Chapter 8: Investment Screening, Industrial Policy, and Strategic Assets
Executive Summary
On August 6, 2020, President Trump issued an executive order giving ByteDance, the Chinese parent company of TikTok, 45 days to divest the popular video-sharing app or face a complete ban in the United States. The order cited national security concerns: TikTok's collection of American users' data, algorithmic content curation controlled by a Chinese company potentially subject to Chinese government influence, and risks of Chinese intelligence exploitation of the platform's vast user base (100 million Americans, predominantly young). ByteDance attempted negotiations, proposing technical solutions and partnership structures, but the Committee on Foreign Investment in the United States (CFIUS) determined that only complete divestment—selling TikTok's U.S. operations to American owners—would address security concerns.
Four years and multiple legal battles later, TikTok remains Chinese-owned, operating under perpetual threat of forced sale or ban. The standoff captures a fundamental transformation underway: investment screening has mutated from sleepy bureaucratic review into an active weapon targeting specific countries, entire sectors, and companies already operating on domestic soil. Meanwhile, governments once allergic to industrial policy now embrace it with gusto. The United States—long a champion of free markets and skeptic of state intervention—committed over $500 billion through the CHIPS and Science Act, Inflation Reduction Act, and Infrastructure Investment and Jobs Act (Rasser et al. 2022) to remake semiconductor production and clean energy supply chains. China doubles down on Made in China 2025 and Big Fund semiconductor investments exceeding $100 billion. The invisible hand has been replaced by the visible fist.
Investment controls and industrial policy now rank alongside tariffs and sanctions as primary instruments of economic coercion. Governments wield them to shape capital flows, dictate ownership structures, and rebuild industrial capabilities they once happily offshored.
First, investment screening has evolved from passive national security review to active economic coercion tool, particularly targeting Chinese investments in technology and critical infrastructure. Traditional CFIUS review focused on narrow security concerns: preventing foreign control of defense contractors, protecting classified information, safeguarding critical infrastructure from sabotage. Applications were relatively rare, reviews largely procedural, and approvals common with modest mitigation measures. The 2018 Foreign Investment Risk Review Modernization Act (FIRRMA) fundamentally changed the game: expanding jurisdiction to cover non-controlling investments and early-stage ventures (previously outside CFIUS reach), mandating declarations for investments in "TID" sectors (Technology, Infrastructure, Data), and explicitly targeting critical emerging technologies (AI, quantum computing, biotechnology, hypersonics). Post-FIRRMA, Chinese investment in U.S. technology plummeted from a 2016 peak of $45.6 billion to just $2.5 billion in 2024—a 95% decline (Rhodium Group 2024). This wasn't market forces but policy intent: investment screening became a mechanism for economic decoupling, preventing Chinese capital from accessing American innovation ecosystems.
Second, industrial policy competition represents a return of state-directed capitalism, with both the United States and China deploying massive subsidies and mandates to reshape critical supply chains. For decades, Western economic policy emphasized market efficiency, comparative advantage, and free trade—viewing industrial policy as distortionary, inefficient, and characteristic of failing developmental states. "The government shouldn't pick winners" was the mantra. Then China picked winners, and they won. Targeted investments in strategic sectors (high-speed rail, renewable energy, telecommunications, semiconductors) enabled Chinese firms to achieve global leadership, often displacing Western competitors. The CHIPS and Science Act, committing $52 billion to semiconductor manufacturing and R&D, explicitly aims to reverse market-driven offshoring (Rasser et al. 2022) and rebuild domestic production despite higher costs. The Inflation Reduction Act's $369 billion for clean energy similarly seeks to counter China's dominance in solar panels (80% global production), wind turbines (60%), and EV batteries (75%). This represents industrial policy on unprecedented scale: not just supporting nascent industries but attempting to reshore established supply chains through subsidies rendering uneconomic production economically viable. The effectiveness of such policies—whether they build sustainable capabilities or create dependency on perpetual government support—remains unproven, but the commitment is unmistakable.
Third, informal economic coercion—state actions outside formal legal frameworks to impose costs on target economies—demonstrates that economic power operates beyond institutionalized sanctions and tariffs. China's 2020-2021 economic pressure on Australia illustrates these dynamics: following Australia's call for an independent investigation into COVID-19 origins, China imposed de facto restrictions on Australian exports including wine (tariffs of 200%+), barley (80% tariffs), coal (unofficial import bans), lobster, timber, and beef—affecting over $20 billion in trade. Notably, these restrictions operated through administrative measures, customs delays, and "quality concerns" rather than explicit government policies, providing plausible deniability while inflicting substantial economic pain. Australian wine exporters, deriving 95% of revenue from China, faced existential crisis. Yet Australia maintained its policy positions, sought alternative markets, and deepened security alignment with the United States. This case demonstrates both the power of informal coercion (imposing costs without triggering WTO dispute mechanisms or formal retaliation frameworks) and its limitations (targets may absorb pain rather than concede, and market diversification reduces future leverage).
Government Tools Boxes detail CFIUS procedures, FIRRMA expansion, and industrial policy authorities (CHIPS Act, Defense Production Act Title III). Case studies examine the BIOSECURE Act's targeting of Chinese biotech firms and China's informal economic coercion against Australia (2020-2021). A Chinese Perspective Box explores Beijing's views on investment screening as discriminatory protectionism and industrial policy as legitimate development strategy.
These themes reveal economic statecraft's evolution beyond traditional trade and financial tools. Capital flows, industrial capabilities, and even market access have become contested domains—with implications extending well beyond bilateral U.S.-China competition to allied policy coordination, development finance, and the future shape of globalization.
Investment Screening - From Passive Review to Active Coercion
Investment screening—government review of foreign acquisitions and investments for national security implications—has existed for decades in most advanced economies. The United States established the Committee on Foreign Investment in the United States (CFIUS) in 1975, primarily to monitor OPEC petrodollar investments following the oil crises. For most of its history, CFIUS operated as a relatively obscure interagency process: companies voluntarily notified proposed foreign acquisitions, government agencies reviewed for narrow security concerns (protecting classified information, preventing foreign control of defense contractors), and most transactions received approval, sometimes with mitigation measures. Rejections and forced divestments were rare. This passive, procedural approach reflected an era when foreign investment was generally welcomed as beneficial capital inflow, and national security concerns centered on traditional military threats. CFIUS was a sleepy backwater of bureaucracy. Then China came knocking with bags of money and shopping lists of technology companies.
The 2018 Foreign Investment Risk Review Modernization Act (FIRRMA) fundamentally reshaped the system, expanding CFIUS jurisdiction, mandating reviews of previously exempt transactions, and explicitly targeting Chinese investments in emerging technologies. Post-FIRRMA investment screening represents not passive review but active economic coercion: deliberately blocking Chinese capital from accessing American technology, even when transactions pose only speculative, long-term security risks rather than immediate threats. This section examines CFIUS evolution, FIRRMA's mechanisms, allied investment screening coordination, and effectiveness in achieving decoupling objectives.
CFIUS Evolution: From OPEC to China
Historical Origins and Traditional Approach (1975-2016)
President Gerald Ford established CFIUS via Executive Order 11858 in 1975, primarily to monitor foreign investments amid concerns about OPEC nations recycling petrodollars into U.S. assets. The Committee, chaired by the Treasury Secretary and including Defense, State, Commerce, and Homeland Security, could review foreign acquisitions of U.S. companies and recommend that the President block transactions threatening national security. However, legal authority remained ambiguous until the Exon-Florio Amendment to the Defense Production Act (1988) explicitly granted the President authority to suspend or prohibit foreign acquisitions, mergers, or takeovers that threaten national security.
Through 2015, CFIUS operated with relatively limited scope and activity:
Voluntary jurisdiction: Companies could choose whether to file CFIUS notices. Most foreign acquisitions proceeded without notification, and CFIUS reviewed only self-selected cases (typically where parties anticipated potential concerns and sought clearance).
Narrow security focus: Reviews concentrated on traditional national security: defense contractors, classified programs, critical infrastructure vulnerable to sabotage (ports, telecommunications). Economic competitiveness, technology leadership, and data privacy were largely outside CFIUS purview.
Rare rejections: From 2008-2015, CFIUS reviewed 770 transactions, investigated 111 (14%), and only 5 were withdrawn or prohibited—a 99%+ approval rate. Most cases received approval with mitigation measures: requiring corporate governance changes, limiting foreign personnel access to sensitive facilities, or implementing cybersecurity protocols.
Limited Chinese scrutiny: Chinese investments grew dramatically from $1 billion annually (pre-2008) to $45.6 billion peak (2016), largely approved. High-profile acquisitions included Lenovo's purchase of IBM's PC business (2005), Chinese investments in U.S. real estate and entertainment (AMC Theatres, Legendary Entertainment), and technology sector venture capital.
Awakening to Strategic Competition (2012-2016)
Several developments triggered policy reassessment of Chinese investment:
Technology transfer concerns: U.S. intelligence assessments concluded that Chinese investments increasingly targeted dual-use technologies, particularly in semiconductors, aerospace, robotics, and AI. While individual investments appeared benign, cumulative effect transferred critical capabilities supporting Chinese military modernization and industrial policy goals.
Huawei and ZTE telecommunications dominance: Growing presence of Chinese telecommunications equipment in U.S. and allied networks raised security concerns about potential espionage, backdoors, and disruption capabilities. Congressional reports in 2012 recommended excluding Huawei and ZTE from U.S. critical infrastructure.
Visible acquisition attempts: China's 2016 attempt to acquire German semiconductor equipment maker Aixtron (blocked by U.S. intervention citing technology transfer concerns) and proposed acquisition of U.S. chipmaker Lattice Semiconductor (blocked by Trump 2017) demonstrated systematic targeting of technology chokepoints.
Intellectual property theft campaigns: Revelations of Chinese cyber espionage (APT1, APT10, APT41 as examined in Chapter 5) stealing hundreds of billions in IP demonstrated that while Chinese firms acquired some technology through investment, they also pursued systematic theft—raising questions about enabling access through permissive investment review.
By 2016-2017, bipartisan consensus emerged that existing CFIUS authorities were insufficient to address Chinese strategic investment targeting American technology leadership. This consensus culminated in FIRRMA, the most significant expansion of U.S. investment screening since Exon-Florio.
