Just days before tariffs on an additional $34 billion worth of Chinese goods--and the nation's retaliatory tariffs on American products such as soybeans--are set to take effect on July 6, news broke that the Trump administration was mulling new restrictions on Chinese investment stateside. That latter bit of saber rattling would seem to be far less threatening.

It was reported earlier this week that the Treasury Department would be crafting rules intended to block firms with at least 25 percent ownership from buying companies involved in "industrially significant" technology, including robotics, maritime and electrical equipment, and biomedicine, according to a recent article in The Wall Street Journal. Trump has also planned to levy new export controls, potentially limiting American companies from selling to the Chinese market. The aim of these policies would be to clamp down on what the White House sees as China's shady trade practices, including alleged intellectual property theft.

In the days since, the administration is said to be adopting a softer tone on restrictions. In a statement on Wednesday, Trump said that he would back a bipartisan bill that would expand the authority of an existing body, the Committee on Foreign Investment in the United States, or CFIUS, to investigate so-called "predatory investment practices" on the part of all foreign countries. The organization already reviews foreign investments for national security threats, and the legislation would merely give it more power to review investments in which foreign companies hold minority stakes. It would also allow it to examine real estate transactions near military bases and other sensitive locations. 

Of course, any new restrictions on China come with caveats for American firms.

"This to my view is the worst-case scenario," says Dean Baker, the co-director of the non-partisan Center for Economic and Policy Research, speaking by phone earlier this week. In particular, Baker notes that small businesses and startups, including those that depend on Chinese partners for fiscal support, could get pinched in the months to come. "The U.S. economy has become very intertwined with China, and if you have many companies unable to deal with their partners abroad, it's throwing a big monkey wrench in their plans," he adds.

To his point, Chinese venture capital firms have invested billions in American startups in recent years: Between 2013 and 2015, the total value of funding rounds that Chinese investors participated in jumped from $1.17 billion to $11.52 billion, according to data from CB Insights. The latter figure represented around 16 percent of all VC funding in the U.S. in 2015, flowing into technology companies that focus on everything from artificial intelligence to virtual and augmented reality.

The Information Technology Industry Council, or ITIC, a trade group that represents the interests of tech behemoths such as Amazon, Google, and Apple, echoed Baker's concerns in a statement earlier this week, when it appeared that the president would be imposing restrictions of his own. "To the extent the administration does take action, we urge it to carefully consider the consequences and the end goal, commit to transparency, an open comment period, and narrowly tailored restrictions on genuine, concrete national security threats," a spokesperson tells Inc.

A Drop in the Bucket

New restrictions in the trade relationship with China come as dozens of U.S. firms, from semiconductor design houses to mom-and-pop retailers, already fear the ripple effects of recently introduced, tit-for-tat tariffs. Indeed, businesses that pay to import component parts or other products from China are likely to see added costs that could hurt the bottom line. Meanwhile, anti-American sentiment in Beijing could take the shine off American brands such as Apple, and additional red tape from China's government could drive out those with a physical presence abroad, analysts suggest. "Tech companies probably have the most to worry about [in a trade war]," noted Adams Lee, an attorney with the international law firm Harris Bricken, in a phone call with Inc. earlier this month.

To be sure, Chinese investment in U.S. technology has declined sharply in recent months, so the impact of restricting investment could be minimal. In 2016 and 2017, the value of Chinese-involved funding rounds was cut by nearly half to just $6.2 billion--largely, as Baker suspects, because of the increasingly fraught relationship between the world's two largest economies. Meanwhile, the administration's purported rationale for restricting investment and increasing export controls holds some water: Industry trade groups including the ITIC largely agree that the theft of American intellectual property is a major issue that needs solving and soon. The Commission on the Theft of American Intellectual Property has estimated that annual costs from the losses of IP range from $225 billion to $600 billion, at least some of which is attributable to China.

Still, analysts warn that the proposed tools--including additional tariffs, investment restrictions, and export controls--are unlikely to move the needle. "That [IP] issue isn't going away, and in some cases, it might make it harder to get China to improve their IP protections," noted Harris Bricken's Lee. "China may be happy with the idea of conceding on tariff issues--as long as they don't have to change how they conduct their business on IP."

In the meantime, business owners are in wait-and-see mode. The bill to expand the power of the CFIUS, which would allow it to investigate foreign entities with even minority stakes in American companies, has passed the House and the Senate, but still needs to be approved in a final Congressional vote. If it isn't, Trump has warned that he would move forward in "deploying new tools" to protect American technology, though what exactly those tools might be is unclear.

Throwing out the rule book on trade--as Trump continues to do--has unintended consequences in the interim, Baker adds. "Once you get into that world, that's absolutely a nightmare for small businesses," he says. "When you create uncertainty, that's going to discourage investment in startups. We are in a full-blown trade war now, and we're starting to feel consequences."

Published on: Jun 27, 2018