Scarcely reported by mainstream press outlets, at the very end of 2022 President Biden signed into law the huge fiscal year 2023 $1.7 trillion spending bill in which tucked away were provisions for Washington to establish a new mechanism to assess the extent to which U.S. firms’ investments abroad engender national security risks at home.
Marrying the now-familiar—but for years considered esoteric—national security screening procedure the Treasury-chaired interagency Committee on Foreign Investment in the U.S. (CFIUS) uses for judging inbound foreign investment transactions consummated on American soil, the U.S. is slated to become the first major Western country to assess domestic national security risks stemming from the nation’s firms’ outbound foreign investment transactions.
There is little question that the maturation and extensive complexity of the world’s cross-border supply chains have fundamentally altered the threat environment endemic to international commerce. This is epitomized by the plethora of such networks winding their way into and out of China—the most populous country on earth, commonly referred to as “the global factory,” and overseen by the nation’s strongman, Xi Jinping, who recently was elected to an unprecedented third five-year term as General Secretary of the China’s Communist Party.
The challenge for policymakers in the West is how best to mitigate potential concomitant national security risks effectuated back home as their businesses, imbued with the capitalistic fervor to compete not only with Chinese firms on their own turf but also with one another in the world’s second largest economy to inure benefits to their domestic consumers, workers, and shareholders.
The tension between operating a business according to the dictates of capitalism in today’s global marketplace and abiding by allegiance to your “home” country flag cannot be overstated. Defining and implementing a policy regime of “economic patriotism” that dissipates that tension is hardly a needle that is easy for the world’s advanced democracies to thread. At the most fundamental level, depending on how it is attempted, it risks making the advanced democracies adopt China’s playbook rather than the other way around.
How Did We Get Here?
It is little secret that the new provisions enacted by Biden, which were largely hatched on a bipartisan basis on Capitol Hill but with at least tacit approval by the White House, are mostly aimed at curbing—and possibly unwinding—U.S. firms’ investment in China in “sensitive” sectors, although the law does not preclude its application in other geographies. Under the statute, the Treasury Department and Department of Commerce were mandated to prescribe the implementing regulations.
Even less of a secret has been strong opposition to the emerging regime by U.S. international companies, private equity firms, and banks. They hardly relish being restricted from investing in or possibly being mandated to exit from China. Adding further salt to these wounds is that unless other Western government adopt similar restrictions, U.S. firms believe they will be put at a global competitive disadvantage in China vis a vis their peers. Much of the hatching of the idea behind such a regime took place a few years ago in deliberations by The U.S.-China Economic and Security Review Commission, an entity that was created by Congress in 2000.
While not always explicitly mentioned, the concept underlying the new legislation is to create incentives for U.S. businesses who otherwise source inputs abroad in countries whose pursuit of commercial objectives erode the competitiveness and national security of the U.S. to embrace a doctrine of “economic patriotism.” On its face, it is hard to disagree with the notion of refraining from abetting the economic fortunes of nations whose goals—sometimes made quite explicit—are to undermine those of ours.
As is almost always the case in making international economic policy in today’s complex system of interrelated markets—interrelated both horizontally (competitor to competitor) and vertically (supplier to buyer)—the question becomes how best to operationalize such concepts in way that we do not inflict net costs on ourselves.
The term net is critical here, just as what is meant by costs. But the principle is straightforward: if supply chains are reoriented to other locales (for example, outside of China) where production costs turn out to be higher, resulting in an increase in “total delivered costs” to U.S. consumers, are we as a nation willing to pay that “surcharge”? Obviously the answer to that question turns on what value we assign to any improvement in our national security engendered by that shift.
Suffice it to say, not only is it a complex calculation to make—fraught with having to make complex, intangible assumptions—but different Americans will likely make different valuations on the incremental national security benefit that results. Needless to say, this is not an argument against having such a policy.
There are of course many other costs and benefits that would come into play here. To state one of the most obvious, if there are net economic benefits accruing to Americans by having a market-driven economic system where businesspeople make supply chain decisions, how much risk do we want to absorb by relying on others to make such determinations? Again, this is not to suggest a specific answer to this question is wrong or right. It is simply to point out that these are not trivial issues with which to contend. And it will likely be hard to have a great deal of confidence in ensuring that the answers proffered are not error-free.
As a veteran international policymaker on economic and business matters, I wish those of us in the field had more confidence in that trade!
Apart from these overarching operational issues in determining the extent to which a doctrine of economic patriotism is feasible, there are also factors at a more micro level that must be considered.
The operations of CFIUS with respect to assessing risks to US national security from inbound investments in our country is one thing. We have access to data through US enforcement agencies on the ground at home as to the underlying identities of foreign entities doing business here or that have applied to do so.
That is a very different picture than what one faces in many foreign countries outside the Western advanced nations, especially in emerging markets like China, where the quality of data can be very low and such data are open to government manipulation. The result is that determining who is, and who is not, the beneficial owner of many of the entities with whom U.S. and other foreign entities might co-invest is fraught with errors. (I say this as someone who has worked on the ground in China for several decades, especially on corporate governance issues.)
Moreover, the notion that the Chinese or other foreign governments in emerging markets would welcome—or not interfere with—U.S. or other Western regulators in-country to engage in the type of due diligence done at home in assessing the national security issues attendant to transactions is a bit fanciful.
Finally, it would be naïve for Western regulators making such in-country assessments to not attribute a positive value to the benefits engendered in such countries precisely because Western investors are participating in the local economy. All other things equal, it may well be the case that such positive spillover effects actually reduce national security threats to Western countries in their own home markets.