FIRRMA 2018: Expanding the Net
The Foreign Investment Risk Review Modernization Act (FIRRMA), enacted August 13, 2018, dramatically expanded CFIUS jurisdiction (Jackson 2020), introduced mandatory filing requirements, and explicitly targeted emerging and foundational technologies. Key provisions transformed investment screening from passive review to active technology protection:
Expanded Jurisdiction Beyond Controlling Investments
Traditional CFIUS jurisdiction covered only transactions resulting in foreign "control" of U.S. businesses—typically defined as acquiring majority ownership or board control. FIRRMA expanded jurisdiction to cover non-controlling investments in specific sectors:
Non-controlling investments in TID sectors: Foreign investments in U.S. businesses dealing with critical Technology, Infrastructure, or Data ("TID") now fall under CFIUS jurisdiction even without control. This captures minority stake investments, venture capital funding, and strategic partnerships previously beyond CFIUS reach.
TID Sectors: The New Red Lines FIRRMA's "TID" framework—Technology, Infrastructure, Data—defines the new red lines for foreign investment. Technology includes AI, quantum computing, semiconductors, biotechnology, and other emerging fields. Infrastructure covers energy, telecommunications, transportation, and other critical systems. Data encompasses any business collecting sensitive personal information on Americans. Even a 5% investment in a TID-sector startup now triggers CFIUS jurisdiction—a dramatic expansion from traditional "control" requirements.
Critical technology definition: Investments involving businesses that produce, design, test, manufacture, fabricate, or develop critical technologies face CFIUS review. Critical technologies include:
Export-controlled items (including emerging and foundational technologies under Export Control Reform Act)
Nuclear facilities and materials
Select agents and toxins
Emerging technologies not yet subject to export controls but determined critical to national security (AI, quantum computing, biotechnology, hypersonics, robotics, brain-computer interfaces)
Critical infrastructure: Investments in 28 infrastructure sectors (energy, telecommunications, transportation, water systems, healthcare, financial services) within the United States face heightened scrutiny.
Sensitive personal data: Businesses maintaining or collecting sensitive data on U.S. citizens that could be exploited for intelligence purposes (genetic information, geolocation data, financial records, health data) now trigger jurisdiction.
Mandatory Declarations
Previously, CFIUS filings were voluntary—parties could choose whether to notify. FIRRMA introduced mandatory declarations for certain transactions:
Foreign government-controlled investors acquiring substantial interest (25%+ voting rights) in TID businesses must file
Transactions involving critical technologies subject to export controls require declarations
Failure to file carries penalties and potential forced divestment even years after transaction completion
Mandatory declarations create a "short-form" filing (5 pages vs. 50-100 page full notices), with CFIUS responding within 30 days: cleared, request for full notice, or unilateral initiation of review. This mechanism forces disclosure of investments previously hidden from CFIUS.
Real Estate Transactions
FIRRMA added jurisdiction over foreign purchases or leases of real estate near sensitive locations:
Military installations (within ranges determined by regulations)
Government facilities involved in critical technologies, sensitive information, or national security functions
Ports and airports
This addresses concerns about foreign surveillance infrastructure near military bases or intelligence facilities—for example, Chinese purchases of land near Air Force bases in Texas and North Dakota.
Pilot Programs and Regulations
Treasury implemented FIRRMA through phased rulemakings:
November 2018: Critical technology pilot program mandating declarations for investments in 27 industry sectors
February 2020: Final regulations establishing TID definitions, mandatory declarations, real estate jurisdiction
Ongoing: Updates expanding critical technology definitions and covered transactions
Increased Resources and Timelines
FIRRMA authorized increased CFIUS staffing and funding (from ~20 full-time employees to 70+) and extended review timelines:
Initial review: 45 days
Investigation if concerns identified: 45 days
Presidential decision: 15 days
Total possible timeline: 105 days (previously 90 days)
Extensions possible by mutual agreement
Impact on Chinese Investment: Near-Total Collapse
FIRRMA's impact on Chinese investment was immediate and severe. Chinese direct investment in the United States:
2016 (Pre-FIRRMA peak): $45.6 billion
2017: $29.4 billion (declining as political sentiment shifted)
2018 (FIRRMA enacted): $5.4 billion
2019: $5.0 billion
2020: $3.8 billion
2021: $5.1 billion
2022: $2.8 billion
2023: $2.6 billion
2024: $2.5 billion (estimated)
This represents a 95% decline from peak, with 2024 investment returning to levels last seen in 2004—before China's emergence as major global investor. The collapse extends across sectors but concentrates in technology:
The 95% Collapse in Chinese FDI The near-total collapse of Chinese foreign direct investment in the United States—from $45.6 billion in 2016 to just $2.5 billion in 2024—represents one of the most dramatic investment reversals in modern history. This wasn't a market correction but a policy outcome: FIRRMA's expanded jurisdiction, mandatory declarations, and aggressive enforcement created an environment where Chinese capital simply cannot access American technology companies. The message was unmistakable: Chinese money is not welcome in U.S. innovation ecosystems.
Technology sector: Chinese VC investment in U.S. technology startups fell from $3.2 billion (2017) to less than $200 million (2024). Prominent Chinese VCs (Sequoia China, Hillhouse Capital) largely exited U.S. deals.
Real estate: Chinese purchases of U.S. commercial and residential real estate declined from $46.2 billion peak (2016) to approximately $3 billion (2024), driven partly by CFIUS concerns about properties near sensitive sites but also Chinese capital controls and economic slowdown.
Entertainment and consumer sectors: High-profile Chinese acquisitions of AMC Theatres, Legendary Entertainment, and other entertainment assets ended. Consumer sector deals (food, retail) also largely ceased.
CFIUS Statistics Reflecting Increased Scrutiny
CFIUS annual reports document transformed review patterns:
Total notices: Declined from 237 (2016) to approximately 150-180 annually (2019-2024) as Chinese filings disappeared
Chinese transactions: Comprised 23% of CFIUS reviews (2016) vs. 7-10% (2024)
Withdrawn transactions: Chinese deals withdrawn or abandoned after CFIUS intervention rose from 1-2 annually (pre-2018) to 8-12 annually (post-FIRRMA)
Presidential blocks: Rare but concentrated on Chinese deals (2012: Ralls wind farm project near naval base; 2017: Lattice Semiconductor; 2018: Broadcom-Qualcomm to prevent Huawei 5G advantage; 2020: TikTok)
Forced Divestments
Beyond blocking prospective deals, CFIUS gained aggressive enforcement of existing investments:
Grindr: Chinese gaming company Kunlun required to divest Grindr (LGBTQ dating app) due to blackmail/espionage concerns from location and personal data. Divestment completed 2020.
PatientsLikeMe: Chinese firm iCarbonX forced to divest health data platform
StayNTouch: Chinese acquirer required to divest hotel management software accessing guest data
Multiple smaller divestitures: CFIUS identified and unwound dozens of unreported transactions closed before FIRRMA, forcing retroactive review and divestment.
Retroactive Power: No Deal is Ever "Final" One of CFIUS's most powerful tools is retroactive review. Transactions completed years ago—even those never notified to CFIUS—can be reopened if security concerns emerge. Chinese investors who acquired U.S. companies before FIRRMA's passage found themselves forced to divest years later. This creates permanent uncertainty: there is no statute of limitations, no "safe harbor" after closing. For foreign investors, especially Chinese ones, this means no deal involving sensitive technology or data is ever truly final.
Allied Investment Screening: Coordination and Divergence
The United States is not alone in expanding investment screening. European Union member states, United Kingdom, Australia, Japan, and other allies have implemented or strengthened foreign investment review mechanisms, driven by similar concerns about Chinese technology acquisition and critical infrastructure control. However, allied approaches reflect differing balances between economic openness and security protection, creating coordination challenges.
European Union FDI Screening Regulation (2019)
The EU implemented a framework for screening foreign direct investments in October 2020, establishing coordination among member states while preserving national sovereignty over investment decisions. Key features:
Voluntary national screening: Member states may establish investment review mechanisms but aren't required to. As of 2024, 25 of 27 EU members have screening regimes, with varying scope and rigor.
Coordination mechanism: When a member state reviews a transaction, other members and the European Commission can provide opinions if the investment affects their security interests or EU-wide projects (Horizon Europe research, Galileo satellite navigation, etc.)
Mandatory factors: Screening must consider whether foreign investors are controlled by foreign governments, whether investors have been involved in activities affecting security in another member state, and risks to critical infrastructure, critical technologies, sensitive information, or media freedom.
No veto power: The Commission and member states provide opinions, but the member state where the investment occurs makes the final decision. This preserves sovereignty but limits coordination effectiveness.
