Let’s use tax incentives to get US money out of China

Lawmakers and policymakers in Washington have made it clear that extensive U.S. investment into China poses a national security threat. The tricky part for them is figuring what to do about it.

The White House and Congress are poised to roll out different forms of outbound investment screening regimes in the coming weeks or months. These proposals are largely based on traditional regulatory frameworks, which focus on telling the market what it is prohibited from doing. Although valuable in some circumstances, this is the wrong approach to stopping investment or getting U.S. dollars out of China. 

Moreover, the U.S. government is not adequately postured or resourced to prevent the outbound flow of U.S. capital into China. Instead of taking on an impossible task that will complicate regulations, introduce uncertainty to the market, and put more air into an already ballooning government, there is an alternative.

That alternative is giving tax abatements to U.S. capital in China that repatriates to the United States and then deploys elsewhere in the world. This is a much more market-friendly, pragmatic and impactful alternative to “Outbound CFIUS” — as it is colloquially referred to, for Committee on Foreign Investment in the United States — which doesn’t require a new agency, more executive branch authorities, or any additional money being spent by the government. 

In this alternative framework, the U.S. government would create four categories of tax incentive tiers that are tied to strategic foreign policy or national security objectives. If a bank were to pull capital from China and reinvest into a U.S. ally considered to be a low-risk market — such as Canada, for example — it would qualify for a tax abatement lasting one year. If that bank were willing to pull its money from China and put it to work in a riskier market that is also a high priority for the U.S. — such as Ukraine — it would qualify for 10 years of tax abatements.

This approach to slowing China’s economic growth offers value above Outbound CFIUS in six distinct ways: 

• First, it doesn’t introduce new, burdensome regulations that interfere with the free market.
• Second, it likely will drain a significant amount of capital from China as its economy is showing serious strain following the COVID lockdowns. 
• Third, it helps drive U.S. capital into other markets where the U.S. should be investing or offering alternatives to Chinese investors. 
• Fourth, it is a net neutral cost to taxpayers; the U.S. doesn’t really receive tax revenue from money parked overseas and this doesn’t ask for any government spending. 
• Fifth, it would give investors who are looking to move out of China more optionality.
• Finally, it likely would cause China to impose capital controls, which would send a strong signal to other global investors about how China intends to regulate its markets.

As long as China is using U.S. capital to fund the development and deployment of critical technologies that offend human rights and undermine global security, the U.S. should be working to counter that. Ultimately, providing investors with options in the form of strategic tax incentives is the best alternative to Outbound CFIUS. Aligning incentives to market interests to support national security would be a huge win for American foreign policy and an even bigger win for countries looking for more investment from the United States.

Let’s use the tools we have to make changes before creating new ones.

David Rader was deputy director of the Global Investment & Economic Security Directorate at the Department of Defense, where he oversaw the DOD Committee on Foreign Investment in the United States (CFIUS) office and supported various economic-focused initiatives at the National Security Council. Follow him on Twitter @drader_dc.