Is America’s Door Really Open to China’s Investment?
A ChinaFile Conversation
There have not been many new topics in U.S.-China economic relations over the past decade: the trade balance, offshoring of jobs, Chinese holding of U.S. government debt, whether China’s currency is undervalued and intellectual property protection problems have been the perennials. So the recent advent of significant amounts of Chinese direct investment deals being done in the U.S. has generated a lot of attention. And it should: it is clear evidence both that economic conditions are changing in China, and that the sophistication of Chinese firms is evolving.
While each previous long-standing issue was associated with some losers in the U.S.—manufacturing workers, U.S. firms facing more competition, or vulnerability to our bond-holders—Chinese investment in real factories and businesses in the U.S. mostly brings benefits in terms of local employment, trade balance and tax rolls. The catch is that direct investment is perceived to carry potential national security risks too. Chinese acquisitions of U.S. firms could put sensitive technologies in their hands, deprive us of reliable suppliers, or present espionage or sabotage risks – at least in theory. That’s why we have a defined process managed by the Committee on Foreign Investment in the U.S.—CFIUS—to screen for such risks.
At this early stage of China’s global arrival as investor, CFIUS has blocked a tiny number of Chinese overtures, and required preconditions to approval of others. A few high profile deals have also been scuttled by Congressional or other political objections before they could even go to CFIUS, for example CNOOC’s attempted takeover of Unocal in 2005. That has left an impression in China and elsewhere that the U.S. is not as open to Chinese direct investment as it says. While understandable, that’s unfortunate, because the truth is that the vast majority of Chinese deals have gone through, and that CFIUS has found ways to work with companies to mitigate existing risks. At the Rhodium Group, our China Investment Monitor database currently tracks 620 deals done since 2000—and the annual figures are at an all-time high, not on the wane.
All major nations employ a screening process for direct investment from abroad, including China. The CFIUS process is not perfect and can certainly be improved, but a mechanism to address national security concerns is necessary to defend openness. The U.S. has managed to keep the door open through many past episodes of foreign-scare—for instance with 1980’s Japan—and we can assert that the U.S. has as open a door as any major nation, including for Chinese firms to come through.
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