Journal of Political Risk, Vol. 9, No. 2, February 2021
By Randall H. Cook
By all accounts, the U.S.-China strategic competition is alive and well. The news that China displaced the United States in 2020 as the world’s preferred destination for Foreign Direct Investment (FDI) was followed closely by publication of a new “Longer Telegram” proposing a U.S. whole of government strategy to contain PRC Premier Xi Jinping’s ambition to realign the geopolitical structure with China as the new fulcrum. The Biden Administration has sharply changed tack from its predecessor on a range of policies. But on China, there is remarkable continuity. The Trump Administration reset the U.S. strategic paradigm and there will be no going back. Complex interdependent engagement is out; realist bipolar competition is the name of the new (but really, a back to the future sort of) game.
This framing tends to draw commentators and policy makers into some familiar debates and blind alleys. Shouldn’t the U.S. oppose Chinese influence everywhere and always? Isn’t every Chinese advantage necessarily a U.S. loss? If the U.S. has fallen behind in the FDI race, this conventional wisdom holds, then the U.S. must “do something” to win back the FDI flow. While this elegant approach to ‘keeping score” in the geopolitical competition is intuitively appealing, it fails to account for a real world that, in fact, remains dynamic and complex. Worse, it leads to a reactive approach to interpreting events and choosing strategies that ultimately will disadvantage the U.S. in the ways that matter most.
In the case of FDI flows, 2020 was a tough year for FDI into the U.S. for two reasons: the pandemic plus the regulatory bite of numerous new policy initiatives intended to better-secure the U.S. economy, sensitive information, technology, and supply chains from exploitation. Most impactful to FDI among these initiatives is the Foreign Investment Risk Review Modernization Act (FIRRMA), a statute that requires increased scrutiny of FDI into the U.S. to identify and mitigate national security risk. But there are several additional, including (among others) a new review process for foreign applicants for U.S. telecommunications licenses; the Export Control Reform Act’s application of heightened controls to “emerging” technologies, such as Artificial Intelligence and Quantum computing; restriction on the use of certain non-U.S. hardware in information systems and power infrastructure; and increasing use of trade sanction authority to target Chinese companies.
As evidenced by the Solar Winds hack and similar reporting, the current threat environment does warrant a synchronized effort by U.S. policy makers and allies to address exploitation risk. But the direct economic effect of these initiatives is to depress, not expand, U.S.-inbound FDI. Each added increment of security required of companies and capital to operate in U.S. markets represents an additional iota of friction and overhead for foreign investors. This FDI-depressing effect is exacerbated by the reality that China was an enormous driver of new U.S.-inbound FDI in recent years, which is now very much no longer the case. This may be a benefit in terms of decreased U.S. exploitation risk, but it is without a doubt detrimental to FDI flow into the U.S.
The upshot is that commentators and policy makers should not over-interpret (but not entirely ignore either) “horse race” indicators like the 2020 FDI data. “Winning” in the current global competition is a more complex problem than just protecting the U.S. economy from exploitation or “beating China” in a series of metrics-based contests. Winning requires that the U.S. adapt its institutions and emerging technologies to secure critical assets while continuing to be the best place in the world for innovation and capital to interact– it will require open markets; freedom of thought, speech, and academic inquiry; protection of intellectual property; a stable, business-supportive political and policy environment; sound national investment in ingenuity; immigration policies, standards of living, and a cultural openness that continues to attract the world’s brightest and most ambitious to seek and become the fabric of new generations of the American dream.
Success also will require avoiding the blind alley of static strategy. While the U.S. and China are engaged in a bipolar competition, realist/conflict-focused analysis is not the best framing for every interaction. The structure of the game is dynamic. The most effective approach to military deterrence in the Taiwan Strait likely will be different than effective strategies for the 5G race or shaping global AI standards. In order to win the game, policy makers need to constantly evaluate how the other players in the system are operating and what strategies generate the best effects. In this complex competition, Hobbes and Waltz are important guides; but so too are Locke and Keohane.
Stated another way, the best way for the U.S. to win the global competition with China is to renew the ingenuity and resourcefulness that drove the country to prominence in the first place, and pursue strategies that are adaptive, pragmatic, and consistent with American commitments. In other words, the U.S. should get back to acting like America.
Randall H. Cook is a consultant, former federal prosecutor, in-house executive leader and counsel, Inspector General, law firm attorney, and U.S. Army officer who leads and advises organizations engaged with critical operational, compliance, and risk mitigation challenges. Randy assists companies, investors, and counsel to navigate complex risks arising from national security concerns (including the Committee on Foreign Investment in the U.S. (CFIUS) and U.S. trade controls); government and regulatory investigations and audits; and public and fiscal integrity issues.