Germany and France: Strictest EU Regimes
Germany and France, as EU's largest economies and leading industrial powers, have implemented the EU's most comprehensive screening:
Germany:
Foreign Trade and Payments Act amendments (2017, 2020, 2023) expanded screening beyond defense to critical infrastructure, media, healthcare, and food supply
Lowered thresholds for mandatory review from 25% to 10% ownership for critical sectors
Blocked Chinese acquisitions: Aixtron semiconductor equipment (2016), Leifeld Metal Spinning (machine tools, 2018), 50Hertz power grid operator (2018)
But approved: Chinese acquisitions in automotive (Volvo/Geely, Daimler stakes), robotics (Kuka), and other sectors, demonstrating selective rather than blanket restrictions
France:
2019 PACTE law expanded sectors subject to screening to include AI, robotics, semiconductors, data storage, cybersecurity
Blocked Chinese acquisitions of Photonis (night vision technology, 2021), though later partially reversed under appeal
Maintains extensive screening but balances with economic openness—Chinese battery investments (Envision AESC) approved for electric vehicle supply chains
United Kingdom: National Security and Investment Act (2022)
The UK's NSI Act, effective January 2022, represents post-Brexit recalibration of investment policy:
Mandatory notification: Acquisitions in 17 defined sensitive sectors (AI, quantum, semiconductors, nuclear, defense, communications) must be notified even for acquisitions as small as 15% ownership or material influence
Call-in powers: Government can review any transaction in any sector if national security concerns exist, with retroactive reach up to 5 years
Volume: Over 1,800 notifications in first two years, with ~1% subject to detailed review and handful blocked
Chinese focus: Particularly scrutinizes Chinese investments in technology and infrastructure, though maintains openness to non-sensitive sectors
Australia: FIRB and Critical Infrastructure
Australia, geographically proximate to China and economically dependent on Chinese trade, faces acute tensions between economic interests and security concerns. The Foreign Investment Review Board (FIRB):
2021 reforms lowered thresholds for review, particularly for investments by foreign government entities (including SOEs)
Expanded definition of national security businesses to include critical infrastructure, defense, telecommunications, data
Critical Infrastructure Act (2021) grants government powers to direct operators of critical infrastructure (ports, energy, telecommunications, data centers) to mitigate security risks, even absent change of ownership
Chinese reaction: Accusations of discriminatory treatment, contributing to bilateral tensions examined in Section 4
Japan: Strengthened FISC Reviews
Japan's Foreign Investment Screening Committee (FISC), operating under Foreign Exchange and Foreign Trade Act (FEFTA):
2019 amendments expanded covered sectors from 12 to 20, including semiconductors, pharmaceuticals, software
Lowered notification threshold from 10% to 1% for sensitive sectors and foreign government-linked investors
Streamlined "pre-clearance" process for trusted investors from allied countries
Scrutinizes Chinese investments while facilitating Western capital—reflecting geopolitical alignment
South Korea: Balancing Act
South Korea faces particular difficulty balancing alliance with the United States against economic dependence on China (largest trading partner). Investment screening reflects this tension:
National Security Investigation Act covers acquisitions in defense, dual-use technologies, critical infrastructure
Applied selectively: blocks or mitigates concerning Chinese investments but avoids comprehensive restrictions
Samsung and SK Hynix exemptions from U.S. semiconductor equipment export controls (Chapter 4) create reciprocal pressure to avoid overly restrictive investment screening
Maintains substantially more open posture toward Chinese investment than U.S./Europe
Coordination Challenges
Allied investment screening coordination faces persistent obstacles:
Divergent threat perceptions: U.S. views Chinese technology acquisition as existential competition; European countries often see commercial opportunities; smaller allies balance economic dependence against security alignment
Regulatory arbitrage: Investors can target countries with weaker screening, or structure transactions to avoid triggers (using multiple jurisdictions, complex ownership structures, sequential transactions)
Sovereignty sensitivities: Investment screening historically national prerogative; countries resist ceding decision authority to multilateral bodies
Economic costs: Blocking foreign investment imposes costs (lost capital, jobs, technology transfer); costs fall unevenly depending on country's economic structure and alternatives
Legal frameworks: U.S. uses national security exception in WTO agreements; EU screening operates under EU law; coordination requires reconciling different legal bases and procedural requirements
The U.S.-EU Trade and Technology Council (TTC), Quadrilateral Security Dialogue (Quad: U.S., Japan, India, Australia), and G7 coordination mechanisms attempt to harmonize investment screening, but progress remains incremental.
Effectiveness Assessment
Evaluating investment screening's effectiveness as economic coercion instrument requires applying the five criteria established in Chapter 1:
1. Target Compliance
Investment screening achieves high compliance: when CFIUS or allied authorities block or demand divestment, targets generally comply rather than risk presidential prohibition, sanctions, or legal penalties. The TikTok case illustrates both the difficulties and ultimate effectiveness of forced divestiture for already-operating businesses: ByteDance resisted through years of litigation and negotiation, but the January 2026 establishment of the TikTok USDS Joint Venture — with majority American ownership and Oracle-hosted infrastructure — demonstrated that even complex, politically charged divestitures can be resolved when backed by credible legislative force.
Compliance extends to voluntary transaction abandonment: when parties anticipate CFIUS rejection, they typically withdraw filings rather than proceeding to formal rejection. This "shadow" effect means visible statistics undercount actual effectiveness.
2. Capability Degradation
Investment screening demonstrably degrades Chinese technology acquisition capabilities:
95% reduction in U.S. investment eliminates Chinese capital from American technology ecosystems
VC funding cutoff prevents Chinese firms from early-stage access to startups developing emerging technologies
Forced divestitures remove existing Chinese ownership of sensitive data and capabilities
However, degradation is partial:
Alternative acquisition methods: Chinese entities pursue technology through partnerships below ownership thresholds, recruitment of talent, procurement of products (rather than companies), and cyber espionage
Non-U.S. investments: Chinese capital increasingly targets European, Israeli, and emerging market technology, though allied coordination limits options
Indigenous development: Investment restrictions spur Chinese self-reliance efforts (Chapter 4 semiconductor example), potentially building capabilities that reduce long-term dependence
3. Economic Cost
Costs fall asymmetrically:
Target costs (China):
Lost investment opportunities in world's most innovative technology ecosystem
Forced divestitures incur financial losses (Grindr sale at distressed valuation)
Reduced access to early-stage technologies limits future competitiveness
Estimated economic cost: $40-50B in lost investment annually compared to 2015-2016 levels
Coercer costs (United States):
Lost foreign capital (though largely offset by other sources—European, Japanese, Canadian investment increased)
Reduced competition in venture capital may inflate valuations
Technology sector lobbying against restrictions creates political friction
Estimated cost: Modest in aggregate but concentrated in specific sectors (biotechnology, semiconductors where Chinese capital significant)
4. Sustainability
Investment screening appears highly sustainable:
Strong political support: Bipartisan consensus in U.S. Congress, political support in allied countries
Institutional capacity: CFIUS, EU mechanisms, allied bodies now resourced and established
Legal clarity: FIRRMA and allied legislation provide clear authorities and procedures
Sustainability risks include:
Allied coordination: Requires ongoing diplomatic effort; political changes could fracture consensus
Legal challenges: Targets contest authorities in courts (as ByteDance did before ultimately accepting the TikTok divestiture); adverse rulings could limit tools
Economic pressure: Prolonged capital controls may generate business community opposition if costs rise or alternative capital sources prove insufficient
5. Collateral Damage
Collateral damage is moderate:
Friendly countries: Investment screening targets Chinese and Russian investments but creates compliance burdens for all foreign investors; allied coordination mitigates but doesn't eliminate costs
U.S. businesses: Startups lose potential investors, face longer fundraising timelines, and navigate regulatory complexity
Technology diffusion: Restricting capital flows may slow global innovation diffusion, reducing benefits of international collaboration
Middle powers: Countries like South Korea, Israel, and Southeast Asian nations face pressure to choose sides, limiting economic flexibility
Overall Assessment
Investment screening has proven remarkably effective in achieving its primary objective: dramatically reducing Chinese access to Western technology through capital markets. The 95% decline in U.S. investment and substantial reductions in Europe demonstrate capability degradation. Political sustainability appears strong, and collateral damage remains moderate. However, effectiveness in preventing Chinese technology development is less clear—restrictions spur indigenous innovation, alternative acquisition methods, and investments in non-allied technology ecosystems. Investment screening is a powerful coercion tool but not a comprehensive solution to strategic technology competition.
Industrial Policy Competition - The Return of the State
For nearly four decades, Western economic policy embraced market-driven allocation of resources, viewing government industrial policy—directed subsidies, mandates, and preferences for specific industries—as inefficient distortions that reduce competitiveness. The Washington Consensus held that governments should establish rule of law, protect property rights, maintain macroeconomic stability, and otherwise let markets determine winners and losers. China's spectacular rise through aggressive industrial policy challenged this orthodoxy. Now, facing strategic competition and supply chain vulnerabilities exposed by the pandemic and geopolitical tensions, the United States and Europe have embraced industrial policy on unprecedented scale, directly competing with China's state-directed model. This section examines contemporary industrial policy competition, comparing U.S. and Chinese approaches, assessing early results, and evaluating prospects for success.
U.S. Industrial Policy: CHIPS, IRA, and Infrastructure
CHIPS and Science Act (August 2022)
The Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act represents the United States' most significant industrial policy intervention in generations, committing $52.7 billion to rebuild domestic semiconductor manufacturing and R&D capabilities. The act allocates $39 billion in direct grants and loans as manufacturing incentives for fabrication facilities, supplemented by a 25% investment tax credit. An additional $13.2 billion supports R&D investments in semiconductor research, including the National Semiconductor Technology Center, the National Advanced Packaging Manufacturing Program, and expanded NSF and DOE research programs. The legislation dedicates $500 million to workforce development for semiconductor industry training. Critically, the act includes guardrails prohibiting recipients from expanding semiconductor manufacturing capacity in China for 10 years, preventing subsidized firms from simultaneously aiding Chinese competitors.
The 10-Year China Ban CHIPS Act "guardrails" force companies to make a fundamental choice: take U.S. subsidies or expand in China—not both. Any company receiving CHIPS funding is prohibited from materially expanding semiconductor manufacturing capacity in China for 10 years. For companies like Intel, TSMC, and Samsung that have existing China operations, this creates difficult strategic trade-offs. The guardrails effectively weaponize subsidies, turning industrial policy into a tool for accelerating decoupling.
Several major projects announced as of 2024 illustrate the scale of investment catalyzed by the CHIPS Act. TSMC committed $65 billion (with $6.6 billion in CHIPS funding) for two fabrication plants in Arizona producing 4nm and 3nm chips, targeting production between 2025 and 2028. Intel announced a potential $100+ billion investment over a decade for two advanced logic chip fabs in Ohio, receiving $8.5 billion in CHIPS funding. Samsung is expanding its Austin, Texas fabrication facility for advanced logic production at a cost of approximately $25 billion. Micron plans two memory chip fabs in New York representing $100 billion in investment over 20 years, supported by $6.1 billion in CHIPS funding. GlobalFoundries received $1.5 billion in CHIPS funding for expansion of its Malta, New York fab.
These projects face significant challenges, however. Cost overruns plague the effort, as U.S. fab construction costs run 30-50% higher than equivalent facilities in Taiwan or Korea due to labor, regulatory, and materials expenses. Talent shortages compound the difficulty: the United States lacks sufficient semiconductor engineers and technicians, forcing TSMC to bring staff from Taiwan to its Arizona operations. Even when completed, the Arizona TSMC fabs will produce chips 2-3 generations behind Taiwan's leading edge, reflecting a persistent technology lag. Questions of subsidy dependency loom large, since without ongoing government support, the economics continue to favor offshore production. Finally, timeline delays have affected multiple projects, with TSMC Arizona's initial production pushed from 2024 to 2025-2026.
