from Greenberg Center for Geoeconomic Studies

Writing New Rules for the U.S.-China Investment Relationship

A man walks past a branch of Citibank in Beijing, on April 18, 2016. Kim Kyung-Hoon/Reuters

The United States should aim for a version of reciprocity that allows it the flexibility to maximize pressure on the broad range of Chinese industrial policy concerns while leaving a clear route to negotiations.

December 12, 2017

A man walks past a branch of Citibank in Beijing, on April 18, 2016. Kim Kyung-Hoon/Reuters
Report

Overview

Chinese outbound investment is on the rise, and much of it is finding its way into the United States. Within the past two years alone, Chinese foreign investment inflows to the United States increased four-fold, and available data suggests 2017 will see the second highest annual investment on record, after 2016. This is not a two-way street: the United States and other foreign investors do not enjoy similar open market access in China. China maintains a dizzying assortment of formal and informal barriers to foreign investment—from outright restrictions and quotas to mandatory joint ventures, forced localization measures, and domestic licensing regimes. Despite years of negotiations, these barriers are, if anything, growing more cumbersome in many sectors.

The principle of reciprocity provides a foundation for a tighter U.S. stance on Chinese inbound investment.

The one-way surge of Chinese investment into the United States comes against a backdrop of strategic mistrust between Washington and Beijing. Ongoing accusations of state-sponsored cyber predation of U.S. firms, Beijing’s increasing aggressiveness over territorial disputes, its systematic efforts to undermine the U.S. alliance system in Asia, and mounting tensions over North Korea all contribute to a darkening mood in the U.S.-China relationship. And, like so much involving China, this investment is simply different. Rarely, if ever, has the United States seen an increase in investment of this magnitude—especially from a non-ally and especially from one where the lines between state ownership and private ownership are so inherently blurred.

All of this raises questions about whether the United States needs to tighten its stance on Chinese inbound investment; proposals to that effect have bipartisan support in the Congress. One foundation for such an approach is the principle of reciprocity. There are four ingredients to such a strategy.

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U.S. Trade Deficit

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  • Use the 1974 Trade Act to enforce reciprocity. The Donald J. Trump administration—led by the U.S. trade representative, along with the State and Commerce Departments—should inform Beijing that Washington will restrict or condition Chinese investments until certain designated industrial policy abuses are lifted or specific conditions are met. The most effective tool to administer this form of reciprocity could be section 301(b) of the 1974 Trade Act.
  • Reform CFIUS to increase oversight. U.S. policymakers should address the current loopholes in Committee for Foreign Investment in the United States (CFIUS) while confining its mandate to traditional national security concerns. The notification process, currently voluntary, should instead be made mandatory for categories of filings that involve certain kinds of technologies or parties from a designated list of countries that would include China.
  • Work with EU countries to create similar frameworks. U.S. policymakers should encourage the EU to adopt such a framework, equipping it with intelligence-gathering capabilities that could form the basis of enhanced intelligence sharing between U.S. and EU officials regarding Chinese investments that involve economic or national security concerns.
  • Update the 1980s Japan playbook for China. In particular, Washington should significantly increase public investment in foundational technology research and development, returning it to Reagan-era levels of 1.4 percent of the federal budget (up from just 0.6 percent today). To address Chinese dumping concerns, the Trump administration should revise U.S. antidumping laws to eliminate recoupment in cases in which the investor enjoys subsidies and financing from a foreign government. Finally, the Trump administration should also affirmatively encourage Chinese greenfield investments in certain industries.

More on:

China

Foreign Investment

U.S. Trade Deficit

U.S. Foreign Policy

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