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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.

To finish this article, click here.


HJS Report: Safeguarding our System: Chinese Investment into the UK’s Digital and Critical National Infrastructure

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Henry Jackson Society, 18 July, 2017

China’s investment into Western advanced economies – including that of the UK
– is increasing and changing in scope surging from EUR 14 billion in 2015 to EUR
20 billion in 2016, a 44% jump since 2014. More than 60% of the value of deals has been by state-owned enterprises, indicating this push is led by state strategy than commercial
interests.
• In 2016, China invested $11.15 billion into the UK. More than double the amount in
2015 and the most in any one year going back to 2005.
• China’s economic strategy, Made in China: 2025, might threaten the long-term
survival of UK businesses unless some sort of government protection is afforded to
them or unless China affords British businesses more access to China’s home market.
• Because of cyber vulnerabilities, critical national infrastructure will be at the forefront
of any future war.
• The current review system could be improved and rationalised:
– It has allowed access to the UK’s digital and critical infrastructure with elements
of China’s defence industrial concerns
– It has allowed deals that have affected the UK’s closest military allies
– It allows for domestic and foreign pressure on the government of the day
• A formal investment screening regime is both necessary and desirable to protect the
UK’s economic interests and its national security.
• A new regime should be built, which is adequately resourced to carry out the difficult
task of tracking foreign direct investment (FDI) into the sensitive parts of the UK’s
economy.
• The new regime should begin to coordinate more closely with the UK’s closet military
and intelligence-sharing allies, including the Five Eyes partners and NATO member
states.
• Any new regime should carry out its review process in a judicious but swift manner so
that foreign investment in the UK is not hampered or harmed. This report suggests
that the regime should be sufficiently able to pass its decisions within 30 days of
receiving an inquiry.
• Ideally, any regime should be overseen by a special committee in Parliament to ensure
that it is sufficiently funded and resourced to carry out its activities, and that it is
carrying them out in a legal, expedient and sufficient manner

To read the full report, please click here.


Written Evidence for Foreign Relations Select Committee Inquiry on UK-China Relations

Evidence, UK Parliament, 28 April, 2017

1.                   The UK’s China policy under the former government was based on a number of erroneous assumptions that predicate that (i) Chinese economic growth is certain and sustainable, (ii) that Chinese investment into the UK was an unalloyed good; and that (iii) there are few political risks to engagement to China; and (iv) that China is a status-quo power which desires only modest changes to the current global order.

2.                   Western debates about rising power China have long been divided between those who emphasize engagement and the transformative side of trade and those who emphasize China’s autocratic government, human rights record, and assertive foreign policy (particularly over its near maritime space). Over the past ten years, there has been a gradual shift as China watchers have begun to adopt a more critical view of China’s foreign policy behaviour, which has been particularly strong among foreign policy elites in the United States, Japan, and other regional (Asian-Pacific) powers. Despite this shift, most diplomacy seeks to hedge against the risks inherent in China’s rise, carrying out both engagement and balancing behaviours. While many in the mainstream insist that this is the best means of maintaining peaceful and stable relations with China, this ambiguity may be ultimately ineffective, and even counter-productive to both UK national interest and to defending a rules-based international order.

3.                   By this reading, the current spate of tensions between Washington and Beijing are down to the unpredictability of the new Trump administration, and the UK should not or cannot afford to become involved. While these three assumptions still define bilateral ties, they are becoming less and less valid and should be reviewed in the light of changes inside China and in China’s foreign policy behaviour. This submission examines the bilateral under the following propositions:

•         The UK cannot afford let trade define the relationship with Beijing, despite the pressures of Brexit, instilling instead a policy of “cautious engagement”

•         The UK should not develop too strong a dependency on Chinese trade, given the structural weaknesses of its economy, such as slowing growth, uncertain financial reporting methods, the property bubble, the continued dominance of state owned enterprises (SOE), and the large national debt to GDP ratio. There is a potential for sudden shocks.

•         The UK must also consider the costs and risks of Chinese investment inside the UK.

•         The UK must reconsider the proposition that economic interdependency is making China into a “responsible stakeholder”. In key ways, it has not.

•         The UK must realize that Chinese actions in the South China Sea (and Asia Pacific more widely) are bound to effect the UK. The idea that the UK can stand aside as a major power attempts to control a major Europe-Asia trade route is misguided and counter-productive to UK national interests.

To finish reading, please click here.

 

 



America, Japan and the UK: A New Three-Way Alliance?

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With Chris Bew, Researcher, Henry Jackson Society

The National Interest, 4 April, 2017

In January 2016, standing on the flight deck of the USS Ronald Reagan aircraft carrier based in Japan, the UK defence secretary, Michael Fallon, spoke of Washington’s commitment to a “three-way alliance” between the United Kingdom, Japan and the United States. He stated that the three countries would develop their commitment to interoperability by working closely together in the future. This is significant because it comes at a time when there are serious questions about stability in the region, and when the East and South China Seas may become crucial issues in relations between Beijing, Washington and Tokyo.

