New investment rules will squeeze US-China flows

Corporate America will be forced to rethink its approach to overseas deals

Rana Foroohar

National security has become the key factor governing foreign investment in the US. That is the upshot of a bill that recently passed through Congress.

Although the inter-agency Committee on Foreign Investment in the United States, or Cfius, has reviewed the national security implications of inbound foreign investment since the 1980s, it has tended to favour the benefits over the potential risks.

But the new Foreign Investment Risk Review Modernization Act, or Firrma, which is driven by fears of a rising China and had bipartisan support, marks a shift. The act strengthens the role of the Department of Defense and the intelligence community in deciding who should, or should not, be allowed to invest in the US. It will also make it a lot harder for American companies to put money into the Middle Kingdom. The result will be significant changes in how companies raise capital and do cross-border business.

Regardless of the dollar amounts involved, these shifts are among the most significant in 40 years, because they mark a new attitude on the part of the US government about American business.

Marketing slogans aside, since at least the 1980s there has been no presumption that US companies had to operate in the national interest. Goods, capital, and labour could move where they liked — that is the definition of globalisation. Most people believed that if US companies did well, Americans would prosper. But, as the past several decades of wage stagnation have shown, the fortunes of US companies and consumers are now fundamentally disconnected.

The wealth gap alone wasn’t enough to persuade politicians from either party to rethink the rules. But China is. While tariffs are President Donald Trump’s personal preoccupation, fears over losing an economic and cultural war (and possibly a real one at some point) with China is a worry that is shared broadly in the US, no matter what circles you travel in.

Midwestern men may wear “America First” hats, but coastal elites are paying top dollar to get their kids into private schools with great Mandarin programmes (better prospects at home have made Chinese nannies, once a New York status symbol, unaffordable, and new visa rules make them harder to find).

Rational or not, this anxiety puts business in an increasingly tight spot.

“In my consultations, Trump administration officials have told me bluntly that US business has sold their souls and IP to gain a foothold in China,” says Michael Allen, a member of the National Security Council in George W Bush’s administration who now advises corporate clients on security issues. “They speak in terms of breaking the dependence [between the two countries] and [say] ‘it will hurt now, but you’ll thank us later’.”

Plenty of people — both on the right and on the progressive left — have thought along these lines for years. But the fact that such views are now being openly discussed and acted upon is a remarkable repudiation of the idea that the US and China are inextricably intertwined. There are any number of reasons why the new view may be wrong: the difficulty of disentangling decades of trade and investment ties between the two countries; the market effects of trying; a change of heart from the president; or some key compromise from the Chinese (both of the latter are doubtful). But I suspect the trend has legs, and will result in the following shifts.

Corporate messaging about cross border deals will change. You will hear less talk about “transforming boundaries” and “bringing people together” and more about “strategic” dealmaking to bolster US growth. Chief executives will spend more time in Washington, not just at the Treasury but at the White House and the Pentagon. Charm offensives in advance of dealmaking will be key.

Defence contractors and large industrial groups are already in the political cross-hairs. Technology and finance will follow. Already, Chinese inbound investment has plunged from a record $46bn in 2016 to a mere $2.1bn in the first half of 2018, according to Rhodium. Now outbound investment will be under fire, too. There has been a tremendous money flow from both Silicon Valley and Wall Street to China in recent years in areas such as artificial intelligence, 5G and quantum computing.

Consider SenseTime, an AI company in Beijing with facial recognition software used with CCTV footage and digital payment systems. It has received funding from Qualcomm, Silver Lake, Tiger Global Management and Fidelity.

But the politics of those investments will become much harder, particularly while there is a perception that American investors are funding or sharing (via joint ventures or forced tech transfer) innovations, ideas and data that may be used by the Chinese surveillance state. One can imagine all sorts of tech companies, from Cisco to Google, Amazon and Facebook, coming under fire in this way.

It is not unusual for the approach to overseas investment to shift every time there is a big new player on the global scene. The previous large update of the Cfius law came in the 1980s, in response to the rise of Japan. But Firrma is different. It may well mark the end of an era in which business was just about that.

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