Derek Scissors on US foreign investment and national security

Derek M. Scissors is a resident scholar at the American Enterprise Institute (AEI), where he focuses on the Chinese and Indian economies and on US economic relations with Asia. He is concurrently chief economist of the China Beige Book.

Dr. Scissors is the author of the China Global Investment Tracker. In late 2008, he authored a series of papers that chronicled the end of pro-market Chinese reform and predicted economic stagnation in China as a result. He has also written multiple papers on the best course for Indian economic development.

Before joining AEI, Dr. Scissors was a senior research fellow in the Asian Studies Center at the Heritage Foundation and an adjunct professor of economics at George Washington University. He has worked for London-based Intelligence Research Ltd., taught economics at Lingnan University in Hong Kong, and served as an action officer in international economics and energy for the US Department of Defense.

Dr. Scissors has a bachelor’s degree from the University of Michigan, a master’s degree from the University of Chicago, and a doctorate from Stanford University. He spoke to Tobin Hansen CMC ‘20 on September 25, 2017.

Photo and biography courtesy of Professor Stephan Haggard and the School of Global Policy & Strategy.

President Trump recently blocked the acquisition of Lattice Semiconductors by a Chinese public-private fund on the grounds that the semiconductors were critical to national security. China criticized this decision as protectionist. How justified are Chinese concerns that this was an economically motivated decision rather than a security driven decision by CFIUS and the Trump Administration?

Their concerns that the decision was economically motivated rather than security motivated have some grounding. Their claims that this is unfair have no grounding whatsoever. It’s unclear that Lattice Semiconductors had technology that posed a threat the United States that the Chinese could not access elsewhere. Therefore, there may be some thinking in the Trump Administration that they want to take economic action against the Chinese, so far they really haven’t done so, but this is a small step in that direction. In that sense the Chinese have a point. Where they don’t have a point is claiming that this action is unfair. American market access is much freer than Chinese market access, so if they are worried that the U.S. is acting more like them, that’s a reasonable worry.

The semiconductor acquisition is not the first instance of the Trump Administration making antagonistic moves towards Chinese trade and investment. Earlier this year, President Trump initiated a Section 232 evaluation of China’s Steel and Aluminum sectors to determine whether these sectors threaten America’s industrial base. Given that the military only consumes 5% of domestic steel production, and 1% of domestic aluminum, do you consider Chinese strength in these markets a threat to national security?

I don’t buy the national security argument on steel. It is no longer a critical national security supply -- that thinking is 50 years out of date. So far the 232 investigation has stalled with no action, only talk. Even though the national security argument is unfounded, I still think the U.S. steel market will receive protections regardless, with Commerce Secretary Ross and Trade Representative Lighthizer supporting those policies. Aluminum is being carried along for the ride. The Administration mostly cares about steel, but aluminum is right next door. For steel at least, there is interest and there are connections within the Administration to push protections of that market through.

Alternatively, are these investigations intended to bolster the U.S. negotiating position with China?

Sure,  the President’s clear pattern is to wave a giant stick around and then hope that people give him things without taking any substantive action. Then he can say he’s a better negotiator without doing anything because doing things is costly. So the Administration is definitely looking to get concessions from the Chinese without actually doing anything. But if that yields no results they will likely start taking real action.

China is the largest foreign holder of U.S. debt, and the U.S. is one of the most important consumer markets for Chinese goods. At what point does tension over these trade disagreements come to threaten this delicate relationship?

The Chinese being a large holder of U.S. foreign debt doesn’t really matter. It’s just an argument used to justify U.S. action or inaction with China. The main issue here is that the U.S. runs a trade deficit of about $300 billion with China. That is less than the President states due to a services trade surplus that the U.S. runs with China, but that deficit supports Chinese jobs. Also China now has a foreign exchange problem where 3 years ago they didn’t. If you took away a significant portion of that trade in the event that the U.S. blocked Chinese exports, the Chinese would have a serious financial problem on their hands with really no harm to the U.S. It would hurt some of our allies because supply chains have been set up that originate in China with our allies supplying intermediate goods and the U.S. consumer as the final demand. For example the Koreans, Taiwanese, to an extent the Japanese and a few other allies, might be affected. So the casualties in a conflict are China and American friends, not so much the U.S. itself.

At what point should U.S. allies then be nervous as they watch economic relations between the US and China?

Well the U.S. really hasn’t done anything yet. They should be moderately nervous because the President is a protectionist, and that’s something we haven’t really seen since the 30’s. In today’s politics it’s not just conservatives who are protectionists because we also had a protectionist coming out of the left and almost beating Hillary Clinton. So far the U.S. has just talked, but China shouldn’t be nervous until you see real action from the Trump Administration. China may be more nervous if we see a resettlement of NAFTA where it still looks like a free trade agreement, then that increases pressure on China because it is very challenging for Trump to run the campaign that he ran and not take action against either the Mexicans or the Chinese.

In this trading relationship, which country has more leverage?

The U.S. has a lot more economic leverage. This is a fight people get into all the time. People say China has more leverage, but that’s just absurd. If we stop buying Chinese goods, we would have short-term supply disruption followed by a fairly small price increase. The Chinese would lose $300 billion of foreign exchange every year. There isn’t enough slack in global demand for these Chinese goods to make up for that. There’s plenty of slack in supply. Many countries specifically seek to displace Chinese manufacturing. We are not in a neutral situation; China is the largest supplier and we are the largest demander. In a global market of excess supply, they simply don’t have as much leverage. So the argument that the U.S. and China are on equal footing is made by people who have very strong motivations to say so. The other part of the argument is alacrity. With China, if Xi Jinping wants a policy he will get it. President Trump can only do something like that for a few months, but then would require Congressional approval. So the US has stronger economic leverage, but there has to be an underlying political willingness to use it. We’re not as nimble as China is on trade issues. The story of who has the power in the relationship is we’re bigger, they’re quicker.

