The Pandemic Depression
The Global Economy Will Never Be the Same
Every year, the American Chamber of Commerce in China conducts a survey of its members’ business sentiment, and this year, nearly 500 firms responded. Three out of four reported that they felt less welcome in China than they did during the two previous years. Those findings reflect the fact that U.S. firms and investors increasingly encounter an unfriendly and difficult business environment in China. Apple’s patent dispute with a Chinese firm and Uber’s announcement that it would sell its China business to Didi Chuxing, a local rival, provide two recent examples of this trend.
Nobody doubts that the United States and U.S. firms have a major stake in maintaining good political and economic ties with China. But equally real are the special problems that U.S. businesses confront there. They range from unclear and changing regulations to total blocks against foreign investment in such sectors as food and the media. The challenge is how to bring greater parity to those two realities, which means implementing a U.S. policy that aims for full investment reciprocity with China, even if it is phased in over several years and with mutually agreed exceptions for investments in sectors of genuine national security significance.
That policy must be based on two principles. The first is to recall that in economic and especially in investment terms, China needs the United States far more than the United States needs China. The second is to recognize that when it comes to the business environment for U.S. firms in China, it is a fool’s errand to seek redress directly from the Chinese government, since little success has come via that route so far. The best way to reach Beijing is through the thousands of Chinese individuals and groups with a growing stake in maintaining access to the U.S. economy. When the interests of those domestic voices are sufficiently at risk, Beijing will hear them far more clearly than any pleading from Washington.
A good illustration of the investment-related differences between China and the United States is the long and continuing saga of the proposed U.S.-China Bilateral Investment Treaty, or BIT. Negotiations for the deal began in 2008 and have now gone through at least 24 rounds. A main sticking point has been what trade negotiators call the negative list: the set of economic sectors that would remain closed to foreign investment even in a post-treaty environment. The United States wants a very short negative list, whereas Beijing has sought to protect a much larger number of sectors and industries.
But the differences between Beijing and Washington go beyond that policy issue. Indeed, they reflect a fundamental asymmetry between China and the United States regarding inward investment. As David Dollar of the Brookings Institution told the Wall Street Journal in September, “China is the most closed of the G20 countries in terms of inward direct investment.” Yet the United States’ position, with some exceptions, has generally been to welcome such investment, and the U.S. Treasury Department has advocated the early completion of the BIT.
Several American groups have taken the same position. One such group is the National Committee on U.S.-China Relations. The Committee’s 2016 report, titled “New Neighbors,” is a particularly noteworthy document because it openly promotes American popular and political support for Chinese investment in the United States. The report, which is organized by congressional district, draws attention to the jobs and tax revenues that Chinese investment brings to each locality. (A good illustration came as Donald Trump was about to name Indiana’s governor, Mike Pence, as his running mate. The Financial Times, drawing on the same sources as the committee’s report, wrote, “Chinese firms employ Hoosiers in each of [Indiana’s] nine congressional districts.”) Even in New Hampshire, which is not often thought of as a recipient of much foreign investment, the report is on the mark. It noted that two companies “account for the majority” of Chinese investment in the Granite State and that they “currently employ more than 300 people.” And in an item certain to catch the eye, the report added that the New Hampshire-invented Segway had been sold a year earlier to a Chinese investor.
The importance to the United States of China’s investment is relatively small.
Of course, such investments are miniscule when compared to China’s recent billion-dollar acquisitions in California, New York, and Texas. The $1.95 billion sale of New York’s Waldorf Astoria hotel to Chinese investors received special attention in the U.S. press. Yet all such reports of China’s investments represent only current and recent investment flows, which are quite different from China’s total foreign direct investment stock in the United States.
Those stocks are surprisingly small. Through 2014, data from the U.S. Commerce Department’s Bureau of Economic Analysis show that the total foreign direct investment in the U.S. was $2.9 trillion, and of that amount, 80 percent, or $2.3 trillion, had come from just eight countries. China was not among them. Instead, the top four sources of foreign investment stock in the United States are the United Kingdom, Japan, the Netherlands, and Canada ($450 billion, $373 billion, $305 billion, and $261 billion, respectively). Those four countries alone accounted for almost $1.4 trillion of the $2.9 trillion total foreign investment stock in the United States in 2014, and four others in Europe (Luxembourg, Germany, Switzerland, and France) were close behind, each with an investment stock of between $224 billion and $243 billion.
Each of those eight countries had a cumulative U.S. investment stock measured in the hundreds of billions of dollars, whereas the amounts reported for China are at highest in the tens of billions. Indeed, in 2015, Commerce Department data show, Chinese investment in the United States barely matched that of Singapore, a country of six million people.
