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The Interpreter, 26 July, 2017

The recent exposure of Chinese influence-peddling inside the Australian political system is just one example of China’s growing influence and willingness to act in Western states. In these days of austerity for many Western nations, money speaks loudly and in recent years Chinese investment into Western liberal democracies has surged.

Chinese foreign direct investment is shifting from commodities in the developing world to high-tech acquisitions, equity stakes and mergers in advanced economies. In Europe alone, Chinese investment increased 44% between 2014 and 2015, when it reached €20 billion. For the most part, these funds have been welcomed by cash-strapped Western states seeking to reinvigorate their economies. However, there are also risks associated with Chinese investment in telecommunications and other mainstays of modern commerce.

Research carried out by the Henry Jackson Society suggests that Chinese investment in national infrastructure is taking on critical proportions, and Western states – particularly the five countries involved in the Five Eyes intelligence alliance – are responding in piecemeal fashion with each screening investments in different ways. A number of incidents in recent years have underlined the need for better co-ordination between nations, particularly those that share intelligence, and improved understanding of China’s investment strategy into the West.

In 2016, for example, a Chinese consortium that included a subsidiary of the Chinese defence industrial giant AVIC, bought a large stake in the UK’s largest data centre operator, Global Switch. Whitehall approved the deal, only to see the Australian Department of Defence pull out of future business with Global Switch, citing the AVIC buy-in. Then came the Canadian government’s approval of a Chinese takeover of the Canadian satellite communications company, Norsat.  After the Trudeau administration confirmed that change in ownership, the Pentagon announced it would have to re-examine its contracts with the Vancouver firm.

MERICS research suggests China’s state owned enterprises (SOEs) accounted for more than 60% of China FDI in Europe in 2015. While this is not as high as it has been, the trend is upward which adds to the argument that much of the investment surge is strategic in nature. Beijing has also recently announced its intention to become the global leader in artificial intelligence (AI), a cutting-edge technology upon which the defence of the West will depend. One can see China’s intentions in its Made in China: 2025 strategy that was announced in 2014. The strategy involves subsidising Chinese firms targeting acquisitions and mergers of Western AI, IT, and telecoms firms and using non-tariff barriers to provide a sanctuary for Chinese firms inside China so they can advance safely away from the harsh glare of competition. The goal is to give China strategic dominance in the technologies of future warfare.

Such goals are alarming, and it’s not just policy analysts who think so.The Trump administration, for example, demanded an investigation in Chinese investment into Silicon Valley start-ups and the resulting report indicates that many of the Chinese firms operating in this field have state support and direction.

The recent decision by Berlin to restrict Chinese investment into parts of its digital economy and infrastructure is another indicator of how critical this issue has become. As one of the West’s most open economies, this action demonstrates Berlin is taking the situation very seriously indeed. While London mulls over a body similar to the Committee for Foreign Investment in the United States or Australia’s Foreign Investment Review Board to supplement its current ad hoc system, it is imperative that the Five Eyes alliance members systemically overhaul the range of sectors open to Chinese investment. Some practices that could assist include:

  • Instituting a regular Five Eyes meeting between the heads of their investment review boards.
  • Use this process to build a ‘common operating picture’ of Chinese investment practices and targets.
  • Sharing more information on what Chinese firms are doing in each of the Five Eyes economies, their ownership structures, and any past instances of serving Chinese national security objectives.
  • Considering an overhaul of the Five Eyes working groups in telecoms and AI, giving them greater prominence than they now have, and creating stronger links between private sector actors and security agencies.
  • Developing better monitoring by Ministries of Economy; presently, governments capture statistics without giving much background. They can and should provide more information to regulatory bodies.

The surge of Chinese SOE-led interest into Western infrastructure and high-tech can help bridge the gap between supply and demand for investment dollars. However, we need to be realistic about Beijing’s own industrial goals and objectives and the nature of its investment strategy. A common assessment system for the Five Eyes allies would assist in safeguarding our interlinked telecommunications and high-tech sectors.

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Pushback: Why the Five Eyes Intelligence Alliance Should Keep Chinese Investors at Bay

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The National Interest, 25 July, 2017

There has been a dramatic shift of investment into the West, which may have a deep impact on U.S. security and the country’s future way of life. According to a report recently published by the Henry Jackson Society, China is making massive investments into Western digital and critical national infrastructure, and Western states are not reacting in a coordinated or rational way. This article argues that those states can and should coordinate a collective reaction through the Five Eyes intelligence alliance. The Five Eyes—arguably one of the strongest and long-lasting intelligence coalitions in history—consists of five of the most robust liberal democracies in the West: the United Kingdom, Canada, Australia, New Zealand and the United States.

