Biden’s Screening Test, The Wire China, Mar. 5, 2023.
Despite strong political pressure, it will be hard to limit American investment into China
The U.S government is poised to increase its scrutiny of the billions of American investment dollars flowing into Chinese high tech firms. But putting the policy into practice may be harder than many in Washington expect.
The idea behind what is known as outbound investment screening is simple: while Washington has processes to review and block investment from China into the U.S., through the interagency body called the Committee on Foreign Investment in the U.S. (CFIUS), the government can’t do much to screen and prevent the likes of American private equity firms or large multinationals from pouring money into Chinese companies.
Support for a new review process is strong in Congress, where lawmakers from both parties have voiced concerns about U.S. venture capital firms and others from funding technological development in “countries of concern” like China, particularly in the military sphere — contrary to U.S. national security interests.
But while the Biden administration has plans to release an executive order on investment screening in the coming months, numerous questions remain about the details involved. Several former U.S. officials, lawyers, and export control experts told The Wire that it is hard to craft a policy when the government has very limited visibility into the current investment flows. Plus, if the scope of screening is overly broad, it could result in unintended downstream effects.
“The government does not have a lot of information about the investment that is occurring and the impact of those investments,” says Aimen Mir, a former senior CFIUS official who is now a partner at the global law firm Freshfields. “It is an area where we want to tread carefully.”
Source: The Wire China
Even if you buy all the commercial datasets that you could find, you still would not be able to answer these questions [about what type of investment is occurring]. It almost seems irresponsible to craft policy before doing the data collection.
Despite intensifying political tensions between the U.S. and China during the Trump administration, parts of the economic relationship remained remarkably strong, particularly when it comes to investment: In 2020, American venture capital firms poured $2.5 billion into Chinese firms, according to data from Rhodium Group, with two of the biggest target industries being artificial intelligence and big data.
Recent investment levels have dropped sharply, while big investors have faced growing criticism: Large U.S. private equity firms like KKR, GGV Capital and Silver Lake have landed in hot water for financing Chinese companies involved in state surveillance, such as SenseTime and Megvii.
Still, beyond these prominent examples, it is difficult to track the type of investments occurring, largely because American firms have few disclosure requirements.
“Even if you buy all the commercial datasets that you could find, you still would not be able to answer these questions [about what type of investment is occurring],” says Emily Weinstein, a research fellow at the Center for Security and Emerging Technology (CSET) who has spent months researching U.S. investment in Chinese AI firms with her colleague, Ngor Luong. “It almost seems irresponsible to craft policy before doing the data collection.”
The U.S. government has never implemented a systematic outbound investment screening process, and there are few international precedents either. Taiwan is one notable exception: the island implemented investment screening focused on high tech industries like semiconductor manufacturing in the 1990s.
Yet there are fundamental differences in the ways that government and businesses interact between the U.S. and Taiwan. For example, Taiwanese companies already have to register any overseas investments with the government, while the state has traditionally been more involved in supporting and funding high tech development, as Cindy Whang, an assistant professor at Fu Jen Catholic University School of Law in New Taipei City, points out.
“There is a different starting point,” she says. “To go from zero to having screening is a huge challenge.”
Given the practical difficulties the government faces, the Biden administration could opt for a limited executive order which would include an investment notification regime, according to recent reports. That would help solve the visibility issue by requiring companies to provide information to the government about their investments in China, along with a screening process for select industries, like semiconductors, quantum computing, and AI. A spokesperson for the National Security Council declined to comment.
What I continue to worry about is that it is very easy for people who want to push this through to criticize people who want to slow down as anti-patriotic or not tough on China.
“You don’t have to do it all in one fell swoop,” says Clete Willems, a partner at Akin Gump and former economic official in the Trump administration. “You can start with a few industries where you know there are issues and then build out from there. The perfect should not be the enemy of the good.”
But a limited executive order might not satisfy China skeptics on the Hill, where investment screening proposals have been far more expansive. Senators Bob Casey (D-PA) and John Cornyn (R-TX) have pushed for including a review mechanism in the CHIPS and Science Act that passed last summer, which would have targeted investments threatening not just national security, but also supply chain security. Such a process could, for example, prohibit a U.S. battery company from moving its manufacturing base to China.
If more hawkish members of Congress believe that any eventual executive order does not go far enough, they may move to pass additional legislation. Representative Michael Gallagher, who chairs the House’s new China Select Committee, recently told The Wire that while he didn’t yet have a detailed policy proposal, “it’s reasonable to say that American dollars, particularly the health of American retirees, should not be dependent on the success of genocide or PLA military modernization,” referring to U.S. investment in companies in China’s Xinjiang region, where the government is accused of human rights abuses against the Muslim Uyghur people.
Such strong language concerns some experts who want a more reasoned debate.
“What I continue to worry about is that it is very easy for people who want to push this through to criticize people who want to slow down as anti-patriotic or not tough on China,” says Sarah Bauerle Danzman, an associate professor at Indiana University Bloomington and expert on investment regulation. She adds that targeting supply chain security would not impact the underlying economic reasons why a company might wish to move a factory to China.
“That requires a different set of policy responses, including a focus on things like providing subsidies and making markets in a way that we see the administration doing through CHIPS and Science Act,” she says.
Other downsides to even a limited investment screening process include the possibility that it could force out a lot of legitimate business between the two countries, and bog down any investment in bureaucratic processes. There are also definitional challenges: any new process that targets AI, for example, would likely catch a large number of companies in its scope, given the widespread use of the technology now.
Business groups argue U.S. companies could lose out on profitable opportunities to rivals in Europe and Asia, if other countries don’t follow suit with their own screening measures; and that American pension funds could be locked out of investing in the world’s second largest economy.
If American companies alone are forbidden from investing in China, our other global competitors will receive an asymmetrical advantage.
“If American companies alone are forbidden from investing in China, our other global competitors will receive an asymmetrical advantage,” says Craig Allen, the president of the U.S.-China Business Council. “We appreciate and agree with the need to protect U.S. national security, but we need to get the details right.”
Who will be in charge of those details is another important question. Some have proposed setting up an interagency committee, akin to CFIUS, housed at the Treasury Department or the Office of the U.S. Trade Representative.
Mir, the former CFIUS official, says that a similar body would be under pressure given the fast moving nature of investment decisions and the volume of transactions it may be tasked with reviewing. It would also have to consider potential evasion tactics, like firms setting up shell companies in third party countries in order to invest in China.
“CFIUS is good at some things and not as well suited for other things. CFIUS’s strength is its ability to bring together a diverse group of government agencies,” he says. “It has a more difficult time reaching quick conclusions on very complex transactions.”