Trump blocks China

US President Donald Trump has blocked the sale of an American technology company to a Chinese-backed organization.

Background

United States and China are two of the largest economies in the world. Both countries consider the other as a partner in trade and an adversary in geopolitics.

Diplomatic relations between US and China were first established in 1844 with the Treaty of Wanghia. This agreement allowed the US to trade in Chinese ports. After the Qing Dynasty was overthrown, in 1911, US recognized the legitimacy of the Republic of China (ROC) government.

When civil war broke out in 1945, between Communist Party of China (CPC) and the ROC, the US supported ROC. CPC gradually gained control of the mainland and this led to the formation of People’s Republic of China. By the 1970s, US realized the geopolitical compulsion to establish relations with PRC and officially recognized the government. It continued its unofficial support to Taiwan through various trade and military deals

The two countries have established a robust framework of trade. Currently, the US-China trade relationship supports around 2.6 million jobs in the United States. In 2015, China purchased $165 billion in goods and services from the United States in 2015.

Canyon Bridge Capital Partners, LLC. is a U.S.-based private equity buyout fund focused on providing equity and strategic capital to technology companies. The firm is funded partly by capital from China’s central government. Reuters had also reported that the company had indirect ties to China’s space program.

Analysis

US President Donald Trump has drawn the hardline against Chinese takeovers of American businesses. When he was running for the Presidency, he was often critical of the role played by China in hurting the American economy. He has been a proponent of the “Make in America” movement.

From November 2016, Canyon Bridge Capital Partners has been seeking approval from the government to buy Lattice Semiconductor. The deal was reportedly worth $1.3 billion. In an executive order Trump ordered both companies to permanently “abandon” the proposed transaction. He added that there was “credible evidence" indicating that Canyon "might take action that threatens to impair the national security of the United States.”

U.S. Treasury Secretary Steven Mnuchin said in a statement, “Today, consistent with the administration's commitment to take all actions necessary to ensure the protection of U.S. national security, the president issued an order prohibiting the acquisition.” He added that, “CFIUS and the president assess that the transaction poses a risk to the national security of the United States that cannot be resolved through mitigation.”

China has sharply criticized the move noting expressing concern over protectionist tendencies displayed by the US. Chinese Commerce Ministry spokesman Gao Feng said, “We believe conducting security examinations of investments in sensitive sectors is a country’s legitimate right, but it should not become a tool for advancing protectionism.” Additionally, Canyon Bridge said that it was disappointed in the decision, and this was “an excellent deal for Lattice’s shareholders and its employees.”

Assessment

Our assessment is that the US  has reiterated that it is concerned with foreign investment, particularly from China , into US semi conductor industry. President Obama had in the recent past rejected a bid by a Chinese government – backed Grand Chip Investment to buy German semiconductor equipment manufacturer Aixtron over fears that it could put sensitive technology with potential military applications in Chinese hands. We feel that the actions of the Trump administration is consistent with earlier US concerns and would not, at least for the present, allude to an unfair trade practice.