Taking aim at China

How to safeguard national security without scaring off investment. It is hard when the lines between friends and foe are blurred.

IT WAS like “selling Mount Vernon to the redcoats”. That was the cry when Fujitsu, a Japanese technology giant, proposed a friendly takeover of Fairchild, a once-pioneering Californian semiconductor firm, in 1986. At stake, in the eyes of the deal’s critics, were America’s economic strength, military security and technological competitiveness. So emerged the first effort to screen foreign direct investment (FDI) into the United States on national-security grounds. Since then, things have become immeasurably more complicated.

Now the main predator is China. The prey is all manner of technology and data, some with overlapping military and civilian uses. The security and surveillance concerns have gone global. President Donald Trump has a bill on his desk, approved in recent weeks with bipartisan support in Congress, that expands the scope of the Committee on Foreign Investment in the United States (CFIUS), an inter-agency body able to block deals that may threaten national security. This week Germany’s government indicated that it would increase its power to block FDI, for the second time in just over a year. Britain is doing likewise, and the European Union is developing an overarching screening framework for its members. Australia and Japan both expanded their scrutiny last year. China itself says that it is tightening up on foreign investors.

Such safeguards are, in principle, entirely justifiable. Weapons systems exploit ever more advanced technology, including artificial intelligence (AI). The economies of the world’s great powers are intertwined, as they were not in the cold war. Data know no borders, and the line between friend and foe is not always clear. What is more, China has a history of stealing intellectual property even as it blocks foreign investment at will.

But the detail matters. Governments will inevitably be lobbied to use their expanded powers not just to preserve national security but also to promote economic one-upmanship. That is when prudence becomes protectionism.

I spy with my FDI

So far, many of the safeguards coming into law are prudent—surprisingly, perhaps, given this year’s trade rows (see article). In America the Foreign Investment Risk Review and Modernisation Act, the biggest revamp of CFIUS in a decade, is level-headed. If enacted, it will expand the committee’s powers to assess not just foreign acquisitions but minority holdings that give investors access to, or influence over, critical infrastructure, technology or sensitive personal data. The definition of the technologies it covers will become broader—but at least the focus remains on the advantages they provide for defence, intelligence and other areas of national security. The proposed EU rules emphasise the need to balance openness to FDI with protection of “security or public order”, something only 12 member states screen for. Both America and the EU also draw attention to who stands behind the foreign investors. When it comes to China, such influence is a particular concern (see article).

Yet in this murky world, lines are repeatedly crossed. Mr Trump set a bad precedent when he used national security as an excuse to impose tariffs on steel and aluminium imports. Germany wants to broaden its restrictions on “critical infrastructure” to include sewerage, among other services, which risks leading to more intervention. Its lawmakers demand protection for the Mittelstand, the heartland of specialist firms. Ministers in Europe, frustrated that foreign firms are sometimes shut out of China, think screening can level the field.

Knee-jerk responses to China risk curbing collaboration as well as competition. Blocking FDI on national-security grounds should be a last resort, not a first line of defence. There are ways to minimise abuse in the screening process. It makes sense to pay attention to technologies, such as AI and robotics, which can have civilian and military uses. But to come up with a long list of industries—including, as some Americans advocate, cinemas—that might fall prey to foreign manipulation goes too far. Instead, investments should be vetted case by case and the decision open to judicial review. The policy should not restrict itself to a particular country. What China does today, Russia may do tomorrow. Look for technological fixes. Britain mitigated some of its concerns about Huawei, a Chinese telecoms firm, by using an evaluation centre that inspects the hardware and software that the company supplies to the telephone network; this year the centre asked for changes. And the policy should be used strictly for national security, not trade diplomacy. Raising the drawbridge will not convince China to open up. There are other ways, such as export controls and bilateral investment treaties, to deter broad intellectual-property theft and to encourage reciprocity.

Safeguards alone cannot keep the West’s technological edge. China already spends more on research than the EU; the National Science Foundation, a federal agency, reckons that it could overtake America by the end of the year. The West could look to incentives for long-term research and more welcoming visa policies. The idea of an innovation strategy may be worth borrowing, too. That is one thing to learn from China.

Correction (August 13th 2018): The original version of this article named the American semiconductor firm sought by Fujitsu as Fairfield. That should have been Fairchild. Apologies.