Trade Wars: When Trade and National Security Converge

This article is part of a special series examining the legal, strategic and economic dimensions of the Trump administration's trade agenda, and assessing what the recent shifts in U.S. trade policy may mean for the country and for the established system of international commerce. In this installment, attorneys from Kirkland & Ellis LLP assess the use of tariffs, new scrutiny of foreign investments in U.S. companies, and export controls over “emerging and foundational” technology as part of a strategy to use economic tools to advance national security objectives.

The Trump administration’s trade and investment policy has unsettled the post-Cold War international consensus, ratcheting up U.S.-China tensions to levels not seen since the time of Mao Zedong, straining the United States' relations with its European partners and sharply questioning the core assumptions of globalization that lie at the heart of the North American Free Trade Agreement and the World Trade Organization. Yet, even as the administration’s various trade-related initiatives reverberate throughout the world, a common strand — as articulated in the National Security Strategy published by the Trump administration in December 2017 — has emerged.

The narrative is straightforward: In a world in which power is more widely distributed and great power competition is on the rise, the U.S. should selectively and forcefully use economic tools as instruments of national security statecraft. This view is a stark departure from the liberal economic consensus of the post-Cold War period — a worldview which the U.S. helped forge and maintain — which generally held that trade and investment liberalization was as inevitable as its benefits unassailable.

This article will explore three components of the Trump administration’s trade and investment toolkit: (i) reform of the Committee on Foreign Investment in the United States, or CFIUS, the U.S. national security review and investment clearance process; (ii) enhancement of U.S. export controls, particularly by their extension to “emerging and foundational” technology; and (iii) the selective use of tariffs. A fourth tool — the design and application of economic sanctions or targeted economic measures — is noteworthy in its own right, but not a focus of this piece.

CFIUS Reform

The Foreign Investment Risk Review Modernization Act, or FIRRMA, passed in August 2018 as part of the National Defense Authorization Act for Fiscal Year 2019, or NDAA 2019, significantly expanded the jurisdiction of CFIUS. A significant legislative victory for the administration, FIRRMA also received broad bipartisan support in Congress.

FIRMMA marks a significant broadening of review of foreign investments in the United States. Prior to enactment of FIRRMA, CFIUS had authority to review any transaction, by or with a foreign person, which could result in foreign control of a U.S. business. FIRRMA, however, empowers CFIUS to, among other things, also review foreign “non-passive” investments in U.S. businesses that (1) own, operate, manufacture, supply or service “critical infrastructure”; (2) produce or develop “critical technologies” (nearly all U.S. export-controlled technologies, including soon-to-be controlled “emerging and foundational” technologies); or (3) maintain or collect sensitive personal data of U.S. citizens. 

Furthermore, whereas the CFIUS review process has been historically voluntary (if sometimes strongly incentivized), FIRRMA makes CFIUS “declarations” mandatory in certain instances. Specifically, CFIUS declarations will be mandatory where a foreign person, in which a foreign government has a “substantial interest,” acquires a “substantial interest” in a U.S. critical infrastructure or critical technology company, or a U.S. company that handles large amounts of U.S. persons’ sensitive personal data. Additionally, FIRRMA provides CFIUS discretion to require notification of transactions in which foreign persons acquire certain U.S. critical technology companies, which it recently did on Oct. 10 through issuance of interim regulations establishing a “pilot program” for certain mandatory notifications.

The passage of FIRRMA clearly evinces its national security origins and aims. In fact, the “sense of Congress” section in FIRRMA notes that CFIUS should review “whether a covered transaction involves a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security.”

Export Control Reform

The passage of the Export Control Reform Act, or ECRA, as part of the NDAA 2019 established statutory authority for the Export Administration Regulations — the EAR — which since the lapse of the Export Administration Act in 2001, had been reauthorized through presidential executive order on an annual basis. 

Notably, in tandem with FIRRMA, ECRA focuses on “emerging and foundational technologies.” ECRA thus complements FIRRMA in addressing U.S. national security concerns regarding expansion of Chinese technology investment and China’s push for international technological primacy. 

ECRA requires the U.S. Department of Commerce, pursuant to an interagency process, to identify and control the export of such emerging and foundational technologies, which presumably for the most part are not currently subject to U.S. export controls. This is in contrast to the longstanding U.S. (and multilateral) position regarding export controls, by which the United States responded to changing foreign policy and national security concerns (such as weapons proliferation and terrorism) by adjusting existing controls around key military or dual use technologies. ECRA, in contrast, calls for controls on items based on U.S. leadership in the underlying technology. 

