U.S. Cuts Itself Off From Future Chinese Profits

 

moon of alabama

Yesterday Secretary of the Treasury Janet L. Yellen gave a speech on the U.S.-China economic relationship. It's a bit like of declaration of war:

Our economic approach to China has three principal objectives.

First, we will secure our national security interests and those of our allies and partners, and we will protect human rights. We will clearly communicate to the PRC our concerns about its behavior. And we will not hesitate to defend our vital interests. Even as our targeted actions may have economic impacts, they are motivated solely by our concerns about our security and values. Our goal is not to use these tools to gain competitive economic advantage.

Second, we seek a healthy economic relationship with China: one that fosters growth and innovation in both countries. A growing China that plays by international rules is good for the United States and the world. Both countries can benefit from healthy competition in the economic sphere. But healthy economic competition – where both sides benefit – is only sustainable if that competition is fair. We will continue to partner with our allies to respond to China’s unfair economic practices. And we will continue to make critical investments at home – while engaging with the world to advance our vision for an open, fair, and rules-based global economic order.

Third, we seek cooperation on the urgent global challenges of our day. Since last year’s meeting between Presidents Biden and Xi, both countries have agreed to enhance communication around the macroeconomy and cooperation on issues like climate and debt distress. But more needs to be done. We call on China to follow through on its promise to work with us on these issues – not as a favor to us, but out of our joint duty and obligation to the world. Tackling these issues together will also advance the national interests of both of our countries.

To use undefined "values", undefined "vital interests" and undefined "international rules" always make for a sorry excuse for mischief. To claim "unfair economic practices" in China when it is the U.S. that is breaking its own rules left and right is embarrassing. As Edward Luce writes In today's Financial Times:

Today’s US cannot make trade deals, cannot negotiate global digital rules, cannot abide by WTO rulings and cannot support Bretton Woods reforms. [So] how can China be squeezed into a US-led order in which America itself has stopped believing?

One can of course forget about the third point when the first and second are made. There will be no cooperation when the other points create a hostile confrontation.

Yellen then discusses the three points in more detail. Under 'National Security' she says:

We also carefully review foreign investments in the United States for national security risks and take necessary actions to address any such risks. And we are considering a program to restrict certain U.S. outbound investments in specific sensitive technologies with significant national security implications.

How is prohibiting U.S. investment in China helping with national security? The U.S. has other tools to prevent Lockheed Martin from build new missiles in China. So what investments are envisioned here?

Two days ago Politico had a preview of the program:

Unprecedented rules limiting American investments in China are expected later this month — and the administration has begun briefing industry groups like the Chamber of Commerce on the broad outlines of the executive order, which is expected to require companies to notify the government of new investments in Chinese tech firms and prohibit some deals in critical sectors like microchips.
...
Since the Trump administration, national security lawmakers and Cabinet officials have sought to craft new rules to oversee — and potentially block — U.S. investments in Chinese tech sectors. The goal is to prevent American firms from funding or developing tech that can later be used by the Chinese military.

But that is only a sorry excuse. This is an escalation in the economic war against China. As Politico continues:

Those moves would come on the heels of aggressive trade action last year, when the administration put in place new export rules that explicitly sought to undermine Beijing’s prized microchip sector and passed massive industrial policies aimed at breaking reliance on the Chinese economy. At the time, national security adviser Jake Sullivan was clear that the goal of the strategy was to preserve America’s competitive edge in emerging high-tech industries, even if Washington does not pursue a broader decoupling.

“We must maintain as large of a lead as possible” in high tech sectors like microchips, Sullivan said, previewing new Commerce Department rules released in October that sought to grind Chinese chip development to a halt.

This has nothing to do with national security but with suppressing economic competition.

The new rule prohibiting U.S. investments in China will apply to three large sectors:

While policymakers last year considered including up to five major Chinese industries — microchips, artificial intelligence, quantum computing, biotechnology and clean energy — in the order, the biotech and clean energy sectors are now likely to be left out of the program.

To prohibit U.S. investments in those three sectors is still silly.

China does not lack investment money. Its capital account balance is positive and China is investing more abroad than foreigners invest in China. In the last quarter of 2022:

- Foreign Direct Investment (FDI) increased by 27.7 USD bn in Dec 2022.
- China Direct Investment Abroad expanded by 44.2 USD bn in Dec 2022.

China also does not lack know how. It is researching and developing at a high level in all the same sectors where the U.S. is doing it.

Prohibiting U.S. investments in new Chinese chip factories or AI models will only hurt U.S. industries. In earlier decades foreign companies which develop stuff that was of interest for large U.S. companies were bought by U.S. investors. Their knowledge and/or production was replicated in the U.S. or they continued running as before but with their profits flowing into U.S. pockets.

China is the most dynamically developing society. There is a high likelihood that it will find and develop new things before the U.S. will do so. But instead of riding that wave and investing in it the U.S. will prohibit itself from profiting from it.

The Biden administration new rules will cut off U.S. investors from China's future revenue stream.

Posted by b on April 21, 2023 at 17:22 UTC | Permalink

https://www.moonofalabama.org/2023/04/us-cuts-itself-off-from-future-chinese-profits.html