Economic Balancing and China-U.S. Financial Ties

• In Event: The Causes and Effects of China’s Economic Statecraft

Abstract

Since the 1950s, American foreign economic policy has been guided by a liberal consensus that financial liberalization is advantageous to U.S. economic and security interests. This consensus led diverse administrations, from Richard Nixon to Barack Obama, to support the financial integration between the United States and China. However, in the past two decades, this liberal financial consensus eroded. Between 2005 and 2018, the United States enacted a series of legal and institutional changes that replaced the liberal FDI screening framework with a protectionist FDI screening framework. This shift led the United States to have one of the most restrictive screening frameworks of inward investment flows among OECD economies.

Departing from explanations based on domestic interests, this paper argues that the deployment of an economic balancing strategy led to American FDI protectionism. Economic balancing entails both augmenting the state’s own economic and technological lead, and checking the economic power of rival states. This strategy was leveraged by both China and the United States in the realm of foreign investments: as China promoted foreign investments in advanced economies to enhance its economic capacity, the United States responded by restricting the access of foreign investors in its economy. To show the applicability of this logic, this paper develops Waltz’s concept of economic balancing and shows its applicability by empirically tracing how American policy-makers interpreted China’s economic policies, and formed a consensus around the need to restrict Chinese investments in the United States.

Author

• Jazmin Sierra, University of Notre Dame