Bound by strong cultural links, these five states have seen off authoritarian communist dictatorships and global conspiracy theories from a range of directions. Following the collapse of the Soviet Empire and its satellites, the men and women who worked in the shadows to keep us safe during that time turned their attention toward failed and failing states. They also began defending us from corporate espionage and, now, the rise of domestic-based Islamist terrorism. While the members of this shadow group still work on those issues, a new one has presented itself, and from an unusual and unlikely direction—Chinese malicious investment.

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How cautious can we afford to be about foreign investment?

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CapX, 31 January, 2017 (with Alex Manzoor)

So we all now know all about Theresa May’s industrial strategy for Britain. In addition to cutting red tape and regulation, the Prime Minister wants her Government to promote innovation, with the creation of a £4.7 billion fund to pay for research and by providing £556 million for the “Northern Powerhouse” project.

Naturally, the reception from the business community has been warm; they’re more than happy for an increase in public investment into the economy.

But the Prime Minister has yet to spell out her plan for dealing with foreign investment. And this is a key issue for her government. In an age of growing protectionism, she must carefully walk the line between encouraging inbound investment from foreign firms, and safeguarding Britain’s national security from those global companies working under state control.

As was the case with the funding for Hinkley Point, which the Prime Minister delayed over the summer, the greatest worry for many countries has been Chinese investment. This is partly because there has been a spike in Chinese investment abroad, but also because the nature of their investment tends to be in tech and critical national infrastructure sectors.

We are seeing barriers to their money going up worldwide. In August, for example, the Australian government blocked Chinese firms from bidding for a controlling stake in its largest electricity network. Then, in October, Berlin blocked a Chinese takeover of one of its largest chip manufacturers, following security concerns.

Shortly thereafter, the US Treasury took the unusual step of nullifying the part of the sale that included Aixtron Inc., an American-based subsidiary, following “credible evidence that the foreign interest exercising control might take action that threatens to impair our national security”.

It is true that an overly tough screening regime could militate against the Prime Minister’s new global objectives, particularly as we tout for business outside of the EU. But there must be some effort to screen investment in a regular and transparent manner. Only this would reassure foreign investors, British business, and our security services.

So how do we do it? Well let’s take a look at what other Western liberal democracies have done about investment security.

The best known example is the US Committee on Foreign Investment in the United States (CFIUS). Chaired by the US Treasury, this inter-agency grouping reviews transactions which might result in an American business being controlled by a foreign person or have an effect on US national security.

A transaction is first examined over a period of 30 days to ascertain its national security implications. The CFIUS then decides whether to approve the transaction or initiate an investigation.

An investigation would give the CFIUS another 45 days to decide whether to permit the transaction, impose conditions or refer the case to the President who can then prevent the transaction taking place. In 2012, President Obama cited national security risks when he blocked the Chinese-owned company Sany’s attempt to purchase wind farm projects in Oregon near the Naval Weapons System Training Facility where the military flies unmanned drones and electronic-warfare planes.

Similarly, Australia has its Foreign Investment Review Board (FIRB), which advises the Treasurer and the Government on foreign investment policy. Again, it does this largely by examining proposed investments in Australia and making recommendations.

The Treasurer can prohibit or impose conditions if there are concerns about the national interest as there were over two bids by the Chinese State Grid Corporation and Cheung Kong Infrastructure for the state-owned Ausgrid electricity company. Worth billions of Australian dollars, the bids were blocked by the FRIB citing “national security” concerns.

France also has a body to regulate inward investment. Before 2014, foreign investors in the technology, defence and betting sectors would have to notify the French Ministry for the Economy and Finance (MINEFI) before receiving authorisation. In 2014, the French government extended this oversight to the energy, transport, telecoms, water and health sectors – all areas of critical national infrastructure.

The new decree also ensured that non-EU investors’ proposals must pass muster under European Court of Justice case law, meaning that measures restricting the free movement of capital within the EU should be limited to the protection of public order and safety. The rejection of any transaction would  be on the basis of national interest, under which national security is a vital component.

It is not without irony that China has one of the most rigorous investment screening processes in the world, with a significant proportion of its economy off-limits to foreign investors.

Equally, why should the UK abandon its security or its values simply because Brexit is making growth a priority. Mrs May’s government is going to have to think carefully about its approach to economic growth and where money is going to come from.

That is why having a formal body or process, which carries out non-intrusive safeguards of investors into Britain’s economy would not be wild, suspicious, or paranoid. In fact, a brief glance around the world reveals that many other advanced economies have a process. It is just a question of common sense.

