This week’s U.S.-China Strategic and Economic Dialogue addressed the gamut of bilateral issues troubling relations between the two superpowers: from the value of the Chinese currency to human rights.
But no issue may have been more important for the future well-being of the U.S. economy than the trajectory of Chinese direct investment in the United States.
Done right, such investment can create much-needed American jobs and tie the world’s two largest economies closer. Done wrong, it can undermine American competitiveness. It is up to Congress, working with the Obama administration, to lay down some guidelines for such investment to ensure that China’s appetite for U.S. assets is satisfied in a manner that is in America’s self-interest.
Chinese direct investment in the United States, through acquisition of existing U.S. companies and greenfield investment in new plants, is soaring, according to a new study, An American Open Door: Maximizing the Benefits of Chinese Direct Investment by Daniel Rosen and Thilo Hanemann for the Asia Society.
Chinese direct investment totals roughly $11.7 billion. This is dwarfed by the $77.7 billion of U.S. stock and the $1.37 trillion in U.S. government bonds owned by the Chinese. But Rosen and Hanemann believe that a tidal wave of Chinese investment is coming. By 2020 they estimate China may invest $50 billion or more in the United States.
“Is more Chinese FDI in America a good thing?” asked Commerce Secretary Gary Locke, at the Asia Society event releasing the Rosen-Hanemann study. “The answer is yes.” And there is data to support this assertion: Chinese investors in the United States pay higher wages on average than domestic firms and have increased their payrolls in recent years.
But the real benchmark is job creation. More than 10,000 Americans already work for Chinese firms in the United States. A good start. But in 1977, at a comparable takeoff point for Japanese investment in the United States, Japanese companies had nearly invested $17 billion in the United States and they already had 77,000 American employees. So with two-thirds of the investment of Japan at a similar juncture, the Chinese now employ only one-eighth the number of American workers. The job intensity of future Chinese investment matters.
Greenfield investments create jobs. Acquisitions of American firms by Chinese companies may save some jobs or they may merely replace an American boss with a Chinese owner. High profile Chinese takeovers of American companies, such as Lenovo’s acquisition of the IBM laptop business, make headlines. But since 2003, Rosen and Hanemann have identified 230 Chinese investments in the United States, almost equally split between greenfield projects (109) and acquisitions (121). The balance so far has been good. The continuing nature of future Chinese investment, not just the quantity, is critical.
With job creation in mind, Washington can then frame a China investment policy that might include the following elements:
Signal that America is open for business: Rosen and Hanemann urge Congress and the White House to issue a bipartisan statement unequivocally supporting increased investment from China.
Favor job-creating investment: Investment promotion is too important to be left solely to the states, which often squander funds trying to outbid each other. The Information Technology & Innovation Foundation has suggested that Washington offer foreign corporations a direct incentive to bring work from offshore to high-unemployment areas in America. The incentive could be in the form of a loan that would become a grant if the investor created and maintained jobs for a given period of time.
Screen investments for their impact on U.S. competitiveness:
Australia, Canada, and China review foreign investments for their economic impact. Washington has always rejected such reviews as protectionism. But such head-in-the-sand behavior only encourages demagoguery because there is no formal process for considering the economic implications of investment. “You don’t want Congress involved transaction-by-transaction,” argues Michael Wessel, president of the Wessel Group. “You need to deal with this on a policy, not a political basis.”
Demand greater corporate transparency from Chinese investors: Only a quarter of Chinese investments in the United States have been made by state-owned companies. But ties between Beijing and private companies remain murky, raising doubts about hidden public subsidies. To arbitrate between those who claim all Chinese investment is state-driven and those who claim China is already a market-based economy, Washington needs more corporate information.
Push for an international agreement on investment subsidies:
Subsidized exports violate international trade rules and can be sanctioned. Investment subsidies face no such constraints. Chinese firms should not be allowed to use the deep pockets of the Chinese Treasury to buy their American competitors or to build new facilities that drive their U.S. competitors out of business.
In the end, balancing America’s need for foreign investment with the imperative that investment serve U.S. interests will not be easy. “The challenge for policy makers,” writes Aaron Friedberg, a Princeton University professor, who was deputy assistant for national security affairs for Vice President Dick Cheney in his new book A Contest for Supremacy, “will be to separate genuine threats from imaginary ones and to resist pressures for action (or inaction) that are motivated by the pursuit of profits, rather than a genuine concern for the nation’s security.”