Putting this rhetoric into practice, on October 20, 2016, the chief of the Japanese Maritime Force and the chiefs of the British and U.S. navies sat across the table from each other at the Pentagon to sign a trilateral cooperation agreement. This agreement commits all three navies to closer cooperation, with increased exercises and joint patrols in the future. Signed at the service-level, this agreement sets forth a roadmap for what it calls “mutually desired strategic effects.”

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–>Why Team Up?
In the context of an increasingly uncertain world, we are seeing more and more states aligning with each other in non-traditional security relationships at the global level. These alignments are non-traditional in the sense that they are not formal alliances, but rather informal and ever-expanding arrangements. Covering a host of different areas, they are in many ways a reaction to the complex level of threats facing liberal democracies these days. Considering Britain’s imminent departure from the European Union, forming alliances with other powerful nations around the world is fundamental. With the United Kingdom, United States and Japan each being liberal democracies and having vested interests in the maintenance of the international rules-based system, they make natural bedfellows.

 

UK-Japan Relations
Focusing closer on the relationship between the UK and Japan, the current bastion of UK-Japan security cooperation is the 2+2 meetings. These have been held annually since 2015. At these meetings, the foreign and defence secretaries from both sides come together, usually for two days of meetings, to discuss a range of common areas of interest. The 2+2 arrangement allows both states to talk about areas of common concern, which allows them to signal both each other, and third-party states about their intentions and interests.

During the January 2016 2+2, both countries affirmed their support for the rule of law in the East and South China Seas. They also expressed a full commitment to Ukrainian sovereignty, adding their concern over North Korea’s missile and nuclear program. To those listening, the 2+2 is perhaps a hint of the security preferences of both the UK and Japan. Other purposes of the 2+2 meetings include helping to socialise each other towards common security interests and enabling both countries to create a framework for bilateral security cooperation.

In the last January 2017 2+2, both countries signed the Acquisition and Cross-Servicing Agreement (ACSA) to facilitate closer bilateral defence logistics. This agreement will enable the two militaries to cooperate abroad on combined exercises and peacekeeping operations, alongside humanitarian assistance and disaster relief missions. Ultimately, this will increase the efficiency of both country’s forces. So, for instance, British tankers will be able to refuel Japanese aircraft, or Japanese ships might be able to refuel British vessels, and so on. An ACSA is really the first step in the holy grail of interoperability for conventional militaries. This agreement improves future cooperative expediency because it removes the need for further individual case-by-case agreements.

UK-Japan Future Cooperation
The tightening of UK-Japan relations comes at a time when rising powers in Asia-Pacific are causing critical uncertainty in the region and beyond. This has led to policymakers strengthening alliances around the world. The United Kingdom and Japan are a strong example of such an alliance that has been redoubled in recent years.

Another significant area of future cooperation between London and Tokyo includes a joint research project on Chemical and Biological Protection suits and other weapons systems. In an age of shrinking defence budgets and rising threats, it makes sense to partner with other liberal democracies, sharing useful technology and pooling precious research and development funding. This follows the success of the first round of talks of a new Joint New Air-to-Air Missile. This sharing of technology is significant because it builds a framework for ever-closer collaboration between both countries for the foreseeable future in a world where nations are choosing their alliances extremely carefully. In a time of growing insecurity, such partnerships are to be welcomed.


Putting Security into Prime Minister May’s New Industrial Strategy

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The RUSI Newsbrief, 15 February, 2017

Prime Minister Theresa May’s proposed post-Brexit industrial strategy is commendable. However, the UK must avoid the pitfalls of an overly mercantilist policy, especially when it comes to dealing with China.

The UK prime minister’s Green Paper on a new industrial strategy was written ‘to provoke debate’ and ‘start a consultation’ as part of Theresa May’s commitment to make the UK a global leader in free trade. This is a commendable drive to build both post-Brexit prosperity and a post-EU identity for Britain. However, the dangers of developing overly mercantilist policies are ever present and a laissez-faire approach to inbound foreign investment should be avoided, particularly when it comes to foreign ownership of critical national infrastructure (CNI). 

A growing number of autocratic states have become global trading partners, and while this is to be warmly welcomed, it is not without risks. China is of particular note in this regard. China is predicted to surpass the US as the largest cross-border investor by 2020 and has a reputation for large-scale projects and visionary economic planning. Furthermore, the prime minister declared in a recent BBC interview that the ‘golden era’ of UK–China relations is still in place.

Much of China’s economic miracle has been built on leap-frogging technologies, achieved through a mixture of cyber espionage and pushing foreign firms with desirable intellectual property into disadvantageous joint ventures with Chinese rivals. As far back as 2007, MI5 was alerting executives in Britain to the dangers of commercial espionage from Chinese state actors. The 2016 US-China Economic and Security Review Commission asserts that ‘reports of Chinese espionage against the United States have risen significantly over the past 15 years’, noting that while the emphasis has been on ‘defence industrial companies, national security decision makers, and critical national infrastructure entities’. This article reviews three types of Chinese investment into foreign firms.

To continue reading, please click here.


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.

 

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