President Obama has become the first president in 22 years to issue a formal order blocking a foreign investment into the United States on national security grounds. The decision, which denies the acquisition of a small Oregon wind farm project by a Chinese-owned company, will unfortunately be seen as yet another signal – this time from the highest possible level -- that the United States does not really want Chinese investment. And for an economy still struggling to create jobs, that’s the wrong signal to send.
The action by Obama is the first presidential rejection of a foreign acquisition on security grounds since President George H.W. Bush blocked a Chinese aerospace company from acquiring Mamco, a Seattle maker of aerospace components. While many other potential transactions not involving Chinese companies have been withdrawn as a result of U.S. government security concerns, the formal decision by President Obama will reinforce Chinese fears that their acquisitions in the United States face an unfairly high level of scrutiny.
As David Marchick of the Carlyle Group wrote in a Renewing America Policy Innovation Memorandum earlier this year, “many Chinese executives believe the United States is unwelcoming of Chinese investment, even though the vast majority of Chinese investments in the United States have either been approved or have not required any approval.” The president’s decision will be yet another case to add to the political firestorm that ended the Chinese National Offshore Oil Corporation’s (CNOOC) effort to acquire Unocal Oil Company in 2005, or the brick wall that has greeted telecom giant Huawei's U.S. acquisition bids.
The timing could hardly be worse, coming just as Chinese reluctance to enter the U.S. market seemed to have ended. Indeed, the Obama administration has tried hard to lay out the welcome mat, aware of the potential economic benefits of expanded Chinese investment. According to the Rhodium Group, Chinese investment in the United States has surged in the past three years, though from a very small base. Over the past two years, there have been roughly 100 deals worth some $5 billion, compared with an annual average of just 30 deals worth $500 million prior to 2009. In the first six month of 2012, another $3.6 billion in deals were closed, including several large acquisitions such as Sinopec’s purchase of shale gas producer Devon Energy and more recently the purchase of AMC Entertainment by Dalian Wanda, the Chinese media conglomerate.
According to Rhodium, U.S. affiliates of Chinese-owned companies had 27,000 employees in 2011, up from just 10,000 five years ago. If the current pace continues, Chinese investment would likely create 200,000 to 400,000 U.S. jobs by 2020.
The particulars of the president’s decision will probably not matter in how it is perceived. It will certainly be hard to explain just exactly how Chinese ownership of a tiny Oregon wind farm poses any national security threat. Based on claims made through a rare lawsuit, the Treasury-led, inter-agency group that reviews foreign investment on security grounds – known as the Committee on Foreign Investment in the U.S. (CFIUS) – appears to have behaved in a particularly heavy-handed way.
The land that was acquired by Ralls, the Chinese buyer, is near a U.S. Navy base that is used as a training site for low-level military aircraft and weapons. According to the court papers filed by Ralls, the company had already agreed at the Navy’s request earlier this year to move part of the wind farm to a new location. But then CFIUS in July abruptly ordered the company to halt all construction on the property and barred Ralls from any further access to the site. It also effectively blocked the company from selling the property to another buyer more to CFIUS’s liking.
More details may emerge that help explain the president’s action (or may not given the secretive nature of CFIUS). But it’s clear that the whole business has been handled abysmally. If the location of the wind farm did indeed pose real security concerns, the U.S. government should have worked quietly with the company to help it find a reasonable way to divest. The transaction was far too small and inconsequential to have risen to the level it did.
Instead, by forcing a presidential action, it becomes a big, public slapdown to another Chinese company. That is not in the economic interests of a country – the United States – that needs all the foreign investment it can get.