As America and China are ratcheting up their negotiations on the bilateral investment treaty (BIT), policymakers and pundits are energized by the political will on both sides to push for its conclusion in 2015 and are excited about increased openness to American investments in China in the future. Social and political tensions that grew with America’s investments in China in the past fifteen years, however, are little noted. Without adequately understanding the social mistrust, the U.S.-China investment relations will bring economic benefits, but also severe political tensions on a massive scale.
Social and Political Backlashes to Foreign Investments
When foreign companies come to invest, they bring capital and technology, generate revenues and employment, and help with economic growth in the host nation. They meanwhile, however, outcompete local producers, replace indigenous products, and challenge dominant norms in their hosts. Indigenous companies face more competition in existing industries and see fewer opportunities in new sectors due to FDI’s presence. As political groups, they thus seek to influence the government policies. The general public, surrounded by foreign products and overbearing foreigners, react with nationalistic sentiments and support protection of indigenous business. State regulators, as social beings, feel the same nationalistic pain and are meanwhile under the political pressure to reign in FDI and instead root for indigenous capital. New regulations are introduced, new protection is placed, and doors become narrower for foreign investors.
Foreign investors then run back to their home governments, complaining, pleading, lobbying, and requesting their home government to apply pressure on the host state to provide “national” treatment and better access to foreign investors.
This was the economic relationship between China and the U.S since the PRC’s admission into the World Trade Organization (WTO) in 2001. Before 2001, American companies, motivated by China’s large markets, were the main supporters of deepening U.S.-China relations and helped to overcome opposition by America’s human rights, democracy, and environmental groups. With China’s WTO entry, American business generated countless gains and achievements in China. Yet problems quickly arose. First it was the rights groups that were continuously blocked from China, then it was Google, Yahoo, etc. that were pressured to comply with the local norms or leave. The biggest blow came recently when Chinese regulators applied anti-monopoly investigation against scores of American investors in China, ranging from milk powders to Microsoft. Often, the obvious beneficiaries of these investigations are domestic producers of comparable products and services.
The U.S. firms then lodged complaints at American Chambers of Commerce in China, the USTR, Congress, and ultimately pressured the President. Indeed, American lawmakers were swept by the sea change in American business’ views on China, from almost unanimous support and enthusiasm to widespread disappointments and critiques. American investors are the main actors behind the government’s pursuit for a bilateral investment treaty with China, hoping to increase the access and fair treatment of American business in China.
The way American policymakers went about negotiating the BIT, however, reveals that they are little aware of the social mistrust and political tensions surrounding America’s FDI in China. To make China more open, the Obama Administration launched the trans-Pacific Partnership (TPP) that includes major Asian economies except for China, generating pressure to make China more malleable to concession. In the short term, the approach appears to be working. Fearful of exclusion from U.S.-led economic integration, China’s leadership has become more forcefully behind BIT; Chinese negotiators are given more latitude to make concessions; protectionist voices are reduced. However, the Chinese BIT negotiators and their opposition are fully aware that China can sign the deal; implementation is another issue. There are ample opportunities down the road for indigenous interests to reinterpret China’s commitment and protect their domestic turf. Social-political tensions explained in the beginning are bound to come back, yet with a magnitude much greater than the recent past.
Lessons Unlearned: Diaspora-Led FDI in China before WTO
From economic isolation, China opened to FDI in 1980. By 2000, it had joined the world’s top recipients of FDI, and perhaps its most successful one. Yet the majority of FDI during the first 20 years was led not by Americans, or Japanese, or Europeans, but entrepreneurs in Hong Kong, Macao, Taiwan, and Southeast Asia—the diaspora Chinese. Diaspora investors came to an extremely backward motherland, building roads, factories, ports and power plants, passing capitalist ideas to people with whom they shared social heritage, working closely with Chinese officials at local and central governments, and exporting most of their products to international markets. The social and political impact of diaspora-led FDI was quite different from FDI from America, Japan, and Europe. Due to statistical convenience, perhaps also political vanity (FDI by Fortune-500 companies showcases a bigger accomplishment than the plain fact that overseas Chinese were the bedrock of the Mainland’s economic success), diaspora investments were masked as “foreign” direct investments in China.[1]
Missing this distinction, however, not only does injustice to the contributions by diaspora Chinese to the economic success on the Mainland, but also leads to wrong lessons about FDI, making both Western foreign investors and the host government unprepared for FDI’s social backlashes. As the PRC and the U.S enter a new stage of investment flows, the lessons from the past—the roles of diasporas and the social tension in America-led FDI—are more important than ever.
[1] See Min Ye, Diasporas and Foreign Direct Investment in China and India. New York: Cambridge University Press. 2014.
