisition of U.S. chipmaker Lattice by Canyon Bridge, a semiconductor investment fund sponsored by a Chinese state-owned asset manager. Acting upon the committee recommendations, Trump issued an order blocking the $1.3 billion deal because of national security concerns related to the potential transfer of IP to foreign acquirer, the importance of U.S. semiconductor supply chain integrity, and the use of Lattice products by the government.

Since December, the administration made its stance even more clear regarding the high-tech industry. The National Security Strategy document released that month labeled China as a “strategic competitor”and fixed as a priority the protection of the U.S. “innovation base” from IP theft by the Chinese in order to preserve the United States’ long-term competitive advantage.

Therefore, since January, a string of interventions highlighted this new outlook. First, the deal for Moneygram, the second biggest money transfer provider globally, came under fire. The acquisition for $1.2 billion had been agreed with Ant Financial, the financial arm of Alibaba specializing in internet and mobile payments. Alex Holmes, director general of Moneygram, acknowledged the changes in the geopolitical environment as one of the reasons behind CFIUS’ refusal to give the green light. However, some congressmen noted that the deal threatened the financial data of U.S. soldiers abroad using the company’s services to send their money home.

Shortly after, CFIUS discreetly raised its voice once more when it put on hold two investments by the Chinese conglomerate HNA into U.S. hedge fund SkyBridge Capital and miner Glencore until the the buyer provided adequate information about its shareholding structure. This was a meaningful development, because as recently as 2016 the Chinese giant could carry out multibillion dollar investments in the U.S. without any opposition from CFIUS.

A month later, the committee intervened again in order to make clear that it was unlikely that it could approve the acquisition of Xcerra, a U.S. semiconductor testing company. This was quite a surprise, since Xcerra doesn’t produce any chips in itself. What might have prompted CFIUS to take that decision was the control exerted over the bidding Chinese company by Sino IC Capital, which also manages Beijing’s national semiconductor fund.

However, it must be said that the efforts against Chinese industrial infiltration have been stepped up by several bureaucratic bodies. Only a few days after the Moneygram deal collapse, Chinese smartphone manufacturer Huawei was going to announce a deal with U.S. telecom carrier AT&T, marking a breakthrough for its penetration into the U.S. market, when suddenly the partner company backed away. It seems that political pressure by Senate and House intelligence committees along with the U.S. Federal Communications Commission has been decisive. Indeed, Washington has a long record of mistrust toward Huawei and the last move appears motivated by concerns over Beijing’s espionage and presence in a strategic sector like telecommunications.

The Chicago Stock Exchange acquisition by Chongqing Casin Enterprise Group couldn’t escape scrutiny either. The Trump-appointed chairman of the U.S. Securities and Exchange Commission blocked the deal back in February, despite the approval received by CFIUS. Lack of transparency over the ownership structure and uncertainty whether the stock exchange books would be available even after the takeover played a crucial role in the decision.

Yet the most prominent chapter of this saga occurred in March, when CFIUS took some unusual steps to kill the biggest deal ever in the technology industry. Broadcom, a Singapore-based formerly U.S. tech company, offered $117 billion for the acquisition of rival Qualcomm, one of the world’s largest semiconductor manufacturers and a prominent developer in the race for the next-generation high-speed wireless network known as 5G. Before the deal was even concluded, CFIUS made clear that it might not let the acquisition go through and soon Trump, building on the committee’s decision, issued an order to block the takeover.

This is probably the most interesting case to date because it shows a shift in how CFIUS thinks about the protection of national security. In the letter sent to the companies, the committee expressed concern over the willingness of Broadcom to make the long-term investments in research and development that are needed to keep Qualcomm in a leading position on the global scale, prioritizing instead quick profits.

After all, the massive bank borrowing required for the deal did anything but assuage that concern. Against that backdrop, CFIUS warned that China would be able to fill any void left by a “hostile” Qualcomm takeover: reducing its competitiveness and its standard-setting abilities, the committee said, would have a negative impact on U.S. national interests as Chinese companies such as Huawei would finally be able to take the lead in the development of the most advanced technologies. This, of course, could bear great military implications.

To couple with this more proactive and broad approach, Republican lawmakers have introduced a bill to reinforce CFIUS’ scrutiny powers. The reform, which appears to have bipartisan backing, would expand its jurisdiction to outbound investments from U.S. companies in order to fight China’s practices of forcing foreign enterprises to share their technologies in exchange for market access. The proposed legislation has been criticized by several companies as a regulatory burden discouraging business but last year the venture capital arm of the Pentagon, investing in tech start-ups with military potential, recommended similar measures to be implemented.

Today, economic tensions between Washington and Beijing are heightening. Despite Prime Minister Li Keqiang’s latest endeavors to reassure his counterparts, the U.S. perception that Chinese trade and investment practices are unfair and harmful for national interests is highly unlikely to go away and Trump’s announcement of a new round of tariffs in late March proves that. Unless those concerns are addressed, Trump will make the U.S. market an increasingly hostile environment to Chinese penetration.