Inflation Reduction Act (August 2022)
The IRA commits $369 billion to clean energy and climate programs, much of it functioning as industrial policy to counter Chinese dominance in renewable energy supply chains. The legislation offers tax credits for U.S.-manufactured solar panels, wind turbines, and components. For electric vehicles, it provides a $7,500 tax credit per vehicle, conditioned on North American assembly and battery component sourcing requirements that effectively exclude Chinese content. A $35/kWh production tax credit for battery cells incentivizes domestic battery manufacturing. The act also directs loans and grants toward domestic mining and processing of critical minerals including lithium, graphite, cobalt, and rare earths, while tax credits for clean hydrogen production round out the package.
The IRA's early impact has been substantial. Over $100 billion in clean energy manufacturing investments have been announced since its passage. A battery plant construction boom is underway, with over a dozen facilities announced across the United States by manufacturers including LG, SK, Panasonic, Ford, and GM. In solar manufacturing, First Solar and Hanwha Q Cells are expanding U.S. production capacity. However, Chinese supply chain dominance---80% of global solar panel production and 75% of EV batteries---means that transitioning to domestic production will take years, and Chinese firms may circumvent sourcing restrictions through third-country operations.
Infrastructure Investment and Jobs Act (November 2021)
The $1.2 trillion infrastructure bill includes significant industrial policy elements. It allocates $65 billion for broadband expansion, $42 billion for bridge repair and replacement, $39 billion for public transit modernization, and $7.5 billion for EV charging infrastructure. "Buy America" provisions requiring domestic content for infrastructure projects further reinforce the reshoring objectives shared across these legislative efforts.
Total U.S. Industrial Policy Commitment: ~$500 billion across these three acts, representing fundamental shift from market-driven allocation to strategic state intervention.
China's State-Directed Model: Made in China 2025 and Beyond
China has pursued aggressive industrial policy for decades, viewing state-directed development as essential for technological catch-up, economic security, and great power status. Current initiatives represent continuation and acceleration of long-standing approach.
Made in China 2025 (2015)
Announced in 2015, Made in China 2025 targets ten strategic industries for Chinese leadership:
New information technology (semiconductors, 5G, AI)
Robotics and automation
Aerospace and aviation equipment
Maritime engineering and high-tech ships
Advanced rail equipment
New energy vehicles and equipment
Power equipment (nuclear, renewables)
Agricultural machinery
New materials (rare earths, composites)
Biopharmaceuticals and medical devices
The plan set explicit self-sufficiency targets: 40% domestic content by 2020, 70% domestic content by 2025, and global leadership in key sectors by 2049, the 100th anniversary of the People's Republic of China.
The program operates through several reinforcing mechanisms. Central and local governments provide subsidies in the form of grants, below-market-rate loans, and tax incentives totaling hundreds of billions of dollars. Government procurement policies mandate preferential purchasing from domestic suppliers. Technology transfer requirements compel foreign firms seeking Chinese market access to partner with Chinese companies and share proprietary technology. State-owned enterprises are directed to invest in strategic sectors regardless of short-term profitability. Government-backed venture capital funds channel investment into startups in target sectors. And the "Thousand Talents Plan" actively recruits foreign scientists and engineers to bring expertise into Chinese institutions.
Western backlash: Made in China 2025 triggered alarm in Washington and European capitals, contributing to shift toward industrial policy competition and export controls. After Trump administration criticism, China downplayed the program but didn't abandon underlying objectives.
Big Fund I, II, and III: Semiconductor Focus
China's National Integrated Circuit Industry Investment Fund (the "Big Fund") exemplifies state-directed capital allocation. Big Fund I, established in 2014 with $21 billion in capital, invested in foundries such as SMIC and Hua Hong, memory manufacturers like Yangtze Memory Technologies (YMTC), and packaging firms. Big Fund II followed in 2019 with $29 billion, shifting focus toward design tools (EDA software), equipment manufacturing, and materials. Big Fund III, launched in 2024 with an estimated $47 billion, targets advanced chips, AI processors, and domestic equipment development.
The results of these investments have been mixed. The Chinese semiconductor industry has expanded capacity dramatically, but significant technology gaps persist. SMIC achieved a notable milestone by demonstrating 7nm chip production for the Huawei Mate 60 Pro despite equipment restrictions, though yields reportedly remain low at 40-50%. Chinese firms produce mature-node manufacturing tools but lag 10-15 years behind the cutting edge in lithography, etching, and deposition equipment. China's share of global semiconductor production capacity rose from 12% in 2015 to 24% in 2024, but this growth concentrates in mature nodes (28nm and above), with advanced node production (14nm and below) remaining a small share. Questions of efficiency also cloud the picture: massive capital investment yielded progress but at high cost, and multiple Big Fund corruption scandals---with executives arrested for embezzlement---raise serious doubts about allocation efficiency.
Comparing Approaches: Market-Driven vs. State-Directed
U.S. Model: Strategic Industrial Policy within Market Framework
The U.S. approach is characterized by selective intervention: the CHIPS Act and IRA target specific chokepoints such as semiconductors, batteries, and critical minerals rather than attempting comprehensive economic planning. Private sector leadership remains central, with the government providing incentives while private firms retain investment and production decisions. The approach maintains a degree of technology neutrality, offering tax credits and grants to any firm meeting established criteria rather than picking specific corporate winners. Programs carry sunset assumptions, with defined funding and timelines rather than permanent subsidies, though political dynamics make extensions likely. The model also emphasizes allied coordination, incorporating friend-shoring and partner cooperation as exemplified by TSMC and Samsung participation in U.S. fabs.
These strengths are offset by notable weaknesses. U.S. political cycles operate on short time horizons, while industrial policy requires decades of sustained commitment---a mismatch the American system struggles to reconcile. Even with subsidies, U.S. production often remains more expensive than Asian alternatives, creating persistent cost competitiveness challenges. Fragmented implementation across multiple agencies, with federal-state coordination difficulties and bureaucratic complexity, hampers execution. And private sector profit motives may undermine policy goals: companies may accept subsidies while maintaining primary production offshore if doing so remains more profitable.
China Model: Comprehensive State Direction
China's approach differs fundamentally in its scope and structure. Sector-wide planning under Made in China 2025 targets entire industries rather than individual chokepoints. State-owned enterprises execute government priorities regardless of short-term profitability, providing reliable implementation capacity. The model benefits from long-term commitment, with industrial policy spanning decades and backed by consistent resource allocation unconstrained by electoral cycles. Technology sovereignty serves as an explicit goal, with Chinese planners willing to accept higher costs in exchange for self-sufficiency and security. And central coordination through top-down direction reduces the bureaucratic fragmentation that hampers the U.S. approach.
China's model carries its own significant weaknesses, however. Inefficiency plagues state-directed allocation, which frequently misallocates resources---as evidenced by Big Fund corruption scandals and zombie companies sustained by subsidies long past any productive purpose. Innovation deficits emerge because state planning struggles to match market-driven innovation; China's strengths lie in scaling production rather than achieving breakthrough R&D. The model faces diminishing returns as China approaches the technology frontier, where state-directed catch-up strategies become less effective than at earlier development stages. Finally, aggressive industrial policy triggers international resistance in the form of Western countermeasures including export controls, investment screening, and tariffs.
Which approach will succeed? Uncertain and likely sector-dependent. Semiconductors favor scale, capital intensity, and sustained investment (potentially China advantage). Biotechnology and AI favor entrepreneurial innovation and talent mobility (potentially U.S. advantage). Both countries face obstacles: U.S. must overcome short-term political pressures and cost disadvantages; China must address efficiency and innovation limitations. The competition will unfold over decades, not years.
State-Owned Enterprises and Sovereign Wealth Funds as Strategic Instruments
State-owned enterprises (SOEs) and sovereign wealth funds (SWFs) function as extensions of government power in economic statecraft. Unlike private firms accountable primarily to shareholders and profit maximization, SOEs and SWFs pursue state strategic objectives—resource control, technology acquisition, geopolitical influence—sometimes accepting commercial losses for political gains. This section examines how states, particularly China, deploy these instruments as tools of economic coercion and strategic competition.
Chinese SOEs: Scale and Strategic Role
China's state-owned enterprises dominate key sectors of its economy and increasingly operate globally as instruments of state policy. As of 2024:
157 centrally-managed SOEs under State-owned Assets Supervision and Administration Commission (SASAC)
Combined assets: Over $35 trillion (larger than many countries' GDP)
Employment: 20+ million workers directly, tens of millions more in subsidiaries and supply chains
Sectors: Energy (Sinopec, PetroChina, CNOOC), telecommunications (China Mobile, China Unicom, China Telecom), banking (ICBC, Bank of China, China Construction Bank), aerospace (AVIC, CASC), shipping (COSCO), nuclear (CNNC)
Dual Mandate: Commercial and Political
Chinese SOEs operate under dual mandate:
Commercial objectives: Profitability, efficiency, competitiveness (increasingly emphasized since Xi Jinping's SOE reforms requiring better performance)
Political objectives:
Implementing industrial policy (Made in China 2025 sectors)
Ensuring resource security (energy, minerals, food)
Supporting Belt and Road Initiative infrastructure
Advancing technology self-reliance
Executing economic coercion when directed
The tension between commercial and political objectives creates complexity: SOEs must generate profits to avoid becoming fiscal drains while simultaneously pursuing strategic goals that may not maximize returns.
Resource Acquisition
Chinese SOEs have aggressively acquired global resources to secure supply:
Energy:
CNOOC's failed attempt to acquire Unocal (blocked by U.S. Congress, 2005)
PetroChina investments in Canadian oil sands, Venezuelan heavy oil, African offshore fields
Strategic petroleum reserves stockpiling (world's second-largest after U.S.)
Mining and Minerals:
Chinalco's stake in Rio Tinto (2008-2009, ultimately reduced after political resistance)
Multiple acquisitions of lithium, cobalt, rare earth, copper mines in Latin America, Africa, Australia
China Molybdenum acquisition of cobalt mine in DRC
Agriculture:
ChemChina acquisition of Syngenta (Swiss agribusiness, $43 billion, 2017)
COFCO investments in grain trading and processing globally
Farmland acquisitions in Africa, South America, Eastern Europe (though facing resistance)
Technology Acquisition
SOEs serve as vehicles for accessing foreign technology:
Joint venture requirements force foreign firms to partner with Chinese SOEs and transfer technology
Huawei's relationship with state (government contracts, financial support) enables global telecommunications expansion
AVIC (aviation SOE) partnerships with Boeing, Airbus, GE to acquire aerospace technology
CRRC (rail SOE) acquisitions of foreign rail manufacturers
Sovereign Wealth Funds as Investment Vehicles
China Investment Corporation (CIC)
Established 2007 with $200 billion initial capital (now ~$1.4 trillion AUM), CIC invests China's foreign exchange reserves:
Portfolio includes stakes in Blackstone, Morgan Stanley, commodity firms, infrastructure
Increasingly focused on technology and strategic sectors
Subject to CFIUS and allied investment screening, limiting U.S./European access
Other Chinese SWFs:
SAFE Investment Company ($1+ trillion, manages forex reserves)
National Social Security Fund ($440 billion, domestic focus)
Compared to other major SWFs:
Norway Government Pension Fund: $1.4 trillion (ethical guidelines, transparent)
Abu Dhabi Investment Authority: ~$700 billion
Singapore GIC: ~$700 billion, Temasek: ~$280 billion
Chinese SWFs operate with less transparency than Norwegian/Singaporean counterparts, raising Western concerns about strategic rather than purely commercial motivations.
