Mnuchin’s Foreign Takeover Weapon Gives Leverage Over China

  • Congress may help Treasury broaden CFIUS’s review authority
  • U.S.-China ties seen bumpy under Trump: ex-Treasury official

What Trump's Trade War with China Would Look Like

A U.S. government panel that reviews foreign takeovers of American companies could become a tool for Treasury Secretary nominee Steven Mnuchin to get tough on China.

If confirmed, Mnuchin will become head of the Committee on Foreign Investment in the United States, which reviews the national security implications of overseas investors trying to scoop up U.S. companies or operations. China was the leading source of investments reviewed by CFIUS from 2012 to 2014, accounting for almost a fifth. Any broadening of the committee’s mandate -- a push backed by representatives of both parties in Congress -- could raise protective barriers if it opens a path to reject Chinese investments.

Republican Representative Robert Pittenger of North Carolina, an early supporter of Donald Trump for the presidency, is leading an effort to determine whether the panel’s legal authority includes foreign governments using sophisticated methods to buy critical infrastructure. If the boundaries of existing national security laws don’t allow that, he may consider proposing legislation to broaden CFIUS’s mandate, according to his office.

“There may be greater, clearer understanding by the new administration to discern that we need to have better oversight of what the Chinese objectives are,” said Pittenger, who along with 20 lawmakers, including two Democrats, helped bring forth the first CFIUS review in a decade that will be completed by mid-2017.

“We need to ask if we should give CFIUS extra authority to review the proposed takeover of media, agriculture, financial assets, infrastructure -- soft power institutions that were not considered an issue during the Cold War,” he said in an interview by phone.

Tense Impasse

The U.S.-China economic relationship is at a tense impasse. President-elect Trump has accused China of carrying out unfair trade practices that hurt U.S. workers and said he wants to impose tariffs on Chinese goods. He took on the Chinese government over social media this weekend, rejecting criticism for his decision to flout diplomatic protocol by accepting a phone call from the president of Taiwan, which Beijing considers a rogue province.

In terms of economic ties, more is at stake than ever before -- Chinese foreign direct investment in America rose to a record $15.3 billion in 2015, according to Rhodium Group.

“Trump made such an issue of trade with China that it seems plausible that he will” spark a serious shift in the U.S.’s posture toward the world’s second-largest economy, said David Dollar, a former U.S. Treasury attache to Beijing during Obama’s tenure. With China’s “clear history of retaliation,” the two-way relationship “will be bumpy for a while,” he said.

Read more: Trump’s Unpredictability in Foreign Policy is Already Here

U.S. legislators are taking notice of investments from state-controlled enterprises from China, including deals such as Dalian Wanda Group Co.’s 2012 acquisition of a controlling stake in AMC Entertainment Holdings Inc.

Twenty-two House lawmakers, led by Pittenger, have sent a letter to the Treasury Department advising against allowing a firm affiliated with the Chinese government from purchasing Lattice Semiconductor Corp. in Oregon. The $1.3 billion buyout would put components critical to American military applications in the hands of a newly created private equity firm that is backed by Chinese investors, according to the letter.

Using CFIUS as a method to pivot away from China could prove difficult, said Andrew Hunter, a senior fellow at the Center for Strategic and International Studies in Washington. “It doesn’t readily lend itself to saying” that “this is one way we’re going to inflict discomfort on a specific foreign country,” he said. But how the law defines certain parts of CFIUS’s mandate will have “a huge influence on the way the process works,” Hunter said.

Muscles Flexed

CFIUS flexed its muscles last week when President Barack Obama upheld its recommendation to block a Chinese company from buying Germany’s Aixtron SE, only the third rejection in 25 years on national security grounds. Aixtron has a subsidiary in the U.S.

Shunning the Chinese could create two losers. Trump has promised to spend $550 billion fixing roads and bridges, and China would seem a natural fit to finance and build some of those projects. But CFIUS could become an impediment, which “would be a missed opportunity for both countries,” said Fred Hu, chairman of Beijing-based Primavera Capital Group.

China has seen a recent push in overseas investment as it grapples with slowing economic growth and rising overcapacity, leaving Chinese companies seeking new customers. Encouraged by the Chinese government, businesses have had an incentive to spend cash sooner rather than later: the weakening yuan.

That decline calls into question another lever Trump wanted to use against China. He promised while campaigning that he would instruct his Treasury secretary to label China a currency manipulator, even though Treasury in October in a semi-annual assessment declined to deem the country as such. Mnuchin in a Nov. 30 interview adopted a softer tone than Trump, saying the designation is an option and not a sure thing.

See a QuickTake explaining China’s shopping spree

CFIUS’s complex structure stretches across more than a dozen federal departments and agencies including Defense, State and Commerce. Companies that may be involved in a deal with a foreign company voluntarily notify CFIUS, although it can review other transactions.

Its mandate needs to be re-examined in light of increasing cyber-security attacks and a shift in how the intelligence community views such threats, according to Pittenger.

China has “utilized and exploited every opportunity possible, whether it’s currency manipulation or cyber war to their advantage,” he said. “If the Chinese are trying to acquire companies where they will gain an inroad to our economy, our infrastructure or our defense systems, then we need to be wary of it.”

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