- September 12, 2016 US-China
Demystifying Chinese Investment in the United States
For almost 40 years, the US-China economic relationship has been defined by rapidly growing bilateral trade, and it is only recently that Chinese foreign direct investment (FDI) in the United States has begun to make a strong mark. These investments are likely to grow significantly, establishing another important and often beneficial economic linkage that, at its best, will support and even create American jobs. Moreover, by linking the two economies more directly, investment can also serve as ballast for what is becoming an increasingly important but more difficult and fraught relationship between the two countries.
Although bilateral trade and the success of US businesses in China have conferred substantial economic benefits onto both nations and are an important linchpin of the relationship, this economic interdependence is not without controversy and real points of friction. This is due to regular trade spats and, especially in recent years, to Chinese government policies that have restricted market access and made it harder for some US firms to compete in China. But it also reflects a lack of public understanding of the enormous economic benefits that trade in general, including trade with China, provides to Americans.
Trade, it is true, does result in very real and serious job losses, while its benefits are spread more broadly over the entire US economy. Yet many job losses are not a result of trade; they are actually driven by productivity gains related to rapid advancements in technology, a powerful force disrupting labor markets globally and affecting numerous countries, including the United States and China.
Capital flows between the two countries are already substantial. But in the past, the vast majority of Chinese capital flows into the US market were paper transactions involving the purchase of securities, particularly US Treasuries, not direct investments that involved the hiring of US workers or the building of plants and other physical assets. Indeed, cross-border direct investments generally flowed from the United States to China rather than the other way around. And these were largely one-way US corporate investments designed to help them enter and compete in the China market.
But that is now changing. China’s outbound direct investment globally has been increasing for a number of years and, where much of this investment once went to Africa and Latin America, for example, it is now increasingly directed at advanced Western economies. That has meant that Chinese direct investment in the US market is ramping up rapidly from a low base.
As a result, Chinese investments have begun to sustain or have created local jobs across the United States. In some instances, Chinese investors can be a source of growth capital to help US firms expand capacity. In other cases, establishing a strategic partnership with a Chinese investor can lead to new market opportunities in China. And for innovative American startups, China is, after all, a market that has both the scale and capacity to commercialize new products rapidly and lower the cost of nascent technologies. Chinese investment could, in this sense, benefit small and medium-sized American firms, manufacturers, and startups, as well as farmers and ranchers, all of which are facing intense global competition.
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