The United States spent 2017 laying the groundwork needed to aggressively pressure China on trade and investment in 2018. Now it appears the pressure is on. On Jan. 17, InsideTrade reported that the administration of U.S. President Donald Trump is contemplating setting up a system of reciprocity on Chinese foreign direct investment in the United States. Under that system, the United States would treat Chinese investment into U.S. sectors the same way China treats U.S. investment into its analogous sectors. It would fall to Chinese investors to prove their desired investments would be allowed under Chinese investment rules.
Rather than limit Chinese investment, the Trump administration seems to want to force China to change its investment policies — which it has been slowly doing albeit at levels far below those expected. The risk Washington is taking, however, is enormous. The plan could face significant legal challenges internationally and domestically. And it could also harm U.S. businesses depending on Chinese investment or those with investments in China at risk of Chinese reciprocation.
Chinese investment into the United States has significantly increased over the past five years, reaching $71.8 billion in 2016 before settling down to $29.5 billion in 2017. And China protects a wide variety of industries, including aviation, telecommunications, construction, finance, agricultural biotechnology and entertainment. Washington's plan could potentially limit Chinese ownership percentages or could even entirely close off sectors of the U.S. economy to Chinese investment. Those sectors with high Chinese investment — including the high-tech, transportation, real estate and entertainment — are at particular risk.
The plan is an outcome of Washington's Section 301 investigation into China's policies on intellectual property rights. In particular, the investigation has focused on allegations that China is forcing U.S. tech companies to transfer technology to Chinese companies in exchange for investment or other incentives. To institute the changes, Trump would declare a national emergency and use his executive power under the International Emergency Economic Powers Act of 1977. Less protectionist lawmakers and business leaders are already pushing back, but protectionist lawmakers led by U.S. Trade Representative Robert Lighthizer have been supportive. It's still possible the Trump administration could ease its stance. Trump, who uses the U.S. stock market's performance to gauge his economic success, has abandoned more extreme economic measures in the past because of concerns about the stock market.
If the Trump administration stands firm on its plan, there could be considerable consequences for both the United States and China. The United States is particularly concerned about China's push into high-technology sectors, so it would not be surprising if the new plan targets those industries the hardest, to the detriment of Chinese technology companies. China could push back the same way, similarly hurting U.S. companies. In response to the plan, China may accelerate its efforts to liberalize investment into parts of its economy, but it will also certainly push back against the measures by pressuring individual companies investing in the country.
Whether the plan is ultimately implemented, it will create controversy. The Trump administration is clearly making a huge statement against Chinese economic policy, and even if this plan dissolves, another plan will take its place. The question is how will China respond.