Though the term “emerging and foundational” technology is not defined in ECRA, it is hard to imagine an approach which does not take aim at responding to China’s explicit push to enhance its standing in critical technology and its efforts to try to shift economic power from the United States to Asia. This view is supported by the public debate and commentary leading up to ECRA’s passage, which focused on the international implications of concerted Chinese efforts to expand China’s technology capabilities through government policies including Made in China 2025, and China’s related focus on making investments in and entering into joint ventures with U.S. companies as a way to gain access to leading edge technologies. This suggests that the U.S. government will seek to more closely regulate technologies such as artificial intelligence, quantum computing, robotics and surveillance, and try to target restrictions at the development stage before a specific item has entered production.

The interagency review mandated by ECRA, along with public notice and comment processes to solicit industry input, will more clearly establish the contours of the new controls of emerging and foundational technologies. If the United States ultimately imposes controls on specific types of technology with significant value to the Chinese economy, that will reflect a high-water mark in national security-driven trade regulation. 

Tariffs

The United States has not meaningfully used tariffs in decades, dating back to the signing of the U.S.-Canada Free Trade Agreement in 1988, one year before the fall of the Berlin Wall. That agreement was the precursor to NAFTA, entered into in 1994, which along with the collapse of the former Soviet Union, ushered in the era of globalization. NAFTA was immediately followed by the establishment of the WTO in 1995. China’s accession in 2001 seemed the apogee of the trade liberalization, which formed the basis upon which companies have organized their global supply chains for almost a generation.

It is precisely that economic order which the Trump administration has sought to alter. First, in January 2018, tariffs were imposed on imports of washing machines and solar cells and modules under the authority of Section 201 of the Trade Act of 1974, the U.S.’s first such action in 17 years. Then, in March 2018, global tariffs were imposed on steel and aluminum, with the administration reaching even further back into the U.S. trade toolbox to Section 232 of the Trade Expansion Act of 1962. Finally, in June 2018, the administration announced the first of what are now three rounds of tariffs on China pursuant to a finding that it has engaged in discriminatory and unreasonable trade. For this, it resorted to authority under Section 301 of the Trade Act of 1974. 

But these tariff actions really are not entirely about import practices, as throughout this time the U.S. had already continued to be an active user of the anti-dumping and countervailing duty laws, which impose corrective duties in response to particular unfair trade practices. Rather, the tariffs were imposed also to advance other U.S. trade priorities and policy interests, including protecting technological leadership, which it considers an element of national security. For example, the Section 232 tariff actions on steel and aluminum were brought specifically under an authority to impose duties on imports that “threaten to impair the national security.” Nowhere is this nexus more pronounced than with respect to the Section 301 tariffs against China. There, the U.S. has imposed duties on what now amount to almost 50 percent of all U.S. imports from China, explicitly on the basis that

[t]he Chinese government’s technology transfer and intellectual property policies are part of China’s stated intention of seizing economic leadership in advanced technology as set forth in its industrial plans, such as ‘Made in China 2025.’

Tellingly, the President’s Trade Policy Agenda for 2017, issued just six weeks after President Trump took office, establishes that the U.S. “will aggressively defend American sovereignty over matters of trade policy,” and not entrust it to the WTO. In doing so, the Trump administration has taken into its own hands a mission to challenge the prevailing paradigms of globalization and integration, and reset the norms of international trade. The Trade Policy Agenda for 2018 affirms that U.S. trade policy “should be consistent with, and supportive of, our national security strategy.” Accordingly, the administration has sought to use trade policy to reverse what it believes is the erosion of U.S. technological competitive advantage, while that is still possible.

Conclusion

Together, CFIUS reform, export controls over “emerging and foundational” technology and the imposition of tariffs are part of an overall strategy that seeks to use economic tools to advance U.S. national security objectives. Those national security objectives are focused on the protection of critical technology from foreign influence and control, preserving U.S. leadership in certain advanced technology areas and imposing increased costs to access the U.S. market in response to actions deemed to be at odds with U.S. policy, such as forced technology transfer when U.S. companies operate overseas, particularly in China. These measures are ushering in a new era of trade restrictions that warrant close attention by any company operating across borders.


Mario Mancuso, Sanjay José Mullick and Anthony Rapa are partners and Abigail E. Cotterill is of counsel at Kirkland & Ellis LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.