Because of the public attention often given to China’s investments in the United States, these relatively small amounts may seem surprising. Yet they are hidden in plain sight in official U.S. figures. Other sources have provided larger estimates, some of them reflecting Beijing’s most recent investment activity. For example, whereas U.S. official data for 2014 showed that China’s U.S. investment stock totaled less than less than $10 billion, China’s Ministry of Commerce reported $38 billion for that year and $46.6 billion for 2015. The Rhodium Group, a U.S. consultancy, provided an even larger figure, of $63 billion for 2015. But the bottom line remains the same: China’s total investment in the United States is far below that of the top eight nations.
That means the importance to the United States of China’s investment is relatively small. It is of course valuable, especially to the firms involved, but unlike those countries where inward foreign investment is widely seen as essential to the nation’s economy, that is not the case for the United States. The investment relationship of China to the United States calls to mind Aesop’s fable about the gnat that landed on the horn of a bull: when the gnat announced he would be leaving, the bull answered that he had not been aware of the gnat’s arrival and would not know when he left.
The United States should adopt a similarly diffident posture toward Chinese investment proposals. One reason is to convey to Chinese investors that business as usual no longer applies to the American inward investment market. The other is that some Chinese investment proposals are candidates for rejection because they raise objectively important issues for the United States. Among these are whether an investment is private or state-owned; whether it threatens competition in the market it would affect; and whether it compromises U.S. national security—for example, by impacting the nation’s vital infrastructure, its supply of essential materials, or by the proposed investment’s involvement with an important U.S.-based technology, such as microchips and advanced machine tools.
Several of those issues, especially those involving security and questions over the proposed investment’s public or private ownership, have been raised in connection with Chinese investments in Germany and the United Kingdom, and more recently in Australia as well. In the United Kingdom, the issue was the construction of the Hinkley Point nuclear power station, in which China is the main source of capital. That aspect raised concerns among the United Kingdom’s security establishment. In Germany, meanwhile, several proposed sales to Chinese investors have sounded alarm bells in Berlin. The initial case was the intended sale of the major German robotics firm Kuka to a Chinese investor, a deal that German Chancellor Angela Merkel at first strongly opposed. Her concerns focused on two issues: one was the impact on the German economy if its near-unique status in robotics development were lost in a foreign sale; the other was China’s failure to allow equal or reciprocal treatment for German investments in China. Indeed, when Merkel visited Beijing in June, she asked that local authorities give foreign firms the same “rights and privileges” as domestic ones.
Yet in both Germany and the United Kingdom, those concerns failed to stop the transactions. In the United Kingdom, Prime Minister Theresa May reluctantly acceded to the Hinkley Point project, although she added security-related steps to incorporate a governmental oversight role that would apply to similar investment proposals in the future, along with new assurances that the United Kingdom remained open to foreign investment. The same played out in Germany: in August, after months of delay, the $5 billion Kuka sale was grudgingly approved, although Vice Chancellor Sigmar Gabriel continued to argue that the issue with the sale was not, as some charged, protectionism, but instead stemmed from Germany’s insistence on “level playing fields.”
That goal remains a German concern. Berlin’s decision, in late October, to withdraw approval for the $736 million sale of the microchip maker Aixtron to a Chinese investment fund suggested an important change in German thinking to that end. It also rekindled hopes in the European Union for a bilateral investment treaty with China—one that aims, as both Merkel and Gabriel seek, to level the investment playing field. In Australia, meanwhile, Canberra blocked the sale of a large electrical grid to China, and members of parliament, backed by a group of wealthy Australian ranchers, strongly opposed the sale to a Chinese company of a cattle ranch the size of Ireland. Nevertheless, after an effort that went on for almost two years, in late October, they gave up in the face of a larger offer by mainly Chinese investors.
In the United States, unlike in those other countries, the Treasury Department’s multi-member Committee on Foreign Investment has the authority to block any potential investment that it deems inconsistent with U.S. national security requirements. In formal terms, it has rarely done so, but recently, there have been signs that Chinese investments in the United States are drawing fresh attention. Senator Chuck Grassley, for example, has proposed that the Department of Agriculture be added to the Committee on Foreign Investment, specifically because of the potential implications of foreign investments for the country’s food and agricultural supplies.
Taken together, these considerations provide ample basis to convey firmly to China’s leaders that U.S. businesses and investors warrant far more equal treatment than Beijing has so far afforded them. The United States’ leverage in that conversation will be strengthened by reminders to Beijing that it is far less dependent on Chinese investment than has been widely assumed and by the undeniable evidence that Chinese investors increasingly need and want to invest in the United States.
Fair dealing and reciprocity have been at the center of U.S. foreign economic and trade policy since the Roosevelt administration championed Secretary of State Cordell Hull’s signal accomplishment, the Reciprocal Trade Agreement Act of 1934. It is now past time to renew that legacy.