From: The Diplomat
Some significant Chinese deals in the U.S. have been blocked. Is China being unfairly treated?
By Ziad Haider
On July 10, the U.S. Senate Committee on Agriculture held a hearing on the proposed $7.1 billion acquisition by China’s Shuanghui International of Smithfield Foods – the largest Chinese acquisition to date of a U.S. company, which was recently cleared by U.S. regulators. Although the hearing focused on food safety concerns relating to foreign acquisitions of U.S. firms, it publicly underscored a key emerging phenomenon in US-China relations: rising Chinese investment in the United States and related national security considerations.
Much as Japan Inc. caused a sensation with its buying spree in the eighties, acquiring prominent U.S. companies and landmarks, including Rockefeller Center, Chinese companies are making their presence felt. Acquisitions range from AMC cinemas to IBM’s personal computers unit. Prominent Chinese bids reportedly in the works include One Chase Manhattan Plaza in New York City and select assets of smartphone maker Blackberry in neighboring Canada.
Far from the Congressional spotlight, the little-known Committee on Foreign Investment in the United States (CFIUS) housed within the U.S. federal government reviews select inbound investments on national security grounds. CFIUS review seeks to balance free market principles that would keep the U.S. market open for business against national security considerations, specifically averting or mitigating foreign control of U.S. companies that are operating in potentially sensitive sectors.
CFIUS reviews are confidential, but what is public suggests that the record of Chinese companies investing in the United States is more robust than it may seem. Often eclipsed by those transactions that have unraveled, such as the failed $18.5 billion bid for Unocal by the China National Offshore Oil Cooperation (CNOOC) in 2005, in many cases investments have been approved. As the investment relationship between the world’s two largest economies evolves into “a two-way street,” China Inc.’s interface with CFIUS will be increasingly important for policymakers to understand and to insulate from politicization, to allow for careful and considered review by the regulators.
Coming to America
China’s investment profile is rapidly changing. The Economist Intelligence Unit projects that China will be a net global investor within four years. This investment is steadily diversifying. Whereas in 2010, energy deals made up 30 percent of outbound deal activity, they accounted for only 24 percent in 2012. While the top destination last year was the European Union, 2012 witnessed record Chinese investment in the United States: $6.7 billion worth of deals. This record will prove short-lived. In the first nine months of 2013 alone, Chinese firms spent nearly $12.2 billion on projects in the United States.
Chinese state-owned firms are not the only players. Private Chinese firms spent more on U.S. deals in the past fifteen months as of April 2013 than in the last eleven years combined. As of September 2013, private Chinese firms led by Shuanghui accounted for 84 percent of deals and 74 percent of total investment value this year. State governments are actively competing for this investment and the derivative jobs (California, New York, Texas, Illinois, and North Carolina are in the lead) with Chinese investment reportedly currently providing 33,000 U.S. jobs – expected to touch 70,000 with the close of the Smithfield deal.
Congress has tasked the executive branch with weighing the value-add of such inflows against their risks. As a result, unsurprisingly, a key issue in the U.S.-China investment relationship from the Chinese perspective has become the CFIUS review process. According to China’s Commerce Minister, the review process needs to be “more open and transparent, because companies never know whether their bid meets the requirements or not…We need clearer guidelines on what conditions might violate U.S. security, to reduce risk for companies that want to invest.” Such comments highlight the important if largely unknown role CFIUS plays in US-China relations.
What Is CFIUS?
Established in 1975, CFIUS is an inter-agency committee in the federal government that includes the heads of the following departments and offices: Department of the Treasury (chair); Department of Justice; Department of Homeland Security; Department of Commerce; Department of Defense; Department of State; Department of Energy; Office of the U.S. Trade Representative; and Office of Science & Technology Policy.
CFIUS operates pursuant to the 1988 Exon-Florio Amendment to the 1950 Defense Production Act – an amendment prompted largely by concerns regarding Japanese acquisitions in the United States. Exon-Florio authorizes the president to suspend, block, or otherwise modify transactions prior to closing that could result in foreign control of U.S. businesses engaged in inter-state commerce in the United States – if such control threatens to impair U.S. national security. It also authorizes the president to seek divestment or other relief in the case of concluded transactions.
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