Part one in this series pondered the merits of delisting Chinese stocks on American exchanges.
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The United States has long been concerned about Chinese outward foreign direct investment (COFDI). Even so, U.S. angst has reached new heights during President Donald Trump’s tenure in office. Under his administration, the United States has launched a three-pronged war against COFDI. The first prong entails a harsher environment for COFDI in the United States. The second encompasses maneuvers against COFDI overseas. And the third involves steps to disrupt the progress of China’s Belt and Road Initiative (BRI).
The first prong has been primarily evidenced by the expansion of the Committee on Foreign Investment in the United States (CFIUS)’s role in reviewing FDI. It has been reflected, too, by the 2018 passage of the Foreign Investment Risk Review Modernization Act (FIRMMA). Notably, FIRMMA changed the ownership standard triggering CFIUS reviews from 10 percent of voting shares to one focused more on decision-making abilities/control and also expanded CFIUS’s ambit to cover FDI in critical infrastructure and real estate near sensitive locations like military bases. Recently, Congress passed the 2019 National Defense Authorization Act, which hits COFDI in the United States directly by forbidding the use of federal funds to purchase rail cars and buses from Chinese-controlled firms. The White House has not publicly pilloried COFDI in the United States, but prominent members of the U.S. Congress continue to warn vociferously about its risks.
The second prong is illustrated by top policymakers like Secretary of State Mike Pompeo pointing, more frequently, but usually obliquely, to problems associated with COFDI. In this vein, we see U.S. officials, over the past two years, issuing strident critiques about the negatives associated with COFDI in Latin America, such as predatory lending practices, the use of Chinese labor, and disrespect for international standards. Beyond this, in 2019, while in Southeast Asia, Pompeo insinuated COFDI served China’s “government, party, and imperials ambitions.” U.S. actions mostly have involved words, but there have been deeds, too. One illustration is the creation of the U.S. International Development Finance Corporation (DFC), which will have more resources than its predecessors and the ability to make equity investments overseas. Another is U.S. efforts to block FDI by Chinese telecommunications companies such as Huawei.
The third prong is evidenced by a slew of countermeasures against China’s BRI. American tactics have entailed harsh charges about the BRI’s dangers, consultations and joint programs with countries like India and Japan that are cool or hostile to the BRI, and the signing of agreements and statements stressing the need for “quality” infrastructure and FDI. Although there has not been any eye-catching American response, the Trump administration has put forth a relatively small investment program called the Indo-Pacific Economic Vision, boosted funding for infrastructure in countries like Sri Lanka, and created the aforementioned DFC. Furthermore, it has set aside $400 million for an “Indo-Pacific Transparency Initiative” designed to improve governance, helped countries like Myanmar bargain with China about BRI projects, and formed a partnership with Australia and Japan to mobilize infrastructure FDI.
There are multiple forces fueling the war against COFDI. As for COFDI entering the United States, a central concern is to prevent China from gaining access to “resources” that could aid it militarily or dramatically boost its economic competitiveness. These “resources” include firms with dual-use technologies, placement in strategic locales or sectors (e.g., utilities), and data (e.g., on the genetic makeup of American citizens or confidential financial information). Another is to counter unfair competition from Chinese companies that receive abundant government aid. Yet another is to limit China’s ability to distort public discourse via control of social media apps, entertainment industry assets, or news media.
With respect to action against COFDI overseas, restricting Chinese access to some of the aforementioned resources is part of the story. Washington also seems to want to blunt Chinese political leverage that might flow from its economic ties with other countries and to diminish Chinese soft power gains that could result from same. As for BRI COFDI, there seems to be worries about its potential adverse effects on sea lines of communication and key transit routes, its ramification for the control of critical infrastructure, and its implications for the regional and global power structures and institutions.
There is no one logic dictating whether or not U.S. maneuvers make sense because the political, security and economic costs and benefits of initiatives against COFDI in the United States, COFDI abroad, and BRI COFDI are not necessarily the same. Unfortunately, we are handicapped in our ability to adjudge the political/security gains/losses of American action/inaction in some cases since the information behind accusations about the threat posed by COFDI is not public. As for political and security costs, Washington’s actions have contributed to frictions with Beijing. Turning to benefits, U.S. steps have dampened COFDI volumes, but it remains unclear if, as a result, China’s access to “resources” has been notably reduced or slowed. The costs in terms of economic development, jobs, tax revenues, technology transfer, and the like seem insignificant on a national basis, though some American cities or states likely suffer from reduced COFDI. Beyond this, straitjacketing COFDI, in concept, harms American companies and public entities by limiting their access to lower cost projects and supplies. Since other channels remain open, however, it is unclear how much suffering there actually is. In the final analysis, if security risks truly are high, then measures to limit COFDI in the United States in some areas seem justifiable given the relatively limited economic costs of restricting it and the fact that they augment rather than create bilateral tensions.
Washington’s campaign against COFDI overseas and BRI COFDI seem less comprehensible. The potential political and security gains — perhaps except where COFDI in highly sensitive infrastructure overseas is concerned — seem quite limited since it is unlikely the U.S. campaign will reduce Chinese leverage or soft power significantly. Even though different countries have their own unique circumstances, it is generally true that a very large proportion need huge amounts of capital, more infrastructure, and the “net” benefits associated with COFDI. This, coupled with the domestic and international gains diverse states obtain from cooperation with China, will ensure countries remain receptive to Chinese money.
Indeed, Washington’s pressure tactics may backfire, alienating others from, rather than allying them with, the United States. It must be acknowledged that if COFDI contributes export, infrastructure, job, tax revenue, and tech transfer opportunities to host economies it can help the United States realize goals such as economic development, poverty alleviation, and the reduction of political instability. In brief, U.S. policy has political downsides. As for economic gains, they are not readily apparent. American firms will not leap into the void just because Chinese businesses cannot. Regarding economic costs, to the extent COFDI can meaningfully boost host country development, American companies might lose future FDI or sales opportunities. Beyond the above, analyses of COFDI and BRI COFDI have shown much of the anxieties about their political ramifications are unjustified. Relatedly, the impact of COFDI and BRI COFDI on institutions hardly appears earth-shattering.
COFDI flows in many forms into many different places and sectors. Consequently, the political/security and economic benefits and costs of constraining it vary. This, in turn, suggests Washington should avoid a “one size fits all” strategy. Clearly, though, a naysaying strategy, its all-to-common response, is a particularly unpromising way to deal with the COFDI challenge.
Jean-Marc F. Blanchard is Founding Executive Director at the Mr. & Mrs. S.H. Wong Center for the Study of Multinational Corporations (USA) and Distinguished Professor, School of Advanced International and Area Studies, East China Normal University (China).