If you’ve been blessed by the presence of Chinese policy-makers, you will have heard the talking points. Why does the U.S. treat Chinese investors so unfairly? Isn’t the Committee on Foreign Investment in the United States (CFIUS) a protectionist tool? What about Huawei? In 2011, Chinese investment in the U.S. was tiny and such questions were reasonable.
In 2016, they are absurd. From 2012-2015, Chinese investment in the U.S. averaged US$15 billion annually, easily tops among recipient countries.* For 2016, that amount might almost triple, despite concerns about capital flight or Donald Trump’s election victory. The issue is not whether the U.S. has been blocking China, it is whether the U.S. will now start to block China. The most likely answer is yes, though perhaps not too forcefully.
Chinese investment in the U.S. will almost surely fall in 2017 as compared to this year’s surge. But it could be substantial for years to come; a new baseline of US$20 billion annually is reasonable. There is also considerable diversification: there are now seven major American sectors and five states with more than $10 billion worth of Chinese investment and both figures are going to rise, especially the number of states.
Directly related to the impressive numbers, many Americans welcome Chinese investment. It obviously benefits existing asset-holders, it benefits a small but growing number of workers, and therefore it benefits local politicians. On the other side, the Americans unhappy with Chinese investment are highly concentrated, in Washington DC.
There are national security concerns over China’s pursuit of technology, given mass Chinese cyber-theft as well as the possibility the U.S. and China will come into conflict over the East China Sea or Taiwan, for instance. Looming behind such concerns is the visible hand of the Chinese state. It is impossible to imagine commercial cyber on the scale practiced by Chinese entities occurring without the Party’s blessing. Legitimate attempts to acquire technology are organized and funded by the government, for example through the two year-old IC Fund.
It is fair to say this is all old news, but it has been made relevant again by rising investment. On top of far more China-made goods and services being sold in the U.S. than the reverse, we now have far more Chinese investment in the U.S. than the reverse. Xi Jinping’s ascension has seen more coercion of foreign participants in the domestic economy, even while China “goes out.” The bottom line is that it is no longer just members of Congress wondering why the U.S. should sell what some consider strategic assets to China, when Beijing would never do the same.
During this election campaign, many candidates were looking to do “something” about Chinese investment. By time of publication, posturing will have wound down and the awkward transition to genuine policy positions will have begun. It is true that the norm in Sino-American relations has been bleating but no action on the American side. In this case, however, policies may look more like campaign politics.
In January, the American Enterprise Institute and others will float figures for estimated 2016 Chinese investment in the U.S. in the US$40 billion range, catching the eye of media, the new Congress, and very possibly the Trump administration. The figures will offer a sought-after means to criticize and limit the bilateral economic relationship without committing to disruptive trade barriers.
And it is not just the populist tilt in American politics which has the potential to make this presidential transition different. Another new factor is greater lobbying by the business competitors of the many Chinese firms now establishing themselves in the U.S. The newly one-way nature of capital flows appears stark. For those unhappy with Chinese investment, reciprocity is a powerful idea to sway DC and national opinion.
If nothing of substance happens before the summer 2017 Congressional recess, the status quo will have triumphed yet again. This, however, is not the best bet. There are a variety of options open to the new administration.
One of these is surprisingly positive. The pause button has been hit on the bilateral investment treaty (BIT) and it may be hard to imagine, after this election, Congress ratifying any agreement with China. However, the President-elect said from the start that he is willing to negotiate international economic issues. The BIT would have to shift to Trump terms, rather than Obama terms with a side of Trump. But if it does shift, the Republican-controlled Congress might prove more amenable than it would have if handed a deal by Hillary Clinton.
The other acronym – the Committee on Foreign Investment in the United States (CFIUS) – is immediately in play. Pre-election, there was intense and China-driven interest in Congress in reforming CFIUS, to make it more restricting. While Congress finds many things interesting pre-election, this one has also seen legislation drafted in the lame-duck session. A General Accounting Office report expected in early 2017, even if vacuous, provides the opportunity to introduce bills.
A policy response to rising Chinese investment has bipartisan Congressional support, but the devil remains in the details. The central question, as always, is whether to emphasize security issues focused on technology or economic issues focused on market access. An apparent bridge between them has been offered in the form of restricting state-owned enterprises (SOEs). This is a live political possibility, but would be a mistake. Chinese investment in the U.S. is increasingly led by private firms and the security risks posed by Chinese firms do not depend on ownership. A private Chinese firm cannot say no to the Communist Party any more than an SOE can.
Also a bad idea: applying a vague test for net economic benefit. This would invite abuse and undermine the U.S. as an investment destination. It is unlikely to succeed on its own but could sneak in as part of a series of reforms as a result of legislative bargaining.
Reciprocity – closing the U.S. somewhat to investment from countries that interfere with American investment – is fine as a general principle. But there are obvious dangers in implementation. The process of identifying the countries and the extent of the response justified would be politicized. In addition, the U.S. should certainly not close the same sectors to China that China effectively closes to the U.S., so the simplest application of reciprocity would be unwise.
There are better options. CFIUS’ purview should be explicitly expanded to greenfield investments, in particular those proximate to “critical” infrastructure. While such a reform could also be abused, the general notion of critical infrastructure is already used by American decision-makers. It also reflects some of the areas where Beijing does not allow foreign participation. Another entirely justified step would be to bar Chinese entities which can be shown to have benefited from stolen intellectual property.
Predictions for 2017
At time of writing, the situation is too chaotic for a sound forecast. Here’s one, anyway:
- The BIT will be comatose, but not renounced.
- A substantial CFIUS reform bill will pass.
- It will have new technology-based restrictions, perhaps involving critical infrastructure.
- It will not ban SOEs merely on the basis of ownership or include a meaningful net economic benefit provision.
- I will not get all of these right.
Number 5 is the best bet.
Once the U.S. acts, China will react. With the Trans-Pacific Partnership already comatose, Beijing may in fact be pleased to see the BIT in a similar state. But fresh restrictions on investment, via CFIUS or otherwise, are another matter. China’s response will naturally depend on the status of the bilateral relationship as a whole. It also depends on whether Beijing believes third parties must be deterred from mimicking American actions. Only a few have technology China wants, for instance.
In general, China can bluster more than it can effectively act on a bilateral economic basis. With advantageous market access in both investment and trade, China has more to lose. If the U.S. adopts reasonable restrictions on investment that leave important sectors such as entertainment and property open, Beijing will do little more than talk. A net economic benefit test or something similarly radical would see retaliation to maximize political pressure on the U.S. or in industries where Beijing sees the most commercial opportunity if American firms are crippled.
Derek M. Scissors is a resident scholar at the American Enterprise Institute (AEI) and chief economist of the China Beige Book. He authored the China Global Investment Tracker. Previously, Scissors was a senior research fellow at the Heritage Foundation and an adjunct professor of economics at George Washington University. He has worked for London-based Intelligence Research Ltd., taught economics at Lingnan University in Hong Kong and served as an action officer in international economics and energy for the US Department of Defense.