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Two Way Street – An Outbound Investment Screening Regime for the United States?

This report provides background on the latest legislative efforts in Washington to create a screening regime for outbound US investment and assesses what such a regime would mean for US-China economic relations and the global economy more broadly.

The intensifying competition between the United States and China is forcing changes in the way the global economy is governed. After a significant overhaul of inward foreign investment screening rules globally, legislative proposals are being considered in Washington that would create a regime to review US outbound investment to China and other countries of concern. This report by Rhodium Group for the National Committee on U.S.-China Relations provides background on the genesis of this legislation and discusses its implications. Our top findings are: 

At a time of intensifying competition between the US and China, lawmakers in Washington are taking a closer look at US investment in China and the risks that such investment could pose to national security: While US foreign direct investment (FDI) into China has elicited criticism in past decades, growing geopolitical tensions and the COVID-19 pandemic have amplified concerns. Critics argue that such investments, when not properly controlled, can lead to the transfer of potentially sensitive technologies, the outsourcing of critical production, and a loss of visibility into supply chains.

A bipartisan group of US lawmakers believe that existing tools are insufficient to address these concerns: Members of Congress and some parts of the executive branch now argue that the United States needs to go beyond existing policy tools—such as export controls, sanctions, industrial policies and supply chain security rules—to restrict the flow of technology and production capacity to China.

Proposed legislation would establish a mechanism to screen US outbound investment to China and other countries of concern: While the ultimate design of such a regime has yet to be decided, the leading proposal – the National Critical Capabilities Defense Act (NCCDA) – would establish an interagency committee led by the Office of the US Trade Representative. This committee, according to the language in the current NCCDA proposal, would be able to screen transactions by US businesses in “countries of concern” and where “national critical capabilities” are at stake.

If enacted, the proposed regime could have serious implications for the US-China investment relationship: While the final language of the bill and details around implementation are still pending, our analysis suggests that up to 43% of US FDI to China over the past two decades would have been covered under the broad categories set out in the NCCDA. In addition to slowing new investment, a new regime could also pressure US businesses to reassess existing operations in China because of potential effects on revenue, profits, and market share. The proposed mechanism could accelerate the already visible shift in US-China investment relations away from “active” channels (long-term direct investment) toward more “passive” channels (securities investment and the sourcing of non-sensitive inputs).

An outbound investment screening regime would represent a break from US foreign economic policy tradition: If the legislation is enacted, the US would be one of only a handful of advanced economies with industry specific outbound investment restrictions distinct from traditional sanctions regimes. If not designed in a targeted, predictable manner, this change could negatively impact not only the global competitiveness of US companies in affected industries but also the attractiveness of the United States as an investment location for firms that operate globally.

A new US regime could trigger more restrictive investment policies in other nations: A decision by the US to introduce an outbound FDI screening mechanism might encourage some US allies to consider similar steps. This could help coordination but in a worst-case scenario could also lead to another wave of investment policy reform that creates additional regulatory barriers for cross-border investment flows globally. There is also a possibility that other countries could view US outbound investment restrictions as going too far and refuse to follow suit. US allies could react negatively if the US operations of their companies are suddenly subject to such restrictions. This could complicate, rather than enhance, multilateral coordination in responding to China and put US companies at a competitive disadvantage.

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