Chinese entities looking to invest in the United States or acquire US corporations should expect 2017 to be filled with greater energy and uncertainty due to a number of factors. Most notably, the policies and rhetoric of the administration of President Donald Trump, who was elected after a political campaign of “economic nationalism” and protectionist rhetoric.
While the US remains the top destination for investors, those seeking to expand their operations and business in the United States may face challenges. Even before Trump’s rise, APCO’s research found that 75 percent of Chinese executives believed entering the US market was challenging.
APCO’s recommendations are based upon two premises:
- Foreign entities must develop a strategy to communicate a compelling business case for their transaction and tangible ways in which it will contribute to the improvement of US-based businesses and the US economy, while allaying concerns about employment, social and environmental impact, and national security.
- Foreign entities must develop relationships to help weather potential risks to deal completion and criticism from a variety of passionate stakeholders and opponents to a specific transaction. An essential factor in success is understanding the issues and stakeholders in the US landscape that potentially need to be engaged by a Chinese entity, in contrast to those involved in a similar transaction in China.
In his inaugural address, Trump issued a strong message that his administration would adopt a very clear “America First” policy. He deemed this as a necessary departure from prior administrations’ policies so as to reverse the “carnage” that he observed in the American economy. The basic outlines of the “America First” policy that Trump presented included elements of both domestic and foreign policy such as:
- A wholesale review of America’s trade deals
- An energy policy framework to maximize US natural resources and limit foreign oil dependence
- A foreign policy refocused on national security and destroying ISIS (and other radical terror groups)
- A new spending bill to “rebuild” America’s military with a particular focus on cyber warfare
- Empowering law enforcement officers in America’s cities and along the country’s borders
Throughout the campaign, Trump made it clear he was vehemently opposed to the practice of US companies shipping jobs, capital and innovation abroad, especially if it involved the destruction of American manufacturing strength. This position has appealed to many in the middle and lower classes who have experienced economic stagnation since the 1970s. In an effort to spark a new era of economic growth for middle and lower class Americans, Trump has advocated the use of the following tactics: renegotiating or withdrawing from trade treaties, threatening tariffs, demanding reciprocity and “fair trade,” public shaming of companies and/or offering tax incentives to invest and keep jobs in the US, restrictions on work visas and immigration, and tax proposals to reward exporters and penalize imports. This shift in economic policy has sparked significant business uncertainty and reputational risk for American companies that have built global supply chains, business processes, and overseas investments.
On the other hand, President Trump’s view on foreign direct investments into the United States is rather undefined. This may indicate Trump’s personal equivocation on the matter, but also a realization that American citizens may value jobs and investment (even if it is foreign capital).
On a macro level, the Trump Administration will likely reshape US trade policy through several key efforts:
- By Executive Order on January 24, 2017, President Trump withdrew the United States from the Trans Pacific Partnership. Some TPP signatories, including New Zealand, have publicly suggested TPP could go ahead without the US. Others have pointed to regional trade frameworks that were already under negotiation and could fill the void left by the TPP, like RCEP (Regional Comprehensive Economic Partnership), the proposed free trade agreement between ASEAN nations and their six Free Trade Agreement partners.
- Trump has indicated he will pursue bilateral trade deals with individual countries rather than multiparty engagements. The United Kingdom, for example, has pushed hard to secure Trump’s support for a US-UK trade deal amidst Britain’s withdrawal from the European Union (a marked shift from the Obama Administration’s pre-Brexit referendum statement that a bilateral UK trade deal would be at the back of the line for the US).
- Trump has announced his plans to renegotiate the North American Free Trade Agreement (“NAFTA”) with Mexico and Canada, threatening to withdraw from the agreement if he is unable to get “American workers a fair deal.”
- Trump has also stated he will use all efforts to end “unfair trade practices” and push for reciprocity in the treatment of US businesses on trade and investment issues. While the specifics of this pledge are still to be defined it may involve tariffs, border taxes, litigation, and restrictive foreign investment policies to punish nations whose trade policies are perceived as detrimental to the US economy.
