New US law sends harsh signal to foreign investors

By Pan Yuanyuan and Zhang Ming Source:Global Times Published: 2018/10/23 18:53:40

Illustration: Luo Xuan/GT


On August 13, US President Donald Trump signed into law the  Foreign Investment Risk Review Modernization Act (FIRRMA), marking the most important reform to the review process of the Committee on Foreign Investment in the United States (CFIUS) in more than a decade.

CFIUS is an interagency panel that screens foreign investments for potential national security risks. Its policies have become a sign reflecting the basic attitude of the US government toward foreign direct investment (FDI). Given the current trade war between China and the US, the CFIUS reform sends an important signal to foreign investors.

Before 2008, China was not even in the top seven countries with the most CFIUS review cases in a year. Yet, after 2008, China's ranking in terms of CFIUS cases climbed year by year to eventually lead the list of acquiring countries by 2012. Statistics showed that nearly 20 percent of the cases CFIUS reviewed in 2015 involved Chinese companies, but during the same year, the share of China's investment in the US only accounted for 0.47 percent of the total FDI in the country. The difference between the two figures is sufficient to show the stricter review process Chinese investors have been facing.

Some may argue that the increase in the number of Chinese cases with the CFIUS has something to do with the rapid growth in China's direct investment in the US. From 2008 to 2011, companies from the UK recorded the highest number of CFIUS cases, while the UK's direct investment in the US averaged $427.2 billion each year during the same period, according to data from the Bureau of Economic Analysis. Since 2012, China has become the country with the most CFIUS reviews, but its direct investment was merely $9.91 billion per year during the period from 2012 to 2015. Also, between 2012 and 2015, the average investment of Japan, Canada and France totaled $361.2 billion, $240.9 billion and $214.7 billion, respectively, but companies from these countries were subject to far fewer CFIUS reviews. The rapid growth of Chinese investment cannot justify the increased CFIUS scrutiny of China-related deals, which may be because the US government is actually biased against FDI from China.

Moreover, US concerns over national security threats from Chinese investment have been growing in recent years. The existing CFIUS review process is now not enough to alleviate such anxiety. It is under these circumstances that FIRRMA has been proposed and passed into law quickly.

To a certain extent, much of the CFIUS reform bill is directed at new trends in mergers and acquisitions by Chinese companies. For instance, it blocks investment by foreign state-owned or controlled entities, and it requires biennial reports on Chinese investment in the US. It is unclear whether there will be more specific regulations against Chinese investment.

In fact, the reason CFIUS pays special attention to China-related national security issues is mainly because China is its largest trading partner, but it is not a strategic ally or political ally of the US. The 2017 US national security strategy named China and Russia as competitors that seek to "challenge American power, influence, and interests" and attempt to "erode American security and prosperity." Such positioning is an important reason for China to be treated so differently in the CFIUS review, and more uncertainties can be expected in US attitudes toward Chinese companies in the future.

This clearly reflects the main traits of the current US review on foreign investment. First, US government agencies have taken into account too many non-economic and ideological factors when evaluating investment decisions. Second, the definitions of some key concepts in the security review are unclear, leaving too much space for speculation in execution and undermining the predictability of policy. Third, with the expanding power of the CFIUS, companies that intend to invest in the US have no choice but to passively accept whatever treatment they get.

The discriminatory practices of the US against Chinese investment indicate the possibility of extending this treatment to investment from other countries, which makes people wonder whether the US will adhere to investment openness in the future. In fact, such a deliberately discriminatory policy has also weakened the status of the US as a global business center. In 2017, FDI inflows to the US fell by 40 percent year-on-year, and in the first quarter of 2018, the country's FDI inflows dropped 43 percent compared with the same period last year.

Pan Yuanyuan is an assistant research fellow with the Institute of World Economics and Politics of the Chinese Academy of Social Sciences. Zhang Ming is chief economist at Ping An Securities. The Chinese version of the article was first published in Caijing Magazine.


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