Hill Panel Pushes for Limits on Chinese Investments in U.S.

International Trade Daily™ provides rapid, reliable notification of the most significant developments affecting U.S. trade and international business policy, as well as the policies of major U.S....

By Len Bracken

Nov. 16 — A congressional advisory commission Nov. 16 recommended that the U.S. ban Chinese state-owned enterprises (SOEs) from buying U.S. companies.

The statute authorizing national security screening of foreign investments in the U.S. should be amended to prevent Chinese SOEs from “acquiring or gaining effective control” of U.S. companies, the U.S.-China Economic Security Review Commission recommended in its annual report to Congress.

Chinese SOEs are “arms of the Chinese state” and act for strategic purposes, Commission Chairman Dennis Shea said at a media briefing on Capitol Hill. He added that policymakers don’t want the U.S. government purchasing companies in the U.S., so it follows that the same should hold for China.

The top recommendation in the report would require changing the statute covering the Committee on Foreign Investment in the U.S. (CFIUS), which conducts national security screening of foreign investments. In 2014, China led foreign countries in CFIUS reviews, with 24 reviewed transactions, the report said. The drive by Chinese companies to acquire U.S. technology companies “has led to growing political concern,” the report added.

Patterns Give ‘Tremendous Pause.'

Commissioner Michael Wessel said the patterns seen in Chinese investment in the U.S. give “tremendous pause,” such as gradual accretion of ownership shares that don't trigger CIFUS reviews. He cited the purchase of Lattice Semiconductor Corp. shares by Tsinghua Unigroup in separate tranches in April and May of 2016.

Panel Vice Chairman Carolyn Bartholomew said the trade and investment relationship is “unbalanced,” with the U.S. racking up a record trade deficit with China of $365.7 billion in 2015 and has reached $225 billion in the first eight months of 2016. Chinese investment in the U.S. is expected to double from about $15 billion in 2015 to $30 billion in 2016, she said, while U.S. investors have faced discrimination in China and requirements that they transfer technology.

Market Economy Status

The commission also recommended that Congress enact “legislation requiring its approval before China—either the country as a whole or individual sectors or entities—is granted status as a market economy by the United States.” China contends that Article 15 of the 2001 protocol on China's accession to the World Trade Organization requires members to stop using an alternative, nonmarket economy calculation method in antidumping investigations against China after Dec. 11, 2016, but the U.S. disagrees.

Under U.S. antidumping law, nonmarket economy status may be re-evaluated only by Commerce’s Enforcement & Compliance Division in the context of an antidumping proceeding, based on a formal request made or supported by the government, such as China. China has not made or supported such a request since 2006.

As a nonmarket economy, the “domestic price” for the allegedly dumped goods is calculated by using the domestic price in another country at a similar stage of economic development, such as India. But if market economy status is granted to China, the home market Chinese prices would have to be used. This would make it easier for Chinese companies that are targeted in antidumping cases to defend themselves.

Wessel said while the word is still out as to what the current U.S. administration will do, he predicted that no change would be made to China's nonmarket economy status and when the first U.S. antidumping case is concluded that uses the third-country method for calculating prices, China would launch at dispute settlement case in the WTO, which he said would take two to five years to resolve.

Other Recommendations

The other trade-related recommendations included:

  •  Congress require that under antidumping and countervailing duty laws, Chinese state-owned and state-controlled enterprises are presumed to be operating on behalf of the state and, as a result, do not have standing under U.S. laws against unfair trade to block a case from proceeding; and
  •  Congress establish an office within the International Trade Administration whose sole purpose is to identify and initiate antidumping and countervailing duty cases to ensure a more effective and timely response to China’s unfair trade practices.

The commission also recommended that Congress direct the U.S. Government Accountability Office to prepare a report “examining the extent to which large-scale outsourcing of manufacturing activities to China is leading to the hollowing out of the U.S. defense industrial base.”

To contact the reporter on this story: Len Bracken in Washington at lbracken@bna.com

To contact the editor responsible for this story: Jerome Ashton at jashton@bna.com

For More Information

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.