The sharp decrease of Chinese direct investment in the United States is an indicator of further decoupling and the deteriorating economic relations of the two countries. New U.S. rules requiring a national security review of foreign investments are likely to have a chilling effect on future Chinese investments.
According to a recent report by the Rhodium Group and the National Council on U.S.-China Relations, total Chinese direct investment in the U.S. in the first quarter was $200 million, down 90 percent from the quarterly average of $2 billion last year during the trade war. It was the lowest since the 2008 financial crisis and started off the fourth consecutive year declining Chinese investment in the U.S. It has virtually ground to a halt.
American investment policy is the direct cause of this precipitous decline. In the past few years, the Committee on Foreign Investment in the United States, an interagency review panel, has kept a close eye on projects involving Chinese investors. Reviews under the Trump administration have tended to be stricter than those under Obama, but even so, at least half the projects with Chinese investors have been cleared.
However, the adoption of the Foreign Investment Risk Assessment Modernization Act of 2018, or FIRRMA, marked a watershed with iconic significance. Clearly, the Trump administration is moving toward protectionism not only in trade but also on the industrial and investment policy fronts, with tightened controls over certain “covered investments.”
FIRRMA identifies China as a “country of special concern” for reviewers. The act requires the CFIUS to submit to Congress every two years a detailed report on Chinese investments in the U.S., including the types of investments, the industries invested in and any government background of the investors.
FIRRMA is designed to build a national gateway. It is nominally concerned with America’s national security and mainly focuses on future competition in the high-tech industry. Yet the national security concept itself is extremely unclear in the law, and the national security review system has many ambiguities when it comes to the standards to be followed and the elasticity for intervention.
The Trump administration’s dynamic definition of national security has already gone well beyond the traditional scope of national security and public order. Factors to be considered in the reviews include critical infrastructure, key technologies, data security and governmental controls, all of which are clearly far beyond the national security review requirements in the World Trade Organization. It seems tailor-made to address China.
Since the beginning of this year, the U.S. has been intensifying its national security review and investment restrictions. Based on the new FIRRMA, the Treasury Department on Jan. 13 issued new investment rules that significantly expanded the CFIUS mandate. These rules, which came into force on Feb. 13, give CFIUS the power to review foreign investors’ non-controlling transactions in specific industries involving key technologies, critical infrastructure or sensitive personal data.
On April 4, Trump signed executive order 13913, establishing a committee for the assessment of foreign participation in the U.S. telecommunications services sector and replacing the former Team Telecom. He called for tighter scrutiny on national security grounds for Chinese telecom companies operating in the U.S. Digital friction between China and the U.S. has thus been further escalated.
This tightening of reviews of investments in the U.S. has produced a chain reaction. In the ongoing COVID-19 pandemic, decisions have been made to restrict certain industries and protect them from foreign acquisition. The concerns are that some companies may face cash flow difficulties as a result of drastic drops in stock prices and that expanding influences of Chinese enterprises may affect strategic security.
Japan, Australia, France, Germany, India and other countries have followed suit and introduced more discriminatory legislation and policies aimed at China and Chinese enterprises. These actually go beyond investment and bring increased risks for Chinese overseas investment.
With the tightening of foreign capital controls in major countries, the value of mergers and acquisitions of listed companies worldwide fell 39 percent to $498 billion in the first quarter, the biggest quarterly drop in seven years. After the financial crisis of 2008, it took eight years for global deals to return to pre-crisis levels. Globally, it may take even longer to revive cross-border investment, which is far more difficult than restoring production and supply chains.
In essence, the U.S. foreign investment review system is a response to the changes in global capital patterns and in overall economic globalization. History shows that after any big crisis, Western powers tend to concentrate on technological sovereignty and national security, consolidating national ownership and alliances to avoid the loss of technological superiority.
From the Coordinating Committee for Export to Communist Countries (known as COCOM) to the Wassenaar Arrangement, and from technological collaboration plans to the Five-Eyes and then technological containment and a tech war targeting China, large-scale high-tech embargoes and exclusive technology blocks have always seriously disrupted the globalization of science and technology. The COVID-19 crisis will prove no exception.
