China's Momentous Change: From Center of Trade to Center of Investment

A leading scholar discusses an economic shift that will change China -- and the world.


(Susan Walsh/AP)

This post is adapted from a conversation on ChinaFile, an Atlantic partner site. See the full exchange here.

Orville Schell:

When many of us came into the the story of U.S.-China relations, the currency of the realm was politics. When Henry [Kissinger] went to China, there was no economics to deal with. So, it was a political question. Without really noticing it, we've undergone an extraordinary transmigration from the currency of politics to, really, the currency of currency.

We talked about trade at some length, and indeed, China's trade relations with the world are extraordinarily robust -- some $2 trillion. But I think we're sitting at the edge of a very interesting change, that's already starting to happen. It's a shift away from China being the epicenter of trade to being the epicenter of investment. This is going to transform the world.

We've lived through varying sorts of tidal flows of foreign direct investment. It used to be that investment just sort of rained down on the United States and Europe as the logical places to go. Then there started to be a great interest in emerging markets, and that's when many people went off to China and started investing in China.

Now, we're at this other inflection point, where the investment is starting to flow out of China --part of the "going out" policy -- and as companies accumulate capital and move up the value chain, they don't want to just buy a coal mine or an iron mine. They want a brand, they want to be in manufacturing or information systems, and so we're beginning to see this change. 

I think America is not ready for it. I think we've not really thought about it particularly thoroughly because we never have had to think about getting investment. The truth is now that we both need new sources of investment and China is the most logical, promising place from which more of those capital flows will come.

This is something that is going to have a profound impact on U.S.-China relations. Today, China's foreign direct investment in the United States is very small -- on the same level as New Zealand, Denmark. But in some of the work we've done here at the Asia Society, we estimate that there's a potential of from $1 trillion to $2 trillion that will be trying to exit China. The question is, where is it going to go.

This is an area on which we need to concentrate more, because it actually is a win-win proposition. You go to China and there's a tremendous amount of uncertainty about whether this investment is welcome. That largely grows out of several cases -- the Unocal case, ZTE, Huawei. There is a review process, but you should all know that the only grounds on which the United States can reject foreign investment is national security grounds -- extremely narrow. There are very few investments that get turned down. America is one of the most open economies in the world to foreign investment, but that is not always the perception.

If we are talking about marriages between foreign policy, bilateral relationships and economics, this is one which is going to deserve our attention going forward.

We don't want to have too rosy-eyed a picture. There's a lot of history between the U.S. and China. It has made our relations difficult. They continue to be difficult at times, despite an understanding of a greater common interest, we sometimes have a difficult time digging down to it. Things get in the way and it is the unpleasant job of governments, of course, to deal with all the problems that are very difficult to solve. Trade and business can sometimes have a more felicitous relationship and I think there's also a role for cultural exchange and other kinds of exchange that are not so fraught with tension.

As I look at the horizon, I'm particularly gratified to hear that President Xi is not only coming to the United States, but he's not, God bless him, going to Washington. I think that he's evinced a tremendous wisdom. If he went to Washington, he'd be immediately trapped in arguments over state dinners, 21-gun salutes and all of the protocol issues that essentially go nowhere.
So, where's he going? He's going to Los Angeles. He's going to Walter Annenberg's estate. Nice golf course, tennis courts, swimming pool -- no neckties needed. And, hopefully, he and President Obama will be able to get down to business, to try to dig down to some of these clouding issues to these basic common interests. It doesn't matter what you think, the U.S. and China have to get along, and so we have to get down to that kind of bedrock.

I worry greatly about some of the things percolating around Asia, particularly the island disputes -- they cause a good deal of worry. They're very inflammatory. They've sort of replaced Taiwan and the point of tension.

I'm a little more optimistic about our relationship vis-a-vis North Korea. There seems to be some common ground there. There needs to be more military-to-military relations. We have two very different political systems, and I don't need to tell anyone that that's a constant source of tension, but tension or not, we need to work through that to get to some of the other issues.

A version of this post appears at ChinaFile, an Atlantic partner site.