Western Responses: Reciprocity and Screening
Reciprocity Arguments
U.S. and European critics argue for reciprocal market access: if Chinese SOEs invest freely in Western markets while Chinese markets remain restricted to foreign firms, this creates asymmetric advantages. Proposals include:
Conditional market access: Deny Chinese SOE acquisitions unless China opens equivalent sectors to Western firms
Subsidies countervailing: Treat Chinese SOE advantages from subsidized financing as unfair trade requiring countervailing duties
WTO reforms: Strengthen disciplines on SOEs to prevent distortionary advantages
Investment Screening (covered in Section 1)
CFIUS and allied mechanisms increasingly target SOE investments:
SOE-controlled investors face mandatory declarations for TID sectors
Presumption of government control raises security concerns
Several high-profile SOE acquisitions blocked: CNOOC-Unocal (2005), State Grid-AES wind farms (2012)
SOE Reform Pressure
Western governments and multilateral institutions pressure China to reform SOEs:
IMF, World Bank, OECD all recommend reducing SOE role, subjecting them to market disciplines
U.S.-China trade negotiations include SOE subsidy reduction demands
China has consolidated, merged, and partially privatized some SOEs but retains strategic control
Informal Economic Coercion - The Australia Case
Formal economic coercion operates through institutionalized mechanisms: CFIUS decisions, tariffs under Section 301, OFAC sanctions. Informal coercion employs state power outside formal frameworks—customs delays, regulatory harassment, unofficial import restrictions, consumer boycotts encouraged by state media—to impose costs while maintaining plausible deniability. China's 2020-2021 economic pressure on Australia exemplifies informal coercion dynamics: how it operates, why targets struggle to respond, and implications for middle powers navigating great power competition.
Background: COVID-19 Investigation and Bilateral Tensions
April 2020: Australia's COVID Origins Call
On April 19, 2020, Australian Foreign Minister Marise Payne called for an independent international investigation into COVID-19 origins, including China's initial response in Wuhan. Prime Minister Scott Morrison amplified the call, comparing it to "weapons inspectors" investigating the pandemic. The proposal, though supported by many countries, particularly angered Beijing:
Timing: During peak of pandemic when China faced international criticism for initial cover-ups, silencing whistle-blowers (Dr. Li Wenliang), and delayed WHO notification
Terminology: "Weapons inspectors" language evoked Iraq WMD inspections, implying coercive intrusion
Motives: Australia had strengthened Five Eyes intelligence cooperation, banned Huawei from 5G networks (2018), and increased criticism of Chinese influence operations—COVID investigation seen as part of broader confrontational approach
Chinese Official Responses
Chinese officials and state media delivered warnings:
Chinese Ambassador to Australia Jingye Chen warned of consumer boycotts if investigation proceeded
Global Times (state media) published articles threatening economic consequences
Chinese Foreign Ministry spokesman condemned Australia's "political manipulation"
Economic Restrictions: Sectors Targeted
Beginning May 2020, China imposed de facto restrictions on multiple Australian export sectors. Critically, these operated through administrative measures and unofficial guidance rather than formal tariff or ban announcements:
Barley (May 2020)
Action: China imposed 80.5% anti-dumping and countervailing duties on Australian barley
Impact: Australian barley exports to China fell from $1.5 billion annually to near zero
Nominal justification: Dumping investigation initiated 2018, but decision timing clearly political
Australian response: WTO dispute initiated (ultimately successful in 2024, with China removing tariffs)
Beef (May-September 2020)
Action: Four major Australian beef processors lost export licenses for "labeling violations," later expanded to more facilities
Impact: Reduced but didn't eliminate Australian beef exports (other facilities continued, though facing delays)
Justification: Technical compliance issues (labeling, health certificates)
Wine (November 2020)
Action: Anti-dumping duties of 107-212% on bottled Australian wine
Impact: Australian wine exports to China collapsed from $1.2 billion (2019) to $12 million (2021)—99% decline. For Australian wineries, China had been largest export market (39% of exports).
Devastating sector impacts: Treasury Wine Estates, Pernod Ricard Australia, and many smaller wineries faced revenue collapse, lay-offs, discounted inventory
The 99% Wine Collapse Australia's wine industry faced perhaps the most devastating blow of China's informal coercion campaign. Anti-dumping duties of 107-212% were prohibitively high—effectively a complete market exclusion dressed in trade law language. Wine exports to China plummeted from $1.2 billion to just $12 million in two years. For an industry where China had become the largest export market (39% of total), this represented an existential crisis. Regional towns dependent on wine exports faced severe economic hardship.
Coal (October 2020-2022)
Action: Unofficial import restrictions—Australian coal ships stuck at Chinese ports for months without customs clearance
Impact: Australian coal exports to China fell from $14 billion (2019) to $2.4 billion (2020) to near-zero (2021)
No formal announcement: Chinese officials denied restrictions; customs simply delayed or rejected clearances for unspecified "quality concerns"
Strategic dimensions: Coal restrictions hurt Australian exports but also created Chinese domestic energy shortages (winter 2020-2021 power crises), demonstrating costs of coercion
Lobster, Timber, Copper
Lobster: Customs delays leading to spoilage of live lobsters at airports
Timber: Import restrictions citing pest concerns
Copper ore and concentrates: Some restrictions and delays
Australian Responses and Economic Impact
Economic Costs
Cumulative trade impact estimated $20+ billion in affected exports over 2020-2022. However:
Diversification partially mitigated: Australian exporters found alternative markets (U.S., UK, Southeast Asia for wine; India, Japan, Korea for coal)
Commodity prices: Strong demand for iron ore, coal, and LNG (not restricted) meant Australia's overall trade balance remained positive
Sector-specific pain: Wine, barley, lobster industries suffered concentrated losses; regional economies dependent on these exports faced severe hardship
Policy Responses
No policy reversal: Australia maintained its positions:
Continued calling for COVID-19 investigation
Upheld Huawei 5G ban
Strengthened foreign interference legislation targeting Chinese influence
Deepened Five Eyes and Quad security cooperation
Announced AUKUS nuclear submarine partnership with U.S. and UK (September 2021)
Market diversification:
Wine industry shifted to U.S., UK, Southeast Asian markets
Coal exporters increased sales to India, Japan, South Korea
Barley found buyers in Middle East, Southeast Asia
Government Export Market Development Grants supported diversification
The Diversification Success Story Australia's response to Chinese coercion offers a model for economic resilience. Rather than capitulating, Australia aggressively diversified export markets. Wine found new customers in the U.S., UK, and Southeast Asia. Coal redirected to India, Japan, and South Korea. Barley reached Middle Eastern and Southeast Asian buyers. While painful in the short term, this forced diversification ultimately reduced Australia's vulnerability to future Chinese pressure—demonstrating that economic coercion can backfire by motivating targets to build resilience rather than submit.
WTO disputes:
Challenged Chinese barley duties at WTO (successful 2024)
Prepared but didn't file wine dispute (bilateral relations thawing by 2023)
Closer U.S. alliance:
AUKUS represented dramatic deepening of security ties
U.S. diplomatic support for Australia during Chinese pressure
Economic resilience strengthened through broader Indo-Pacific partnerships
Easing of Restrictions (2023-2024)
Following Chinese leadership transition dynamics and Australian government change (Labor Party's Anthony Albanese elected May 2022), bilateral relations gradually stabilized:
Barley: Duties removed August 2023 after Australia suspended WTO case
Wine: Duties under review with indications of removal by 2025
Coal: Informal restrictions eased 2023; exports resumed
Ministerial engagement: High-level visits resumed after three-year freeze
Why did China ease pressure?
Several factors:
Limited effectiveness: Australia didn't reverse policies; restrictions imposed costs on China (energy shortages, forfeited revenue)
Diversification: Australian exporters found alternative markets, reducing future leverage
Reputational costs: China's coercion alarmed other middle powers, driving them toward U.S. alignment
Broader strategy shift: China sought to reduce tensions with multiple countries simultaneously (also stabilizing relations with Japan, South Korea, EU)
Lessons: Informal Coercion Dynamics
Mechanisms
Informal coercion operates through:
Administrative discretion: Customs delays, regulatory harassment, licensing revocations for ostensible technical violations
Plausible deniability: No formal government announcements; officials deny political motives
Sector selectivity: Target economically significant exports while avoiding escalation (iron ore untouched because China depends on Australian supply)
State media amplification: Nationalist sentiment, consumer boycott encouragement
Advantages
Avoids WTO constraints: Informal measures harder to challenge than explicit tariffs or quotas
Flexibility: Easily escalated or de-escalated without formal policy reversals
Deniability: Diplomatic relations can continue while economic pressure applied
Limitations
Market diversification: Targets can find alternative buyers, reducing long-term leverage
Domestic costs: Restrictions harm Chinese consumers and industries (coal shortages)
Reputational damage: Visible coercion drives other countries toward rival alliances
Targets may not comply: Australia accepted economic pain rather than concede sovereignty
Middle Power Implications
Australia's experience demonstrates challenges facing middle powers:
Asymmetric economic dependence: China was Australia's largest trading partner (35% of exports); Australia represented smaller share of Chinese trade
Security vs. economics trade-off: Maintaining sovereignty and security alignment with U.S. required accepting economic costs
Alliance value: U.S. and allied support (diplomatic, security deepening via AUKUS) helped Australia withstand pressure
Resilience through diversification: Market access to U.S., Europe, Japan, India, Southeast Asia provided alternatives
For countries like South Korea, ASEAN states, and others with high China trade dependence but security interests aligned with U.S., Australia's experience offers cautionary lessons: economic coercion is real, painful, but survivable with diversification and allied support (Chapter 9 places Australia's experience in historical context alongside other major economic coercion cases).
