Politics is all about pork, but this is ridiculous
When you are asked to list commodities that are vital to national security, pork chops are typically not the first thing that spring to mind. But the Committee on Foreign Investment in the United States (CFIUS) seems to think otherwise. CFIUS is the body charged with reviewing acquisitions of U.S. assets by foreign companies (be they state-owned or privately held) to ensure that such deals do not create national security concerns. CFIUS is conducting a more intensive review of the proposed acquisition of Smithfield Foods, the largest producer of pork products in the United States, by China’s Shuanghui International. Bacon, it would seem, is a matter of national security after all.
While few observers will have been surprised that the Smithfield-Shuanghui deal triggered an extended review, that was not a certainty. The parameters under which CFIUS conducts national security reviews of foreign investment transactions are kept deliberately vague. While that gives the committee the flexibility that some would say it should have, it leaves a lot of issues open to interpretation. And sometimes, people seek to construe those rules in ways that serve purposes outside of national security concerns. That, in turn, potentially harms the overall investment climate and American financial interests. As global economic activity and cross-border capital flows start to accelerate once again, it’s time to consider whether CFIUS continues to serve its intended purpose.
CFIUS is a creature of the 1980s — a time when the popular narrative held that corporate America was being systematically acquired by foreign companies, particularly those from Japan. For the most part, the Committee does its work quietly and without fanfare, but every so often it is called upon to review an acquisition that arouses political controversy. Examples include the proposed acquisition of Unocal, the California-based energy company, by the China National Offshore Oil Corporation (CNOOC) in 2005. A year later, controversy erupted again when Dubai Ports World sought to acquire the U.S. ports management business of P&O. The Shuanghui-Smithfield deal hasn’t yet reached those levels of public and media excitement. But the fact that CFIUS is giving the deal a second, more comprehensive look is likely to reignite the debate over just what “national security” interests the Committee is protecting.
Governments, of course, have an obligation to balance a country’s receptiveness to inbound investment against national security imperatives. And the United States is not alone in undertaking such a balancing act – countries the world over have similar regimes in place. Unfortunately, few people outside of the network of those who counsel companies on their international merger and acquisition strategies pay much attention to these laws until a deal comes along that triggers other political or economic concerns. In those circumstances, national security can become a cloak for completely unrelated objectives that may ultimately harm the very interests that the system is meant to safeguard.
Filing a notice of a proposed transaction with CFIUS is voluntary. However, prudent companies almost always choose to do so prior to completion in order to avoid the risk that CFIUS initiates an ex post facto review of the transaction and orders it to be unwound due to national security concerns. Accordingly, the onus is on the parties to assess whether a deal would potentially trigger a review. The trouble is, there is no comprehensive guidance as to what types of deals fall within CFIUS’s remit. Acquisitions of military or dual use technology will almost certainly trigger a review, but the 2007 amendments to the CFIUS regime introduced by the Foreign Investment and National Security Act opened acquisitions of “critical infrastructure” to a more intensive review process. But “critical infrastructure” is only vaguely defined. The law does not actually say that acquisitions in the food and agriculture industries would prompt a more intensive CFIUS review, but that is exactly what has happened with the Smithfield-Shuanghui deal.
The nation’s food supply could be construed as a component of critical infrastructure, but foreign companies have bought U.S. food producers in the past without either the political establishment or the wider public batting an eyelid. This deal, however, appears to be different.
In July of this year, the U.S. Senate Agriculture Committee held hearings on the proposed transaction and called on CFIUS to undertake a thorough review of its merits, citing concerns about foreign ownership of the nation’s food supply and the maintenance of food safety standards. While it’s impossible to say for certain whether the spectre of Congressional pressure definitely caused CFIUS to ratchet up the scrutiny of the deal, that’s precisely what it did. This raises a number of issues.
First, while critics of a transaction will often cite national security concerns in calling for CFIUS to review and reject and transaction, they will never be called upon to substantiate those allegations. CFIUS will conduct that assessment outside of the glare of public scrutiny. To those with concerns about foreign ownership of U.S companies and assets, a “threat” can be found around almost every corner.
