US treasury limits foreign investments in tech

The new US Treasury Department program limits foreign investment in U.S. technology.

The program is largely considered to be a tool in President Trump’s arsenal in the ongoing trade war with China.

Background

The United States and China are two of the largest economies in the world. Both countries consider the other as a partner in trade and an adversary in geopolitics. Diplomatic relations between US and China was first established in 1844 with the Treaty of Wanghia. This agreement allowed the US to trade in Chinese ports. After the Qing Dynasty was overthrown, in 1911, the US recognized the legitimacy of the Republic of China (ROC) government.

US President Donald Trump has previously been a critic of China. He blamed the country for loss of jobs within the US and has often criticized the US trade deficit with China. China's trade surplus with the United States widened in 2017 while total foreign trade volume maintained rapid growth.

Experts have begun sounding the alarm about an impending trade war between US and China. Former chief executive of Hong Kong Tung Chee-hwa recently said that a trade war must be avoided. “In such a big relationship, there is bound to be disagreement, but rash action on either side will only create the environment for a very serious trade war, which is not good for any country. Patient discussion and negotiation, particularly considering the long-term prospects of the relationship, will be very important,” he said.

Analysis

The Treasury Department on Wednesday said it would soon begin imposing new limits on foreign investment in U.S. technology, giving President Trump new powers in his trade battle with China.

The restrictions, which go into effect on Nov. 10, are part of a pilot program authorized by the Foreign Investment Risk Review Modernization Act, a law passed with bipartisan support earlier this year.

It aims to give the government more power to block foreign, non-controlling investments in “critical technologies” that are considered non-public, technical information. This would include investments in companies involved in aircraft development and computer manufacturing, as well as chemical and weapons systems.

The new limitations could be interpreted broadly, as they also apply to battery manufacturing and wireless equipment.

The U.S. government has long had the power to block foreign investments in certain American companies if it deemed the investments could pose a national security threat, but the new powers would expand the government’s reach to minority, non-controlling stakes.

The new rules don’t prohibit foreign investments in U.S. companies, but they require investors to notify the government that they are seeking to take a non-controlling stake, giving the Treasury Department the opportunity to review any deal. Failing to notify the government could lead to a fine, Treasury said.

Democrats and Republicans in Congress, as well as Trump, have alleged the Chinese government uses Chinese entities to seek footholds in U.S. technology through investments and other partnerships, and the pilot program could put stricter boundaries around future deals.

The program is not “country specific,” the Treasury Department said, and would not only apply to China.

The Treasury Department is expected to launch other pilot programs as it moves to fully implement the law, though all the programs are slated to become permanent by 2020.

Trump has launched a series of economic attacks at Beijing this year, arguing that major changes need to be made to the trade relationship between the two countries. He has imposed tariffs on $250 billion in Chinese imports and threatened to go even further.

The new investment restrictions were seen as a compromise by some lawmakers, who believed Trump wanted to try to cut off all access to the United States from Chinese investors. The White House and Chinese leaders have had off-and-on talks about resolving differences, but those efforts have not led to an agreement.

Counterpoint

This pilot program implemented by the Treasury department will not be fully implemented before 2020, indicating a trial phase for the new regulations. It can also be seen as an attempt to push Chinese companies away from taking over unprofitable or strategic American organisations.

The program is an effective tool in President Trump’s arsenal in the ongoing trade war against Beijing. Chinese tech companies are rapidly expanding in size and capacity. Companies like Alibaba and Tencent are making inroads into America’s tech sector by purchasing promising start-ups and revitalising over-leveraged companies. The pilot program is intended to prevent certain Chinese companies from extending its influence over industry-defining companies in Silicon Valley.

Assessment

Our assessment is that the ongoing trade war is starting to impact the one of the most promising sectors in the American and Chinese economies. China has caught up with Silicon Valley in technology and investment volume and is excepted to surpass the famed Californian region in the next few years. We believe that the US treasury department is applying the brakes on China’s tech sector by limiting access to key US technological breakthroughs. We also feel that China will be forced to innovate for itself instead of adapting existing US technologies, as it has done in the past.