This article was originally posted in Political Insights.
By Christian Honeywood and John M. Zindar
From hyper-high tariffs to new extreme scrutiny for visa-seeking Chinese, the White House, with growing support in Congress, is taking a sledgehammer to transpacific commerce. Christian Honeywood and John Zindar write that singling out China again in new foreign investment rules will only make things worse.
While most economists find President Trump’s stance on trade with China wrong-headed, with net negative effects on the flow of goods and services and on the United States, many also recognize the urgent need to protect against malign foreign investment targeting U.S. intellectual property.
Thus, discussions underway about long overdue reforms to the review process under the interagency CFIUS (Committee on Foreign Investment in the United States) to boost the U.S.’ ability to navigate today’s treacherous landscape of dual-use civilian-military technology should be good news.
However, these worthy goals will also create net negatives for America as the reforms are being politicized with an obsessive targeting of China, specifically aimed at stopping it from acquiring sensitive U.S. technology. This approach will interrupt the flow of capital, complicate trade relations further, and make for an unfavorable climate for foreign investors on either side of the Pacific. All protections within the reforms should be applied in an equitable and technocratically neutral manner on a case-by-case basis.
Chinese entities have targeted U.S. technology for decades. The latest stealth-capable Chinese fighter jets and other military hardware look remarkably similar to Western equivalents. Meanwhile the number of hacks originating in China that successfully target U.S. intellectual property increases.
Beyond blatant industrial espionage, China is taking more subtle approaches to acquire U.S. know-how, such as investing heavily into America via mergers, acquisitions and the purchase of non-controlling shares in U.S. companies. China is also exploiting gaps in the current CFIUC review process by investing in Silicon Valley start-ups and acquiring stakes in companies below the 10% threshold triggering a review.
Naturally, the Pentagon is concerned. A 2016 report detailed national security fears over the proliferation of dual-use military and civilian technology, and the control of critical infrastructure by rival states.
President Trump is taking action. He recently used executive power to block two deals: the merger between Broadcom (a Singaporean company with links to the Chinese conglomerate, Huawei) and US Qualcomm, over fears that Huawei may overtake the America in 5G technology; and, the acquisition of Lattice Semiconductor by Canyon Bridge, a private equity firm purportedly funded by China.
The President is correct to address this as a national security concern, but his approach needs a different, less self-destructive tack.
First, while reform to stop rivals from exploiting deficiencies in CFIUS’ review process is warranted, proposals to move from a case-by-case process to one driven by automatic watch-lists—featuring China —would not only risk worsening investment reciprocity with the world’s second largest economy, it could make the USA less attractive to other foreign investors. In an age of reckless deficit spending, the United States needs all the legitimate investment it can get, be it from China or anywhere else!
Deals should continue to be reviewed on a case-by case basis no matter the country under scrutiny and CFIUS staff needs bolstering to move through those cases more quickly as the current slow process can discourage foreign investors and tank job-creating deals.
Second, new regulation to account for cutting-edge future industries is required. Regulation of foreign control of critical infrastructure and key industries such as telecommunications and energy already exists, but as new industries develop CFIUS is failing to keep up with changing times, creating serious gaps in coverage.
Countering economic espionage has often taken a backseat to other national security concerns in America. CFIUS reform signals we are taking action to right the ship and maintain our lead in technology and innovation. But it must take care not to compromise its traditionally open approach to global commerce by economically isolating itself for the sake of national security.
The politicization and usage of CFIUS as a protectionist tool is unprecedented and signals another retreat from the free market ideals that made the United States the world’s leading economy, and afford the best security money can buy. Trump’s biased approach will create unfavorable investment conditions for foreign investors here, and U.S. investors abroad.
This new unilateral attack on the global commerce will intensify the global blowback that will damage the American economy. U.S. policy should not be incentivizing others to create unwarranted barriers to investment. Smart reforms of existing controls to foster a fair investment environment and encourage win-wins for all stakeholders are the best way to ensure our continued prosperity – and national security.
Christian Honeywood is a U.S. Air Force Reservist and works in the financial services industry. He holds an MS in Global Affairs from New York University. John M. Zindar, a former U.S. Army Intelligence officer, is an adjunct professor of global affairs at New York and Long Island Universities, as well as partner at the European-American Business Organization, Inc.