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Make It Easier for China to Buy U.S. Businesses

By Stephen Heifetz
February 13, 2013 7:00 PM EST

U.S. President Barack Obama’s administration this week approved a significant business deal involving a Chinese company: the acquisition of Nexen Inc., a global energy company, by the China National Offshore Oil Corp.

In the last several months, the administration has approved Chinese purchases of a U.S. biotechnology company and a U.S. battery manufacturer. For those interested in free trade, prosperity and peace, this is good news.

Unfortunately, these approvals come against a backdrop of difficulties. With increasing frequency, Chinese investments have run into U.S. national-security concerns from the Committee on Foreign Investment in the United States, or CFIUS, which has scuttled several acquisitions, including one late last year.

We’re in the midst of a CFIUS outbreak. Without continuing and visible approvals of Chinese investments, this may damage the health of U.S.-China relations, which are critical to a more stable and prosperous 21st century.

The committee reviews commercial transactions when foreign investors -- from Canada, China, Israel, Russia, the U.K., Venezuela or anywhere else -- obtain control of U.S. companies. The U.S. has a policy of welcoming foreign investors, and research shows that an open investment climate fuels economic growth. But the foreign-investment committee is in tension with this open policy.

Generally Painless

Made up of multiple U.S. government agencies, with the Treasury Department acting as chairman, CFIUS helps ensure that foreign investments don’t threaten national security. Historically, the committee hasn’t found security concerns in more than a small percentage of foreign investments. And the resolution for such cases has generally been painless: CFIUS has requested commitments from foreign buyers -- insisting, for example, that a foreign buyer establish a security plan -- in roughly five to 10 cases each year. The committee has sought to scuttle a deal no more than a couple times a year, on average.

Periodically, however, circumstances have caused it to threaten the open investment climate or international trading relationships. I served on the committee from 2006 to 2010 and played a role in a lesser outbreak. But the current outbreak affecting Chinese investments is particularly virulent and harder to contain.

The first outbreak occurred in the late 1980s. Japanese investments in the U.S., and Japanese business success more broadly, fueled envy and fear (Mitsubishi’s 1989 purchase of the iconic Rockefeller Center was met with end-of-empire musings by U.S. elites). This gave rise to the first laws with teeth, enabling the committee to review foreign investments and recommend to the President that he block a transaction or force a divestment if necessary to protect national security.

Fortunately, the crackdown in that era was self-containing. The mere fact that CFIUS would review investments with an eye toward national security eased concerns about Japanese investment. And the economic slowdown in Japan, coupled with the resurgence of the U.S. in the mid-1990s, ended the perceived threat.

The second outbreak began with the 9/11 terrorist attacks and the understandable fears that resulted. In 2006, the committee approved an acquisition of a U.S. port management company by DP World Ltd., owned by the government of Dubai in the United Arab Emirates. Though the UAE is a close U.S. ally and the company is regarded as among the world’s best port- management companies, Congress went berserk. Public sentiment was inflamed by the idea that an Arab company might manage U.S. ports.

Foreign Commitments

Reacting to congressional pressure, the committee started to seek many commitments from foreign acquirers -- to develop a security plan, screen key personnel, provide data to the committee and the like -- as conditions for approving acquisitions. Although CFIUS had requested these security commitments before, we (it was here that I played an active role) requested these agreements with much greater frequency. It threatened to recommend that the president block the transaction if these commitments weren’t forthcoming. Playing to a hawkish Congress and public, CFIUS showed just how tough it could be.

Yet foreign investments in U.S. companies had virtually nothing to do with the terrorist threat. As with the outbreak over the Japanese, this episode was largely a result of perceptions rather than reality. Fortunately, the newly demonstrated CFIUS toughness helped to ease concerns. So, too, did broader successes against terrorists and the creation of homeland-security institutions. There was little damage to U.S. investment policy.

All the while, however, the third outbreak was beginning. The Chinese economy was in hyperdrive. Espionage by China against the U.S., and U.S. espionage against China, was rapidly accelerating. By the end of the first decade of the 21st century, alarm over U.S. inability to secure cyberspace, particularly against China, reached fever pitch. That is where we are today.

CFIUS treats Chinese investments with profound skepticism. And whereas previous outbreaks were the result of perceived (generally misperceived) threats, the current outbreak is troubling in part because more than perception is at work. The U.S. isn’t wrong to see a threat.

But the committee is far too weak a tool to address concerns about Chinese spying. Its authority is limited to transactions that result in foreign control of U.S. companies and doesn’t extend to sales of equipment or services, leases, the development of new businesses or myriad other ways to engage in espionage.

The committee too often builds a Maginot Line that results in high costs for U.S.-Chinese relations but little gain for U.S. security.

Deals Denied

For example, in 2009 it prevented a Chinese company from buying a Nevada gold mine, on grounds that the site was too close to a U.S. defense facility. Since then, several other deals in various parts of the U.S. have foundered on such “proximity” concerns. Yet it is possible for anyone to come within the same proximity to a U.S. defense facility in ways that the committee can’t review, including leasing a building, visiting a property, and driving trucks on nearby public roads.

Instead, CFIUS should use a balancing test. It needs to ask: “Is the security gain from preventing this acquisition marginal and easily circumvented, or is the gain significant enough to outweigh potential harm to U.S.-Chinese relations?” The absence of any sort of balancing test has fostered the current outbreak.

In the long run, the U.S.-Chinese espionage tension will have to be defused by cooperation and trust. The continued development of mutually beneficial institutions, such as the World Trade Organization, and increasingly close government-to- government relations can reduce each side’s reliance on spying. The current outbreak risks real damage by making it harder for cooperation and trust to grow.

(Stephen Heifetz is a partner in the Washington office of Steptoe, an international law firm. His clients include parties subject to review by CFIUS. He is a former deputy assistant secretary at the Department of Homeland Security, where he was a representative to CFIUS. The opinions expressed are his own.)

To contact the writer of this article: Stephen Heifetz at sheifetz@steptoe.com.

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net.

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