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Why we need to make it easier for China to invest in America

By : Ziad K Abdelnour| 24 October 2016
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I am frankly flabbergasted that with all the economic issues facing our nation today and our dire need for capital inflows to help invigorate our industries all across the board, we are giving so much hard time for Chinese foreign direct investment in the United States.

It is a fact that Chinese direct investment in our economy is set to reach a new high this year due to a wave of deals announced in early 2016. But experts say the pace is already slowing as politicians and regulators increase their scrutiny of Chinese details.

Some lawmakers are crying foul, protesting that U.S. firms can’t invest easily in many sectors of China’s economy, while the U.S. market is wide open for their Chinese competitors, or nearly so. Efforts to negotiate a bilateral investment treaty between the two countries have stalled as Beijing has sought to rope off numerous industries.

Frankly, I believe this approach is too narrow minded and blindsided and it’s part of a troubling trend.

Suspicion of Chinese motives is hardly new. After all, blaming China for America’s economic ills has been a theme of the past three presidential elections. But within the U.S. government and business community, there’s intensifying concern — ranging from wrong but reasonable to paranoid and hysterical — that China’s drive to invest in the United States is not benign.

The far smarter response would be to embrace Chinese investment. Rather than being a threat to U.S. security, it’s the best way to reduce future tension.

As China’s economy and reserves have grown, so has its appetite for investing abroad. In 2006, China did 39 deals worth $195 million in the United States. By 2015, that had mushroomed to 171 deals worth $15.3 billion. And already this year, Chinese investors have completed transactions in the United States totaling more than $3 billion, with an additional $26 billion in the pipeline.

China’s appetite encompasses multiple industries. Noteworthy deals that have gone through this year include General Electric’s $5.4 billion sale of its appliance division to Haier and Hollywood studio Legendary Entertainment’s $3.5 billion acquisition by Dalian Wanda (which already owns AMC Theaters).

But as Chinese deals in the United States have become more numerous and more ambitious, there’s been more resistance.

Last summer, security concerns prevented Tsinghua Unigroup, a state-owned semiconductor company, from buying memory-chip maker Micron Technology for $23 billion, which would have been the largest Chinese acquisition of a U.S. company by far. In February, another state-owned Chinese company bid $3 billion for Fairchild Semiconductor. That transaction fell apart after the Fairchild board “concluded that there is some non-negligible risk of a failure to obtain CFIUS approval.” Also in February, Tsinghua yanked its multibillion-dollar bid for hard-drive maker Western Digital after CFIUS decided to launch a review. There was a strong feeling that the regulators were going to run the deal down.

It’s true that semiconductors and hard drives have some security implications. The deals nixed, though, didn’t involve ultra-sensitive National Security Agency equipment but rather mass-produced, commoditized technology. In theory, China could play Manchurian candidate with such technologies, but the Chinese government already has the capacity to disrupt the semiconductor supply chain through its own domestic factories and with its various cyberwar investments. It doesn’t need to spend tens of billions in foreign investment to acquire destructive capacity.

Even deals that have at best minimal security implications have encountered stiff opposition. Recently, a Chinese company’s planned acquisition of the Chicago Stock Exchange led 46 members of Congress to draft a letter to CFIUS opposing the deal although fewer than 1 percent of all trades in the United States are handed by the Chicago exchange.

Lawmakers were similarly incensed by a Chinese company’s effort to buy Smithfield Foods in 2013. It took months of lobbying by Shuanghui International to get regulatory approval, amid concerns about theoretical contamination of the U.S. food supply. Those concerns largely missed the reason for the acquisition: to provide safer pork (produced in the United States) for Chinese consumers. If the motives were pernicious, there are far easier and more devious ways to disrupt the U.S. food supply.

My personal opinion?

Instead of raising the battlements, the United States should adopt a policy that follows the old adage “keep your friends close and your enemies closer.” Hence, the best way to preserve American security and prosperity and to keep China’s aggression in check is not to resist China’s desire to invest but to encourage it.

The more money Chinese companies pour into the United States, the more motivation China has to maintain good relations and the more it has to lose if relations turn sour.

If you are the Chinese President, the scale of these investments and capital flows becomes a serious consideration every time you contemplate an overture to Russia, or policy toward North Korea, or whether to menace that trawler in the seas around Vietnam. It is a factor when assessing how to value the yuan, and how much to confront or accommodate the United States on issues ranging from tariffs to trade agreements.

Consider that the last crisis in U.S.-China relations occurred in 2001, when a U.S. spy plane crashed on Hainan Island and put tensions on high. It may be purely coincidental that nothing even remotely as incendiary has occurred since China joined the World Trade Organization in December of that year and began its foreign investment push. But it’s striking how the U.S.-China relationship — which has all the seeds of a serious and adversarial rivalry — has avoided any serious bouts of angry words, let alone retaliatory action.

Bottom Line:

Economic ties may not guarantee peace and prosperity, but they do increase the incentives to negotiate differences and accommodate the needs and sensitivities of economic partners. That was the original intent, for instance, behind the creation of the European Union, which for all its many failures nonetheless helped end centuries of deadly conflict between the European powers.

Wake Up policy makers…. We need to make it easier for China to invest in America. Not only would it help invigorate domestic industries, but it would also provide a path to greater security. If instead we let our fears lead us to greater isolationism, we will surely lose.

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