In the past month, the House and Senate each marked up legislation to reform the Committee on Foreign Investment in the United States (CFIUS), an interagency body that vets sensitive acquisitions of U.S. assets. The vehicle for the legislation is the National Defense Authorization Act (NDAA), which is fitting, since the legislation is aimed at the country which presents the greatest current threat to American security: China.
The legislation is long overdue. CFIUS has done its best to prevent America’s national-security interests from being compromised by foreign acquisitions, but to deal with China, it needs new authorities and more resources.
However, there is a loophole in the new CFIUS regime that Congress envisions. Neither the House nor the Senate bill addresses ”greenfield investment” by Chinese state-owned enterprises (SOEs).
“Greenfield” assets are investments in new facilities in the United States. Since greenfield investments hold the promise of creating American jobs, state governments usually welcome them and often provide tax breaks and other incentives to get them.
That may be appropriate where the foreign company is Toyota, BP, BMW, or other private businesses that build factories in the United States because that is the best place for them to make a profit as they sell their products in the globalized economy.
However, Chinese SOEs do not pretend to be private enterprises. They are wholly owned subsidiaries of the Chinese state, and their purpose is to advance the strategic national priorities of the Chinese regime. While the SOEs are fine with making money when possible, they are really about capturing markets and controlling technology in areas that will advance China in its national competition with other countries, and in particular with the United States.
The SOEs are heavily supported by the Chinese state in every conceivable way. Their domestic markets are protected. They are controlled by the regime, financed by Chinese state banks (themselves SOEs), directly subsidized by the government, and the beneficiary of technology which the Chinese state steals or extorts from American firms and other foreign companies.
In short, the SOEs are at the center of China’s national economic strategy, which it implements through what the U.S-China Economic and Security Review Commission has called China’s “Technonationalism Toolbox” of various illicit and/or illegal trade, regulatory, and financial practices.
The rest of the world is beginning to catch on to these practices. China is well aware of that; it knows that the temperature for buying foreign companies is getting hot and will likely remain so. Two years ago, for example, the China Commission recommended that Congress flat out forbid SOEs from purchasing any American company. The CFIUS-reform bills making their way through Congress flow from that recommendation and others like it.
So we can expect Chinese SOEs to turn to more greenfield investments as another and seemingly more benign way of pursuing their national goals. They will build plants abroad, often with the assistance of state and local development programs, and then use their indigenous branches to flood the foreign market with their products and force local competitors out of business.
That may produce short-term losses for the SOEs, but they can well absorb those because of the support they receive at home. Longer term, the strategy enables them to capture markets and damage their biggest technological competitors, which is their main goal.
One example is from the Australian railcar industry. According to a 2016 report by Oxford Economics, “in under 10 years, all Australian manufacturers have largely ceased production or have gone out of business.” The Oxford Economics analysis found that most of Australia’s railcar manufacturing is now controlled by CRRC, a Chinese state enterprise.
China’s General Chamber of Commerce recently announced that greenfield investments are now the most common way that Chinese companies enter the American market. Not all of those investments are by SOEs, of course, but concerns over the trend is one of the reasons the China Commission recommended last year that Congress give CFIUS the authority to review greenfield investments.
Congress walks before it runs, and it is still getting its arms around how best to respond to China’s long-term strategy for dominating crucial segments of the global economy. So I’m not surprised that the current reform bills don’t deal with the greenfields issue. But Congress and the Trump administration are going to have to deal with it. When a Chinese SOE builds a greenfield asset in the United States, there are usually other objects besides profit in view — objects that do not bode well for American workers or American national security.