Biden's Foreign Investment Policy Hobgoblin

Senior Fellow and Director, Center for the Economics of the Internet
Legal Fellow, Center for the Economics of the Internet
A view of the North entrance of the U.S. Treasury Building in Washington, DC. (Photo via Wikimedia Commons)

Ralph Waldo Emerson once observed that “[a] foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.”  Those in charge of America’s 21st century foreign investment policy would be wise to heed this advice.

Earlier this month, the Biden Administration gave Iran access to more than $6 billion of previously-frozen assets and explicit approval to enrich uranium to 60%.  In exchange, five Americans hostages were released from Iranian prisons.  America’s capitulation to Iran, a regime that is notoriously hostile to the west and its allies and that routinely funds and arms global terrorist networks, will no doubt boost Iran’s nuclear ambitions while incentivizing future hostage-taking.

It would be hard to characterize this as anything other than nuclear acquiescence and ransom paid to a rogue terrorist state.  Such a combination, one could argue, represents “an unusual and extraordinary threat to the national security of the United States.”

Yet, around the same time, President Biden released an executive order identifying precisely that: “an unusual and extraordinary threat to the national security of the United States.”  Does this threat originate out of Iran, given recent events?  Perhaps North Korea?  No; the order deals instead with China.

Specifically, the order instructs the Secretary of Treasury to issue rules regarding certain transactions between “United States persons” and “covered foreign persons.”  The advancement of certain technologies, according to the order, poses the “unusual and extraordinary threat to the national security of the United States.”  Some “notifiable transactions” will require notification to the federal government, while “prohibited transactions” will be completely outlawed.

Many news outlets claimed that the executive order would “block and regulate high-tech investment going toward China,” as if its effects were imminent or easily predictable.  But that is not what the executive order says, much less what it implies.  There is no deadline by which the Treasury Secretary must issue the requested regulations, nor is there a deadline by which such regulations must become effective.  Nor is there a deadline by which court challenges to any future regulation must be completed—of which, there will doubtlessly be many.  As of now, even after this executive order’s signing, business with China will continue as usual.

Yes, the Department of Treasury will issue an advanced notice of proposed rulemaking on investments China in a few days.  But that is bureaucratic jargon simply meaning that final rules are in the future, perhaps distant.  The ANPRM was only recently published in the Federal Register.  And it’s unclear when, if ever, Treasury might actually adopt final rules subsequent to this administrative maneuver.

The challenge Treasury faces is not a lack of will, but instead a lack of economic feasibility.  It is easy to announce rules that would block investments in certain technologies with one of America’s largest trading partners.  It is another matter to enforce such rules, for several reasons.

First, for competitive reasons, businesses may not wish to publicly announce technologies they are developing.  For similar competitive reasons, firms may wish to announce the are developing certain technologies, when in fact little is actually being developed.  As a result, any “list” of firms that Treasury may construct that engage in the development of certain technologies will almost certainly be inaccurate.

Second, the “nationality” of a firm is an ambiguous term of art.  A firm may have offices, employees, and corporate documents in many countries; investors around the globe; and be subject to the laws and regulations of every country in which it operates.  It is difficult enough to impose restrictions on transactions with “persons” of certain nationalities—even those in rogue states like North Korea with which the United States has effectively erected a blanket economic blockade.  Imposing restrictions on “foreign persons” in the second largest economy in the world—as well as one of America’s largest trading partners—would be significantly more difficult.

Third, money is fungible.  Even if Treasury developed a list of Chinese firms with which direct transactions were prohibited, it is practically impossible to prohibit third-party transactions—particularly third-party transactions within China.

For these and many other reasons, any attempts to block American transactions with certain Chinese companies via government fiat, even for national security purposes, are likely to be ineffective at best and counterproductive at worst.

Despite its problems, though, President Biden’s executive order does recognize that:

The commitment of the United States to open investment is a cornerstone of our economic policy and provides the United States with substantial benefits.  Open global capital flows create valuable economic opportunities and promote competitiveness, innovation, and productivity, and the United States supports cross-border investment, where not inconsistent with the protection of United States national security interests.

The challenge the administration faces, ultimately, is one of distinguishing cross-border investments that are consistent with national security interests from those that are not.  Such a task is not easy in China.  And given the recent ransom America paid to Iran, it’s apparently not easy there either.

Perhaps it’s finally time for American policy leaders to take a page from Emerson and quit while we’re less than ahead.

Read in RealClearMarkets.