Weighing Up China's Investment in the United States
Chinese investment flows into the United States have reached unprecedented heights over the past two years and the future promises more of the same. Inward investment from China climbed to US$18 billion in the first six months of 2016, a threefold increase over the same period in 2015. The acquisition of US companies accounts for 84 percent of these investments.
The Committee on Foreign Investment in the United States (CFIUS) is the country’s key body for evaluating the domestic effects of inbound foreign investment. Is CFIUS likely to rule against many of these Chinese acquisitions on national security grounds? And what will be the impact on the US economy of those Chinese investments that are allowed to proceed?
In February 2016, ChemChina proposed to acquire the Swiss agribusiness firm Syngenta for a record US$44 billion. Senator Charles Grassley of Iowa asserted that this acquisition would threaten US ‘food security’ and demanded a CFIUS review. The Obama administration complied as a courtesy, but when no plausible national security threat could be uncovered, the ChemChina acquisition was approved with no mitigation whatsoever.
The overwhelming bulk of Chinese investments can be welcomed without hesitation, their presence greatly beneficial to US workers, firms, communities, and consumers.
CFIUS regulations were rewritten in 2009, in part to help regularize the relationship between CFIUS proceedings and Congress. The redraft left the definition of threats to national security open-ended, but analysis of CFIUS cases shows that these threats can be separated into four distinct types.
The first is the possible leakage of sensitive technology to a foreign company or government that might deploy or sell such technology in a way that harms US national interests.
CFIUS encountered this threat in 2015, when Dutch giant Philips agreed to a US$3.3 billion deal to sell 80 percent of its Lumileds division to Chinese investor GO Scale Capital. At first glance, the sale might appear to involve nothing more than the transfer of a standard commercial lighting affiliate to Chinese control. But closer investigation revealed that Philips was experimenting with equipment that utilizes a substance called gallium nitride, used in the production of advanced radar and anti-ballistic missile systems. CFIUS refused permission for the acquisition.
The second threat springs from the ability of the foreign acquirer to delay, deny, or place conditions on the provision of output from the newly acquired producer. CFIUS evaluates this threat by considering how ‘crucial’ or ‘critical’ the process or product is and determining the abundance—and cost—of its near-substitutes.
In 2015, a Chinese mining company made a nonpublic proposal to acquire a Canadian mining firm that owned rare earth properties in Canada, the United States, and South Africa. China already controls approximately 90 percent of rare earth exports. The Chinese government has ordered the withholding of rare earth exports to Japan during periods when territorial disputes have flared up. CFIUS advised the parties that the deal would not be permitted to take place.
The third threat is that the acquisition might allow a foreign company or government to watch over, monitor or place ‘time bombs’ within the US company’s systems.
Figuring out how to cope with this threat in a world of globalized supply chains—especially in the information technology (IT) sector—creates difficult quandaries for CFIUS. All the basic building blocks of IT systems have hardware and software components from production sites around the world. All of these are susceptible to surreptitious engineering inputs.
But it would be misguided and ineffective to reject Chinese-owned providers while allowing purchases from US, French, or Swedish firms whose assembly facilities are adjacent to the Chinese-owned plants in Shenzhen.
The fourth and final potential threat arises if the target US firm has properties close to US military installations.
In March 2012, without reporting the transaction to CFIUS, the Ralls Corporation, a Chinese-owned firm, acquired several US wind farm projects. The projects’ towers overlooked restricted Naval Weapons Systems Training Facility airspace, where the newest generations of drones are tested. After investigating the acquisition, CFIUS recommended the investment be blocked.
Chinese investment in the United States has been growing rapidly from a very low base. Lindsay Oldenski and I created a model of Chinese foreign direct investment (FDI) to find out what the future of Chinese FDI in the United States might look like. The model takes into account trade and investment related variables like per capita income, distance between countries, and shared languages.
Based on these variables, the model can predict the size of FDI flows between any two given countries. China’s investment in the United States, despite recent growth, remains no more than half of what would be expected on the basis of the two countries’ other characteristics. The model predicts large and steady increases of Chinese FDI in the United States in years to come.
Using a different predictive model, based on market size, natural resources, and governance, China specialist David Dollar has shown that China is underinvested in the United States but that flows from China can be expected to rise rapidly in coming years.
What impact will these new and greater investment flows from China have on the US economy? Looking at the Chinese FDI that has already taken place, Chinese investors provide jobs with wages and benefits substantially higher than industry averages. This is not surprising—Chinese companies come to the United States not just to sell goods and services, but to conduct research and development, and gain management expertise. Future flows of Chinese FDI are likely to provide good jobs to American workers.
12 percent of the United States’ total productivity growth from 1987–2007 can be attributed to productivity spillovers from inward FDI.
When foreigners invest in the United States, their presence provides productivity ‘spillovers’ to other firms in the sectors where they invest, through introducing additional resources, technologies, or expertise. These effects are not small—12 percent of the United States’ total productivity growth from 1987–2007 can be attributed to productivity spillovers from inward FDI.
Will the same be true for Chinese investors? Somewhat surprisingly, Chinese FDI is already generating significant productivity spillovers. These are likely to grow in magnitude.
Within these rising flows of Chinese FDI, it will be possible to separate those acquisitions that might pose a genuine national security threat from those that do not.
Foreign acquisitions can only bring about a credible national security threat under very specific conditions. Careful assessment will show that very few inward acquisitions will pose any national security threat whatsoever to the United States. The overwhelming bulk of Chinese investments can be welcomed without hesitation, their presence greatly beneficial to US workers, firms, communities, and consumers.
An extended version of this article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Managing China’.