Be Careful What you Wish For: Commerce and Security in the U.S.-China Relationship

October 1, 2014

“Food security is national security.” That was the sentiment expressed by Senator Debbie Stabenow when she recently called for greater scrutiny of Chinese investment in the U.S. agribusiness sector. Her proposed legislation dealing with this issue, combined with further changes mooted by Congresswoman Rosa DeLauro, have reignited a long-simmering debate over American openness to foreign investment. The problem is that this issue is being revisited at a time when Chinese regulators are turning their sights on foreign companies doing business in China. As a result, the two countries could end up in a tit-for-tat regulatory war that would further damage a bilateral relationship already colored by deep suspicion. It will be important for policymakers to consider just what is at stake as they debate these reforms.

Stabenow’s draft legislation will subject foreign acquisitions of U.S. food and agriculture companies to greater scrutiny by the Committee on Foreign Investment in the United States (CFIUS), the body responsible for assessing the impact of proposed foreign investments on national security. Congresswoman DeLauro’s draft bill, on the other hand, looks beyond agribusiness to all foreign investment activities. Among other things, she proposes expanding CFIUS’s remit beyond questions of national security to include a “net benefit” test which would assess transactions against a variety of economic, political, and even cultural criteria.

In many ways, Chinese investment in the United States is the elephant in the room on this debate. Both Stabenow and DeLauro were vocal opponents of last year’s acquisition of Smithfield Foods by Shuanghui International, China’s largest pork producer. Stabenow even singled out China as a country of concern, stating: “…I can’t imagine that the American people will feel comfortable if they wake up someday and find that half our food producers are owned by China.” Even if lawmakers deny that they have any one particular country in mind when raising the bar on foreign investment review, Beijing will almost certainly view these proposals through that prism.

The question of how to approach China’s growing appetite for investment in the United States – it doubled in 2013 to $14 billion – is not a new one. The matter first reared its head in a material way in 2005, when the China National Offshore Oil Corporation abandoned its proposed acquisition of Unocal, the California-based oil and gas company, amidst U.S. political disquietude over the transaction. Those suspicions re-emerged with the Smithfield Foods deal last year. However, attitudes toward Chinese investment must be viewed in the context of the broader U.S. Chinese relationship and the current legislative proposals raise a number of important issues in that regard.

First, targeting Chinese investment has the potential to generate considerable blowback for U.S. companies investing in the opposite direction. Earlier this year, the American Chamber of Commerce in China released the results of its annual survey of foreign companies doing business in the country. Sixty percent reported feeling less welcome as investors in China than previously. Among other things, they cited fears that foreign businesses are being disproportionately targeted by Chinese authorities in a variety of ongoing regulatory investigations. Multinationals such as GlaxoSmithKline, the Anglo-American pharmaceutical company, have been caught up in China’s crackdown against bribery and official corruption. A number of prominent foreign companies are also being investigated for “anti-competitive behavior” under China’s nascent anti-monopoly laws.

In recent weeks, U.S. officials have contended that any targeting of foreign companies by Chinese authorities could potentially violate China’s obligations as a member of the World Trade Organization. In addition, a number of U.S. lawmakers have previously argued that, as China’s agriculture sector is effectively closed to foreign investment, principles of reciprocity should apply to Chinese companies seeking out opportunities in the U.S. The problem, of course, is that such finger pointing has the potential to descend into an impasse. For each proposed act of discrimination by Chinese officials, China will counteract by citing examples such as targeting of Chinese investment by CFIUS and vice versa. Nothing will be achieved and trade and investment will suffer accordingly.

Second, crying “national security” as a reason to limit foreign investment has the potential to weaken the efficacy of that defense when it really does matter. It is plain to see why governments are concerned with assessing the motives of a foreign acquirer of sensitive military or dual-use technology. It becomes much harder to establish the linkage in many other sectors. Senator Stabenow may argue that food security is integral to national security, but if that means ensuring that Americans have access to a safe and stable food supply, it is questionable what will be gained in practice by bringing the Department of Agriculture and the Food and Drug Administration to the CFIUS table. Food processers will still be based in the U.S. post-acquisition and they will remain subject to strict and ongoing regulation and supervision, regardless of the nationality of their owners.

This argument becomes even more tenuous with respect to any “net benefit” test of foreign investment. When CFIUS was created in 1988, Congress expressly rejected including such concepts from its remit. Its role was to ensure that intelligence data from National Security Threat Assessments could be used to determine if a particular acquisition posed a clear and credible threat to national security. Assessing foreign investment for its impact on employment levels, industrial efficiency, product innovation, and cultural policies (all factors named in this new bill) changes the purpose of the review process entirely. There are many factors at play in criticisms of Chinese investment, ranging from human rights issues to concerns about the consequences of trade on U.S. unemployment levels. Lawmakers have every right to express such concerns. However, using CFIUS as the means by which to achieve broader political objectives risks distracting it from the purpose for which it was created.

Finally, it is important to consider how these proposals could impact broader U.S.–China relations. Strategically, this relationship is already characterized by deep mistrust and suspicion caused by issues ranging from allegations of Chinese government complicity in cyberespionage to China’s fears of encirclement by countries seeking to inhibit its rise to global power. Trade and investment have often been seen as counterbalances to such suspicions, cutting through politics and allowing confidence to be built through economic interaction. Further regulatory changes could impose a real brake on that aspect of the bilateral relationship and, in doing so, remove one of the principal inhibitors to even greater strategic rivalry.

This would play into China’s long-standing political narrative. Senior business leaders with whom I have spoken say that Chinese officials believe – apparently genuinely – that they are subject to double standards. In the eyes of China’s policymakers, the country has, for years, been criticized for hiding behind the mantle of a “developing economy” and for failing to undertake concerted efforts to make its economy more competitive. Now that it is doing so by encouraging its companies to invest in the wider world and by starting to enforce market-based reforms of its own, such as its new antitrust laws, it is subjected to criticism and scrutiny of a different nature. One can dismiss such notions as being far-fetched; however, it is important to recognize that they pervade the ranks of officialdom in China nonetheless and that any further efforts to single out Chinese investment may only play further into such emotions, generating still deeper suspicion and mistrust.

The harsh reality is that proposals such as these have the potential to fan the flames of wariness that increasingly dominate how China and the U.S. view each other strategically. Moreover, they can almost become self-fulfilling as one government seeks to find a way to retaliate for what it sees as mistreatment of its business community in the other country. Yes, important principles are at stake in seeking to ensure that vital national security interests are preserved. However, by creating obligations that distract CFIUS from its core focus, and by using the rhetoric of retaliation in justifying such measures, they have the potential to weaken the U.S.–China relationship further and, thereby, generate even greater challenges to national security than those they seek to meet.

 

David J. Chmiel is a managing director of Global Torchlight, an international political and security risk consultancy. He previously practiced for ten years as a merger & acquisitions lawyer in the London and Chicago offices of a major global law firm. The views here are his own. He can be followed on Twitter: @LONDJC.

 

Photo credit: Jason Wesley Upton