The Case for Letting China In

Industrial policy is back in fashion in the United States. As fragile global supply chains and a weakened industrial base present growing economic and national security risks, policymakers in both parties have embraced energetic efforts to rebuild the country’s industrial capacity. With interventions such as the 2022 CHIPS and Science Act, Washington has made historic commitments to strengthening the United States’ technology and manufacturing base, which is becoming increasingly important to the country’s economic success and ability to defend itself. As director of U.S. President Joe Biden’s National Economic Council, I helped to design and drive this shift. Initiatives to revive domestic capacity are a necessary response to real dangers. But more and more, American leaders are seeking to support industry at home in ways that are counterproductive. In particular, they are growing hostile to foreign investment. Many policymakers fear that foreign investors could steal sensitive data or gain dangerous leverage over U.S. companies or critical infrastructure. Their aversion is most pronounced with respect to China but has been trained on allies and partners as well. It applies not only to cases of foreign ownership of U.S. companies but also to joint ventures, the licensing of foreign intellectual property, and other arrangements in which a foreign company shares its knowledge or resources. Stephen Miran, the chair of the president’s Council of Economic Advisers, has suggested imposing fees on foreign holdings of U.S. assets, including those owned by allies. Senators Tammy Baldwin and Josh Hawley have introduced bipartisan legislation in the U.S. Congress that would tax foreign capital inflows outright. At the federal, state, and local level, those in power are taking steps to shut global capital out of the United States and prevent American enterprises from harnessing the latest advances in data storage, critical mineral processing, and chip-making. This is a troubling and ultimately self-defeating strategy. Of course, the U.S. government should mitigate the risks of foreign investment. But today, its screening regime is overzealous. The United States is undermining its own industrial policy by denying itself the tools to become competitive globally in crucial sectors. What the country needs is a new framework for selectively encouraging investment from abroad to match its industrial ambitions. The U.S. government’s existing policy toolkit isn’t designed to take on this task. Washington has an elaborate apparatus for saying no to inbound investment but few ways of getting to yes. An improved system would welcome foreign capital and know-how while maintaining transparency, protecting U.S. data, and ensuring that Americans have control of companies when it matters. The fact is, the frontier of knowledge for many industries lies outside the United States. The federal government must get better at weighing the risks and rewards of foreign investment to take advantage of that expertise. THE HIGHEST FORM OF FLATTERY Throughout its history, the United States has used foreign knowledge and tools for its own gain. At the turn of the nineteenth century, for example, the country’s military readiness depended on a fledgling domestic gunpowder industry. Washington could no longer rely on its single foreign supplier, Britain, against which it had just fought a revolution. Supported by a significant French investment, the chemist Éleuthère Irénée du Pont brought French expertise in advanced manufacturing techniques to the United States, establishing a company in 1802 that would quickly become the biggest purveyor of explosives to the U.S. government. The firm, DuPont, remained at the center of innovation in U.S. chemical and materials production for centuries. Foreign knowledge has proved invaluable in more recent cases, too. In the early 1980s, when U.S. car companies were lagging behind their Japanese competitors, General Motors and Toyota jointly reopened a shuttered GM plant in Fremont, California. By bringing in state-of-the-art Japanese manufacturing systems, the companies transformed a failed factory into the most productive auto assembly plant in the United States within two years—while largely retaining the same American workforce. The methods GM picked up from Toyota are now standard across U.S. auto manufacturing. The CHIPS and Science Act was designed to replicate these and other successes, but with semiconductors. American lawmakers understood that creating a domestic chips industry would require investment and expertise from companies such as South Korea’s Samsung and the Taiwan Semiconductor Manufacturing Company. Under the 2022 law, Washington issued grants and loan guarantees to firms, domestic and foreign, to build semiconductor fabrication plants in the United States and to train American workers in chip making, which is notoriously difficult to master. The act also funded the National Semiconductor Technology Center, which facilitates technology transfers and shared research and development between domestic chipmakers and foreign ones operating in the United States. Companies that accepted money from the U.S. government were barred from expanding advanced chip capacity in China. The United States is undermining its own industrial policy. If efforts to encourage foreign investment from U.S. allies and partners have proved contentious at times, deciding how to treat investment from the United States’ biggest rival, China, has been downright incendiary. More