 


The ‘China’ Role of the US-Japan Trilaterals

The National Interest, December 6, 2015

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Asia’s immense economic growth over recent decades has come in tandem with a large increase in insecurity and military spending. Partly in response, the region has seen a quiet revolution in U.S. Asia-Pacific policy as the ‘hub and spokes’ system has been integrated across U.S. ally partners and external powers. The United States and Japan, for example, have developed a number of on-going trilateral security arrangements with states in Asia, including Australia, India and South Korea. All partner countries regularly deny that these groupings are formal alliances, and lacking formal defence commitments in the third dyad (Japan-Australia, Japan-India, Japan-ROK), they are more precisely forms of alignment, not dissimilar to the Triple Entente of pre-1914.

Not only are trilaterals more ad hoc and flexible than alliances, but they are driven by a complex range of factors. They are partly driven by a strand of neoliberal optimism from the late 1990s, as well as by a more realist strand of pessimism found in the early 2000s. The most mature of these groupings, the US-Japan-Australia trilateral Strategic dialogue (TSD) has focused on “human security” activities, such as peacekeeping, capacity-building, humanitarian assistance and disaster relief. This side of their nature stems from their neoliberal optimism that they can be the building blocks of an integrated security community in Asia, and are part of an inclusive approach to former Cold War adversities, like Vietnam and China. To allied partners like Japan and Australia, the activities are important for “anchoring” the United States to the region, and have allowed both alliances a certain amount of legitimacy by providing “public goods,” while carefully avoiding a security dilemma with China.

On the other hand, the trilaterals also have a hard balancing element: the US-Japan-Australia TSD has included defence-industrial cooperation, the institutionalization of intelligence-sharing and growing military interoperability. With this double logic, they are a classic hedging strategy, as envisioned by political scientist Evan Medeiros. They encourage engagement, integrating regional militaries towards common objectives, as well as provide a form of insurance if Chinese revanchism begins to threaten regional stability. This hedging element is not incidental, but has evolved over time, to match rising Chinese assertiveness and the needs (and concerns) of the trilateral partner states.

The trilaterals are not—as China might think—a means of containment. Rather, they act like a restraining woven paper cup, loosely form-fitting. As one expands one’s hand in the basket, the material naturally tightens around it.

In many ways, it is the ultimate moral high ground, since the cup only tightens in reaction to expansion. In this way, as China continues to expand its power projection capabilities and attempts to expand its territoriality into the East and South China Seas, the trilaterals will continue to tighten around it and create the exact reaction that Deng Xiaoping once hoped to avoid.

The revised US-Japan Defense Guidelines are one aspect of that weaving, as are growing Japan-Philippines and Japan-Vietnam capacity-building behaviors in maritime security.

In some ways, this process is neatly described by the security dilemma in Thomas Christensen’s International Security essays. However, there is one material difference. The United States and its allies have helped China rise by investing trillions of dollars over the past three decades and by promoting Chinese inclusion in almost every important regional and global fora. No one could argue that the alliance partners have not done all they can to make China welcome and included in regional politics. Unlike Christensen’s neutral analysis, the increasing constrainment of China is driven by China’s own behaviour in much the way that occurred with pre-1914 Germany. Again, this is an important moral difference and highlights the reactive and defensive nature of the trilaterals.

Post-Bismarckian German foreign policy was unpredictable, expansionist and supported by a growth in nationalism and militarist culture. Similarly, Chinese revanchism is driven by a narrative of exclusion and regaining its “rightful place in the sun.” No one power—not even the United States—has the power to contain Chinese expansionism. However, an interlocking web of alliances around this struggling behemoth can deter it from unwise adventurism and act as a constraining influence. What happens next, of course, depends on China and its ultimate ambitions. States must understanding that in seeking to constrain China, they are not themselves acting dangerously or – as Hugh White might contend – recklessly. They are doing what they must to defend a rules-based order during a time of structural instability. The real recklessness would be in to appease the rolling ambitions of a newly-risen power, rather than seeking to shape and constrain them.


An East Asian Community?

RUSI Newsbrief, 26th January, 2010

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In the run up to the September 2009 election, Japan’s new Prime Minister Yukio Hatoyama unveiled his vision for an East Asian Community (EAC) in a series of policy statements and speeches.1 It was to be, he asserted, a vision of regional co-operation based on the model of the European Union, underscored by principles of fidelity and brotherhood. While the idea for such a community has been promoted by various Asian leaders since the late 1990s, and has been considered rather pie-in-the-sky, this latest incarnation of the vision is interesting because of Japan’s weight as a regional leader.

Hatoyama’s proposal comes hot on the heels of a similar proposal made by Australian Premier Kevin Rudd, whose 2006 Asian-Pacific Community was met with withering criticism at home and deafening silence in Asia. Both proposals reveal the growing trend for integration in Asia and the obstacles facing that integration. The editor-in-chief of the Jakarta Post, Endy Bayuni, put it succinctly when he said, ‘While no one disputes the need for closer regional integration, the question always quickly gets bogged down by mechanism, about who is in and who is out, as well as what the most appropriate regional architecture might be.

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