In a circumstance like what you describe, what actions do you think would be a likely response to China?

Right now the Administration is building a case on the basis of coercive IP practices and outright theft. That is going to be a challenging case to build. We might find a few Chinese companies and we might sanction them, but they would be individual firms whose exports would quickly be replaced by another Chinese company in the same field. So we’re going down that path, but we haven’t really initiated much of anything else. I’m sure we’ll get steel and aluminum tariffs. Aluminum tariffs will hurt one Chinese company. Steel tariffs, depending on how we implement them, may not hurt China. China probably needs to have its industry curbed anyways because the Chinese domestic steel market is so completely out of control. China has smartly changed their currency policy so it would be challenging for the US to pursue anything in that realm. We don’t have a strong US action sitting out there unless the investigation on IP turns up stronger evidence than I expect. We have short term US actions, but no other sweeping US actions are on the table. NAFTA gives us an opportunity to make sweeping changes to our policy towards Mexico, but we don’t have something like that for China.

In your paper "CFIUS, Chinese Investment, and How to Improve Both", you recommend that CFIUS distance economic and national security motivations from determining trade limitations. How likely do you think these kinds of reforms are, given how broadly critical Trump has been over Chinese  economic policy?

This is a good point. I wrote that paper in part because I’m trying to warn the Trump Administration against politicizing CFIUS. There are certainly people in Congress trying to do that. The argument that started the push for CFIUS reform is that there was a surge in Chinese investment in the US, and we needed to make sure they were not acquiring sensitive technology under the radar. That’s a national security argument, and one that naturally leads to, give CFIUS more resources so they can make sure this doesn’t happen. That’s a good argument, and I agree with it. Whenever you introduce an economic issue you have the potential to be hijacked by special interests, now people go beyond that, trying to block Chinese investment in the US that has nothing to do with national security. So we begin with a legitimate attempt to protect national security, and end with a protectionist strategy to just bash China. A counter-argument to that theory is that if you are bashing the Chinese for taking jobs, then wouldn’t you want positive investment from China in the US where they will be creating American jobs? So the paper is hinting to the Administration that CFIUS should not just be interpreted through trade issues and economic terms.

While that is the intent of the paper, how well do you anticipate the Trump Administration receiving this advice when he campaigned on a platform opposed to a globalized economy.

I wouldn’t view my position as soft on China. We want to expand the role of CFIUS in protecting national security, that’s not soft. The choice is not whether to be really tough on China or be soft. The choice is whether you want to focus on national security. The Trump Administration can be convinced on this. The Treasury doesn’t want to give up any of its flexibility and doesn’t want any CFIUS specifications because right now they get to do anything they want. That’s a problem for the Trump Administration, but the problem is really coming from Congress. Democrats have always wanted to turn CFIUS into a protectionist tool. Now they seem to have some support from some Republicans, at least in the House, and CFIUS is just not important enough for people to stand and fight over. This policy change will likely be created through vote trading as an amendment attached to a bigger bill. The group I was really trying to warn off on this issue are those members of Congress who are less educated on CFIUS and would assign importance to expanding the scope of CFIUS through vote trading.  

Intellectual property concerns are also central to the US-China trade relationship. You note in the CFIUS paper that investment policy alone cannot address intellectual property concerns. What are the strategies you would recommend to the Trump Administration that would protect domestic firms that engage with Chinese investors or invest in China that are often forced into joint-venture deals that require surrendering IP to Chinese companies?

If a Chinese company benefits from IP theft or coercion, though that’s a difficult thing to prove,  they and their subsidiaries should be banned from the US market. If you implement that process over time, you will get progressively more support from US companies and you will ban the Chinese companies that cheat, but still allow law-abiding Chinese companies to come into the US. For the shakedown of US companies going overseas. I frankly don’t care. If you decide to go overseas and you’re dealing with an inhospitable Chinese government, that’s not my problem. What I would do on the security side is to identify if those companies have technology vital to security interests, and then ban the transfer of that technology, punishable at the felony level. US companies have always lobbied Congress to support their business interests in China. However, those operations in China don’t employ Americans so I don’t care. I’m also not looking for policy reciprocity. We have very different economies, we don’t want to match their wise or unwise policies because good and bad is relative for our economies.

What role did China's 2001 accession to the WTO have on China’s current strategic-economic relationship with the US?

This is not only a contested opinion, but a revisionist opinion on my part. I think it was a mistake to let China into the WTO. At the time it made sense. When we started negotiations they were pursuing reforms after Tiananmen, they had made some difficult reform decisions, we thought we were dealing with a reforming China, and at the time we were. But after China joined the WTO, within 8 or 9 months they had a new party leadership. We admitted a reforming China, but we got a statist or mercantilist China. We have seen the movement of production from all over the world, the US included, to China. Production made yet more competitive by WTO protections. By itself, there’s nothing wrong with that. However, the Chinese block access to their market, they subsidize state-owned enterprises, they steal IP from US companies, they’re bad partners. We let them in assuming a reforming China, instead, we can no longer respond unilaterally to their bad actions. A lot of people are arguing that the US should just take unilateral action from now on, saying that China is the largest bad trade actor we contend with, and because they’re in the WTO we can’t truly respond to their practices. This would imply leaving the WTO, something I don’t think is right, but it is a logical progression from allowing China to enter the WTO.

Tobin Hansen CMC '20Student Journalist

Featured Image by EugeneZelenko (Own work) [GFDL ( or CC BY-SA 4.0-3.0-2.5-2.0-1.0 (], via Wikimedia Commons

Share this:

Leave a Reply

Your email address will not be published. Required fields are marked *