Outlook: China-US Cross-Border Investment

Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Dr. Jean-Marc F. Blanchard – executive director of the Mr. & Mrs. S.H. Wong Center for the Study of Multinational Corporations in the U.S. and distinguished professor at East China Normal University, School of Advanced International and Area Studies – is the 268th in “The Trans-Pacific View Insight Series.”

Explain the impact of the 14th Five Year Plan (FYP) on China-U.S. cross-border investment trends.

In theory, the 14th FYP should produce increased bilateral FDI flows. China needs intellectual property (IP), advanced equipment, and markets to support its continuing effort to move up the value-added chain, boost its high-tech capabilities, and diversify markets, and FDI in the U.S. could help with this. China also will embrace FDI that improves its R&D base and yields IP, advanced equipment, and processes; enables it to supply more and better education, healthcare, and logistics services; facilitates development in more “backward” areas; aids its creation of a greener economy; and reduces inequality. American companies have much to offer in these areas. For their part, American businesses remain attracted to China because of the latter’s market size and growth, favorable FDI policies, and positive developments in sectors like financial services.

Actual FDI flows, though, most likely will fall short of the ideal due to the U.S.-China rivalry, increased Chinese nationalism, the reality that investing overseas is far from a “cake walk,” investing firms’ worries that giving up too much in the short-term will hurt them long-term, and fluctuating economic conditions.

How will China’s shift toward greater self-reliance affect bilateral investment?

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On the surface, it should reduce bilateral FDI. In the short- to medium-term, however, the opposite might be the case. China needs more IP, advanced equipment, and managerial expertise. It further needs to create jobs (which has become an issue because of the pandemic) and boost disposable incomes because both support Beijing’s quest to turn domestic demand into a bigger driver of the economy. Chinese outward FDI (OFDI) and greater inflows of FDI (IFDI) can contribute towards these ends even though Beijing clearly would not want “overinvestment” in the U.S. or excess dependence on U.S. IFDI for diverse national security, political, and prestige reasons. If the U.S.-China relationship notably declined, then it is conceivable Washington and/or American companies would become more sensitive about OFDI from China and IFDI in China. After all, a stress on self-reliance implies an exploitative stance towards FDI. Moreover, Washington likely would feel greater pressure to decouple, as challenging as it would be, because of the negative signal self-reliance sends about the direction of future ties.

As the China-U.S. tech race accelerates with Washington promoting reshoring, explain how multinationals are adapting tech supply chains.

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In 2020, there was too much hype about supply chain diversification that was completely unwarranted. Indeed, numerous Chamber of Commerce business surveys and FDI statistics undercut the notion that FDI is flowing or will flow out of China in any substantive way. China’s huge market, incomparable infrastructure, impressive supply chains, social stability, and economic prospects will support a continuing, strong U.S. corporate presence in China. Moreover, the “usual third-party suspects” like Cambodia, Malaysia, and Vietnam and potential reshoring locales in the U.S. all have various shortcomings. Still, corporate boards are contemplating supply chain relocation or reshoring because they recognize the need to devise ways to minimize their economic and political risks. This said, significant changes in U.S. manufacturing (e.g., through the use of AI or robotics) coupled with improvements in infrastructure (to be seen) and economic incentives ultimately may facilitate tech supply chain reshoring in a way politics has not.

Identify the top three U.S.-China cross-border investment challenges and opportunities for the U.S. administration and investors.

For Washington, it is ensuring U.S. national security and political interests are protected while not killing the gains that accrue from U.S. FDI in China or Chinese OFDI in the U.S. in terms of corporate profits, cheaper goods, financial capital, knowledge gains (it is too often neglected there is a two-way flow), and human capital. For American firms, it is satisfying two governments that often are headed in competing directions as shown by the issues of high-tech export controls and China’s efforts to counter the extraterritorial application of sanctions as well as U.S. sanctions against the use of cotton from Xinjiang and China’s “consumer” boycott against firms complying with such sanctions. American businesses also need to secure their position in China while dealing with a government that increasingly evaluates FDI through national security lenses, needs FDI relatively less than before (generally speaking), and views FDI in a very utilitarian way.

Identify the top three U.S.-China cross-border investment challenges and opportunities for the Chinese government and investors.

For Beijing, it is protecting China’s national security and political interests while not damaging the benefits it obtains from U.S. IFDI or Chinese OFDI with respect to jobs, IP, advanced equipment, tax revenues, and exports. Chinese firms, of course, also face the problem of making Beijing and Washington as well as the American public happy, but the latter tasks likely will be more daunting for them because of the fact that some are state-owned enterprises and thus “guilty before charged” in the eyes of many. The usual opacity of Chinese firms (coupled with Beijing’s opacity), their relative backwardness in terms of government and public relations, and their deficient corporate social responsibility practices further will complicate matters. Chinese firms face challenges, too, because what they seek through FDI—brands, high-tech IP, involvement in infrastructure projects, manufacturing, and increased usage of data-hoarding social media apps—are areas that most raise anxieties.