Josh Rogin - Chaos Under Heaven

Two decades of China’s bad behavior—stealing intellectual property, spying, hacking, and attacking US industries—had made it harder and harder to defend the pro-business position. Xi was committed to a military-civil fusion strategy that obliterated the already thin line between Chinese firms and the People’s Liberation Army. Under Chinese law, any Chinese company could be compelled to help the government and hand over its data at any time. Chinese acquisitions were entering new sectors so fast, nobody could keep track. And the technologies Chinese companies were scooping up here were sure to feed into the CCP’s repression and military machine at home.

Not all Chinese investment was considered bad, of course—it’s just that the rules were written for a long-ago era and new technologies posed new national security challenges that nobody could have anticipated, but that China was certain to exploit. The technology had outpaced the policy.

The body in charge of auditing Chinese investments to identify national security concerns—the Committee on Foreign Investment in the United States (CFIUS)—was operating on laws and rules designed for a past era. CFIUS had nine member agencies, including the State Department, the Defense Department, the Justice Department, and so on. These agencies often had competing interests and were focused on different parts of the issue. If it were to stand any chance of meeting the threat, CFIUS needed new marching orders, and it was going to be a fight over who would get to write them.

The drive to reform the CFIUS law in Congress began before Trump’s election in 2016, when Senator John Cornyn (R-TX) tasked one of his senior intelligence staffers, Dave Hanke, to start a process to write a new law. Cornyn, a member of the intelligence committee and GOP Senate leadership at the time, had long been interested in China and had pushed for a more hawkish approach. He used his seniority to take a leadership role on CFIUS reform, and that led to tougher restrictions than otherwise would have resulted. Hanke began convening dozens of meetings and briefings with congressional offices, government officials, intelligence community representatives, business stakeholders, and anyone else he could think of. They soon realized that foreign acquisitions of American companies were only one part of the country’s vulnerability to malign Chinese economic influence.

For one thing, the Chinese government forced American firms to form joint ventures with Chinese firms in order to secure access to the Chinese market. Those Chinese firms routinely stole the US companies’ intellectual property and then used it against them, first inside China and then everywhere else. On top of that, there was a huge problem with the United States’ export control regime, which wasn’t set up to manage emerging technologies that couldn’t have been conceived when the rules were written. The high-tech items the United States was exporting to China often were being used for military purposes; many of these products simply had never been restricted from export because they hadn’t existed when the rules had been written.

The Treasury Department under Obama didn’t want to come to the table. They believed that revisiting the CFIUS guidelines would end up expanding the committee’s jurisdiction endlessly and giving the Treasury Department endless work to do. In the House and Senate, moreover, the financial services and banking committees viewed the very idea of CFIUS reform as an encroachment by the national security folks on the American business community and their interests. “We realized along the way that our opinions and conclusions were not shared by key committees and even key agencies,” Hanke recalled. “The financial services guys were looking out for their interests. This is the beauty and also the weakness of capitalism.”

After Trump was elected and Steven Mnuchin—a former investment banker who was as pro-business as they came—was sworn in at Treasury, things changed. CFIUS reform suddenly gained traction, with Mnuchin’s support. For anyone who prized America’s national security over its businesses’ bottom lines, however, his involvement was an ominous sign.

Cornyn convened a meeting in his office and invited Mnuchin, Senate Banking Committee chairman Mike Crapo (R-ID), and then House Financial Services Committee chairman Jeb Hensarling (R-TX). He knew any reform would need the agreement of these three figures, and the strategy was to get them bought into the process early. These lawmakers weren’t particularly involved in the China issue, and to the extent they were, it was from the economic and business perspective. They were in the position of key gatekeepers simply because the reform bill would have to go through their committees. But that meant the business lobby would have its say before any deal was done.

Mnuchin pledged to work with Cornyn to pass legislation that would overhaul the CFIUS guidelines—so long as Cornyn accepted his guiding principles. The new law needed to provide Treasury with flexibility it could exert through regulations, Mnuchin said, rather than micromanaging each issue. Treasury also would need more resources if it was to handle a lot more work. He did not reveal his true motivation for supporting the reform bill: subverting the drive for executive action to restrict Chinese investment. Cornyn and Mnuchin shook hands on the deal.

Crapo and Hensarling had no choice but to go along. The Republican committee chairmen believed that as the chairmen of the committees of jurisdiction, they should be in charge of writing the bill. But they were soon upset to discover Cornyn and Treasury had been exchanging drafts of the new bill for several months outside their visibility; Crapo and Hensarling also were annoyed that the intel committee staffers were negotiating a bill the financial services and banking committees would have to ultimately approve.

Their frustration would soon become more acute. When Cornyn introduced the new CFIUS legislation—called the Foreign Investment Risk Review Modernization Act (FIRRMA)—the bill already had the endorsements of Mnuchin, James Mattis, and Jeff Sessions.

At Mnuchin’s insistence, FIRRMA never mentioned China by name. But at the first hearing on the bill in January 2018, which Crapo chaired, Cornyn made sure there was no doubt which country posed the threats the legislation meant to address. “The context for this legislation is important and relatively straight forward, and it’s China,” he testified. “It’s not just that China poses a threat, though, it’s that the kind of threat is unlike anything the U.S. has ever before faced—a powerful economy with coercive, state-driven industrial policies that distort and undermine the free market, married up with an aggressive military modernization and the intent to dominate its own region and potentially beyond”

It may seem surprising that Mnuchin, who resisted so many other national security actions against China, was so willing to work with Cornyn on a project that was meant to restrict investment from China based on national security concerns. But for Mnuchin, this was part of a bigger play. Because, at the same time the FIRRMA drama was unfolding, he and Robert Lighthizer were involved in a food fight over Lighthizer’s 301 investigation, which finally had come out in March 2018.

The Lighthizer Report

By February 2018, Lighthizer had been ready to release the results of his 301 investigation into China’s economic aggressions against the United States. The investigation was a crucial part of the Trump administration’s efforts to impose pressure on Beijing by laying the groundwork for tariffs; the clear and present danger of a trade war, many inside the White House believed, would be enough to motivate Beijing to make meaningful concessions in order to alleviate the risk of tariffs. In that sense, the conclusion of the 301 investigation was one that everyone in the White House—whether pro- or antitariff—should have been able to get behind. But the rollout, like the announcement of the investigation back in August 2017, had gotten caught up in factional infighting.