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PERSPECTIVE: Washington's Anti-Chinese Investment Rules Will Result in Job Loss

Anti-Chinese restrictions will only lead to a decline in funds for America’s high-tech developments, as well as job losses.

Sara Hsu
    Jul 10, 2018 5:00 PM  PT
PERSPECTIVE: Washington's Anti-Chinese Investment Rules Will Result in Job Loss

U.S. President Donald Trump has pulled back from his statement specifically barring Chinese firms' investments in the United States, but concerns regarding Chinese involvement in the U.S. economy remain. Anti-Chinese restrictions will only lead to a decline in funds for America's high-tech developments, as well as job losses, and sour the relationship between the world's two biggest economies.

Anti-Chinese Investment Legislation, Sentiment

In May, the White House announced plans to restrict Chinese investment in U.S. technology firms. The Trump administration backed away from this in June, instead implementing a reform of the Committee on Foreign Investment in the United States (CFIUS) in Congress that would tighten scrutiny of all foreign investment in the US.

However, some analysts believe that, despite the softened stance on Chinese investment, the CFIUS reform bill, called the Foreign Investment Risk Review Modernization Act (FIRRMA), is aimed at China. The revised bill, in fact, may include specific language regarding funding of American firms by Chinese companies. Trump has said that he will address the concerns derived from the Section 301 investigation against China using the FIRRMA legislation.

Trump has already initiated $34 billion in tariffs against China in order to punish the country for alleged forced intellectual property transfers from U.S. firms doing business in China to their Chinese partners.

Part of this was a result of the Section 301 investigation which found China guilty of forcing technology transfers. The other part was a response to a lesser-known Defense Innovation Unit Experimental (DIUx) report produced by the Department of Defense, called "China's Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels of US Innovation," which viewed Chinese venture capital investments as a tool to extract US technology secrets.

The DIUx report, along with the findings of the Section 301 investigation, has fueled the anti-Chinese hysteria in the Trump administration, stating "China is executing a multi-decade plan to transfer technology to increase the size and value-add of its economy, currently the world's 2nd largest. By 2050, China may be 150% the size of the U.S. and decrease U.S. relevance globally."

Who Loses?

The question is not whether Chinese investment in U.S. tech firms pose a threat. The Trump administration has already decided so in what can be called a slanted view of Chinese technology partnerships. The question is: who loses from barring Chinese investment?

First, some facts. Chinese investment in the U.S. declined by 35 percent to $30 billion in 2017 from $46 billion in 2016. Total foreign direct investment (FDI) into the U.S. in 2016 was $457.1 billion; of which Chinese FDI amounted to 10 percent. Half of the foreign financing in 2016 came from Europe while only a quarter originated from Asia. In 2015, China invested $11.5 billion in U.S. early-stage technology deals. That same year, the UK, Germany, and Japan contributed much more investment in the U.S. overall, as well as in the high-tech sector. In return, American automobile companies and venture capital firms have funded a number of Chinese transportation and technology startups. So, not only is China not a very large investor in the U.S., but the U.S. is also funding Chinese technology ventures.

The percentage of funds coming from China into the American high-tech sector have not been massive, but they have affected many Silicon Valley startups and represented the growing extent of cooperation between the U.S. and China. Notably, Chinese firms have funded at least 80 U.S. transportation-related startups. For example, Tencent Holdings Ltd., China's tech giant, has invested in Zoox, a firm developing self-driving cars for commercial fleets.

Importantly, this type of investment supports American jobs, as well as research and development in the high-tech sector.

Chinese-owned firms employ at least 140,000 people and fund new companies at a time when new business creation in the U.S. is at its 40-year lows.

Chinese investors are looking to make a profit, but they may have to look elsewhere if the coming investment curbs target their activities in the U.S. American high-tech startups will have to find funds elsewhere or go without, which will slow down growth in this sector and reduce employment.

American firms receiving funds from Chinese investors have not complained about forced technology transfers, indicating that the situation is quite different from that encountered by U.S. companies doing business in China.

 A better solution would be to place conditions on foreign investment from China into the U.S., rather than to cut it off. The government could stipulate that U.S. firms hide sensitive technology from foreign investors, or simply fund firms without controlling the business, as China has required for foreign and private companies investing in state-owned enterprises. Reducing investment in the U.S. economy doesn't make sense, while targeting China will only worsen relations between the world's two most economically powerful countries, compounding the trouble caused by the trade war.