The Truth About American Foreign Direct Investment In China

In a few decades, China’s risen from a land of rice paddies and rickshaws to one of skyscrapers and steel.

How?

Yes, China’s smart and industrious, but the truth is that they couldn’t have done it alone.

America provided them with enough capital, both indirectly (by buying Chinese products) and directly (foreign direct investment) to build a modern economy from the ground up.

America’s Trade With China

America’s provided China with trillions of dollars indirectly, but first, some context.

America’s indirect investment in China began in 1971, when President Nixon lifted America’s embargo on China (which was imposed because of Mao’s communist takeover).

Trade remained fairly insignificant until 1980, when President Carter conferred “most favored nation” status on China, thereby exempting Chinese products from the Smoot-Hawley Tariff, which imposed higher tariff rates on hostile states.

But it was not until China’s policy pivot in the mid-1980s that trade began to pick up.

In 1985, China reoriented its market to cater to America consumers, by investing in export-oriented industries in the coastal cities of Dalian, Guangzhou, Shanghai, and Tianjin.

This worked, especially since President Reagan had recently reclassified China as an American ally, which loosened American prohibitions on technology exports. This allowed China to buy updated American equipment.

China modernized.

In the end, America’s insatiable appetite for cheap goods fueled China’s industrialization, and provided them with the capital and technology they needed to upgrade China’s infrastructure (they build a web of highways, railways, canals, harbors, airports etc.). This made China’s economy more efficient, and cheaper.

Indirectly, America provided over $5.2 trillion to China since 1985 (by buying Chinese products). In reality, the value is infinitely higher, since you cannot put a price on technology. Remember, 30 years ago China was transporting goods around in wagons and rickshaws.

America’s Foreign Direct Investment (FDI) In China Is Underestimated By 400%

America also invested directly in China, through something called foreign direct investment (FDI).

FDI is money which flows from one country to another, for the purposes of building economic projects directly (in this case, from America to China).

For example, if Apple funded and built a factory in Shanghai, this would count as FDI.

Between 2001 and 2012, America invested $29 billion in China directly—if that seems low, it is.

First, this doesn’t include American investments in Honk Kong, which is in China, just as Miami is in America—if Hong Kong is included, the number increases to $50 billion.

Much of America’s investment in China actually flows through other countries first.

The biggest “hidden” investment conduit is the British Virgin Islands (BVI).

Between 2001 and 2012, the BVI received $349 billion USD worth of FDI, which was matched by FDI outflows (BVI was a middleman)—of this, $93 billion was from America.

Since this money was not invested domestically in the BVI, and since 70.8% of BVI’s FDI went to China or Hong Kong, it’s likely that the same proportion of America’s investments went to the same places.

Therefore, Americans likely invested $66 billion in China and Hong Kong via the BVI during the period.

All totaled, American direct investment in China increases to $116 billion between 2001 and 2012 (under-reported by 400%).

There’s a huge difference between what we’re told, and what’s actually happening.

Why?

Because established interests want Americans to accept China’s rise.

This reduces the demand for change—you can’t change something that’s beyond your control.

However, America is directly responsible for China’s rise, and it’s hurting us.

It’s time we woke up to that fact.

Select Sources:

Bureau of Economic Analysis, “Direct Investment & MNEs.” Accessed May 11.

United Nations Conference on Trade and Development, “World Investment Report 2016: Annex Tables.” Accessed July 5, 2016.

United States Census Bureau, “Trade in Goods, 1985-2016.” Accessed May 20, 2016.

World Bank, “GDP by PPP Statistics.” Accessed May 15.