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You Can't Be CFIUS

Author: Douglas Holtz-Eakin
July 13, 2006
Wall Street Journal

The ongoing legislative effort to reform the Committee on Foreign Investment in the United States (CFIUS) has suddenly been put on the fast track. In particular, Senate Banking Committee Chairman Richard Shelby is asking for unanimous consent by the full Senate to vote on his bill with no debate over whether key provisions are in the national interest. Unfortunately, there is a big downside risk in precipitous action.

Earlier this year, international investors looked askance when an acquisition—the purchase by Dubai Ports World (DPW) of Peninsular and Oriental Steam Navigation Company (P&O)—dissolved into political controversy because the deal included terminal operations at a number of U.S. ports. Yet even though this impasse came on the heels of heavy-handed congressional interference in Chinese National Offshore Oil Corporation's proposed purchase of American oil company Unocal, hope remained that this was all a brief departure from the U.S. tradition of open international investment.

Hope took a hit in the solar plexus last month during the Senate debate over the U.S.-Oman free trade agreement. Sen. Byron Dorgan objected to an obscure provision covering “land-side aspects of port activities,” arguing that it would obligate the U.S. to turn over to Omani interests the same kind of port operations that were disputed in the DPW affair. The Oman agreement ultimately was approved by the Senate. But the eagerness of politicians to play the DPW card bodes ill for the future.

Congress may not appreciate what is at stake. Far from being in continuous conflict, open capital markets and national security support one another. A strong economy is part of national security, and among developed economies the U.S. has experienced uniquely strong productivity growth in the past decade. A key ingredient for this success has been openness to global trade in goods, services and capital. Currently, U.S. subsidiaries of international companies have over five million employees and pay compensation of over $300 billion each year, or about $60,000 per employee. The vast bulk of these investments have come from countries belonging to the OECD (over 90%) and a small minority is undertaken by firms with government control.

Transactions do arise (and have arisen) in which security considerations overwhelm their financial desirability. To date, the CFIUS process has worked well to support well-functioning, open capital markets with specific carve-outs for transactions that pose a national security threat. CFIUS did its security job, but it failed miserably in other respects. Congress, which created the security-screening authority with the Exon-Florio legislation nearly two decades ago, was left too much in the dark. Suspicious of security gaps and frustrated by its inability to exercise appropriate oversight, Congress has seized the opportunity to revisit the entire issue.

And therein lies a danger. While global investors watch nervously, the Senate has raised the specter of wholesale politicization of investment approvals—requiring notices to governors and congressional delegations of proposed purchases in their states; ranking countries by their cooperation in the war on terror and nuclear nonproliferation and basing the severity of security reviews on these published rankings; adding bureaucratic delays for investments that don't raise security concerns; and drawing Congress into the middle of the review process. The potential for damage to the U.S. investment climate is quite real.

More productive would be to drop the legislative approach entirely. After all, what is the rush? Once our genuine national interests are clarified, the president can take advantage of Treasury Secretary Hank Paulson’s 30 years of experience in cross-border transactions and issue an improved executive order revising the marching orders for CFIUS to include greater transparency, improved cooperation with Congress and improved monitoring of compliance. The Treasury has already appointed a new deputy assistant secretary position devoted to CFIUS reviews.

It is important to eliminate any lingering threat of politically driven reviews that will boomerang and directly hurt U.S. global investments. The greatest danger lies in other countries using recent U.S. missteps as a pretext for protectionist rules draped in the guise of national security. Press reports indicate that China will tighten screening of deals, and impose new curbs on foreign acquisitions by setting up a ministry-level committee to review controlling stakes in strategic industries including steel and the manufacturing of equipment for shipbuilding and power generation. A trend toward restricted capital markets would greatly damage the global economy, especially at a time when multilateral trade liberalization is losing steam. It would also directly hurt U.S. interests. To reduce this danger we need presidential leadership, and no more interference by Congress.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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