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A public policy blog from AEI
Congress is about to take up reform of the Committee on Foreign Investment in the United States (CFIUS) process. The CFIUS process, which is overseen by an interagency committee headed by the Treasury Department, scrutinizes proposed mergers and acquisitions by foreign companies that could have an impact on US national security. Its congressionally mandated purpose is to “protect legitimate national security interests while promoting foreign investment.” The dual mandate juxtaposes two potentially conflicting goals whenever Congress moves to update and “modernize” CFIUS.
This is the first of two blogs that will analyze the issue posed by the rapidly evolving challenges thrown up by new conditions surrounding foreign direct investment (FDI), including the dramatic increase in cross-national investment and, most particularly, the rise of China, with its (thus far) highly successful model of state capitalism as the progenitor of technological advance. This blog will deal more broadly with the underlying conditions of competition and relevant guiding principles. The follow-on piece will delve more deeply into specific issues that Congress must decide as part of the legislative process to reform CFIUS.
Let’s start with economic fundamentals: Inward FDI is an almost unalloyed benefit to the US economy and standard of living (so is outward FDI, but that’s another story). The United States is both the largest foreign investor in other countries and the biggest recipient of foreign investment—the total accumulated US outward investment amounts to $7.4 trillion, and cumulative inward investment also about $7.4 billion (US Department of Commerce, market value). Some seven million US workers are directly employed by foreign companies (about 6 percent of total private sector employment), and these jobs provide on average almost 25 percent higher compensation than US domestic firms.
Sources of foreign FDI: China versus the rest
In the developing fierce debate over reforming CFIUS, Chinese investment in the US clearly serves as the catalyst for both fear and motivation for updating the US FDI regime. Of note, however, is that China is a latecomer to investment in the US economy. As late as 2014, some eight countries (not including the PRC) dominated US inward investment (80 percent): the UK, the Netherlands, Germany, France, Switzerland, Japan, Canada, and Luxembourg. Compared with these numbers, Chinese investment in the US was — and is — a small percentage of total inward FDI.
But in 2016, as documented by AEI scholar Derek Scissors, Chinese investment in the US jumped from about 3 percent of its total world investment to 30 percent (or about $50 billion). Chinese investment in the US has also broadened, including strategic sectors such as technology, finance, transport and real estate, and energy. Despite root fears of state-owned enterprise (SOE) dominating the investment landscape, SOEs have not played a prominent role in Chinese FDI in the US.
Although still relatively minor in terms of total FDI investment flows to the US, Chinese investment activities occupy a prominent place in the CFIUS review process. For instance, according to the most recent CFIUS annual report, from 2013 to 2015, the interagency group reviewed 387 covered transactions, of which 74 (or 19 percent) were Chinese (China was number one among all the countries). Furthermore, the annual total of CFIUS notices is steeply rising, with a total of 170 in 2016, on route to 250 in 2017.
Although certainly part of increased CFIUS scrutiny stems from the normal consequences of growing Chinese investment, it also reflects darker and more ominous developments in China. As earlier blogs in this series have chronicled, under the Xi Jinping regime, the PRC has steadily moved to close its markets, particularly in high-tech sectors, to foreign competition — or make it virtually impossible to compete on fair market terms. In addition to earlier government-backed theft of intellectual property, Beijing has added the use of the Great Firewall (censorship) as a tool of protectionist industrial policy and passed so-called security legislation (National Security Act and Cybersecurity Act) that potentially mandates turning over private source code and encryption passwords to government officials. Further, with the publication of the Made in China 2025 plan, Beijing has openly committed to replacing foreign technologies with domestic capabilities and firms.
Given this background, Congress, as it moves toward legislative reform of CFIUS, should be guided by a realistic set of principles and cautionary notes, including:
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