Trump Administration Weighs Economic Escalation Against China

Source: By Alan Rappeport and Ana Swanson, New York Times • Posted: Thursday, October 10, 2019

The Trump administration is considering ways to inflict more economic pain on Beijing, including limiting American investment in Chinese companies.
Roman Pilipey/EPA, via Shutterstock

WASHINGTON — Trump administration officials are weighing a range of options that could inflict additional economic pain on China as the United States continues looking for ways to force Beijing to change longstanding practices that have put American companies at a disadvantage.

The ideas under consideration would move the White House’s negotiating tool of choice beyond tariffs toward limiting China’s access to American capital markets and imposing greater scrutiny on its companies, according to people familiar with the discussions.

Administration officials, including members of the National Security Council, have begun pressing the Securities and Exchange Commission to tighten its checks on Chinese firms. They are also looking for ways to reduce the exposure of American retirement funds to certain Chinese companies.

Many of those efforts have been proceeding independently from the trade talks — which resume again this week — and are fueled by longer-term considerations of China’s economic and security threats. Some White House advisers now view those options as an additional lever to force China to make the kinds of deep economic concessions that have so far proved elusive in the talks, which have dragged on for more than a year.

Top-level officials from both countries will convene on Thursday for their 13th round of trade negotiations. They are expected to discuss proposals for a somewhat limited trade deal that would address some of President Trump’s criticisms of China’s economic practices but still be acceptable to Beijing.

Some administration officials have been hopeful that a deal will lock in more intellectual property protections for American companies and provide those firms with greater access to Chinese markets. They also want to avoid further tariffs on Chinese goods that have begun to weigh on American consumers.

If China makes sufficient concessions, some in the administration are willing to roll back a portion of the tariffs that Mr. Trump has placed on more than $360 billion of Chinese goods, people familiar with the discussions said. They may also approve licenses that would allow some companies to sell nonsensitive goods to the Chinese telecom provider Huawei, which has been blacklisted from buying American products.

But China has resisted many of the administration’s demands to make more transformative changes to the way it runs its economy. Chinese officials have come to Washington this week eager to settle on a narrow deal that would involve tariff reductions in exchange for a resumption of Chinese purchases of American food. They appear unlikely to agree to the administration’s longstanding demands that Beijing limit its subsidies to Chinese firms, change its policies surrounding the treatment of data or make other structural changes, people familiar with the negotiations said.

The potential for such a limited agreement has fueled private deliberations within the White House on options for escalating economic pressure on China.

Officials have held meetings in recent weeks to consider escalation options if the current round of negotiations fails to address the administration’s primary concerns. Mr. Trump’s top economic advisers have publicly played down the discussions, which have centered on tightening scrutiny of Chinese companies listed on American stock exchanges and limiting the direct exposure of government-run retirement funds to China.

Larry Kudlow, the director of the National Economic Council, acknowledged on Tuesday that the administration was looking for ways to protect Americans who were investing in Chinese companies.

“We’ve opened up a study group to take a look at it,” Mr. Kudlow said on the Fox Business Network.

But the options under consideration go further than that. According to a memo circulated within the White House and reviewed by The New York Times, the administration is studying a menu of actions that, if carried out, would most likely rattle the Chinese government.

The memo was drafted by Michael Pillsbury, a China scholar at the Hudson Institute and an outside adviser to the White House. It proposes holding Chinese companies and their employees criminally liable for financial disclosure violations, broadening the criteria that could get prominent Chinese companies blacklisted in the United States and blocking public and private pension funds and university endowments from certain Chinese investments.

Other options go beyond financial scrutiny of Chinese companies. The memo describes the possibility of fostering deeper ties between the United States and Taiwan and disrupting the flow of capital between Hong Kong and mainland China if it is determined that Hong Kong’s autonomy is not being respected.

It also lays out legislation in Congress, which Mr. Trump has yet to endorse, that would impose sanctions on China for activity in contested areas of the South China Sea and crack down on Chinese-funded Confucius Institutes at American universities.

