The Changing Politics of Chinese Trade and Investment

On the same day last week that President Obama was issuing an order blocking a Chinese company from acquiring several Oregon wind farms, the Financial Times had a fascinating story on the changing politics of the U.S. trade relationship with China. While both the president and his Republican challenger Mitt Romney are trying to one-up each other over the economic threat posed by China, the mayor of Toledo, Ohio – the swing state of all swing states – was busy courting some 150 potential Chinese investors, trying to persuade them to bring jobs into the hard-hit local economy.

“I have to say the [presidential] campaign is really hindering us,” the story quoted Toledo mayor Michael Bell. “The Chinese people we invited here are asking ‘Why are you picking on us?’ or ‘Why are we suddenly the big issue?’”

The story brilliantly captured America’s current confusion over its economic relationship with China. There is no question that rising imports from China have caused job losses in U.S. manufacturing, and that the benefits of lower-priced consumer goods have been significantly offset by the costs associated with higher unemployment. When President Obama went to Cincinnati last month to announce a new World Trade Organization case against alleged Chinese subsidies to auto and auto parts producers, it seemed like a political winner. The Obama administration has launched more WTO actions against China than in the previous eight years of the Bush administration, and there has also been a growing number of successful trade cases filed by companies that have led to new tariffs on imports of Chinese sinks, solar panels, wind turbines, and other goods.

But much as with Japan in the 1980s, China’s growing interest in overseas acquisitions and investments could change the political calculation very fast. Thirty years ago, Toyota and Honda had no defenders in the Congress; today they can count on the unquestioned support of members from nearly a dozen states where the companies have production facilities – not to mention all the affiliated parts suppliers and dealer networks that span the country. While China’s investment in the United States remains very small, it has grown very rapidly over the past two years, and state and local governments are eager to encourage more.

All of which makes it especially important that the United States and China work carefully through the implications of the President’s decision to issue the first formal order in twenty-two years blocking a foreign acquisition in the United States on security grounds. The dispute, involving Ralls Corporation, which is owned by two executives of the big Chinese manufacturing conglomerate Sany Group, is a tiny one financially but potentially a huge one symbolically. The wind farms purchased by Ralls are in the vicinity of the U.S. Naval Weapons Systems Training Facility Boardman and its restricted airspace. But they are in a location, as Greentech Media reports, that “is thick with wind farms,” including a large one that just opened last month. The owners of adjacent properties include a German and a Danish firm. As the law firm Baker Botts noted: “The Ralls matter seems to confirm an apparent emerging trend that CFIUS will subject transactions by Chinese investors to heightened scrutiny.”

Further, Ralls has sued the administration to try to reverse the President’s ruling forcing it to divest the acquisition. While the courts are unlikely to hear a challenge to presidential authority over an issue pertaining to national security, it is likely to keep the matter in the news for some time.

The Obama administration certainly recognizes the dilemma. Even as it has been stepping up scrutiny of Chinese acquisitions on security grounds, and ramping up the number of trade actions against China, administration officials are busy encouraging China to increase its investments in the United States. The government’s challenge – and it’s getting harder – is to figure out whether both can be done simultaneously.