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  February 1st, 2017 | Written by

Chinese Investments in US Firms Pose Dangerous Challenge

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  • China is competing to win.
  • At least one-third of Chinese investments in the US come from state-owned enterprises.
  • Don't ignore China’s mercantilist tactics nor retreat into fortress America.

To evaluate the impact of increasing Chinese investments in the United States, US policymakers must first understand that China isn’t merely participating in the global free market—it’s playing hardball to ensure that its firms gain global market share at the expense of their competitors.

So said Robert D. Atkinson, president and founder of the Information Technology and Innovation Foundation (ITIF), in testimony before the US-China Economic and Security Review Commission.

On a deal-by-deal basis, some foreign direct investment from China is a net positive for the US economy, Atkinson said. But at least one-third comes from Chinese state-owned enterprises, and it is likely that considerably more is guided and supported by the Chinese government as part of an “indigenous innovation” strategy that employs mercantilist policies and specifically targets sectors that are strategically important for US national security or economic leadership.

“Too many economists and pundits tiptoe around China’s increasing innovation mercantilism, suggesting that its industrial policy is only a problem because it distorts markets and creates an uneven playing field,” said Atkinson. “But this is underselling the true impact. China’s economic and trade policies are not so much market-distorting as they are firm-destroying. They represent a coherent array of measures designed to attack US companies with the goal of defeating them. China is playing to win, and by focusing on the rules of the game instead of the results, America is merely playing to play.”

China’s goal is to gain global market share for its firms, whether through coercive mercantilism or legal acquisition, Atkinson noted. “In this sense, some Chinese investments—especially acquisitions of US tech firms—represent a direct challenge to US technology leadership, jobs, and national security interests,” he added. “America’s policy response needs to be grounded in a broad understanding of China’s hardball strategy and should dovetail with a concerted effort to push back on its innovation mercantilism. The right approach is neither to blithely ignore China’s brass-knuckles tactics in the hopes that a free market will work itself out, nor to close the drawbridge as a way to defend fortress America. The United States should welcome inward FDI that is market-driven and based on commercial interests, and it should block FDI that is driven by the mercantilist interests of foreign governments.”

To thwart harmful Chinese investment in the United States without foregoing the benefits of investments that contribute to the US economy, Atkinson offered policy recommendations which included reform the investment review process, insisting on mutual access and treatment, developing stronger analytic competence within the federal government, rethinking antitrust policy to consider mercantilism, and work with US allies to coordinate measures to constrain mercantilist-inspired Chinese FDI.

“It is clear that China’s number one goal is to take US technology capabilities so that Chinese firms can gain global market share at the expense of their foreign competitors,” said Atkinson. “Access to US technology and know-how is integral to China’s plan to gain and ultimately surpasses the United States in technology capabilities.

“When it comes to the economic competition between China and the United States, the United States is playing recreational softball to China’s major league hardball,” he concluded. “When China’s FDI technology firm acquisition strategy is seen in this light, it should be much more worrisome than some irritating market distortion. It’s time policymakers take action to ensure the United States can continue to compete.”