Steven Mnuchin, Treasury speaks during a Senate Finance Committee hearing in Washington. (Photographer: Andrew Harrer/Bloomberg)

Mnuchin Wins a Round in the White House Battle Over China

(Bloomberg) -- Treasury Secretary Steven Mnuchin won a battle inside the Trump administration over trade policy this week after a series of setbacks as he tries to ease economic tensions with China.

Most of President Donald Trump’s top advisers had decided by Monday to recommend he invoke emergency powers under an obscure 1977 law to block China from acquiring U.S. technology companies and their intellectual property. But by Tuesday evening, Mnuchin had forged an about-face, according to two people familiar with the deliberations.

Secretary of State Mike Pompeo provided a key assist, four people familiar with the matter said, siding with Mnuchin out of his own concern that an escalating trade war with China could hurt U.S. efforts to persuade North Korea to give up its nuclear weapons.

On Tuesday, once Mnuchin had secured Trump’s agreement to instead pursue a stepped-up Committee on Foreign Investment in the U.S. -- a less confrontational approach to the issue -- Mnuchin hit the gas on a public announcement that wasn’t expected before Friday. Late Tuesday evening, the Treasury department scheduled a news conference with the secretary. At midnight, the White House announced a conference call for reporters at 7 a.m. Wednesday.

The episode offers another window into the Trump administration’s internal war over trade policy. Mnuchin has urged the president to reduce trade tensions and take a more conciliatory approach negotiated behind closed doors.

White House trade adviser Peter Navarro, a China hawk, has pressed for the harshest measures. The two have clashed repeatedly, and Navarro has won previous rounds when Trump slapped tariffs on imported steel and aluminum and announced that he would levy duties on $50 billion in Chinese goods in July, decisions Mnuchin opposed.

This account is based on interviews with more than a half dozen current and former U.S. officials who insisted on anonymity to discuss the internal debate.

Ieepa v. Cfius

Trump’s advisers initially agreed by Monday to recommend creating a new regime under which the president would declare a national economic emergency to address threats from China, citing the International Emergency Economic Powers Act of 1977. The other option -- which Trump eventually chose -- was to use the existing Committee on Foreign Investment in the U.S., or Cfius, which is headed by Mnuchin. The panel scrutinizes foreign acquisitions of American companies for national security risks.

Mnuchin said that Trump’s advisers were “100 percent unanimous” about the decision to use Cfius rather than Ieepa to combat risks from foreign investment.

A QuickTake on CFIUS, Trump’s watchdog on China dealmaking

“At the end of the day, it’s the president’s decision,” Mnuchin said Wednesday. “The benefit of the president having different advisers is that we will express different views, and that’s a healthy process.”

Trump’s economic team is full of deep divisions over trade. Gary Cohn, the first director of Trump’s National Economic Council, resigned in March after he lost the internal dispute over imposing steel and aluminum tariffs. His successor, Larry Kudlow, is a self-proclaimed “free trader” but has supported Trump’s economic agenda.

U.S. Trade Representative Robert Lighthizer is viewed as largely a Navarro ally. Commerce Secretary Wilbur Ross regards China as an adversary but is respectful of Trump’s decision to appoint Mnuchin as his administration’s lead interlocutor with Beijing.

On Monday, the Dow Jones Index fell more than 500 points following news reports that the Trump administration planned to invoke Ieepa. On Tuesday, the House passed a bill that would strengthen Cfius and expand its scope, allowing the panel to scrutinize more deals. Together, the two developments helped Mnuchin persuade the president to abandon the Ieepa approach.

Pompeo’s Role

Trump has accused China of engaging in widespread theft of intellectual property. In March he asked the Treasury Department to draft options to crack down on the practice, specifically citing China. But Mnuchin has insisted that the effort to curb foreign investment in U.S. technology isn’t specifically about China, and the White House statement Wednesday that Trump would embrace legislation to strengthen Cfius didn’t mention the country.

The announcement tamped down fears of an abrupt escalation in the trade war between the U.S. and China. The Dow closed down about 166 points on Wednesday.

Pompeo’s support was likely crucial. The secretary of state has been in his job only since late April but he has attained a level of trust with the president that his predecessor, Rex Tillerson, never enjoyed.

A senior State Department official acknowledged the intense discussion of the China issue within the administration, but said the ultimate goal never wavered from being tougher on Beijing, as Trump has demanded.

On Sunday evening, Pompeo’s aides exchanged a flurry of emails recommending that he back Mnuchin’s approach toward Chinese acquisitions. Pompeo has been explicit in public that the issues of North Korea and Chinese investment in the U.S. are separate. But his advisers are concerned about the administration escalating tensions with China while it also seeks Beijing’s assistance pressuring North Korea to abandon its nuclear weapons program.

Summit Maneuvers

Before the historic summit between Trump and the North Korean leader Kim Jong Un, Pompeo argued against imposing tariffs on China, two people familiar with the matter said. After the summit, which took place in Singapore on June 12, Pompeo met with Chinese President Xi Jinping and discussed trade, the people added.

“Secretary Mnuchin and I have each spent substantial time working on exactly this problem set,” Pompeo said Wednesday at a Senate Appropriations Committee hearing. “In the trade domain we’re working diligently to figure out how we can develop trade relationships that are fair and reciprocal for the United States but don’t benefit China at the same time."

Pompeo’s willingness to enter the fray reflects how advisers in his department have pressed him to wrest control of economic diplomacy away from Navarro and Lighthizer, where it has accumulated in Trump’s first 18 months in office. 

Pompeo’s role is also partly explained by his close relationship with Mnuchin, which the two developed during his time as CIA director. That alliance and the victory it won - in contrast to the one that Tillerson forged with Defense Secretary Jim Mattis -- may become a formidable one in shaping Trump’s foreign policy in the coming years. 

"They overall have a very good, positive working relationship," Senator Tom Cotton, an Arkansas Republican, said in an interview in his office Wednesday. “They worked together very closely while Mike was at the CIA since the CIA and the Department of Treasury do so much work on financial intelligence, or funding of terrorism and sanctions and so forth, so I know they personally have a very good relationship."

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