National Security and Chinese Investment — Presidential Politics?

Two recent actions by the United States, one by President Obama and another by the House Intelligence Committee raise the issue again of China – U.S. trade relations and national security.
….. President Obama ordered a Chinese firm to divest ownership in four wind farm projects under the CFIUS legislation and national security provisions of the Defense Production Act. “Obama Orders Chinese Company to End Investment at Sites Near Drone Base.New York Times (Oct. 28, 2012). This raises fears concerning the U.S. approach to foreign business and investment liberalization even though Chinese acquisitions in the U.S. has reached already a record high of almost $8 billion. “Blocked Project Raises Fears Over U.S. Approach to Foreign Business.” Financial Times (Oct. 2, 2012).
 ….. A new report from the House Intelligence Committee concludes that the expansion into the U.S. of Huawei Technologies and ZTE, Inc. (two Chinese telecom companies) would pose a national security threat. (But has found none so far.) This report is likely to add to tensions with China. But the report also comes from a Republican controlled committee during the presidential campaign. “China Tech Giant Under Fire.” Wall Street Journal (Oct. 7, 2012). China has of course lashed back with cries of protectionism. “Huawei Fires Back at the U.S.” Wall Street Journal (Oct. 8, 2012). (Congressional Report of Oct. 8, 2012).
The question that obviously arises is this just election year posturing or do these actions really portend more restrictive U.S. policies toward Chinese direct  investment into the U.S.?
Both these actions arise under CFIUS and are based on national security concerns. Yet, at this point no violation of national security or cyberespionage have actually been determined. Very little discussion has been held concerning the impact of these decisions on promoting jobs and a liberalized, open investment environment in the U.S.
 Chinese direct investment into the U.S. holds the promise of assisting in economic development. That’s why U.S. governors from many states support aggressive policies to attract such investment  from state-owned, private and Chinese investment funds. China has the money and it can help U.S. economic development. There is an unnecessary divide between Washington and the states.
The recent U.S. actions carry with them threats of a possible trade war and tougher conditions on U.S. investment and U.S. firms in China especially technology and telecom firms. To some the dispute with Huawei is really about a foreign producer that is competitive and produces good products at half the cost. The fear is that protectionism is lurking close under the surface of recent U.S. actions. If the U.S. has serious trade and intellectual property rights issues with China it should use the WTO to adjudicate them as it has many times.
Greater transparency as to corporate structure and equity ownership  is needed by large Chinese firms, even private ones,  especially those that have or had ties to the Chinese government. While concerns of cyberespionage for political and economic gain is to a certain extent reasonable, the solution may involve better verification by the U.S. of foreign products, foreign ownership or government influence.
Unfortunately, there is not a clear set of rules governing investment with China as there is governing trade. The WTO does not apply to foreign direct investment and there is no bilateral investment  treaty with China. This situation could be addressed by the new administrations in both Washington and Beijing.
 It is necessary for the U.S. to have a more balanced approach fairly assessing the many relevant factors, aside from partisan politics and  grabbing of headlines. Trust is developed by mutual actions. Better, cheaper products always tend to win in the domestic and  global marketplace. Foreign investment holds the promise of expanding local development. Persuasion and not unilateral actions are preferable as in all relations.  Our closest allies in Europe with similar national security concerns have welcomed Huawei, ZTE and Chinese direct investment.


Let’s see what happens after the presidential election when the focus returns fully to the need to increase global trade and U.S. jobs.

About Stuart Malawer

Distinguished Service Professor of Law & International Trade at George Mason University (Schar School of Public Policy).
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