- The Trump Administration has put forward a trade strategy document for 2017, indicating that decisions of the World Trade Organization arbitration panel may be treated as non-binding by the United States. This suggests a potentially significant paradigm shift in how the US engages its international partners over trade disputes.
The key theme during Trump’s presidential campaign was the fact that China has taken advantage of the United States. His promise to his supporters has consistently been to rectify this “outrage.”
One of Trump’s most likely weapons will be the Committee on Foreign Investment in the United States (“CFIUS.”) This is an interagency committee, chaired by the US Department of the Treasury, authorized to evaluate whether a transaction will affect the national security of the United States. To do so, CFIUS looks at a range of factors such as whether the target company owns and operates critical infrastructure, owns property near US government facilities, or impacts the national transportation system.
Trump may promote a broader definition of “national security” or may expand the criteria used to evaluate transactions. Consequently, there may be a significant increase in the number of potential direct investments which are affected. CFIUS has the power to block a specific transaction or to order mitigation (which may include recommending that the President block the transaction if sufficient mitigation is not achieved). Given that key Trump appointees will be serving on CFIUS, this will be a likely instrument to promote his trade and investment policies.
In November 2016, the US-China Economic and Security Review Commission (USCC) issued a report recommending that Congress “amend the statute authorizing [CFIUS] to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of US companies”. The term “control” was defined broadly as “ownership of a majority or dominant minority of a company’s voting interest” that would allow the state entity to influence important matters of that company. The USCC’s view was based on its belief that there is a high risk that Chinese state-owned enterprises, if allowed to gain control over US companies, will use any “technology, intelligence and market power…in the service of the Chinese state to the detriment of US national security.” Chinese Foreign Ministry spokesman Geng Shuang responded that the report “again revealed the commission’s stereotypes and prejudices.”
In 2015, the Commission recommended the law be amended to make reciprocity for US investors to China on a sector-by-sector basis a condition precedent for US market access by Chinese investors, so that there would be equal access. Separately, a bill was introduced in July 2016, to add the US Department of Agriculture to CFIUS membership in response to several transactions in this sector that provoked concern. Thus, it is clear that CFIUS will be central to Trump’s engagement with China.
Reciprocity is increasingly gaining traction in the US, along with the concept of bilateral treaties. Specifically, the Trump Administration seeks to allow only market access in the United States for Chinese investors to those sectors in which US companies can similarly access China. In his recent speech to Congress on February 28, 2017, Trump, while referring to trade stated: “I believe strongly in free trade, but it also has to be fair trade. It has been a long time since we had fair trade. The first Republican President, Abraham Lincoln, warned that the ‘abandonment of the protective policy by the American government will produce want and ruin among our people’. Lincoln was right.”
In September 2016, 16 members of Congress sent a letter to the US Government Accountability Office, requesting a review of CFIUS operations to determine whether the Committee had “effectively kept pace with the growing scope of foreign acquisitions in strategically important sectors in the US”. The Senate Minority Leader Chuck Schumer recently wrote to the US Treasury Secretary and the US Trade Representative urging them to do the same.
Peter Navarro, the head of Trump’s National Trade Council, provides another indication of the Administration’s perspective on China with his book entitled “Death by China.” From Navarro’s perspective, China is manipulating its currency in order to export more goods to the United States, damaging the US manufacturing sector. In addition to supporting a tax policy of “border adjustment” (a tax on all imports and credit for US exports), Navarro also favors bilateral trade deals.. Navarro’s views are in the minority among US economists, with a number of leading thinkers regarding his views as misguided.
In contrast to some of the potential challenges, however, there is an opportunity for Chinese entities willing to cooperate with different arms of the US government. Ironically, a number of cases show that the optimal advocate is Trump. If he perceives an inbound investment as a “win” for the United States, that will create jobs and growth, then he may be happy to endorse such a transaction.