than any other government in history, Beijing has aggressively wielded the tools of economic statecraft. Its theft of intellectual property and enormous subsidization of domestic industry, combined with Washington’s longtime complacency, have hollowed out manufacturing capacity in much of the world and created dependencies on China for many critical technologies. It is easy in this context to conclude that the United States must keep out Chinese investment. The analyst Oren Cass, for instance, recently argued that allowing Chinese companies to invest in the United States would be “an unforced error of world-historic proportions” because it would cede dangerous economic influence to Beijing. But if the United States wants to produce more advanced goods, it needs to remain open to foreign investment, including from China. Indeed, China itself followed the same playbook beginning in the 1980s, luring U.S. companies to its shores with cheap labor, low taxes, and access to its vast domestic market. Much of China’s expertise can be linked back to foreign companies that set up factories in the country—expertise that Chinese firms later used to outcompete their foreign counterparts. In 2018, for example, China convinced Tesla to establish manufacturing facilities in Shanghai by offering cheap land, low-interest state loans, tax breaks, and permission to fully own its plant. Chinese automakers absorbed what they needed from Tesla and applied those lessons to propel the domestic electric vehicle sector forward. China is now at the forefront of many critical technologies, including electric vehicles and energy storage. Gaining access to that knowledge via foreign investment is, in many cases, the only way for the United States to catch up. BRAIN GAIN Chinese companies are already doing business in the United States in limited cases. In 2023, Ford announced a multibillion dollar plant in Marshall, Michigan, that will manufacture batteries for electric cars with technology and know-how licensed from China’s largest battery maker, CATL. Ford fully owns the facility but has a long-term agreement that enables it to train its workers on CATL’s core technological processes. Eventually, Ford could use the expertise learned from CATL to design and produce its own batteries without Chinese licenses. What Ford is doing in Michigan provides a model for an ambitious industrial strategy: encourage investment, work with foreign firms when necessary, and learn by doing. The partnership was possible because of a novel intellectual property-sharing arrangement with CATL that entailed licensing but not foreign ownership of the facility. In many other cases, however, presidential directives and onerous regulations get in the way of deals that have similar potential to strengthen the U.S. industrial base. U.S. presidents from both parties have used their authority under the Defense Production Act to block major foreign direct investments out of fear that sensitive American technology and data will fall into the wrong hands. The Committee on Foreign Investment in the United States (CFIUS), the government body that reviews deals that could threaten national security, has become backlogged, difficult to navigate, and overly cautious. When the committee identifies a concern with a foreign company’s proposed investment, the firms involved frequently cannot negotiate a resolution within the statutory deadline and end up starting the process from the beginning. In 2024, applicants withdrew and refiled nearly a quarter of all notices. Filings have declined because the lengthy process discourages companies from even trying. In other cases, the problem is a lack of regulation altogether. CFIUS, for example, generally screens only those transactions in which foreign entities seek to acquire an interest in an American business. If a foreign company, say, wants to license out the use of its equipment, there is no formal review process through which it can receive approval. Such an arrangement falls into a gray zone, vulnerable to a political attack. Congress spent years threatening to disqualify Ford’s electric vehicle plant in Michigan from receiving a tax credit and investigated it for national security risks, in part, because the plant was not subject to any review process. DUE DILIGENCE To encourage American companies to pursue strategic foreign partnerships, the U.S. government must cut red tape and stop reflexively rejecting investment. It should treat capital from close allies as different from capital from countries of concern such as China, Iran, and Russia. It should also develop new systems to review and greenlight new models of foreign investment and partnership. When it comes to allies and partners, CFIUS should simplify its process. To reduce the number of U.S. companies and foreign investors that need to apply for approval, it ought to expand its list of countries whose firms are exempt from this requirement—currently just Australia, Canada, New Zealand, and the United Kingdom—to include Japan, South Korea, and countries in Europe. Low-risk deals, such as investments in software companies whose only critical technology is routine encryption, should be exempt from filing, and there should be more rapid approval for pre-vetted investors. Most important, CFIUS should change how it judges the deals it does review. It should, for instance, analyze transactions on the basis of whether a foreign adversary could plausibly exploit the investment to harm the United States, instead of fixating on the investor’s nationality and