For instance, if a foreign sovereign wealth fund invests in a toll road or an airport – the sorts of investments that such funds favour because of the long-term stable returns that they offer – does that really mean that such infrastructure is more vulnerable than it was previously? In Congressional hearings in 2007, at least one member of Congress suggested that foreign owners of roads might prevent those roads from being used in a national emergency. If a foreign company spends hundreds of millions of dollars acquiring a hotel overlooking the White House, does that mean that the White House is any more vulnerable to attack than if a terrorist or spy was to book a room in a hotel owned by a U.S. company? In Congressional hearings conducted one year after the failed Dubai Ports deal, another member of Congress said that this was exactly the sort of deal CFIUS should be reviewing.
The second concern is whether the foreign investment review process is actually becoming a tool for wider political purposes. When CFIUS was created in the 1980s, Congress explicitly rejected proposals to give the committee a mandate to review any transaction that put the economic well-being of the United States at risk. Malcolm Baldridge, the Secretary of Commerce at that time, said such a proposal was like “…trying to kill a gnat with a blunderbuss.” CFIUS’s scope was limited purely to assessing threats to national security. That hasn’t stopped some from trying to widen its remit ever since.
In recent Senate hearings on the Smithfield deal, some argued that the U.S. food industry should not be open to Chinese investment because foreign companies cannot acquire interests in China’s agriculture sector. Fair enough – quid pro quo is a concept that oft raises its head in international diplomacy. But that’s not why CFIUS was created and CFIUS should not be approving or rejecting deals on that basis. The threat assessment review process cannot be used for broader policy purposes. Not only does it lead to deals being scrutinized – and potentially rejected – for the wrong reasons, but it injects uncertainty into the entire process. And such uncertainty is in no one’s interests, be they the foreign investors who must navigate the system or those who conduct the security reviews who will be forced to try and anticipate whether a deal will be politically unpalatable.
Finally, there’s a need to balance the risks to national security posed by foreign investment with the benefits that such activity generates. After all, a strong economy is a national interest in its own right. The United States is both the world’s single largest exporter and its largest recipient of investment capital. Like it or not, inbound and outbound investment flows are critical to the U.S. economy. In 2008, then-Deputy Treasury Secretary Bob Kimmitt noted in Foreign Affairs that foreign investment accounted for 5.7% of the US economy’s total output, 13% of total research and development spending, and 10% of all outlays on new plants and equipment. Earlier this year, the American Society of Civil Engineers estimated that the United States would need to invest USD 3.6 trillion in the nation’s infrastructure by 2020 in order for it to remain functional. Much of that investment will come from domestic sources, but a significant portion of it will come from overseas, and policymakers need to decide just how receptive they will be to it.
The debate over America’s openness to foreign investment and the role that CFIUS plays in that process cannot simply be reopened every time a controversial deal comes along. It raises issues that are vital to U.S. national security interests. Careful, reasoned deliberation over the risks presented by foreign investment and the benefits that it brings is required.
There are serious issues to be considered here. Which industries really need to be protected? Which countries constitute real threats to U.S. national interests and how does one balance those threats against the benefits that come from economic engagement? How will the U.S. deal with the fact that sovereign wealth funds and state-owned enterprises from places like Asia and the Middle East are increasingly likely to be key sources of foreign investment in the coming decades? Is the U.S. government prepared to see similar restrictions imposed on American companies seeking to invest overseas? These are just some of the questions that must be tackled.
Countries engage in debates over balancing interests every day. The most effective policies that emerge from those debates are those that are formulated away from histrionics and conspiracy theories. An open and welcoming attitude to foreign investment can create exposures to national security risks, but building barriers to trade and retreating into suspicious mercantilism can be just as harmful and present much more tangible consequences. This isn’t the sort of debate that should be dealt with by an ad hoc discussion of whether a ham really is integral to U.S. national security.
David Chmiel is the managing director of an international political and security risk consultancy. He previously practiced for ten years as a mergers & acquisitions lawyer in the London and Chicago offices of a major global law firm. The views presented here are personal and do not reflect the opinions of any past or current client or employer.
Photo Credit: I Can’t Believe I Fry, Flickr