Chinese Perspective Box: Industrial Policy, SOEs, and Reciprocity
This perspective box presents Chinese government and elite viewpoints on investment screening, industrial policy, state-owned enterprises, and informal coercion. These perspectives show how policies appear from China's vantage point, even as we maintain Western analytical frameworks.
Industrial Policy as Legitimate Development Tool (产业政策, chǎnyè zhèngcè)
From Beijing's perspective, Chinese industrial policy represents legitimate catch-up development strategy employed by successful late industrializers from 19th century Germany to post-WWII Japan and South Korea. Key arguments:
Historical precedent: Every major economy employed industrial policy during development. The United States protected infant industries through tariffs (1800s), funded railroad construction, supported aerospace and internet development through military contracts (ARPANET, GPS), and currently subsidizes agriculture massively. For Washington to condemn Chinese industrial policy while deploying CHIPS Act and IRA subsidies exemplifies hypocrisy.
Development imperative: China remains middle-income country ($13,000 per capita GDP vs. $70,000 U.S.) seeking to escape "middle-income trap" where countries stagnate before reaching high-income status. Industrial policy targeting strategic sectors (semiconductors, aerospace, pharmaceuticals) represents rational development strategy, not unfair competition.
Technology sovereignty (科技主权, kējì zhǔquán): Chinese experience of Western embargoes (CoCom during Cold War, post-Tiananmen sanctions, contemporary semiconductor export controls) demonstrates that relying on foreign technology creates vulnerability. Indigenous innovation through state support ensures China cannot be "strangled" (卡脖子, qiǎ bózi—"strangled at the neck") by foreign technology denial.
"Dual circulation" (双循环, shuāng xúnhuán): Xi Jinping's dual circulation strategy emphasizes domestic self-sufficiency (internal circulation) while maintaining international engagement (external circulation). Industrial policy enables internal circulation by building domestic capabilities in critical sectors, reducing dependence on potentially hostile foreign suppliers.
State-Owned Enterprises as Strategic Instruments (国有企业, guóyǒu qǐyè)
Chinese perspectives on SOEs emphasize their role in national economic security and strategic objectives:
Economic stability: SOEs provide countercyclical investment during downturns, employ workers for social stability, and invest in infrastructure with long payback periods that private firms avoid. During 2008 financial crisis, Chinese SOE infrastructure spending helped sustain growth while Western economies contracted.
National champions (国家冠军企业, guójiā guànjūn qǐyè): SOEs in telecommunications (Huawei, ZTE), energy (Sinopec, PetroChina), and aerospace (COMAC) compete globally against established Western firms. State support helps Chinese firms achieve scale and technical capabilities to challenge incumbent monopolies.
Strategic sectors: Defense, nuclear energy, grid infrastructure, telecommunications networks require state control for national security. Allowing foreign or purely profit-driven private ownership in these sectors would create unacceptable vulnerabilities.
Reform and efficiency: Chinese government acknowledges SOE efficiency challenges and has implemented reforms: consolidating SOEs, introducing private capital into mixed-ownership enterprises, requiring profitability improvements, and disciplining poor performers. However, strategic control remains non-negotiable.
Western investment screening as discriminatory protectionism (歧视性保护主义, qíshì xìng bǎohù zhǔyì)
Chinese analysts view FIRRMA and allied investment screening as:
Violating market principles: The United States long championed free markets and foreign investment openness, criticizing protectionism. CFIUS expansion represents abandoning these principles when Chinese firms achieve competitiveness.
Discriminatory targeting: Investment screening ostensibly applies to all foreign investors but disproportionately affects Chinese firms. De facto country-specific restrictions violate non-discrimination principles and WTO national treatment obligations.
Moving goalposts: When Chinese firms acquired technology through market-based transactions (investments, acquisitions), Western countries retroactively deemed this threatening and changed rules (FIRRMA). This "rules-based order" only operates when rules favor Western interests.
Reciprocity demands (对等, duìděng) as unreasonable
Western calls for reciprocal market access ignore development stage differences:
Development stage: China as developing country reasonably maintains SOE presence and foreign investment restrictions to protect nascent industries, similar to Western countries during their industrialization. Demanding China immediately match U.S. openness ignores this context.
Sectoral sensitivities: Every country restricts foreign investment in sensitive sectors (U.S. restricts defense, telecommunications, energy). China's restrictions may be broader but reflect legitimate security concerns, particularly given Western containment strategy.
Incremental opening: China has substantially opened markets since WTO accession (2001): eliminated joint venture requirements in many sectors, opened finance and insurance, reduced tariffs dramatically. Western demands for faster opening ignore progress achieved.
Informal coercion: Western double standards
Regarding Australia case and similar episodes:
Legitimate trade measures: Anti-dumping duties on Australian barley and wine followed proper procedures (investigations, findings of dumping/subsidies). That decisions coincided with political tensions doesn't prove political motivation—timing may be coincidental or reflect genuine trade concerns.
Western sanctions more severe: U.S. and European sanctions freeze assets, cut off entire countries from financial systems (Russia, Iran, Venezuela), impose secondary sanctions forcing third parties to comply. Chinese trade measures affecting specific sectors while maintaining overall economic relations appear mild by comparison.
Australia's provocations: Australia's calls for COVID investigation using "weapons inspector" language, Huawei ban, foreign interference legislation targeting Chinese community, and AUKUS nuclear submarine deal all represented hostile actions. That China responded through trade policy merely reflects normal state behavior protecting interests.
Selective outrage: When U.S. imposes tariffs on Chinese goods (Section 301), blocks Chinese investments (CFIUS), and sanctions Chinese entities (Entity List, SDN), Washington frames these as legitimate national security measures. When China responds through trade restrictions, Western media condemns "economic coercion." This double standard reflects unwillingness to accept that China can employ similar tools.
Synthesis: Chinese Elite Consensus
Despite internal debates about economic policy details, Chinese elite consensus holds:
Industrial policy is essential: Market forces alone cannot build capabilities in strategic technologies where established Western firms dominate; state support is necessary and legitimate
State economic role must continue: SOEs, government guidance, and capital allocation serve strategic purposes that pure market allocation would not achieve
Western containment requires self-reliance: Technology controls, investment screening, and alliance coordination demonstrate Western intent to prevent Chinese development; indigenous innovation is survival imperative
Reciprocity demands are premature: China's development stage and security concerns justify maintained restrictions; Western countries protected their economies during similar development stages
Economic coercion is mutual: If U.S. can employ export controls, investment restrictions, and sanctions for national security, China can use trade policy for similar purposes
Understanding these perspectives doesn't require accepting their validity—significant criticisms exist regarding SOE inefficiency, technology theft beyond market acquisition, and Chinese coercion targeting. However, recognizing Chinese reasoning illuminates why U.S.-China economic competition intensifies: both sides view their policies as defensive responses to adversary aggression, creating escalation dynamics resistant to resolution.
Government Tools Box 1: CFIUS Procedures and FIRRMA Expansion
Legal Authority
Primary statute: Section 721 of the Defense Production Act of 1950, as amended
Major amendments:
Exon-Florio Amendment (1988): Granted President authority to block foreign acquisitions
FINSA 2007: Codified CFIUS procedures, required Congressional notification
FIRRMA 2018: Expanded jurisdiction, mandatory declarations, added real estate and TID sectors
Committee Composition
CFIUS consists of nine voting members (Cabinet-level):
Treasury (Chair)
Defense
State
Commerce
Homeland Security
Justice
Energy
Office of Science and Technology Policy
U.S. Trade Representative
Plus non-voting members: Office of Management and Budget, Council of Economic Advisers, National Security Council
Covered Transactions
Traditional CFIUS jurisdiction:
Control transactions: Foreign person acquiring control of U.S. business
FIRRMA expanded jurisdiction:
Non-controlling TID investments: Foreign person (especially government-controlled) acquiring non-controlling interest in Technology, Infrastructure, or Data (TID) U.S. business
Real estate: Foreign person purchasing/leasing real estate near sensitive facilities
Change in foreign investor rights: Modifications to existing investments expanding foreign access
Review Process
1. Voluntary Notice or Mandatory Declaration
Voluntary notice: Parties may file if seeking CFIUS clearance
Mandatory declaration required for:
Foreign government substantial interest (25%+) in TID business
Critical technology companies where foreign person gains specific rights
Failure to file mandatory declaration results in penalties and potential forced divestment
2. Initial Review (45 days from acceptance)
CFIUS members review for national security concerns
Three outcomes:
Cleared: Transaction proceeds without conditions
Mitigation agreement: Conditions imposed (governance structures, security protocols, data protections)
Investigation: Proceed to Phase II
3. Investigation (45 days)
Detailed interagency assessment
Parties provide additional information
Mitigation negotiations
Outcomes:
Cleared with or without mitigation
Parties withdraw (often indicates anticipated block)
Proceed to Presidential decision
4. Presidential Decision (15 days)
President may:
Approve transaction
Approve with conditions
Block transaction
Require divestment (if already closed)
5. Post-Transaction Monitoring and Enforcement
CFIUS can review non-notified transactions (5-year look-back)
Monitor compliance with mitigation agreements
Enforce through penalties, divestment orders
Mitigation Measures
Common mitigation approaches:
Board governance: Independent directors, government observers, foreign person voting restrictions
Data security: Firewalls preventing foreign access to sensitive information
Physical security: Limiting foreign personnel access to facilities
Export controls: Enhanced compliance programs
Annual certifications: Ongoing reporting requirements
Violation consequences: Fines, divestment, criminal penalties
Statistics (2024)
Total filings: ~150-180 annually
Investigation rate: ~15-20% of notices proceed to Phase II
Withdrawal rate: ~5-10% (often indicating anticipated blocks)
Presidential blocks: Rare (<5 since 2012), but shadow effect means parties withdraw before formal decision
Mitigation agreements: ~20-30 annually
FIRRMA Impact
Post-FIRRMA changes:
Mandatory declarations: 200-300 annually (new category)
Increased staff: From ~20 to 70+ FTEs
Longer timelines: Average case duration increased from 60 days to 80+ days
Chinese transaction collapse: From 23% of cases (2016) to 7-10% (2024)
Challenges and Criticisms
