How cutting China investment could damage US interests
"What's good for General Motors is good for America" was the old saying (slightly misquoted from the 1953 original) about the alleged link between corporate interests—those of the auto giant specifically—and the broader economy. If it were ever true, Congress this week made it crystal clear that it isn't now, at least when it comes to investing in China.
Tucked away inside a bill that passed in the House of Representatives on Friday is a provision that would establish a new process to review outbound US investment. For readers familiar with CFIUS—the Committee on Foreign Investment in the United States, which has the power to veto overseas companies' acquisitions in the US—this is essentially a mirror of that.
And it could mean trouble for the future of the US economy.
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The new bill's "Committee on National Critical Capabilities" would have the power to review foreign direct investment deals that pose "unacceptable risk to one or more national critical capabilities." While investments directed toward China aren't targeted in so many words, the language makes the intent reasonably clear: the provision deals with countries with a "history of distortive or predatory trade practices," something US officials have long said is the case with China.
"If enacted, the proposed regime could have serious implications for the US-China investment relationship," the Rhodium Group wrote in a report last month. "Our analysis suggests that up to 43% of US FDI to China over the past two decades would have been covered under the broad categories set out."
The scenario of curtailed investments—crimping sales and earnings potential in what in time is likely to be the world's biggest economy—is not lost on Corporate America. Indeed, a chorus of critics warns the endeavor could be the economic equivalent of shooting oneself in the foot.
The Chamber of Commerce on 1 February warned that the measure "would complicate efforts by US businesses to compete, grow and expand in global markets." What's at stake in dollar terms? The current amount of acquisitions and "greenfield" investments, where new subsidiaries or facilities are created, can be seen below:
The broader bill passed by the House on Friday is ostensibly aimed at strengthening US competitiveness against China, and includes:
- $52 billion over five years to support semiconductor production.
- $45 billion over six years for a new Supply Chains for Critical Manufacturing Industries Fund.
- $8.8 billion this year for Energy Department research and development programs, with that amount increasing each year through fiscal 2026.
The Chamber and other business groups have welcomed more support for American manufacturing but prefer the Senate's version of the bill—which left out prospective curbs on outbound investment. House and Senate negotiators will be heading to conference "expeditiously," Speaker Nancy Pelosi said Friday, and the co-sponsor of the Senate's version, Indiana Republican Todd Young, has said he's aiming for passage of a final bill by late May.
Upcoming House-Senate talks will offer lobbyists a chance to strip out the new commission on overseas investment. But that might not be the end of the push.
"The likelihood of tougher outbound capital controls—and of additional China-related legislation—will rise sharply if, as expected, the Republicans recapture control of Congress in the midterm elections," Dan Wang, a technology analyst at Gavekal Dragonomics, wrote in a note on 3 February.
The issue highlights the difficult landscape already facing US-based multinationals with major operations in or ambitions toward China. In June, a new law signed by President Joe Biden will take effect, banning the import of goods from China's Xinjiang region (where more than a million Muslim Uyghurs have been locked up) unless companies can prove they aren't made with forced labor. An incident with Intel Corp. demonstrated the dangers for firms active in China: the chipmaker found itself embroiled in controversy after it asked suppliers not to use any labor or products sourced from Xinjiang. After a firestorm of online attacks from within China, the American company promptly apologized.
While many US politicians and a substantial portion of the American public view investment in China as a danger to US competitiveness, it's not just businesses that see continued engagement as vital.
Christina Paxson, an economist who's served as president of Brown University for the past decade, this week highlighted the danger posed by tighter federal scrutiny of links between US universities and China.
It could "potentially adversely impact the advancement of science in this country and also economic development of this country," she said this week in an interview with Bloomberg.
"We believe strongly in academic freedom and openness and exchange of knowledge," Paxson said. "And we don't want to do anything that makes people afraid to collaborate with somebody on a great project at another university—that makes them feel like they can't do the work, the best work that they want to do."
Investors, too, could soon find their freedoms curtailed as Washington reassesses what's in the national interest.
"Some in Congress, especially Republicans, would like to expand outbound investment screening to include portfolio investments by financial institutions—whether in public equity markets, private equity or bonds," Wang writes.
Associating what's good for America with strictures on outbound capital, continued tightening of rules on imports and expanded scrutiny of links in education would be a perspective well understood in Beijing. China's Communist leadership is a veteran player on all of those fronts.
And it's true that adopting the tactics of a rival is a natural feature of engaging in strategic competition. But as Washington turns up the dial on China-directed measures, voices of concern may grow louder, and unintended consequences could spell trouble for the economy Congress says it's trying to protect.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
