The World of Globalization is Getting Smaller for American Businesses

Globalization and the expansion of international trade have created an economy unlike any before. The United States (“U.S.”) has particularly benefitted from foreign trade, with many businesses dependent on it for their success. However, recent events and growing concerns surrounding the sustainability of the global business model have led to executive actions and legislative movements which may foreclose significant portions of the world for U.S. businesses and may have dramatic implications.

While the expansion of global economies has provided a variety of benefits, to corporations and consumers alike, in the form of efficiency and lower prices, it has created some difficulties for national economies. (Collins, Forbes). Over the past few decades, the pace of globalization has increased dramatically, due in part to the proliferation of free trade agreements, rapid developments in technology, and easier means of transportation. (Williamson, Peterson Institute for International Economics). Notably, China has led the way in international trade and investments, receiving about a fifth of all direct investment globally in 2021. (Huang and Lardy, Peterson Institute for International Economics). Additionally, China is responsible for 17% of global exports, a third of which were supplied by foreign affiliates in China in 2021. Id. The United States’ investment in China was responsible for about $118.19 billion in 2021, a significant increase from the $12.08 billion just 20 years prior. (Statista). China’s strong grasp on international trade has had a large role in the growth of the U.S.’s trade deficit, which was almost four times greater than any other country in 2020. (Statista). China currently accounts for 18.6% of all imports into the U.S., which created a U.S. trade deficit with China of $33.5 billion in July of 2021 alone. (Office of the U.S. Trade Representative; U.S. Census Bureau).

China’s large role in international trade, and specifically in U.S. imports and trade, has created larger concerns than merely economic ones. The COVID-19 pandemic highlighted one of the largest downsides of widespread economic globalization, and that is over reliance on foreign imports. (West, Brookings). The pandemic caused serious disruptions in the global supply chain, leading to shortages in many consumer goods and increased prices for consumers. Id.Additionally, foreign trade has given rise to multiple national security concerns. (Lillis, CNN). For example, in July of 2022, the Federal Bureau of Investigations concluded that telecommunication equipment from Chinese company, Huawei, installed near military installations could be used to disrupt U.S. nuclear arsenal communications. Id.

In an effort to combat China’s dominating control of the global economy, minimize overreliance on foreign production, increase national security and restrengthen the domestic economy, the United States has considered a variety of approaches. (Flicker, Wang, Yan, and Zhang, JDsupra). In September of 2022, President Biden signed an executive order (“EO”) providing explicit guidance to the Committee on Foreign Investment in the United States (“CFIUS”)—the first time a president has done so in almost 50 years since the Committee’s creation. (Doherty, Law360; Handler, Wolber, Motto, Toussaint, and Yi, Gibson Dunn). The EO targets both foreign supply chain over reliance and national security threats. (Handler, Wolber, Motto, Toussaint, and Yi, Gibson Dunn). Specifically, the EO addresses five factors for CFIUS to consider in evaluating foreign activity in the U.S.: (1) resilience of supply chains; (2) technological leadership of the U.S.; (3) trends in investment with possible adverse consequences; (4) cybersecurity risks; and (5) risk to U.S. persons’ sensitive data. Id.

The EO comes in the wake of other legislative efforts aimed at strengthening U.S. production and competition. Most important of these efforts is the CHIPS and Science Act of 2022 (the “CHIPS Act”), which was signed into law in August of 2022. (Zhang, Parry, and Aldin, Mayer Brown). The CHIPS Act aims to strengthen American manufacturing in key technology sectors. The Act includes hundreds of billions in funding for domestic production of semiconductors, tax credits for the sectors, and most importantly, prohibitions on expanding manufacturing in China for recipients of the act. Id. However, the U.S.’s concern with China and semiconductor manufacturing doesn’t stop at the CHIPS Act and increasing domestic production. With escalating tensions between China and Taiwan, and the risk of a Chinese invasion of Taiwan increasing, the U.S. has become increasingly concerned with the possibility of China taking over Taiwan Semiconductor Manufacturing Company’s (“TSMC”) facilities. (Zheng and Wang, Bloomberg). The Biden administration has already begun contingency planning in case of a Chinese invasion, including considering evacuating TSMC chip engineers to render the facilities useless. Id. Some former U.S. officials have gone as far as suggesting the U.S. bomb the TSMC facilities so China could not benefit at all from the semiconductor industry in the case of an invasion. Id.

While these recent efforts are significant, they are far from isolated, and are only part of a growing trend in the U.S.. The CHIPS Act was originally part of two larger bills, the house of representatives Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength Act of 2022 (“COMPETES Act”), and the Senate’s United States Innovation and Competition Act. Id. These acts were much broader in scope and targeted domestic production and global competition more aggressively. Id. However, as a result of legislative stand still, the CHIPS Act was created as a faster compromise to the acts while still achieving some of the goals of the two original acts. Id. The COMPETES Act had strong bipartisan support and proposed the creation of an outbound investment screening mechanism for U.S. investment in “countries of concern”, an ambiguous term which largely was directed towards China. (Flicker, Wang, Yan, and Zhang, JDsupra). This sort of screening mechanism would be the first of its kind, creating a sort of reverse CFIUS, where CFIUS screens investments into the U.S. from foreign countries, the proposed legislation would screen investments from the U.S. into other foreign economies. Id. While the legislation did not pass into law, it still has strong bi-partisan and White House support and should be closely followed. Id.  The bill has received strong backlash from U.S. businesses, which would be significantly impacted by the bill’s directives. However, support for the bill seems unaffected by these criticisms. Id.

China is not the only country that may be the target of significant trade restrictions in the near future. Amidst the publicity surrounding the Russian invasion of Ukraine, a strong push for designating Russia as a state sponsor of terrorism has found its way into Congress, yet again with bipartisan support. (Ward, Politico). This designation would have serious implications for Russia beyond the dishonor, which is currently only given to North Korea, Syria, Cuba, and Iran, all of which are known for their vast human rights violations. Id. The designation comes with long lasting trade sanctions, which effectively prohibit Americans from doing business in those countries, removing another significant area of international trade. Id. Despite vast congressional demands, including from Speaker of the House, Nancy Pelosi, the White House has vocally pushed back on the idea due to the long-lasting implications of the designation and fears of worsening already tense relations with the Kremlin. Id. In response to the White House’s resistance to the idea, legislation was introduced in the Senate in early September of 2022 to circumvent the resistance and force the designation on Russia. (Ward, Desiderio, and Ukenye, Politico).

President Biden’s most recent executive order and the CHIPS Act point towards a larger and concerning trend for U.S. businesses of government action prohibiting business and investment in some of the largest markets of international trade. Consequently, U.S. businesses may need to start dramatically shifting their business models and planning to minimize their dependence on foreign countries. In a rapid contrast to the past decades of what seemed like unrestricted international trade, more restrictions have been placed and more are likely to come, shrinking the world of global trade for the U.S.