This soft diplomacy was clearly on display in the weeks preceding the inauguration when several notable Asian business leaders met with President-elect Trump. On December 6, Mayoshi Son, the CEO of Softbank, visited Trump Tower and pledged to invest $50 billion in the United States and create 50,000 jobs. Following the meeting, Son revealed that FoxConn was looking to invest $7 billion in the US and create an additional 50,000 jobs. On January 9, Jack Ma, CEO of Alibaba, met with Trump and pledged to create over 1 million jobs in the United States. The strategy of going “straight to the top” and offering significant benefits to the United States is clearly a way to secure Trump’s personal endorsement of a desired transaction.
Another opportunity is to develop ties with US state and municipal governments. Governors and mayors are very eager for foreign direct investment in their communities. For many, this is a matter of economic and political survival, to stem the decline of traditional manufacturing centers and industries in their states and the resulting tide of job losses. For more vibrant regions, investment is a matter of sustaining their competitive lead and expanding local prosperity. Thus, they are likely to welcome Chinese foreign direct investment if the positive benefits can be communicated effectively. Fortunately, Chinese entities have experience in their home market dealing with regional governments and national authorities.
Actions Checklist for Chinese Investors
There are a number of initiatives that a potential Chinese investor or acquirer can take to prepare for a successful investment in the US
- Prioritize Positive US Impact
In this environment, it will be crucial for a foreign investor to emphasize the positive benefits for the US resulting from the investment. Among the potential issues that could be highlighted:
- Impact on US jobs and suppliers
- Facilities/plants/offices to be built or maintained
- Plans for retention of US headquarters and management
- Corporate responsibility and compliance (environmental/health/HR/safety)
- Total investment in the US (and key communities)
- Support and contributions to local municipalities
- Research and Analyze CFIUS Factors
Given the likely increased scrutiny that CFIUS may apply to Chinese investors, it will be important to reduce potential risks by investigating whether the US target will likely raise any CFIUS concerns. The following should be considered:
- The impact of essential assets located near US military facilities or US transportation infrastructure
- Cybersecurity and technology related concerns
- National security concerns (broadly defined)
- Market leadership or iconic brand
- Antitrust and other regulatory or political risks
- Define Investor Identity
Given the potential anti-China tenor of the discussion to date, it will be important to communicate the identity and objectives of the Chinese investor. Specifically,
- Chinese investor profile, reputation, and transparency
- Reasons for Chinese interest in target company
- Broader strategy, business fit, and availability of financing
- Chinese investor understanding of US market and target
- Corporate governance, ownership, and management
- State Owned Enterprise or public sector control
- Communicate Goodwill and Mutual Benefit
In this potentially heated environment, it will be beneficial for a Chinese investor to communicate key benefits of investment and its intentions to
work together with the US stakeholders for mutual benefit. For example, the Chinese investor should be prepared to engage:
- Elected representatives of target company (e.g. Members of Congress)
- Regulatory agencies that may have jurisdiction over the target company
- State and local officials of the target company (e.g. Governors, mayors, etc.)
- Partners of the target company (e.g. local charities, supply chain partners, key vendors)
- Local and national media that may naturally cover the target company
- Develop Third Party Support
If possible, the Chinese investor should proactively identify and develop third-party endorsers who can advocate on their behalf. A desirable third-party endorser will have the following characteristics:
- US domicile and identity
- Real knowledge of the investor
- Credibility and reputation with key US stakeholders
- Willingness to support the Chinese investor publicly
- Financial interest or other stake in a successful outcome
- Identify Potential Deal Modifications
Prior to announcing the investment, a Chinese investor should consider potential deal modifications that could increase the odds of success and mitigate specific risks and reactions.
- Structural and behavioral remedies to allay concerns
- Potential divestments of specific assets
- Goodwill gestures and confidence building steps
- Retention of headquarters and management
- Increased US investment and jobs commitments
About the author: APCO Worldwide is a global communications consultancy. We help the most innovative organizations adapt and thrive in this fast-moving, interconnected world. Companies undertaking high-stakes transactions face a complex, politicized global landscape. We work with clients and their legal and banking advisors to anticipate risks, align around an integrated communications and public affairs strategy, develop clear and compelling messaging and engage effectively with internal and external stakeholders, influencers and media. APCO gives clients the edge in getting major deals through, and in supporting their longer term goals.