SUMMARY
Direct investment flows are an aspect of reglobalization. The pandemic and related shocks slowed both US foreign direct investment abroad and inward direct investment but the August Survey of Current Business shows y-o-y rebound. Nominal returns also rebounded in 2021 vs 2020 for both outward and inward direct investments involving the US. The Biden administration continues the US trend for tougher CFIUS investment rules around national security concerns. The G2 relationship is focused on geostrategic assessments by both countries.
Cross-border Investment Update
Strategic industrial policy is regaining footing as a part of Bidenomics (through recent infrastructure, chips, climate/energy legislation, and a new biomanufacturing proposal). The strategic side of this confronts both investment in areas of national and economic security, as well as a tougher process to review inward investment in critical sectors. The last four presidents have toughened rules guiding decisions of the Committee on Foreign Investment in the US (CFIUS), to varying degree of emphasis. President Biden added to this 15-year trend with an Executive Order last week designed to give the Committee clearer guidance on national security risk factors crucial to its work. The EO adds for consideration a transactions potential effect on US supply chains, with specific mentions of microelectronics, AI, biotech and biomanufacturing, quantum computing, advanced clean energy, climate adaption technologies, critical minerals, and elements of the agricultural industrial base.
G2 Strategic Reset
There isn’t a more strategically frank relationship reset than US/China, nor one more important to near-term global growth. Core characteristic of G2 relations are frictions built especially since the Great Financial Crisis over geopolitical and geoeconomic pursuits, official and increasingly popular distrust of the other’s systems, and increasingly confrontational strategic policies.
Bytedance/TikTok has been under review by the National Security Council for the past few months as the Biden administration pushes back against China’s world-class surveillance tech sector which it uses extensively at home and exports globally. The company and its parent typify the deep disagreement over governance models, especially affecting human rights per the US perspective. Senator Hawley’s (R-MO) recent letter to Treasury Secretary Yellen continues a bipartisan congressional effort (in this case transparently mixing politics and policy) to require TikTok divest from Bytedance.
The whole-of-government intervention against China national security risks was on display today. The Federal Communications Commission added equipment and services from China telecom stalwarts PacNet/ComNet and China Unicom to its list of communications equipment and services that have been deemed a threat by US national security agencies.
Brent Neiman, an advisor to Secretary Yellen, also gave a speech today at the Petersen Institute for International Economics (PIIE) focused on cross-border credit activities. China’s strategic use of debt in emerging markets, particularly in Africa, received specific mention as a cause for concern. He warned that borrowers, lenders, and multilateral organizations share responsibility for controlling emerging market debt service burdens. A “Common Framework” began in late 2020 to address non-Paris Club emerging and developing country, including loans from China. Debt levels in such countries increased to 64% of GDP at the end of last year compared to 54% before the pandemic, according to Neiman. Debt service burdens will further constrict budgets in vulnerable countries as rates rise.
Michael Hirson initiates 22V’s China Research at the beginning of next month. His insight on the recent swirl of China strategic threat activity is that like the Trump administration the Biden team has empowered each agency to aggressively protect US interests. Michael sees a bit more coordination now than three, four years ago but no less vigor in strategically countering China.
Nonetheless, China remains in the top ten of countries closing deals reviewed by or notified to CFIUS. It’s not that Beijing can’t do business in the US, just that the past four presidents increasingly have moved against China acquiring sensitive or strategic companies. While we understand the decoupling argument, our view hasn’t change that throughout the world recent shocks have goosed the normal evolution of geopolitical ties. Concerning the G2 relationship, this reglobalization is sharply centered on geostrategic risk assessments by both countries.
