Frogger! For those of us who played the classic arcade game, the word can induce stress. In this game, the frog not only has to cross multiple lanes of traffic, timing each jump to avoid trucks in one, alligators in another, but successive lanes moving in opposite directions. And if a frog succeeds, more lanes are added.
Frogger might seem an extreme comparison to the political challenge facing Chinese investment in the U.S., but it has to cross lanes of traffic overseen by local state, congressional and executive monitors. They each move in different directions, and the more success, the harder it gets.
The Chinese frogs are multiplying. As the Rhodium Group said in its reports for the Asia Society and the U.S. Chamber of Commerce, Chinese outward foreign direct investment (OFDI) in the U.S. now exceeds U.S. direct investment in China, and it is diversifying. Now high-tech investments are a quarter of the total, and they are poised to make a leap forward this year.
The trend is hardly surprising given that the U.S. is the chief market for worldwide OFDI (17 percent of total inflow) and China’s global share has risen to third place (5 percent of world outflow). There is a tectonic rubbing of the opaque interconnectedness of Chinese activities with the complex entrepreneurialism of American politics.
So far, Chinese frogs have been crossing mostly at night, with only a few attracting a public searchlight and even fewer getting gigged. But with the rapid increase in Chinese investments coupled with the IMF projection that this year the Chinese economy will become the world’s largest, political and media dawn is arriving.
As Chinese investment grows, the major projects will receive more attention, but it will not be uniform across different levels of government. At the local level, city and state governments are eager for capital and jobs and compete for new opportunities.
But at the national level, Congress tends to reflect (and amplify) American anxieties about Chinese involvement. The executive branch must base its judgments on national interest and security in the context of general American investment policy. Thus, the typical investment frog is enticed by the local level, sideswiped by congressional and media reports, and finally navigates national investment and security policy.
The largest single Chinese investment has been the acquisition of ,, headquartered in Virginia, by Shuanghui International Holdings (now renamed WH Group Ltd.) for US$7.1 billion. The May 2013 offer was the culmination of four years of discussions, and it resulted in an immediate 28 percent increase in Smithfield stock. The deal was supported by the United Food and Commercial Workers representing 16,000 Smithfield employees and was approved in September by a 96 percent plurality of stockholders. The acquisition merges two of the world’s largest pork processers and marketers. This was a large frog leaping from firm ground, and ultimately it made it across the political road.
The first lane was easy. Virginia stood to gain capital and jobs. Moreover, it has had a rough relationship with Chinese agricultural export markets, suffering under a four-year poultry export ban (due to avian virus) that was lifted only in May. The involvement of China’s “Number One Butcher” should secure and expand Smithfield’s exports to China, 30 percent of its current total exports.
The congressional lane cut the other way. Representative Randy Forbes, whose district includes the Smithfield home office, is founder and co-chair of the Congressional China Caucus. He immediately raised concerns about food safety, antitrust issues and national security, and he was joined by congressmen from Connecticut, Michigan and Iowa.
The link to national security was made most graphically by Senator Chuck Grassley of Iowa, who said: “We are nine meals away from a revolution.” Various special interest groups added their concerns ranging from food safety to the general problems of large-scale pork production.
The final lane at the national level was more complex but positive. The offer was submitted to the Committee on Foreign Investment in the United States (CFIUS), and Forbes asked the Justice Department to check for antitrust and unfair practices. CFIUS cleared the acquisition on September 6, and it was consummated at the shareholders’ meeting later that month.
Behind the crosscutting lanes are crosscutting interests. State governments are eager for OFDIs because they are conspicuous windfalls of investment and employment. There are ribbon-cuttings and official trips abroad. And a particular opportunity is more likely to support than compete with other possibilities. Virginia recently landed China’s largest greenfield investment, US$2 billion and 2,000 jobs, and Shandong Tranlin’s new manufacturing operation will be closely linked to agriculture.
If Toyota builds an assembly plant, BMW might follow suit. Congressional interests are a different story. Even if the delegation of the winning state is friendly, the losers are also represented.
In the case of CNOOC’s failed attempt to acquire Unocal in 2005, congressmen supported by its competitor Chevron played a part. In any case Congress is media-hungry and therefore more attuned to popular concerns. Vis-à-vis China it tends to see its task in terms of vigilance rather than results. Moreover, given the utility of the China specter for high-tech defense spending, there is considerable money riding on continuing suspicion of China. In 2010, Forbes’ top three campaign contributors were defense-related and Smithfield was not among his top 20.
Case for jobs
The national level is necessarily more complicated. Shuanghui made a plausible case that it would add American jobs by increasing exports to China. China’s problem with food safety is one of the reasons the acquisition makes sense. Chinese consumers trust foreign food products, and much of the fodder for Chinese pigs comes from the U.S. so why not feed the pigs there and just bring in the meat.
The more general national issues of reciprocity, level playing fields and national security did not raise flags for the Smithfield acquisition, but they are always in the background. This is as it should be. Even mutual benefit is a competitive interaction.
President Obama’s 2012 blocking of a wind farm development in Oregon is a rather odd case, but it demonstrates that while technically China is under the same rule as others, in fact its status as a potential peer competitor puts it permanently under the microscope. Standard procedures are more likely to be bent against China than for it.
Underlying the difficulties at the national level is a subtle but profound shift in the American evaluation of China’s rise. As long as China was merely a super-sized developing country prospering by becoming more like us, we could cheer its progress. But as it becomes our size economically and remains communist politically, Americans get worried. We do not want China to become less prosperous, but increasingly what counts for us is its relative gain.
Win-win is still nice, but who wins more, and does it make us more vulnerable? Political tensions are also likely to rise. As China gets eye-to-eye with us, in disputes it will be more tempted to respond with eye-for-an-eye.
But this is far from a rerun of the Cold War. The bilateral relationship is crucial to both economies, and both are enmeshed in the same globalized world. China may not quite play by our rules (after all, they are our rules), but we both play in the same sandlot. Moreover, China is still a developing country, and at an equal GNP its per capita productivity is only one-fourth of ours. The disparity between China and the U.S. will continue to create rich opportunities for mutual investment like the Smithfield acquisition. In many areas each has what the other needs.
So what should rich Chinese frogs do? Local, opportunity-driven encouragement is real, and when the road is crossed it will provide the environment of the enterprise. But it is prudent to anticipate the crosscutting concerns of Congress and the media as well as the bureaucratic and political dynamics at the national level. While the high growth rate of Chinese OFDI will increase concerns, there will be a better sense of risk on both sides as the experience and bulk of successful investment grows.