US faces open-door challenge
By Benjamin A Shobert
As China's economy has continued to grow and America's to struggle post the
2008 financial crisis, it has become increasingly difficult to advocate for the
good China has done for the US economy.
Earlier justifications about how China kept prices down, thereby improving
American's standard of living, have been drowned out over concerns over the
loss of jobs and the numerous quality problems of Chinese-made goods. China's
geopolitical ascendency and the country's increasing ability to exert influence
on issues over which Americans felt they had near hegemony, has only added to
these concerns.
It has come as something equal parts surprise and frustration then that,
precisely when America most needs additional
investments in its aging infrastructure and stagnant economy, one of the
countries with both the most interest and ability to make these investments
remains China, a country Americans are coming to view through increasingly
jaded eyes.
Ensuring America keeps an open door to Chinese investment is by no means a sure
thing. Regardless of party affiliation, the executive branch of American
politics has proven to be a fairly consistent advocate for ongoing Chinese
investment in the US.
Earlier this summer, at the urging of several key business lobbying groups
worried that America's political climate was making foreign investment in the
US less likely, President Barack Obama released an official statement as part
of the administration's SelectUSA Initiative.
This is designed to affirm the president's interest in, and commitment to,
seeking additional investment from foreigners into the US. In this, he stated,
"In a global economy, the United States faces increasing competition for the
jobs and industries of the future. Taking steps to ensure that we remain the
destination of choice for investors around the world will help us win that
competition and bring prosperity to our people."
But congressional politics on the matter have noticeably soured over the past
three years. In a recent US-China Congressional Commission (USCC) hearing, US
Representative Michael Michaud (Democrat-Maine), voiced the concerns of many
over whether the underlying economic rationale that has knit America and China
together is valid any longer when he stated "I am not sure there is a way to
engage economically with China that will protect our workers and businesses
from their nefarious trade practices."
For some in congress, the distrust that Michaud speaks of has resulted in what
many see as increasingly protectionist positions and proposed legislation.
As one recent example, the congressional steel caucus led by Congressman Tim
Murphy (Republican-Pennsylvania) has aggressively attacked moves by Anshan Iron
and Steel Group to take stakes in US plants. In a letter to Obama protesting
one proposed deal, Murphy wrote "China's state-owned Anshan Iron and Steel
Group made a troubling investment in US steel plants that we continue to
believe will give China a beachhead to exploit the American steel market, lead
to a loss of American jobs, and jeopardize our national security."
Against attitudes of this kind, it has become increasingly problematic to argue
not only that the status quo in trade relations between the two countries is
acceptable, but that the US should take steps to make itself further attractive
to Chinese investment.
Even against these headwinds, Chinese investment in the US is booming.
According to numbers compiled by the Rhodium Group, a New York consulting firm
tracking Chinese outbound investments, Chinese direct investment in the US has
grown 130% annually from 2008-2010 and reached US$5.3 billion last year.
Thilo Hanemann, Research Director for Rhodium, predicts that: "2011 will be
another solid year for Chinese investment in the US." According to a June
report published by Rhodium Group, "During the first three months of the year
[2011], Chinese firms spent an estimated $758 million for 6 greenfield projects
and 5 acquisitions in America." Hanemann adds that "the full year figure could
match or surpass last year's level, but that this will largely depend on
whether several large scale deals close or not."
This would be an impressive achievement given, as the Rhodium Group's June
report notes that, "The political climate for Chinese investment in the US
remains difficult." According to Rhodium, these difficulties have been
compounded in the first half of this year by "Concerns about China's openness
to foreign investment and a controversial new Chinese framework for national
security screening of inward FDI [foreign direct investment]."
Hanemann also warns that, beyond the existing and reasonably well-traveled
national security concerns that have been raised over deals like those by
Huawei and China Aviation General Industry, the alleged accounting frauds
perpetrated by several high-profile companies listed on the New York Stock
Exchange could "raise further questions about corporate governance and
transparency in China and seriously damage the brand of China, Inc." Hanemann
suggests these problems "could spill over into the debate over China's FDI into
the US".
Karl P Sauvant, the executive director of Columbia University's Vale Columbia
Center on Sustainable International Investment and author of the recent book Investing
in the United States: Is the US Ready for FDI from China?, echoes
Hanemann's comments, adding that "while outflows [from China to the US]
continue to grow, China appears to be giving preference to investments in the
EU because China feels the EU is more welcoming than the US is".
Sauvant went on to reinforce this: "The single most important factor which is
holding further investment back is the perception by the Chinese that their
investment dollars are not welcome in the US ... this goes back to the CNOOC
attempt to acquire Unocal [in 2005]. This received a lot of attention in
China."