business affiliations. The committee must also change its risk calculus. Today, the body can approve foreign investments in U.S. companies only by certifying that there are no unresolved security concerns. That means even a deal that would benefit national security overall cannot be approved if doubts linger about any single component of the arrangement. If resolving those doubts is impractical, the deal dies altogether. In other words, CFIUS only takes risk into account, not opportunity. Congress should replace this standard with one that lets the committee approve investment deals that are, on balance, in the national security interest. U.S. companies need more options for entering partnerships with foreign firms. For more risky investments, such as those by Chinese companies, the U.S. government should adopt a model similar to the Defense Department’s Foreign Ownership, Control, or Influence program, which polices foreign control over defense contractors. The framework allows critical U.S. industries to benefit from foreign investment while guarding against foreign access to American secrets and foreign influence over key industries. Consider BAE Systems. The defense firm is wholly owned by a British parent company, yet it employs roughly 35,000 Americans, generates close to $13.6 billion in annual sales, is among the Pentagon’s largest suppliers, and is deeply involved in classified projects. This arrangement is possible because, under FOCI, a special agreement restricts the parent entity’s control over BAE Systems. The company has a separate U.S. board dominated by American directors with security clearances, and firewalls shielding technology, products, and programs from the foreign parent company. The arrangement gives the United States another major contractor competing for Pentagon work, tens of thousands of domestic manufacturing jobs, and access to British technology and capital. The British parent company, for its part, gets to profit from the world’s largest defense market. Meanwhile, the risk of leaks remains relatively low. Today, the FOCI regime applies only to companies that do business with the U.S. government on classified contracts. A system based on this program, however, should also be used to assess the risk and opportunity of foreign investments in companies that don’t need security clearances but could pose national security risks, such as those that make advanced chips, batteries, drones, or critical software. The Department of Commerce, which has already started negotiating arrangements with semiconductor companies that resemble those the Pentagon reaches with defense contractors under FOCI, could oversee an expanded system immediately under existing authorities (some of which were granted by the CHIPS Act). But Congress should codify the department’s authority to review and request adjustments to deals involving foreign adversaries. In practice, a firm contemplating an acquisition, joint venture, or licensing arrangement would submit a proposal to the Department of Commerce, which could add safeguards to the deal before issuing its approval. The goal is to give American companies more options for entering partnerships with foreign firms, with safety measures tuned to the specific risk presented by the investment. When the risk is that sensitive information may be leaked, a new FOCI-based system might allow foreign ownership as long as the parent company’s access to sensitive technology, data, and day-to-day decisions is severed through proxy boards, security agreements, and cleared American directors. When the foreign firm holds expertise the United States needs but is based in China or another country of concern, the right template may look like the Ford plant in Michigan, where an American company retains operating control but benefits from foreign ingenuity. Under such a system, the government would no longer default to rejecting deals but act as a creative problem solver. NAYSAYER NO MORE Establishing new pathways to approve foreign investment will not be easy. The politics of blocking these transactions are well entrenched in both parties. Regulators are so afraid of approving a deal that leaks sensitive technology or hands adversaries control over a key company that they err on the side of restricting access to knowledge, money, and production capability from abroad. The way to calm those fears and bring in productive foreign investment is to execute foreign deals competently. The Trump administration has treated announcements of major foreign investments as ends unto themselves but has shown little appetite for building a process to encourage safe deals with foreign companies. Democrats should embrace openness to foreign investment but improve on the practical application of that philosophy by championing legislation that institutionalizes a better and more transparent method for vetting agreements. With a system that approves the right kind of partnerships, the United States can gain the experience it desperately needs to revitalize its industrial capacity. From du Pont’s gunpowder to Arizona’s semiconductor factories, the United States has always become stronger not by walling itself off from the world’s know-how, but by making that knowledge its own. You are reading a free article Subscribe to Foreign Affairs to get unlimited access. - Paywall-free reading of new articles and over a century of archives - Six issues a year in print and online, plus audio articles - Unlock access to the Foreign Affairs app for reading on the go Already a subscriber? Sign In