US Investment Policy Needs a Return to Rationality

The United States has traditionally been a country open to investment. “Traditionally” because, where Chinese investors are concerned, the U.S. is in the process of slamming its doors shut at speeds visible to the naked eye. Data from the U.S. Bureau of Economic Analysis show that the flow of Chinese direct investments to the U.S. dwindled into insignificance in 2023, with the period from 2020 to 2022 even seeing a net divestment. At the same time, while Chinese companies are investing abroad at a dizzying pace, their rate of investment in the U.S. has gone from bad to worse, and the role of U.S. investment policy in this contrast has not gone unnoticed.

The Evolution of the CFIUS’ Focus

The Committee on Foreign Investment in the United States is an important interagency committee of the U.S. government tasked with reviewing foreign merger and acquisition transactions in the U.S. and assessing the impact of foreign investments on U.S. national security. It is chaired by the U.S. Secretary of the Treasury and comprises 16 government departments and agencies, including, among others, the Departments of Defense, State, Homeland Security, Commerce and Energy; different departments provide opinions on specific foreign investment cases from their own functional perspectives.

The CFIUS was created in 1975 by executive order from then President Gerald Ford, initially in response to implicit concerns surrounding oil-exporting countries investing in U.S. portfolio assets. The U.S.’ fundamental attitude toward foreign investment is reflected in the legal changes the CFIUS undergoes, and its focus continues to evolve: In the mid to late 1980s, it was on a wave of Japanese investment and merger and acquisition activity in the U.S.; in the 1990s, it was on the rising number of foreign state-owned enterprises’ acquisitions in the U.S.; and after the Sept. 11, 2001, attacks, it was on DP World’s attempt to acquire the operating rights to six major U.S. ports, triggering concerns over homeland security. And for the past 10 years or so, the CFIUS’ single-minded focus has been on “solving” the “problem” of China investing in the U.S.

In 2018, the U.S. passed the Foreign Investment Risk Review Modernization Act. That legal reform to the CFIUS targeted investments from China, and its goals were very clear. Concrete manifestations included increased supervision of noncontrolling investments — and Chinese venture capital takes a keen interest in American companies. Another example is that sensitive personal data is one of the focuses of U.S. reviews, and China happens to have some dominant companies in pertinent industries. A representative case is ByteDance’s short video mobile application, TikTok, which has come under extreme pressure from the U.S. Congress and the CFIUS — and other Chinese internet companies are facing similar risks. A further example is how much more difficult it is for Chinese state-owned enterprises to invest in the U.S.

A Large Number of Noneconomic Considerations Presenting ‘Black Box’ Characteristics

Although the CFIUS’ new policy does not single out China in legal terms, the review criteria are almost tailor-made to match the characteristics of Chinese investors. In addition to conventional negotiations with transaction parties to propose mitigating measures, the tools and means at the CFIUS’ disposal include the right to make recommendations and impose penalties, and other enforcement measures to prevent or terminate transactions. Even though China is not the U.S.’ most important source of investments, under such particular targeting and high-pressure measures, Chinese investors are being dealt with in a discriminatory manner, and the volume of investment continues to dwindle. Direct investments are a conduit for economic ties between countries, and this conduit’s role has been greatly weakened by the CFIUS’ policies.

The new U.S. policy on investment review has shown “remarkable results,” with China’s total investments in the U.S. since 2019 — including venture capital, technology mergers and acquisitions, and other investments — all dropping significantly. In the years from 2020 to 2022, China’s direct investments in the U.S. amounted to -$1.5 billion, -$6.5 billion and -$1.3 billion, respectively; Chinese venture capital investment in the U.S. exceeded $10 billion in 2018, $3.2 billion in 2020, and by June of this year, U.S. technology companies had forced Chinese-sourced venture capital to divest.

Many of China’s technology-related mergers and acquisitions in the U.S. have been blocked due to the CFIUS reviews. Investment access is the right that pertains the most to foreign investors, and it is usually easier to control when a host country is determined to exclude a certain type of investment. As for why the U.S. refuses to grant access rights to a certain type of foreign investment, the determining factors are more complex: Domestic political considerations, lobbying by interest groups, a stubborn desire to maintain technological leadership and a serious tendency toward policy short-termism all contribute to a protectionist turn in U.S. foreign investment policy.

There are numerous noneconomic considerations to U.S. investment policy, which is one reason why, in practice, there is a “black box” quality to U.S. investment reviews.

Competition between China and the US Is Inevitable — the Key Is How To Respond to It

It is not just U.S. investment policies that have caused Chinese investments in the U.S. to drop precipitously; other policies that sever U.S.-China investment ties are emerging one after the other. Formulating new regulations for some Chinese investment transactions, prohibiting U.S. funds from investing in publicly traded securities of certain Chinese companies, tracking investors’ identities and sources of funds and combining investment policies with export controls are all policies that could be implemented in the future.

U.S.-China relations are similar to other relations between great powers throughout history where competition is an inevitable norm, the key being how to view and respond to that competition. Competition can be a force for good if the existence of competitors is seen as a driving force that motivates the country to be proactive, clear-headed and circumspect. On the other hand, if competition is seen as a life-or-death zero-sum game — one in which you need to injure 1,000 of your own just to kill 800 of the enemy — then the rationale behind the corresponding national strategy can only be dubious in the extreme.

Current foreign investment policy in the U.S. seems to be closer to the latter scenario: There is still plenty of room for U.S.-China investment cooperation, and resources are by no means limited, yet the U.S. has chosen to promote investment decoupling. In this regard, China will above all advise the U.S. in good faith; then, it will need to anticipate the irrationality of U.S. investment policies; and finally, it will maintain its own rationality and not be too easily swayed from its policy choices because of changes in the external environment.

The author is a researcher at the Chinese Academy of Social Sciences’ National Institute for Global Strategy, Beijing.