As the Rhodium Group's principal and China practice leader Daniel Rosen pointed
out recently, while the greater quantity of investment deals completed by
Chinese firms in the US are those done by private Chinese businesses, the
largest amount of dollars invested in the US comes from Chinese state-owned
enterprises (SOEs).
The weighting towards SOE investments only serves to further the political
concerns these businesses face as they seek to deploy capital in the US. Where
American politicians have a general anxiety over Chinese business making
investments in their districts and what this suggests about America's economy,
many of these politicians become apoplectic at the idea of Chinese SOEs owning
assets that have any semblance of an American national security interest.
In fact, raising a national security concern over a Chinese firm's investment
in a US company has become one of the easiest and most politically feasible
means of dissuading such a transaction from occurring.
Sauvant acknowledges that some of these positions are understandable, if
unfortunate: "... the sort of attitudes from members in Congress and the public
in general is colored by a broader picture that the US and China are
competitors .. so anything that brings the two countries together is greeted
with mistrust."
This raises the question of what, if anything, can be done to ensure America
does not miss out on China's growing outbound investments in other countries.
To Sauvant, " ... what needs to be done is for US policy makers to demonstrate
the good that China is doing; specifically, to what extent China's investments
create jobs and exports."
At the same time, if China does desire a closer economic relationship with the
US, it will be necessary for Beijing to do three additional things.
First, the country must develop and enforce greater standards of transparency
both for its SOE sector, but also for privately owned businesses. Doing so
would help answer questions which range from what sort of influence the
Communist Party has on procurement policy and technology transfer, to more
easily addressed questions over whether accounting standards are being held to
international standards.
Hanemann adds, "The problem is bigger than just compliance to international
accounting standards. It's about whether China's regulations and legal
frameworks such as the state secrets law are compatible with Chinese
multinationals operating in OECD [Organization for Economic Cooperation and
Development] economies."
Second, according to Sauvant, "... Chinese investors need to be educated on how
to navigate corridors of power in Washington." This would help Chinese firms
regardless of state or private ownership, by running potential investment
opportunities up the flagpole and gauging whether the politics in DC will
accommodate such a move. Those Chinese businesses most capable of bearing these
costs may likely prove to be SOEs, which could further complicate their ability
to easily execute meaningful transactions in the US.
Third, Chinese businesses will need to internalize the subjective standards
that come with operating in a foreign culture. This challenge can be easily
overlooked but, as Sauvant points out, "the cultural challenges can be as
significant as the political ones ... how you do business, how you get
permission to do certain things ... for this reason you need to educate and
help Chinese executives understand how you behave in a highly sophisticated
market with established institutional systems like those in the US."
Just as the first wave of American ex-pats heading into China had to adopt
management practices that took into account the culture they were operating
within, so too will this first generation of Chinese outbound investments need
to pay attention to the differences in managerial approaches between US and
Chinese companies.
All of these changes beg the question of whether China in fact "must" move to
make further investments in the US. The analogy that most easily comes to mind
in affirming this belief is that of Japan which, in the early 1980s, set off on
an aggressive investing strategy in the US. According to Sauvant, the
similarity between Japan's investments then and China's now, is that "in both
cases you had a big country growing rapidly in economic strength and that was
considered a threat to the established order ... Japan exported a lot to the US
and that was considered a threat to US jobs."
But "the dissimilarities were that Japan in the '80s was an ally and from the
point of view of Washington was not really perceived as a strategic competitor,
but China is."
Hanemann adds that "Japanese companies operated in a slightly different global
environment than what Chinese companies face today ... a lot of the initial
Japanese investment in the US happened due to tariff barriers, which is
something that Chinese companies have not had to face as much of due to the WTO
[World Trade organization]. Japanese companies did not have access to this
protection and so they had to make local investments earlier."
To Hanemann, the result is that "Chinese companies are lagging behind where
their Japanese counterparts were at this stage of development".
In a perverse sense, could additional trade barriers imposed by congress
actually increase Chinese investment in the US? Sauvant is quick to quash such
an idea: "... tariffs send the wrong message on the part of the US in how it
sees the international order on trade evolving ... if we want to stimulate
investment in the US by China then we need a more active solicitation by the US
government, not tariffs."
This may then be the only question worth answering: does the US still believe
it stands to benefit from participation in, and competition from, the
globalized world? If so, American policy makers need to embrace the necessary
reforms that ensure Washington's fiscal house remains in order, that US workers
remain the most productive and best educated the world has to offer, and that
in doing both of these together America remains the best place for any country
- China or anyone else - in which to invest.
Undoubtedly there remain many policy challenges unique to China's investments
in the US. However, the US should be more concerned with those domestic
policies it can enact and enforce that ensure America remains an attractive
destination for outside investors.
Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com),
a consulting firm dedicated to helping Asian businesses bring innovative
technologies into the North American market.
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