Note: The following is an edited translation of a commentary from the Chinese-language “Commentaries on International Affairs.”
In 1898, Russian writer Anton Chekhov created an image of Belikov, a character who follows the old-fashioned, anti-historical trend in the novel “The Man in the Case”. More than a hundred years have passed since its publication, it seems that a “Man in the Case” is leading the world’s most powerful country.
Recently, the United States promulgated the “Foreign Investment Risk Review Modernization Act of 2018”. This is the first time in a decade that the United States government updated and strengthened the functions of the Committee on Foreign Investment in the United States (CFIUS), in a move that it said will provide more rigorous scrutiny of foreign investment in the country.
[Photo: China Plus/Chen Xiwen]
Established in 1975, the CFIUS has the power to approve or block company investment, mergers, and acquisitions by foreign entities in the United States. The review system has undergone several major legislative and policy changes since its establishment. After the current administration took office and protectionism became increasingly prevalent, there were calls for an expansion of the role of CFIUS, which led to the new foreign investment review bill.
Over the years, the United States has put limits on foreign investment on the grounds of “protecting national security”. But since the early 20th century, the United States has maintained a position of dominance in international politics and economics, military affairs, and science and technology. So in reality, the United States is worried not about its national security, but rather about its ability to maintain its industrial competitiveness and its capacity for cutting-edge technological innovation.
Since the beginning of this year, the United States has vetoed many foreign investments, including China’s Ant Financial’s merger and acquisition of MoneyGram, and the acquisition of Waldo Farms by Beijing Dabeinong Technology Group. The reason given was always the same: protecting national security. And the new foreign investment review bill grants CFIUS even broader powers to restrict investments, including in the tech and real estate industries, and to review previously unrestricted minority-holding investments.
The world outside the United States has generally questioned the ambiguity of the American definition of what constitutes a national security risk, suspicious that its broad definition leaves it open to misuse. As early as May this year, when the Trump administration announced its Section 232 investigation into imported cars and component parts, it was accused of applying the concept of “national security concerns” too broadly. Nancy McLernon, the president and CEO of the Organization for International Investment, has warned of investment transactions becoming more and more unduly politicized in the name of national security.
Imposing even greater restrictions on foreign investment will damage the development opportunities of American enterprises in the short term, and reduce employment opportunities for Americans. In the long run, it will have a profound impact on America’s industrial development and capacity for technological innovation. Multinational corporations want and need to deepen cooperative investments and technology exchanges, and they should not be held hostage for political purposes.
Chinese investors have been the main victims of the tightening restrictions on foreign investment. According to the 2015 annual report released by the CFIUS in September 2017, it reviewed 143 transactions that year. Of these, 29 transactions – more than 20 percent – involved Chinese companies, despite China’s foreign capital inflows into the United States being less than 0.2 percent of the total. And China has been the country with the largest number of national security review cases in the CFIUS for four consecutive years.
In April this year, according to a report released by the New York-based Rhodium Group and the National Committee on U.S.-China Relations, in 2017 Chinese investment in the United States totaled 29 billion U.S. dollars, a decrease of 35 percent from the previous year. In June, Rhodium Group reported that in the first five months of this year, mergers, acquisitions, and direct investment by Chinese investors in the United States totaled only 1.8 billion U.S. dollars, down 92 percent year-on-year. This is the lowest level of inbound investment in seven years, and is mainly due to tightening reviews of Chinese investment. And the Trump administration has threatened to include additional investment restrictions as part of its China-related Section 301 investigations.
American politicians should acknowledge the fact that access to advanced technology is normal market behavior for companies. Companies in China purchase technology or patents according to market rules, just like their American counterparts. But given the traditionally high barriers in the United States, Chinese companies have stuck to investing mainly in the finance, real estate, and entertainment industries, and have stayed away from the technology sector. But even with this strategy, most of the investments blocked by CFIUS in the first half of this year were in finance and agriculture. How do these mergers and acquisitions threaten American national security?
Rather than follow the American lead of choking off foreign investment with a growing number of restrictions, China has continued along the path of further opening its economy to the world. In June, China announced this year’s amendments to the “Special Management Measures for Foreign Investment Access” list. Better known as the foreign investment negative list, it details the sectors of China’s domestic economy that are closed to foreign investment. The number of restricted sectors fell from 63 to 48 – and the world’s investors have responded positively. According to data from China’s Ministry of Commerce, in the first half of this year, 29,591 new foreign-invested enterprises were established in China, nearly double the number registered in the previous year, and foreign investment rose to 68.32 billion U.S. dollars. Meanwhile, U.S. Bureau of Economic Analysis data shows that net foreign direct investment in the United States fell to 51.3 billion U.S. dollars in the first quarter of this year, a 37 percent decrease from the same period in 2017, and a 65 percent decrease from 2016.
As an old Chinese saying goes, it is easier to catch thieves deep in the mountains than it is to change someone’s stubbornly fixed mindset. Foreign investment is not a threat that the United States should be worried about. Rather, the biggest threat to American national security is the belief by some that isolationism and a Cold War mentality is the path to continued prosperity.