Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Andrew Gilholm – director of China and North Asia analysis at Control Risks – is the 139th in “The Trans-Pacific View Insight Series.”
Explain how geopolitics affects national regulators’ role in cross-border mergers and acquisitions (M&A), and how this may be changing.
In theory – and usually in practice – it doesn’t. The vast majority of M&A approval reviews are mainly focused on whether a deal will undermine competition in a certain market. In certain cases, Chinese regulators are arguably more influenced than most of their counterparts by national economic interest and place tougher conditions on deals. But most cases aren’t heavily politicized and China has rarely blocked deals (though it has rules restricting foreign investment broadly in some sectors).Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Geopolitics usually comes in more when deals face explicit national security or other national interest objections, and since the mid-2000s China has been the target of such objections more often than the source. Traditionally, this focused on “strategic” sectors like defense, critical infrastructure, and natural resources, but sensitivities are broader now and we’ve seen the U.S. Committee on Foreign Investment in the United States (CFIUS) block more China-related deals since 2017. This is probably just the start.
After Broadcom’s failed bid for Qualcomm and now Qualcomm’s stalled bid for NXP Semiconductors, is M&A now another arena for U.S.-China tit-for-tat competition?
Most deals shouldn’t face major issues, but even in an optimistic scenario for tariffs and wider “trade war,” we’re heading for a more restrictive investment environment. Fear of China exploiting U.S. economic openness to dominate crucial technologies is wider than ever in Washington. As well, more CFIUS intervention drives momentum for other restrictions on Chinese investment in the U.S., and U.S. firms’ engagement with China. This trend goes beyond Trump. It is bipartisan and seen in proposed legislation – particularly the China Fair Trade Enforcement Act – as well as administration action.
China is part of this trend, but the logic for M&A openness is different for each side so the dynamic is unlikely to be straightforward tit-for-tat. For example, the U.S. has blocked some Chinese acquisitions in semiconductors, but while China is holding up acquisitions in the sector by Qualcomm and Bain Capital, it also just approved Qualcomm’s venture with Chinese firm Datang, and the Microsemi-MicroChip tie-up. Beijing needs firms like Qualcomm in the China market to help develop its domestic industry, so retaliation is not always as simple as “you hit ZTE, we hit Qualcomm.”
Assess the wider fallout effect of the U.S. decision to ban component sales to ZTE.
It was a hugely significant move – I think we might even look back on it as a game-changing moment in the U.S.-China trade fight. In March we had what I’d call a quantitative escalation as the two sides imposed or threatened larger packages of tariffs. What happened in April was a qualitative escalation as Washington put more emphasis on possible investment and other restrictions targeting the advanced sectors China is aggressively promoting through industrial policy. For Beijing, U.S. regulatory moves against Huawei and ZTE are more provocative and surprising than tariffs.
It is therefore an effective U.S. move if the aim is raising pressure and uncertainty, but it may have backfired in another sense: the ZTE case really drove Chinese “patriotic” public sentiment on the trade dispute to a new level, and greatly reinforced the belief and urgency behind Xi Jinping’s call to accelerate domestic technological capabilities to avoid reliance on foreign companies. Trump’s latest comments suggest the ZTE situation will be resolved with some quid pro quo, but this hardening of sentiment on both sides will probably have lasting effects even if the current situation is contained.
How might U.S.-China friction impact the global semiconductor industry and other key technology and advanced manufacturing sectors?
In both countries it’s taken emerging narratives around these sectors and pushed them rapidly up the political agenda with wider traction. In China that’s the narrative where dependence on foreign technology leaves China vulnerable to crippling supply chain or critical infrastructure disruption, and stuck in the “middle-income trap” as a low-end manufacturer. In the U.S. it’s the narrative that naïve, unfettered economic engagement must be reined in to contain a stronger, bolder China under Xi. In both narratives, these industries and technologies are central to the perceived strategic U.S.-China competition.
Some firms and share prices will win from huge investment in these industries, but that also portends future overcapacity issues. For many players, politicization of their sector means huge disruption and uncertainty, seen most clearly in ZTE and Qualcomm. ZTE is in crisis mode, unable to operate normally without U.S. supplies. Qualcomm’s key acquisition is in doubt, while its global business will face growing constraints from Washington and an ever-tougher bargain with Beijing to access China’s vast market. An extreme scenario – but not a fanciful one – is that these conflicting pressures eventually become irreconcilable for some firms, and national industries and standards start to develop separately, not globally.
How else could China retaliate in the short term over U.S. trade and investment measure, and how will this all impact long-term relations?
Everyone knows about the tariff threats, and we’ve touched on likely investment restrictions, but there’s also a whole swath of potential regulatory tactics that China hasn’t really begun to tap yet. U.S. firms in China could face bureaucratic hold-ups or regulatory investigations involving anything from customs and inspection, through antitrust and anti-bribery cases, to cybersecurity law compliance issues. Beijing hopes to avoid uncontained escalation but we’re very likely to see some of these tactics soon, if talks don’t make more progress.
Long term, again we’re seeing more than just Trump-driven, temporary posturing here. There are structural drivers of this conflict that pre-date Trump and will persist beyond his presidency. With these narratives I referred to, the genie is out of bottle – there are obviously limits to the Cold War parallels but they don’t look as far-fetched as they once did. We’ll have a very patchy picture going forward because some foreign firms will continue to prosper in China and some sectors will get less, not more constrained. But overall the level of U.S.-China “win-win” economic engagement may have already peaked, at least for several years.