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Trump just backed down from a big trade fight with China

He’s opting to work with Congress on a more modest measure to restrict Chinese investment in the US.

Al Drago-Pool/Getty Images

After weeks of anticipation, President Donald Trump has decided to back down from a hard-hitting policy that would sharply restrict Chinese investment in the US — opting to work with Congress on a more modest measure instead.

Trump’s decision should at least temporarily defuse tensions between the US and China, who are on the brink of an all-out trade war over China’s trade policies.

Earlier this week reports indicated that Trump was on the verge of using emergency presidential powers to issue an order to dramatically restrict Chinese investment in US businesses. The Treasury Department was reportedly looking into rules that would block firms with at least 25 percent Chinese ownership from investing in US companies with “industrially significant technology.”

The goal is to make it harder for China to acquire important technology used to manufacture things like robotics, aerospace and aviation equipment, clean energy cars, and medical equipment. Experts say China currently sees buying technology from American companies as a key strategy for developing its own manufacturing capacities.

But Trump is now refraining from going down that path. Instead, he’s going to allow new legislation moving through Congress to enhance the currently-existing review process for foreign investment in US companies.

It seems that Trump’s sudden change of heart is due to the influence of US Treasury Secretary Steve Mnuchin, who has won out over China hawks in the White House like trade adviser Peter Navarro. Mnuchin has been trying to persuade the president to take a more careful approach to prodding Beijing into changing some of its controversial trade and investment practices.

Had Navarro gotten his way, Trump would likely be escalating his trade fight with China to new levels this week.

Trump is taking a smaller step than expected

In a statement on Wednesday, Trump said that the bill in Congress “will enhance our ability to protect the United States from new and evolving threats posed by foreign investment” while maintaining an “open investment environment.”

The Senate and House have passed their own versions of the bill, but they need to be reconciled before Trump can sign them into law.

The bill, called the Foreign Investment Risk Review Modernization Act, aims to expand the powers of the current system for reviewing foreign investment.

That system is known as the Committee on Foreign Investment in the United States — commonly referred to as CFIUS. Currently, CFIUS reviews investments from foreign countries to make sure they don’t pose a national security threat to the US by doing things like appropriating technology that’s vital to the US’s military power.

The new law would expand its criteria for reviewing foreign investments to ensure they don’t give away valuable trade secrets.

This approach is much less aggressive toward China: It uses less stringent rules to block foreign investment; it will be backed by both parties in Congress; and, crucially, it won’t single out China specifically.

China hawks will view it as relinquishing a powerful weapon for hampering China’s industrial ambitions. But advocates of a more dovish stance toward China are likely to take comfort in Trump’s decision to approach the issue more carefully.

The US and China have been clashing for months. This might lower the tension.

Over the past few months, Trump has begun to execute his campaign promises to crack down on China’s influence on the US economy.

On June 15, the administration said that $34 billion worth of Chinese goods will be subject to tariffs starting July 6, with an additional $16 billion worth of products undergoing further review and public hearings.

Within a day, China promised to retaliate against those tariffs with its own tariffs of “the same strength,” and said it would purposely impose tariffs that will affect American farmers and industrial workers in the Midwest — states that have large populations of Republican voting Trump supporters.

In response, Trump threatened to impose tariffs on up to $400 billion of Chinese exports on June 18.

The recent back-and-forth has the US and China in the early stages of what could be a sustained trade war, in which both countries continue to strike at each other’s economies with increasingly expansive tariffs.

Trump’s anticipated moves on restricting Chinese investment looked like a new front in the US-Chinese trade clash. But now it’s looking like Trump is taking steps to ensure he doesn’t push Beijing’s buttons too hard — at least for now.

It is possible that recent signals from Beijing deterred him. China has started to sound less compromising in its public statements, and Chinese President Xi Jinping reportedly made some strikingly belligerent remarks to some Americans last week in anticipation of the investment restrictions.

“In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” Chinese President Xi Jinping told a group of American and European CEOs on Thursday. “In our culture, we punch back.”