Henry M. Paulson Jr via Caixin | Trade does result in very real and serious job losses, while its benefits are spread more broadly over the entire U.S. economy. Yet many job losses are not a result of trade; they are actually driven by productivity gains related to rapid advancements in technology, a powerful force disrupting labor markets globally and affecting numerous countries, including the U.S. and China.
Capital flows between the two countries are already substantial. But in the past, the vast majority of Chinese capital flows into the U.S. market were paper transactions involving the purchase of securities, particularly U.S. Treasuries, not direct investments that involved the hiring of U.S. workers or the building of plants and other physical assets. Indeed, cross-border direct investments generally flowed from the U.S. to China rather than the other way around. And these were largely one-way U.S. corporate investments designed to help them enter and compete in the China market.
But that is now changing. China’s outbound direct investment globally has been increasing for a number of years and, where much of this investment once went to Africa and Latin America, for example, it is now increasingly directed at advanced Western economies. That has meant that Chinese direct investment in the U.S. market is ramping up rapidly from a low base.
As a result, Chinese investments have begun to sustain or have created local jobs across the U.S. In some instances, Chinese investors can be a source of growth capital to help U.S. firms expand capacity. In other cases, establishing a strategic partnership with a Chinese investor can lead to new market opportunities in China. And for innovative American startups, China is, after all, a market that has both the scale and capacity to commercialize new products rapidly and lower the cost of nascent technologies. Chinese investment could, in this sense, benefit small and medium-sized American firms, manufacturers, and startups, as well as farmers and ranchers, all of which are facing intense global competition.
On a broader level, as the U.S.-China relationship becomes ever more challenging, bolstering and sustaining cross-border investment can set a new tone for its progression. Chinese direct investment can provide stronger and more enduring economic linkages — in some ways more permanent than bilateral trade — while also supporting American growth. Direct investment reflects a vote of confidence in the American market and its workers and a belief in the long-term resilience of the U.S. economy.
Of course, many other factors can affect the ebb and flow of investments, not least of which is what happens in the Chinese economy, including currency movements and capital controls. Still, such cycles are normal and unlikely to affect the overall trend. Plenty of Chinese investors, much like their counterparts from Europe, Japan, and elsewhere, continue to view the U.S. as one of the most stable and dynamic markets in the world.
There are good reasons to believe this trend will persist. First, macroeconomic conditions are changing rapidly in China, and its current growth model is leading to diminishing returns and limiting attractive opportunities for Chinese investors in their domestic market. Second, many Chinese companies have reached a point where their success in the home market has naturally led them to pursue global expansion and attempt to build global brands. Third, Chinese investment targets are shifting from natural resources and commodities in developing countries toward the consumer, enterprise technologies, services and high-tech markets.
These factors indicate that Chinese investment has the potential to grow rapidly, but whether it actually does will depend equally on the ability and willingness of the U.S. — federal, state, and municipal governments, as well as U.S. firms — to capitalize on these dynamics and continue to embrace foreign investment. This requires the creation of an investment climate that welcomes global capital, including Chinese capital. The eventual completion of a U.S.-China Bilateral Investment Treaty (BIT) would go a long way toward that end by making the rules and institutions that govern investment more predictable.
To keep direct investments flowing, the U.S. will also have to compete with other advanced markets, such as the European Union. It is no secret that competition for Chinese capital is fierce from Asia to Europe. Britain and Australia, too, have been favored destinations of Chinese investment, although politics in both countries have, as in the U.S., started to yield a backlash. The U.S. will not fully benefit from Chinese capital if it fails to maintain an environment that attracts, rather than spurns, foreign investment in general and Chinese investment in particular.
To be sure, while direct investment can bring enormous opportunities, it also comes with a daunting set of practical and execution challenges. Simply having demand for foreign capital or the desire to make an investment is insufficient. Above all, a prospective deal has to make economic sense, providing the investor with adequate returns and the recipient with new opportunities. The U.S. is a comparatively open and transparent market, but identifying and executing on transactions is still a complex process. It involves complying with a thicket of federal and state regulations, accepting some level of political risk, accommodating local stakeholders, and addressing corporate culture mismatches, among other considerations.
All these factors matter even more when it comes to the U.S. and China, where differences in culture, legal and regulatory regimes, basic understanding of the respective markets and opportunity sets, political dynamics, and information asymmetry amplify these challenges. As a result, some investments will invariably fail to be consummated for various economic, legal, and political reasons. And many deals, once consummated, will turn out to be not so successful.
Although the level of Chinese investment remains relatively modest, some of the larger deals have already raised national security and related concerns about the nature and intent of those acquisitions, particularly when they are concentrated in high-tech sectors. That fear is often unwarranted and stems from a common misunderstanding of how investments work.
Foreign investors, Chinese or otherwise, tend to seek stable environments in which to put their capital and typically look for steady, long-term returns. When it comes to physical assets, such as plants, manufacturing facilities, and property, the identity of the investor may change, but the actual assets almost never leave the country. The upside is that the U.S., in the meantime, potentially stands to gain an important new source of capital.
Moreover, on balance, Chinese investors, whether state-owned enterprises or private firms, have largely behaved like other international investors in the U.S. market: they are looking to diversify their portfolio with good assets and deploying capital into sectors that have complementarities with the Chinese economy and can meet domestic demand.
Despite these positive trends, challenges and barriers — some unavoidable, some imposed by the U.S. government in its national interest, and some counterproductive — prevent Chinese direct investment from reaching its full potential. The impact of these barriers and obstacles, such as mutual misperception, should not be lightly dismissed.
As adverse as today’s politics are, the reality is that almost every foreign direct investment has had a political dimension. Indeed, it is becoming increasingly important for the parties involved on both sides of a prospective deal, particularly those involving Chinese investors, to address and mitigate the politics. Chinese investors certainly have a learning curve to climb in managing not just political issues at the federal level but also grassroots politics at the local level where the investment occurs.
This is no easy task, and there is simply no one-size-fits-all solution. The U.S. market is complex, regulations differ across states, and local politics are diverse. So for any Chinese investor, it is necessary to adhere to a high standard of transparency and faithfully comply with the legal processes and norms to complete a transaction.
