September 10, 2019

Can Presidents Block Investment in China?

Trump has threatened to make U.S. companies leave China. Can he do that?

By Jennifer A. Hillman, J.D.
Senior Fellow for Trade and International Political Economy
Council on Foreign Relations

President Donald J. Trump says he has the right to force U.S. firms to leave China, citing the International Emergency Economic Powers Act of 1977 (IEEPA). Is he correct?

Yes, he could use IEEPA to prevent future investments in China. He cannot use IEEPA to force existing investments in China to leave, but he might be able to make it difficult for those already there to continue to do business in China.

However, any action under IEEPA requires that the president meet certain prerequisites. First, he must declare a national emergency—which means he must find that there is an “unusual and extraordinary threat” to the national security, foreign policy, or economy of the United States emanating from overseas. Second, he must consult with Congress before taking any action under IEEPA.

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Once the prerequisites are met, the president has broad powers. The statute says he may “investigate, block during the pendency of an investigation, regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest.”

That broad authority would allow Trump to block future transfers of funds to Chinese companies or individuals. It would also allow him to make it difficult for U.S. companies already operating in China to continue to do business there, especially if they need to import input materials or transfer funds in and out of China as part of their operations.

Could Congress stop him?

Built into the IEEPA law was the notion that Congress could rein in the president if it disagrees with his use of the law by passing a concurrent resolution, which would require a simple majority in both houses, terminating the national emergency. If there is no national emergency declaration in place, the president loses his authority to act under IEEPA.

However, in 1983, the U.S. Supreme Court determined in Immigration and Naturalization Service v. Chadha that so-called legislative vetoes in the form of concurrent resolutions are unconstitutional. Instead, Congress would have to pass a joint resolution—which the president could veto—to terminate the national emergency declaration.

That means if Congress wants to terminate a national emergency, it would now require a two-thirds vote in each chamber to override the president’s veto.

What effect would a prohibition on investment in China have on the trade war?

Trade between the United States and China totaled more than $700 billion in 2018, including both goods and services, making China one of the United States’ largest trading partners. Additionally, economists estimate that U.S. multinational enterprises hold some $640 billion worth of assets in China.

A Chinese employee sewing a U.S. flag at a factory in Fuyang, China. AFP/Getty Images

The future of that relationship is uncertain, but what is clear right now is that U.S. companies that have pulled out of China as a result of the existing tariffs are going to Malaysia, Mexico, Vietnam, and other countries. Chinese purchasers of U.S. exports, especially agricultural products, have shifted to Australia, Brazil, Canada, and others.

How does this relate to ongoing trade talks with China?

It is important to remember that this all started with the Trump administration’s investigation under Section 301 of the U.S. Trade Act of 1974 that largely focused on Chinese theft of intellectual property, subsidies for the “Made in China 2025” sectors, and forced technology transfers. Experts estimated that the economic harm to the United States from such practices was $50 billion at the time. But soon the value of Chinese imports under U.S. tariffs will surpass $550 billion.

The theory behind imposing Section 301 tariffs was that they would create leverage to get to a negotiated solution. The problem now is that it is not clear what negotiated solution, if any, the Trump administration is seeking. It may see decoupling the United States from China as the real goal—which implies no agreement at all. The administration may be pushing for an agreement to lower the bilateral deficit between the United States and China by pressuring Beijing to buy more American goods. Or it may still be seeking an agreement that addresses the intellectual property, Made in China 2025, and tech transfer issues raised in the Section 301 report.

At this point, no one really knows the goal of these negotiations, which is in part why it appears to be so difficult to reach an agreement.

Originally published by the Council on Foreign Relations, 09.05.2019, under the terms a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International license.