Rosen and Hanemann: New Realities in the US-China Investment Relationship

From the Executive Summary:

For decades, foreign direct investment (FDI) flows between the US and China were a one-way street: American multinationals invested in labor-intensive manufacturing and consumer-oriented operations in China, but Chinese firms had neither motive nor capacity to invest in the US economy. In the past 5 years this situation has changed profoundly, as Chinese investment in the US took off, and, by most measures, now exceeds flows in the other direction. This sea change suggests opportunity, but also a pressing need for policy leadership to ensure a success story does not turn into a new grievance.

Key Findings:

  • After 5 years of rapid growth, Chinese annual FDI in the US now exceeds FDI by US companies into China by most measures — including China’s own official statistics.
  •  These investment flows bring benefits for Americans, including job creation and a more competitive consumer market, and have the potential to be a major contributor to stronger US-China relations.
  • However, this turning point calls for increased policy attention, including US leadership in support of continued openness and timely Chinese investment liberalization to keep pace with changing trends on the ground.

Recommendations:

  • Chinese and US officials need to jointly acknowledge the changed pattern in two-way FDI flows. Failure to recognize new realities will cause confusion and aggravate existing perception biases on both sides.
  • In light of the data trend, leaders must correctly diagnose the threats to two-way investment growth. These risks include the possibility that the US investment screening process could be stretched beyond protecting solely national security, and that China’s steps to open its foreign investment regime could occur too slowly and half-heartedly to forestall investment protectionism abroad.
  • Reality-driven expectations will naturally fall on the ongoing US-China bilateral investment treaty (BIT) negotiations. Since the US imperative is not to open, but simply to stay open, the bold progress in these talks must principally come from the Chinese side, including a heavily trimmed down “negative list” of sectors to be partly or wholly excluded from liberalization.

Available for download here.

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