US-China investment at risk of slowdown under Senate proposal for greater FDI scrutiny, report says

·4 min read

A proposed new screening regime for American outbound investment risks harming investment relations with China and making business more difficult for US multinationals in the world's No 2 economy, a new report said on Wednesday.

US lawmakers are poised to debate a new review process for any outbound investment that might threaten critical production, supply chains or result in the transfer of sensitive technology.

The so-called National Critical Capabilities Defence Act (NCCDA) was introduced by US senators last year amid heightened geopolitical tensions and concern about pandemic-driven disruptions to production of critical goods.

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A new analysis has found that if adopted, up to 43 per cent of American foreign direct investment (FDI) to China between 2000 and 2019 would have merited review under the act.

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In value terms, that amounts to 45 per cent of the US$243 billion in FDI recorded over the period, said the report written by research firm Rhodium Group and the non-profit National Committee on United States-China Relations.

The sectors at most risk under the proposed legislation include manufacturers of medical supplies and protective equipment, disaster recovery, military and intelligence, and developers of critical infrastructure.

Besides affecting FDI, the new regime could have a negative impact on US multinationals operating in China, the report said, although the mechanism is not retroactive in nature.

Figures from the US Bureau of Economic Analysis showed that US operations in China produced US$573 billion of revenue and US$38 billion of profit in 2019.

"It's still unclear how the screening would apply to follow-on investments or the expansion of facilities," said Charlie Vest, a senior research analyst at Rhodium Group and one of the authors of the report. "For example, if a US-owned auto factory in China was upgraded to produce electric vehicles, it might be seen as a shift of national critical capabilities in a key technology to a country of concern."

US firms will also likely face greater legal and compliance costs, especially if the European Union or other developed countries do not put a similar mechanism in place, the analysis said.

A particular risk would be the possibility of violating Beijing's new data security laws, as companies would presumably have to submit confidential data to US authorities on their China operations, it added.

The proposed legislation also risks drawing the ire of Beijing. Though it is unclear how the new review process would be viewed under China's anti-sanction law, the Chinese government could label US firms as unreliable suppliers or use informal tools to raise the bar for market access.

The analysis said the new screening regime would shift US-China investment from "active" to "passive", meaning FDI and venture capital would decline when measured against combined gross domestic product.

"If the US implements an outbound investment screening regime, it would be one of only a handful of OECD economies that have formal constraints or review requirements on top of sanctions and export control regimes," said Vest.

The US leads the world in both inward and outward FDI, valued at US$10.8 trillion and US$8.2 trillion respectively in 2020, according to the Organisation for Economic Cooperation and Development.

"In its current form, the bill could also affect the US operations of foreign companies, as any subsidiaries engaged in US interstate commerce would be subject to outbound investment rules as well," added Vest.

Intellectual property-intensive operations and assets of American and foreign firms could move out from the US jurisdiction, the report said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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