U.S. Review of Inward Chinese Investment: Reciprocity or Rule of Law?

October 2, 2012

One further point to be made about the Ralls wind farm deal, or specifically Obama’s rejection of it, that I wrote about yesterday. Most of the commentary has focused on the legal challenges Ralls has mounted, first against the Committee on Foreign Investment in the United States (CFIUS), and then against the administration itself following Obama’s decision to uphold the CFIUS ruling.

But there is another issue that I want to raise concerning the U.S. and its approach to China. As I said yesterday, no one knows exactly why this decision was made or whether it signals a change of policy from the White House. That’s impossible to know given the lack of transparency when it comes to CFIUS decisions.

So we don’t really know why the decision was made. Nevertheless, the speculation surrounding the decision has included debate that assumes the U.S. ruled against Ralls not because of national security concerns but on other grounds. If this is true, this leads to an obvious question: is this a good thing?

There are many different points of view here, but I want to highlight two of them: reciprocity and rule of law.

On the reciprocity side, many would argue that the U.S. is not only justified in ruling against Ralls but should be nixing more Chinese deals of this kind. Why? Because if this were China reviewing a similar U.S. investment into the PRC, they say, there is no way in hell that it would have been approved (probably true). Therefore, if China wouldn’t have allowed an American company to do this kind of deal, shouldn’t CFIUS reciprocate and shoot down the Ralls purchase?

The rule of law perspective says no way, that China’s position on a similar deal with a U.S. investor is irrelevant. What matters is whether CFIUS and the Obama Administration followed relevant law and made the decision based on a bona fide concern about national security. Reciprocity may be important for legislators, but when it comes to enforcing decisions, speculation about what China would do should not even be on the radar scope.

I’ve written about reciprocity, rule of law and industrial policy on numerous occasions. I feel strongly that the U.S. needs to develop a more formal industrial policy to better compete with China, and in that sense, I believe it is definitely appropriate for the U.S. government to take reciprocity into account when formulating policy. (A good place to start is this post I wrote in 2010: Jim McGregor on U.S. China Policy: Fight Fire With Fire.)

But making policy (i.e., writing law) is very different from enforcement, and I’m a strong proponent of the rule of law perspective. You can’t have a rule of law country that allows, and even condones, ad hoc enforcement, a results-oriented administrative procedure. This is one of the main criticisms the U.S. has with the current Chinese legal system, for good reason, and yet some are suggesting that the U.S. should emulate China’s shortcomings?

This is a crazy, race-to-the-bottom mentality that wouldn’t even work in the long run. Even if targeted CFIUS decisions led to limited concessions from Beijing on U.S. investment, the chilling effect on other inward deals to the U.S. could be significant. Prospective U.S. investors would be none too happy knowing that Washington is willing to play fast and loose with the law to achieve specific results. Without certainty, without predictability, indeed without rule of law, U.S. investment becomes a lot less attractive.

Reciprocity sounds great as a guiding principle. It is inherently fair, after all, and definitely should be factored into policy decisions. However, the U.S. would be going down the wrong path if it decided that reciprocity should guide the application of law. The U.S. holds itself out as the shining example of a successful rule of law society, but ad hoc decisions based on reciprocity concerns would run counter to stated American principles.