Lack of transparency: CFIUS decisions classified; limited public explanation
Resource constraints: Despite increases, staff struggles with volume and complexity
Interagency disagreements: Members occasionally divide on risk assessments
Legal uncertainty: Scope of "national security" undefined, creating unpredictability
Allied tensions: Extraterritorial reach (blocking foreign-to-foreign deals with U.S. nexus) causes friction
Government Tools Box 2: Industrial Policy Authorities
CHIPS and Science Act Implementation
Legal authority: Public Law 117-167 (August 2022)
Implementing agencies:
Department of Commerce (primary): CHIPS Program Office administers manufacturing incentives
National Science Foundation: R&D investments
Department of Energy: Materials research, workforce development
Department of Defense: Trusted foundry program
Funding mechanisms:
Direct grants: Awarded through application process to qualified semiconductor projects
Loans and loan guarantees: Up to $75 billion via Commerce Department
Investment tax credit: 25% advanced manufacturing investment tax credit (IRS administered)
Guardrails:
China restrictions: Recipients prohibited from expanding semiconductor manufacturing in China for 10 years
Excess profits clawback: If projects exceed projected profits significantly, government may recoup portion
Transparency requirements: Recipients must report financials, employment, production
Review and approval process:
Company submits application detailing project scope, investment, jobs, technology node
Commerce Department evaluates: Economic and national security benefits, financial viability, guardrail compliance
Conditional award negotiated (subsidies, conditions, milestones)
Environmental reviews, community engagement
Final award and disbursement tied to construction/production milestones
Defense Production Act Title III
Legal authority: 50 U.S.C. § 4501 et seq., Title III
Purpose: Expand productive capacity and supply for national defense critical materials and technologies
Mechanisms:
Purchase commitments: Government commits to purchase materials/products to incentivize production
Loans and loan guarantees: Finance expansion of production capacity
Technological and production expansion: Support development of new production techniques
Recent applications:
Semiconductors: Title III investments in domestic chip production before CHIPS Act
Critical minerals: Rare earths, lithium, graphite mining and processing
Pharmaceuticals: API production capacity post-COVID
Defense industrial base: Munitions, shipbuilding, aerospace components
Administration: Department of Defense, Department of Energy (for nuclear materials)
Inflation Reduction Act Industrial Components
Legal authority: Public Law 117-169 (August 2022)
Clean energy manufacturing incentives:
Advanced Manufacturing Production Credit: $35/kWh for battery cells, $10/kWh for modules
Solar/wind component credits: Domestic content bonuses for U.S.-manufactured components
Critical mineral sourcing: Requirements for North American or free-trade agreement partner sourcing
Electric vehicle credits:
Consumer credits: $7,500 per vehicle, conditioned on North American assembly and battery component/mineral sourcing requirements
Commercial vehicle credits: $40,000 for heavy vehicles, similar sourcing requirements
Implementation: IRS (tax credits), Department of Energy (loan programs), Treasury (guidance on sourcing requirements)
Buy America Provisions
Various statutes require federal procurement and federally-funded projects use domestically manufactured goods:
Infrastructure Investment and Jobs Act: Buy America requirements for infrastructure projects
Berry Amendment: Defense Department procurement must use U.S.-manufactured items
Trade Agreements Act: Federal procurement restricted to designated countries (excluding China)
Implementation challenges:
Domestic unavailability waivers: Many products not manufactured domestically require waivers
Cost thresholds: Domestic content requirements vary (often 55-60% domestic content)
Enforcement limitations: Tracking supply chains and verifying compliance difficult
Coordinating Mechanisms
U.S.-EU Trade and Technology Council (TTC):
Coordinates industrial policy, investment screening, export controls
Working groups on semiconductors, AI, clean technology
Goal: Align allied subsidies to avoid subsidy races and coordinate China policies
Indo-Pacific Economic Framework (IPEF):
Supply chain resilience pillar coordinates friend-shoring
Critical mineral and semiconductor cooperation
Limited participation (not comprehensive trade agreement)
Multilateral export control regimes (Wassenaar, etc.): Coordinate advanced technology export restrictions (covered in Chapter 6)
Case Study 1: BIOSECURE Act and Chinese Biotech
Background: Genomics and Pharmaceutical Dependencies
U.S. healthcare and pharmaceutical industries rely heavily on Chinese biotechnology companies for genomics services, contract research, and manufacturing. Five Chinese firms dominate specific segments:
WuXi AppTec: Contract research organization (CRO) providing drug development services to U.S. and European pharmaceutical companies. Estimated 20-30% of U.S. biotech and pharma companies use WuXi services. 2023 revenue: $5.4 billion.
WuXi Biologics: Biologics manufacturing (antibodies, vaccines), separate from WuXi AppTec. Major customers include top 20 global pharmaceutical companies.
BGI Group (BGI Genomics, MGI): Genomics sequencing services and equipment. Processed millions of genetic samples globally, including U.S. COVID tests during pandemic.
Complete Genomics: Genomics sequencing (BGI subsidiary).
GenScript: Synthetic biology and gene synthesis services.
National Security Concerns
U.S. intelligence and security officials identified multiple risks:
Genetic data collection: BGI processing U.S. patient samples creates access to American genetic data—potentially exploitable for intelligence (identifying individuals, health vulnerabilities) or biological research (population genetics, targeted therapeutics or bioweapons). BGI also operates globally, collecting genetic data from multiple countries.
Intellectual property: WuXi AppTec and WuXi Biologics work with early-stage drug candidates and proprietary research. Access to this IP could enable Chinese firms to develop competing products or support Chinese pharmaceutical industry development.
Supply chain dependencies: Relying on Chinese genomics equipment (BGI/MGI sequencers) and services creates vulnerability—potential disruption during geopolitical crisis or deliberate denial to disadvantage U.S. healthcare.
Chinese national security laws: China's 2017 National Intelligence Law requires all organizations and citizens to support intelligence work. WuXi, BGI, and others must comply if Chinese government requests data access.
Legislative Response: BIOSECURE Act
House version introduced: January 2024 Senate version: March 2024 Enacted: December 18, 2025 — signed into law as Section 851 of the FY2026 National Defense Authorization Act (NDAA), after passing the House 306-81 (September 2024) and surviving extensive Senate negotiation over the final text.
Key provisions:
Prohibition on federal contracts: Federal agencies prohibited from contracting with or procuring from "biotechnology companies of concern" (BCCs) and their subsidiaries. Agencies may not expend loan or grant funds for biotechnology equipment or services provided by a BCC.
Designation mechanism: The enacted law does not name specific companies. Instead, it treats any company on the Department of Defense's Section 1260H list of "Chinese military companies" as a BCC, while creating an administrative process through which additional companies can be designated. Notably, WuXi AppTec and WuXi Biologics are not currently on the 1260H list and therefore are not subject to the law's restrictions as of early 2026 — a significant narrowing from the original House bill, which named them explicitly.
Covered activities:
Drug development contracts
Genomics sequencing services
Equipment procurement
Data processing services
Timeline:
Existing contracts: Five-year safe harbor for contracts with companies later designated as BCCs
New contracts: Prohibition effective upon designation
Equipment produced or services provided prior to designation are excluded
Exemptions and waivers: Secretary of HHS may waive in national security interest or if no viable alternative exists
Industry Impact
Pharmaceutical and biotech disruption:
Immediate costs: U.S. firms using WuXi or BGI services must find alternatives
Development delays: Transitioning to non-Chinese CROs and genomics providers delays drug development timelines (estimated 6-18 months for some projects)
Increased costs: U.S. and European CROs charge 20-40% more than Chinese providers; capacity constraints may drive prices higher
Market cap impact: WuXi AppTec and WuXi Biologics lost ~$20 billion combined market capitalization when BIOSECURE Act advanced (stock prices fell 20-30%)
Genomics sector:
BGI/MGI sequencing equipment widely used in U.S. hospitals, research institutions, and companies
Illumina (U.S. genomics leader) stands to benefit but faces capacity constraints for rapid expansion
European (Oxford Nanopore) and Japanese (PacBio) genomics firms gain market opportunities
Chinese countermeasures:
Chinese government condemned BIOSECURE as protectionism violating WTO principles
Potential retaliatory restrictions on U.S. pharmaceutical companies operating in China
WuXi companies announced efforts to restructure operations, separate U.S. businesses, or sell assets to avoid designation
Lawsuits challenging legislative designation as unconstitutional (bills of attainder, due process violations)
Effectiveness Assessment
1. Compliance: High—federal agencies must comply; private firms relying on federal contracts (NIH grants, DoD biodefense projects, Medicare reimbursements for diagnostics) will transition. However, the narrower designation mechanism (1260H list rather than named companies) means the initial scope of compliance obligations is more limited than anticipated during the legislative debate.
2. Capability Degradation:
Chinese access to U.S. genetic data reduced: BGI and others lose U.S. samples
IP protection improved: WuXi companies lose access to early-stage U.S. drug development
But limitations: Private sector not prohibited from using Chinese services unless seeking federal funding; Chinese firms serve European, Asian markets
3. Economic Cost:
U.S. costs: $5-15 billion over decade (higher development costs, delays, lost efficiencies)
Chinese costs: $40-60 billion in lost revenue for WuXi, BGI over 10 years; reputational damage limiting global business
4. Sustainability: High political support (bipartisan enactment via NDAA), aligns with broader China competition strategy. Industry lobbying succeeded in narrowing the designation mechanism from named companies to the 1260H list process, but the framework is now law and can be expanded through administrative action.
5. Collateral Damage: Moderate—U.S. biotech firms face costs and delays; patients may experience delayed access to new therapies; European and other allies not coordinating similar restrictions may gain competitive advantages if their firms continue using Chinese services.
Strategic Implications
BIOSECURE Act represents expansion of U.S.-China economic competition into healthcare and biotechnology. Unlike semiconductor or telecommunications restrictions justified by military applications, biotech restrictions emphasize:
Data sovereignty (genetic information as strategic asset)
Health security (supply chain resilience)
Future technology leadership (genomics, synthetic biology, CRISPR)
The legislation demonstrates U.S. willingness to accept economic costs (delayed drug development, higher healthcare costs) for security and competitive objectives—consistent with broader strategic decoupling. Chinese firms face growing exclusion from Western markets, reinforcing Beijing's drive for technology self-reliance and alternative partnerships with developing countries.
