Outbound Investment Executive Order: Waste of Time

The Biden administration’s executive order (EO) on outbound investment finally appeared, continuing a process that began July 2021. Thanks to the Department of the Treasury wanting to ignore the national interest, and a bit to Congressional inaction, the EO does little. It’s in large part an IOU for choices that should have been made months ago. The EO isn’t “small yard, high fence.” It’s small yard and still thinking about how many holes in the fence.

Consider a good motivation for the EO. The US has means to prevent China’s acquisition of technology here—the Committee on Foreign Investment in the United States. It has controls to prevent Chinese acquisition of technology through American exports, though effectiveness of the controls is often in doubt. But American investors can freely and on a large scale help China develop advanced technology, which is the worst outcome.

The EO probably doesn’t change this. There are different ways to count how much the US invests in China, but don’t use Treasury’s monthly data. Those indicate the Cayman Islands may have the biggest securities markets in the world (it has none). Treasury has annual data that correct for offshore financial centers and put US portfolio investment in mainland China at $946 billion in 2021 (latest).

The EO correctly treats Hong Kong and Macao as part of the PRC. Including those totals raises portfolio investment to $1.18 trillion in 2021. This more than doubled from 2016. In comparison, direct investment rose from $168 billion in 2016 to $209 billion in 2021 (and fell in 2022). Another $40 billion in direct investment, if it doesn’t bring technology that should already be blocked, doesn’t matter.

Another $650 billion in portfolio investment can matter. It made the US by far the biggest national partner for China on the capital side, and Beijing is currently soliciting more money. The EO isn’t being applied retrospectively, and shouldn’t. If it were, guess how much of the $1.38 trillion in total American investment in the PRC would be covered? Seriously, guess, because Treasury won’t tell you. Best estimate: well under 1 percent.

We don’t know definitively because Treasury (i) claims still not to have decided how to treat the largest investment channels and (ii) has never provided information on investment in specific technologies it now says is so important. Regarding the latter, amazingly, it just asked the public for this information. Secretary Yellen calls for transparency for investors, even for China. But her department has utterly failed to pursue it.

Regarding the former, “the Treasury Department expects to create a carveout or exception for specific types of transactions, such as certain investments into publicly-traded securities or into exchange traded funds”

How can this not have been decided? Treasury had two years to consult interested parties. Yet there are five pages of outstanding questions along these lines in Treasury’s notice. The financial sector has of course already demanded exceptions to let investment flow as it likes, which is basically what Secretary Yellen promised. We don’t know how much money each exception covers. This has been a painfully long charade.

It may not even be worth debating. After discussing the EO with half the planet, there will be an extended period for more comments. Any bets if this produces tighter or looser restrictions? A possible time for “full” implementation is five months before the 2024 election. After the election, a second Biden administration could simply drop the EO, with much less political accountability.

A new Republican administration absolutely might do the same. By far the biggest surge in American investment into China occurred when President Trump was in office. While he talked tough, hundreds of billions of dollars headed west across the Pacific. If the next administration drops the EO, it will have achieved only a minor pause. In something yet to be determined.

For its part, Congress condemns Chinese behavior, then asks for reports. The Senate’s record to date on outbound investment is a notification requirement that may have no effect at all. The House passed an outbound investment bill last year but the Senate wouldn’t take it up. This year, the House has done nothing.

Outbound investment is going the way of intellectual property—speeches but no steps. China wasn’t getting enough technology by stealing, we should fund their technology too. China isn’t too scary for the US, but it’s too scary for US decision-makers. When it’s time to act, they curl into a ball. That the EO is only the first move is laughable. It took the administration two years to do almost nothing, and Congress longer than that. If more is coming, it will be just as empty.