Mr. Pillsbury declined to comment on his conversations with the White House but acknowledged that he had been analyzing such possibilities for a coming study on China strategy for the Hudson Institute.

“It appears that tariffs alone are not enough, but we also need to meet some of the Chinese demands to get the kind of deal the president wants,” Mr. Pillsbury said.

A White House spokesman declined to comment.

Mr. Trump’s tariffs have already pushed some companies to move their operations out of China. But the raft of new investment restrictions and export controls that the administration is mulling would further sever supply chains and discourage financial integration between the countries, potentially to the detriment of financial markets.

On Monday, the White House clamped down on Chinese firms it accused of human rights violations by adding eight companies and 20 government organizations to an entity list that will prevent them from buying American products. On Tuesday, the State Department announced visa restrictions for Chinese officials allegedly involved in the detention and abuse of Muslim minorities.

An array of initiatives related to American capital markets and investments made by retirement funds in Chinese entities are also under consideration.

The most advanced discussions have centered on the Thrift Savings Plan, the retirement plan for federal employees and the military. As of next year, that plan, which holds nearly $50 billion in assets, is expected to begin investing in an index fund that includes more Chinese and Russian companies, as part of an effort to diversify its exposure.

The index fund includes companies that the United States government has imposed sanctions on — including Hangzhou Hikvision Digital Technology, which was among the companies blacklisted on Monday. It also includes AviChina Industry & Technology, an affiliate of China’s major military aircraft and weapons manufacturer; ZTE, which was hit with sanctions for providing technology to North Korea and Iran; and several Russian companies that the Treasury Department’s Office of Foreign Assets Control has put under sanctions.

Officials have also been discussing efforts to close loopholes that give Chinese companies access to American capital markets with less stringent disclosure requirements than American firms or those from other countries.

Chinese law requires the records of companies based in China to be kept there, and restricts the kind of documentation that auditors can transfer out of the country. The rules mean that hundreds of Chinese firms, with a collective market capitalization of more than $1 trillion, have received looser oversight than companies in other jurisdictions, according to the Securities and Exchange Commission.

A bipartisan group of senators has introduced legislation that would force Chinese companies to comply with S.E.C. disclosure regulations or be delisted from American exchanges in three years. White House officials have debated throwing their support behind the bill, but several officials, including Mr. Kudlow and Treasury Secretary Steven Mnuchin, have opposed delisting as a draconian option that could throw American stock markets into turmoil.

“Delisting is not on the table,” Mr. Kudlow told reporters on Monday. He said the administration was responding to complaints to the commission about a lack of transparency and compliance, “but we’re very early in our deliberations.”

Elizabeth Economy, the director for Asia studies at the Council on Foreign Relations, said that addressing the lack of compliance among Chinese companies was “overdue” but that a solution would ideally be negotiated between Chinese companies and the S.E.C.

“Nobody benefits from a mass delisting of Chinese companies on U.S. stock exchanges,” Ms. Economy said.

Henrietta Treyz, the director of economic policy at Veda Partners, outlined the extensive array of economic weapons at Mr. Trump’s disposal for investors this year. She said she would not be surprised if the S.E.C. stepped up scrutiny of Chinese firms or if the United States imposed penalties on China’s electronic payments systems, such as Alipay, on national security grounds.

Such moves could be far more severe than the tariffs on $550 billion of Chinese imports that the United States will have imposed by the end of the year, leading to a decoupling not just of the American and Chinese economies but of the financial sector as well.

“Tariffs are just a tax, a cost of doing business, but those costs can be digested by passing costs on to consumers or squeezing margins or diversifying your end consumer,” Ms. Treyz said. “If you’re no longer allowed to ship or buy products from Huawei or other entity list companies, you’ve shut out an entire pipeline of access, not to mention lost 1.3 billion potential customers in China.”