US considers screening outbound investment amid China competition, leading experts to urge caution
- ‘We’re talking about regulating a very small portion of total investment’ in China, one tells the American Enterprise Institute
- The US Commerce and Treasury Departments have reported plans to review outbound investments, and House legislation has been introduced to create a screening process
With the White House planning to regulate US outbound investment into “countries of concern” amid a raging rivalry with China, experts urged the Biden administration on Thursday to approach the issue with “humility” and avoid hurting US interests.
“We’re talking about regulating a very small portion of total investment” in China, noted Scott Kennedy, a scholar on US-China relations, at an event hosted by the American Enterprise Institute, a think tank in Washington.
For at least two decades, he said, annual US investment in China has roughly been between US$5 billion and US$10 billion. And while US stakes have typically been about 3 per cent of total foreign investment into China, the figure stood at just 0.6 per cent last year.
Thus, Kennedy said, “we need to engage this topic with a lot of humility, because our ability, the leverage that we have, is a small portion of overall commercial activity”.
“And we want to get this right, so when we’re done with this, we want to make sure we did more good than harm,” he said.
For decades, the US has reviewed inbound investment by foreign investors through an inter-agency body called the Committee on Foreign Investment in the United States (CFIUS).
In March, the Commerce and Treasury Departments each submitted reports to Congress describing plans to review outbound investment in cutting-edge technologies that could advance capabilities of US adversaries and threaten national security.
This month, a bipartisan group of representatives introduced House legislation to create a screening process for outbound investment, to ensure that the US could quickly detect supply chain vulnerabilities and protect national, economic and health security interests where needed.
Kennedy hoped that a conversation about the legislation would produce “something more tailored” than the broad authority it suggested, saying that even though a relationship with China was a “pile of risks”, ties also delivered advantages.
Clete Willems, a partner at the Akin Gump Strauss Hauer & Feld multinational law firm, argued that these legislative actions “go well beyond what I think is necessary”.
He called reviewing “almost every investment” into China “crazy”, advocating cutting off finances for companies that “we know are affiliated with the Chinese military”.
“Because if you ask everyone just to sift through everything, you will waste a lot of time and energy and make things worse,” Willems added.
Kennedy and Willems diverged on how China would react to such regulations from Washington.
China already restricts investment, inward and outward, would they make things more difficult for us? I think that’s quite possible
Willems contended that “from a broad standpoint, I think the Chinese retaliation will be somewhat limited” since China’s economy is “not in a great spot”, adding that China was trying to “decouple” from the US “but at its own terms”.
Kennedy acknowledged that China’s response to US restrictions on the export of semiconductor technology had been moderate. However, he noted, over the last several weeks Beijing had started cracking down on some due diligence firms that help Western companies in their Chinese investments.
“So the next question is, will they go further? I mean, China already restricts investment, inward and outward, would they make things more difficult for us? I think that’s quite possible,” Kennedy said.
Elina Ribakova, a non-resident senior fellow at the Peterson Institute for International Economics, said that multilateralism was necessary for the US plan to restrict investment in China to succeed “because the best thing that China can do in response is then shift away from the US and offer deals to somebody else in order to try to break up the coalition”.
She added that if US allies felt that the restrictions on investment could potentially endanger them or hurt their producers and consumers, Washington would have to re-evaluate its costs and benefits.
