Globalization is real and capital flows that once ran largely one-way - West to East - are increasingly travelling a two lane highway. The emergence of China as a global economic powerhouse and the five-year long lingering malaise in Western economies are significant factors behind this capital flow evolution. As China continues to flex its new-found economic and commercial muscle, other markets are racing (or not) to roll out the welcome mat.
Chinese outward investment has been on a relatively rapid rise since the mid-2000's. According to China's Ministry of Commerce, outward investment in 2005 totaled a mere $12.3 billion. By 2008, that number had climbed to $55.9 billion for the year. 2011 saw the level of outward Chinese investment top $70 billion, and that pace is being matched in 2012. It is interesting to consider where those funds are flowing. And why.
According to Heritage Foundation data, roughly 8% of that investment - $42 billion - found its way to the U.S. (putting the US just slightly below Latin America as an investment destination), but as much as 12% was devoted to Europe, with the UK receiving roughly one-fifth of Chinese foreign investment bound for the EU (about $12 billion, or 2% of total Chinese outward investment).
While there are any number of comparative indicators to consider, let's look at the size of the economies as a belweather for the scope of the potential investment opportunity:
The delta between the 2011 $17.5 trillion aggregate GDP of the European Union and the U.S. 2011 GDP of just over $15 trillion would seem to jibe with the delta in Chinese investment into Europe versus the U.S. But, U.S. GDP eclipses the UK's (just shy of $2.5 trillion in 2011) by a factor of five, which, when factored against the Chinese capital inflow, would seem to indicate that the UK benefits from a disproportionate level of Chinese investment vis a vis the U.S.
Again, while there are any number of potential factors to consider, for the sake of brevity (and my agenda), let's consider one rather telling illustrative comparative experience (regular readers: here we go...):
In 2005, Huawei Technologies struck a landmark telecommunications infrastructure deal with British Telecom. Over the last 7 years Huawei has grown that relationship, and deployed network equipment with a range of other UK operators, from Everything Everywhere to Orange to Virgin Media. In September, 2012, Huawei announced it would increase its investment in the UK by more than $2 billion over the next five years.
In 2010, the U.S. Government intervened in the multi-billion dollar Sprint-Nextel telecommunications network upgrade to prevent Sprint from selecting Huawei as a vender, on supposed national security grounds. Pulled off the table were potential billions in capital and operating expense savings for Sprint, as well as world-leading technology that uniquely met Sprint's complicated network needs. Japan's Softbank recently announced its purchase of the beleaguered company.
Did the British sacrifice their national security by allowing Huawei to compete and invest? Of course not. Did they share concerns similar to those expressed in the U.S.? Yes, indeed.
The delta between the way the U.S. and the UK addressed Huawei epitomizes the delta between their approaches to attracting (or discouraging) ever-growing Chinese outbound investment capital, which in turn explains the seeming disproportionality mentioned above.
The UK took a coordinated and comprehensive commercially pragmatic approach to a perceived security concern by employing appropriate technological tools and related disciplines to safeguard the integrity of UK telecom networks while simultaneously adhering to its commitment to free and fair trade and competition and ensuring that UK operators could avail themselves of world-class rationally-priced technology. Huawei and other China-based investment are warmly welcomed. The economy benefits. The nation is secure.
The U.S., which unlike the UK harbors plans - contingency or otherwise - to one day go toe-to-toe with the Chinese (whether virtually or kinetically), has taken a chaotic, uncoordinated, commerce-be-damned, Cold War-inspired protectionist approach, stringing together odd, underhanded, market-distorting and anticompetitive attempts to somehow blackball Huawei from doing business in the U.S.
Is the nation any more secure? Nope. All of the competitor gear is at least in part sourced from China as well and, well, duh, is subject to the same potential global supply chain and other vulnerabilities as Huawei's. Does the economy benefit? Nope. Less competition, higher prices, less innovation, fewer jobs, protectionist retaliation...and, of course, less foreign investment.
And this ain't just about Huawei. Sure, torpedoing the Sprint deal effectively tanked the possibility that Huawei might have invested the billions in the U.S. that it has subsequently invested in the UK. And sure, the treatment Huawei has received in the U.S. could easily have contributed (albeit in some vague, indirect way) to the December 2012 decision to invest almost $100 million in smartphone R&D in Finland instead of Texas, New Jersey or California, any one of which has a wealth of displaced telecom gadget expertise to rival Nokia's home market.
But its bigger than Huawei. The signal to Chinese companies looking to invest in the U.S. is clear. There are no rules. The environment is at best capricious. So they think twice, or just go elsewhere altogether... We are myopically engineering lost opportunities, at the expense of American workers, families and innovators, and all in the name of so-called national security policies that are easily demonstrated to be utterly ineffective.
Or look at it this way:
As legend has it, in 867 AD, Viking pirates from Zealand and Uppsala landed in Scotland. When news of the raid reached Æbbe the Younger, the Mother Superior of a monastery of Coldingham, Scotland, she gathered her nuns together and urged them to disfigure themselves, so that they might be unappealing to the Vikings. She demonstrated this by cutting off her nose and upper lip, and the nuns proceeded to do the same. The Viking raiders were so disgusted that they burned the entire building to the ground. This legend is thought to be the origin of the phrase 'cutting off the nose to spite the face'.
Get it?
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