By Zachary Karabell
The rattled stock market gets all the trade war attention, but it’s the sharp decline in China’s U.S. investments that should alarm Americans.
The cadence of the U.S.-China trade war has become all too familiar, with periods of amicable albeit tense negotiation punctuated by Washington’s escalation of tariffs followed by Beijing’s tit for tat. That latest salvo played out with U.S. President Donald Trump’s sudden announcement that as of Sept. 1, another $300 billion of imported goods from China would be subject to a 10 percent tariff, followed by an equally sudden delay along with an extensive list of products exempted.
The escalating tariff war, while it gets the attention, has masked a sharp decline not in U.S.- China trade (which, according to U.S. Census Bureau data, has remained relatively static) but in Chinese investment in the United States. The dollar amounts matter, but more significant is the lost leverage that those investments entail. Trump’s unilateral, preemptive trade war has rattled markets for sure, but early signs are that the domestic U.S. economy along with American soft power are the prime casualties. That surely was not the goal.
The Trump administration decided early on that the best way to force China to make concessions on everything including protecting intellectual property rights and buying more U.S. products was to use tariffs as a cudgel. But that is only the tip of the spear; less heralded has been a much frostier climate in the United States for Chinese capital, for Chinese investments in the domestic American economy. While tariffs get the attention, freezing out Chinese investment may be even more consequential. In fact, while tariffs can be lifted as easily as they are applied, reversing the flow of investments is much like repairing a damaged reputation: What takes little work to destroy can take years to rebuild.
The hostile climate matters, because more Chinese investment in the U.S. economy might be the most powerful force of leverage for change that the United States possesses, and the Trump administration is throwing it away. If the goal is to move China toward a more equitable and open economy, giving up that leverage is a profound mistake.
To date, tariffs have not succeeded in forcing concessions from Beijing. As annoying as they are, current tariffs rates are not enough to force sudden shifts in supply chains or consumption patterns, and other than a decline in U.S. agricultural exports to China, the U.S.-China trade balance has been largely static even with the tariffs.
What has not been static is the level of Chinese investment in the United States. Between 2000 and 2018, according to datafrom the Rhodium Group, Chinese companies and individuals poured about $140 billion into the United States, with the bulk of that coming between 2011 and 2018 and with 2016 the peak year at about $45 billion. That does not include Chinese purchases of U.S. real estate; according to the National Association of Realtors, the Chinese have been the largest foreign buyers of residential U.S. real estate, snapping up an average of nearly $30 billion annually from 2015 to 2018, mostly in Florida, Texas, California and New York. And, of course, China has also been the largest holder of U.S. government debt, having surpassed Japan and currently holding over $1 trillion of government bonds.
All of that, however, has been reversing in the past year since the tariff war began. China’s purchases of U.S. debt have been going down. Foreign direct investment from China in the United States fell 88 percent from 2016 to last year and shows no signs of rebounding this year. The over 300,000 Chinese students in U.S. universities, who by some estimates contribute $13 billion to the U.S. economy each year, were warned by Beijing in June to reconsider whether the United States is a hospitable environment in light of increased difficulties in obtaining visas. And for the first time in 15 years, Chinese tourism to the United States—which contributes another $35 billion annually—declined last year.
The numbers are bad enough and represent a direct harm to the domestic American economy without any commensurate benefit. But that isn’t the worst of it. These multiple streams of Chinese investment in and intertwinement with the United States represented a powerful source of leverage and influence, which is now being lost and squandered.
The most obvious leverage is that hundreds of billions of dollars of direct investment in the United States make it more painful for China to continue practices that Americans perceive as unfair or harmful. Just as U.S. investments in China are in good times a benefit and in bad times a liability, the same is true of Chinese investments in the United States. Being enmeshed in the domestic U.S. economy means that China reaps the benefits of the businesses it owns doing well and also suffers the pain when those businesses are at risk from retaliation during disputes. The owners of those businesses, which in the case of China are often state-owned enterprises with direct links to the Beijing or provincial governments, are that much more likely to be a voice for compromise.
A similar logic applies to students, tourists, and, of course, Chinese purchasing U.S. government debt. The trade deficit that many decry results in the Chinese having a whole slew of excess dollars, which in the past years they then used to fund purchases of U.S. companies, U.S. real estate, U.S. debt, and, indirectly, tuition at American universities and tourism trips. None of that, of course, shows up in trade statistics, which therefore are a woefully incomplete picture of the circular flow of money, goods, and services between China and the United States that the tariff war threatens to disrupt, if it has not already done so.
The Trump administration and Democratic supporters of the hard-line policy would do well to remember the experience of Japan in the 1980s and 1990s. Then, the Japanese took their excess dollars and invested heavily in the United States, buying real estate such as Rockefeller Center, buying companies such as Columbia Pictures, and buying U.S. debt. That in turn made it more complicated and less in Japan’s self-interest to pursue trade policies that generated negative reactions in the United States. It made Japan more interested in finding common ground. It made Japanese companies with large stakes in the domestic U.S. market more likely to petition their own government to yield. While the relationship was fraught, and many Americans then viewed Japan as an economic threat just as they view China now, the many tendrils linking the two economies acted as a gravitational pull away from conflict.
That should have been what the United States cultivated relative to China, and indeed did until the past year. Any complicated and large relationship demands compromise, which means China would have to give but also means that the United States could not get all that it demanded. Having hundreds of billions of dollars of Chinese investment in the United States was a powerful source of influence that is dwindling rapidly and is in fact shrinking more quickly than bilateral trade. Tariffs can be imposed or lifted almost at the whim of a presidential tweet, but creating a welcoming climate for inward investment takes longer to build. Until this tariff war, the United States, with Chinese investments surging year by year, was in a strong position to work with China on revising the terms of trade. In the name of taking a strong stance, the United States has now weakened itself with little to show for it.
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