Case Study 2: Australian Economic Coercion (2020-2022)
China's campaign of economic pressure against Australia following Canberra's April 2020 call for an independent COVID-19 origins investigation represents one of the most comprehensive modern cases of informal economic coercion. The episode is analyzed in detail in Sections 4.4 and 4.5 above, which cover the full spectrum of Chinese restrictions (barley, wine, beef, coal, lobster, and other sectors), Australian economic impacts and policy responses, the gradual easing of restrictions in 2023-2024, and broader lessons about informal coercion mechanisms and middle power resilience.
The case is particularly instructive for this chapter's themes because it illustrates how investment screening and industrial policy intersect with coercion dynamics. Australia's decision to exclude Huawei from its 5G network (August 2018) and to strengthen foreign investment review through the Foreign Relations Act (December 2020) were both triggers for and responses to Chinese economic pressure. The episode demonstrates that countries willing to absorb short-term economic costs—and capable of diversifying trade relationships—can resist coercive campaigns without policy capitulation.
Data Sources and Further Research
Investment Screening Data
U.S. CFIUS:
Annual Reports to Congress: Treasury Department publishes annual reports with aggregate statistics (total filings, countries of origin, sectors, withdrawal rates, mitigation agreements). Available: https://home.treasury.gov/policy-issues/international/cfius-reports-and-tables
Individual transactions: Specific deals rarely disclosed publicly except Presidential blocks (Ralls wind farm, Lattice Semiconductor, TikTok). Media reports and company disclosures provide partial information.
Chinese FDI Data:
Rhodium Group China Investment Monitor: Tracks Chinese FDI into U.S. and Europe with sector breakdowns, deal values, policy analysis. Subscription-based but reports often publicly available.
American Enterprise Institute China Global Investment Tracker: Database of $100M+ Chinese investments and construction contracts globally. Free access: https://www.aei.org/china-global-investment-tracker/
Bureau of Economic Analysis (BEA): U.S. FDI statistics including country-of-origin data
Allied Investment Screening:
European Commission FDI Screening Reports: Annual reports on member state screening activity
UK Investment Security Unit: NSI Act annual reports detailing notifications, investigations
Australian FIRB: Annual reports on foreign investment applications and decisions
Industrial Policy Tracking
U.S. Programs:
Commerce Department CHIPS Program Office: Awarded projects, funding details, timelines
Department of Energy Loan Programs Office: Clean energy investments
IRS: Clean energy tax credit statistics
CSIS Industrial Policy Tracker: Aggregates U.S., Chinese, European subsidies and investments
Chinese Industrial Policy:
Made in China 2025 documentation: Original Chinese government documents (五年规划, wǔ nián guīhuà—Five-Year Plans) outline sector targets, investment levels
Big Fund disclosures: Partial information from Chinese securities filings, company annual reports
MERICS (Mercator Institute for China Studies): European think tank tracking Chinese industrial policy with excellent English-language analysis
Chinese government statistics: National Bureau of Statistics provides R&D spending, production capacity data (caution: reliability varies)
State-Owned Enterprise Data:
SASAC: State-owned Assets Supervision and Administration Commission publishes limited aggregate data on central SOEs
Company disclosures: Individual SOE annual reports (for listed entities) provide financial details
OECD SOE Database: Comparative data on SOE presence globally
Sovereign Wealth Fund Institute: Tracks SWF assets, investments
Australia-China Trade:
Australian Bureau of Statistics: Detailed trade data by commodity, destination
Wine Australia: Industry-specific export statistics
Meat and Livestock Australia: Beef export data
Industry reports: Sectoral analyses of Chinese restrictions impacts
Key Academic and Policy Literature
Investment Screening:
Hanemann, Thilo, and Daniel H. Rosen. Chinese Investment in the United States series. Rhodium Group.
Jackson, James K. "The Committee on Foreign Investment in the United States (CFIUS)." Congressional Research Service.
Industrial Policy:
Miller, Chris. Chip War: The Fight for the World's Most Critical Technology. Scribner, 2022. [Exceptional history of semiconductors and industrial policy competition]
Rodrik, Dani. "Industrial Policy for the Twenty-First Century." KSG Working Paper, 2004.
Harrison, Ann, and Andrés Rodríguez-Clare. "Trade, Foreign Investment, and Industrial Policy for Developing Countries." Handbook of Development Economics, Vol. 5.
Chinese Economic Strategy:
Lardy, Nicholas R. The State Strikes Back: The End of Economic Reform in China? Peterson Institute, 2019.
Naughton, Barry. The Rise of China's Industrial Policy: 1978 to 2020. Universidad Nacional Autónoma de México, 2021.
Scissors, Derek. "Chinese Investment: State-Owned Enterprises and the Trade Agenda." American Enterprise Institute.
Economic Coercion:
Blackwill, Robert D., and Jennifer M. Harris. War by Other Means: Geoeconomics and Statecraft. Harvard, 2016.
Baldwin, David A. Economic Statecraft. Princeton, 1985. [Classic text]
Drezner, Daniel W. "Economic Statecraft in the Age of Trump." The Washington Quarterly, 2019.
Think Tanks and Ongoing Analysis:
Center for Strategic and International Studies (CSIS): Economics Program, China Power Project, Strategic Technologies Program
Center for a New American Security (CNAS): Economic Statecraft Initiative
Council on Foreign Relations: Asia Studies, International Economics
Peterson Institute for International Economics: China Economic Watch, Trade and Investment Policy
Atlantic Council: GeoEconomics Center
Key Insights
Investment screening has evolved from passive bureaucratic review to active economic coercion: Traditional CFIUS review focused on narrow security concerns with a 99%+ approval rate. FIRRMA's 2018 expansion transformed the process into a mechanism for strategic decoupling, and Chinese investment in U.S. technology plummeted 95% from a 2016 peak of $45.6 billion to $2.5 billion in 2024 -- a decline driven by policy intent, not market forces.
The return of industrial policy represents a paradigm shift in Western economic governance: The United States -- long a champion of free markets and skeptic of state intervention -- committed over $500 billion through the CHIPS Act, Inflation Reduction Act, and infrastructure legislation to reshape critical supply chains. The mantra "government shouldn't pick winners" gave way after China picked winners and they won, particularly in renewable energy, batteries, and telecommunications.
Informal economic coercion operates outside legal frameworks but can be devastatingly effective: China's 2020-2021 trade restrictions on Australia -- imposed through administrative measures, customs delays, and "quality concerns" rather than explicit government policies -- affected over $20 billion in trade while providing plausible deniability and avoiding WTO dispute mechanisms. This form of coercion is increasingly common and difficult to counter through established institutional channels.
FIRRMA's expansion to non-controlling investments and TID sectors fundamentally changed the calculus for technology startups: Even a 5% investment in an AI, quantum computing, or biotechnology startup now triggers CFIUS jurisdiction. This has chilled not just Chinese investment but legitimate venture capital flows, potentially reducing innovation funding in precisely the sectors the United States aims to lead.
Industrial policy effectiveness remains unproven at the scale now being attempted: Whether the CHIPS Act's $52 billion or the IRA's $369 billion will build sustainable domestic capabilities or create permanent subsidy dependence is an open question. Historical examples of successful industrial policy (Taiwan's semiconductor strategy, South Korea's chaebol system) involved decades of sustained investment in economies far smaller and more centrally directed than the United States.
Australia's resistance to Chinese economic coercion offers lessons for middle powers: Despite over $20 billion in affected trade, Australia maintained its policy positions, sought alternative markets, and deepened security alignment with the United States. The case demonstrates both the power of informal coercion and its limitations: targets may absorb economic pain rather than concede, and market diversification reduces future leverage.
Discussion Questions
FIRRMA expanded CFIUS jurisdiction to non-controlling investments in technology, infrastructure, and data sectors. Has the expansion gone too far in restricting beneficial foreign investment, or not far enough given ongoing technology competition? How should policymakers balance the security risks of foreign capital access against the innovation benefits of open investment?
The United States and China are both pursuing massive industrial policy programs (CHIPS Act, Made in China 2025). Historical evidence suggests that state-directed industrial policy works best in catch-up contexts with clear technological targets, but less well for frontier innovation. Does this historical pattern apply to the current competition? Under what conditions might China's approach succeed or fail?
China's informal economic coercion against Australia operated through administrative measures and "quality concerns" rather than explicit sanctions, allowing plausible deniability and avoiding WTO mechanisms. How should international institutions adapt to address this form of coercion? Is a new institutional framework needed, or can existing trade law evolve?
The TikTok divestiture case has dragged on for years through multiple administrations and legal challenges. Does the inability to resolve this case suggest fundamental limitations of investment screening as a coercion tool? What does it reveal about the tension between national security authorities and due process protections in a constitutional system?
Belt and Road Initiative lending creates dependencies that may constrain recipient countries' foreign policy autonomy. How does development finance differ from -- or overlap with -- economic coercion? At what point does a financing relationship become a leverage relationship, and how should recipient countries manage this risk?
If you were advising a mid-sized democratic country (such as South Korea or the Netherlands) navigating pressure from both the United States and China to align investment screening and industrial policies with their respective preferences, what principles would guide your recommendations?
Tabletop Exercise: The tabletop exercise for this chapter — CFIUS Review and Investment Screening Dilemmas — can be found in Appendix A: Tabletop Exercises.
References
U.S. Department of the Treasury, "Annual Report to Congress on CFIUS," various years, https://home.treasury.gov/policy-issues/international/cfius-reports-and-tables
Rhodium Group, "Two-Way Street: 2024 Update on US-China Investment Trends," Thilo Hanemann, Daniel H. Rosen, et al., May 2024.
U.S. Congress, Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), Public Law 115-232.
U.S. Congress, CHIPS and Science Act of 2022, Public Law 117-167.
BIOSECURE Act, Section 851 of the National Defense Authorization Act for Fiscal Year 2026, Pub. L. No. 119-XXX (December 18, 2025); originally H.R. 8333, 118th Congress (2024).
Australian Bureau of Statistics, "International Trade in Goods and Services," various releases 2020-2024.
State Council of the People's Republic of China, "Made in China 2025," 2015.
Miller, Chris. Chip War: The Fight for the World's Most Critical Technology. New York: Scribner, 2022.
European Commission, "Annual Report on the screening of foreign direct investments into the Union," 2024.
American Enterprise Institute, "China Global Investment Tracker," https://www.aei.org/china-global-investment-tracker/
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