Cross Post: In Defense of the CFIUS

In the Hutong
I should be doing this in Linux
1551 hrs.

In recognition of a simmering foreign investment stand-off between China and the US, I’ve started a review of the policy literature on both sides of the Pacific. Over at The Peking Review, I posted the following review of an interesting defense of the American approach to foreign investment review. I post the full review below, with some appropriate additions.

Damming Capital

The United States has a long-established system for reviewing foreign investments in the United States, a process that is understandably highly political given both self-interested protectionism and legitimate national defense concerns that grapple with the interests of entrepreneurs and shareholders seeking greater opportunity or a simple cash-out.

China’s growing hunger for offshore investments has already begun testing that process, in particular with Huawei‘s recent attempt to snap up the leftover assets of a bankrupt technology startup in California. Huawei’s application – filed after the fact – was rejected, and it seems likely that more Chinese companies will face challenges as they attempt to use acquisitions as a pathway to globalization.

At some point China is likely to want to cast a global spotlight on the U.S. foreign investment review process (and would have done so sooner but for the attention it would have brought to its own), and when it does, the Committee on Foreign Investment in the United States (CFIUS) will find itself under global scrutiny.

Following the 2006 controversy around Dubai Ports World and its attempt to acquire the U.S. port operations of P&O Steam Navigation Company, Alan Larson and David Marchick at the Council on Foreign Relations conducted a study on the U.S. foreign investment review process and the CFIUS in particular. The recommendations made in Foreign Investment and National Security: Getting the Balance Right suggest that the U.S. needs to ensure that the process remains sheltered from political and commercial interests, remaining a purely national security issue.

Setting a Transparent Example

At its heart, though, the short book is a reasoned defense of what the authors clearly believe to be a fair process, if not quite a model for similar processes overseas. Their greatest concern is in the matter of transparency, and it is worth dwelling on that for a bit.

China is in the habit of rejecting foreign investments with greater frequency, an expression of an all-but-explicit national industrial policy that implicitly questions the value of foreign ownership of Chinese companies. That foreign firms – most recently YUM Brands – continue to pursue acquisitions of healthy Chinese corporations in blithe ignorance of this policy implies either willful ignorance on the part of executives, legal counsel, and investment banks, or that it is time for China to be more transparent in the criteria it uses to evaluate foreign investments.

A fair case could be made that the CFIUS is less interested in transparency than it is in national security, and this is fair. But if the cross-border flow of investments and ownership are to continue between the world’s two largest economies and the ties that bind them to a common interest are not to be severed, the CFIUS must ensure that it offers the greatest transparency possible consistent with national security.

For this reason alone, Larson and Marchick’s work calls for appreciative review. Indeed, their recommendations deserve a read in Europe, Japan, Australia, and anywhere in the world where foreign acquisitions are placed under regulatory scrutiny or a political microscope.

Regulation is Not the Problem – Communication is

And while we’re on the topic, let my reiterate my concern about the levees that appear to be rising against foreign investment. Whether you accept globalization as a step into a better future or condemn it as a leap into a corporatized hell, you must accept that the lack of a global framework for standardizing foreign direct investment review is arguably the global system’s point of greatest vulnerability.

It is difficult under current treaties for the U.S. to prevent, say, a Chinese shipyard from selling tugboats to a U.S. tugboat operator. It is simple, however, to stop that same Chinese company from buying a shipyard in Michigan to build those tugboats in the U.S. with American workers. Similarly,  while Chinese policymakers would be hard pressed to stop the import of ingredients for Coke or take the American beverage off the shelves of Chinese stores, it was a snap for them to block Coke’s acquisition of local juice maker Huiyuan. And while I am free to visit Australia as often as I wish, I have require government approval to buy a home there.

What keeps these restrictions in place, and what prevents the world from sitting down and hammering out a General Agreement on Direct Investment (GADI for short), is public perception. Larson and Marchick note that in America, arguably the most small-l liberal country in the world, 53% of the people are opposed to foreign ownership of U.S. assets.

The most pressing problem in the path of foreign investment is, then, not regulation, but communication. Governments and NGOs are unlikely to take on the burden of advocacy for the cause. This means corporations are on their own, and that every effort to purchase a company overseas demands that the acquirer make a convincing public case for that acquisition, because, as Larson and Marchick point out, the regulator charged with reviewing it will be required to justify his/her decision as well.