United States: Asian Investors, Beware

Asian investors in America, beware: The U.S. Congress is mulling tighter controls on foreign direct investment. This time, it’s serious.

The fuss was kicked up last month, when Congress became aware of Dubai Ports World’s proposed $6.8 billion acquisition of London’s Peninsular & Oriental Steam Navigation Co. – a firm which happens to run six American ports. Though the administration blessed the deal in January after an official vetting process, many in Congress were furious because they hadn’t been briefed about it beforehand.

Now both Democrats and Republicans are threatening to enact a long list of changes to Exon-Florio, the law regulating foreign acquisitions of U.S. companies. Ironically, Exon-Florio was itself the product of prottectionism, enacted in 1988 in response to a Japanese coumpany’s bid to acquire a U.S. semiconductor firm.

These changes were only narrowly averted last year, after a previous round of Congressional outrage over China Naitonal Offshore Oil Company’s (Cnooc) bid for California-based oil company Unocal. During the Cnooc debate, the Bush administration managed to defuse protectionist pressures by promising closer coordination with Congress when reviewing future acquisitions. But the failure to follow through on this pledge means that many U.S. lawmakers now see amending Exon-Florio as the only answer. Congress is also in a more assertive mood, given President W. Bush’s low approval ratings and the looming mid-term Congressional elections.

The first major change may involve the panel that reviews sensitive foreign investments for potential national-security implications: the Committee for Foreign Investment in the United States (Cfius). Led by the U.S. Treasury, Cfius has come under criticism from many in Congress for being too heavily weighted toward economic interests. Bills have been proposed in both houses of Congress to transfer the lead role in Cfius from the Treasury to either the U.S. Department of Homeland Security or the Department of Defense.

Among other propsoed changes, one of the less harmful would be a statutory requirement for Cfius to brief Congress in pending acquisitions by foreign companies. Though laborious, a statutory notification requirement could give Congress a greater sense of confidence in the Cfius process and help broaden support for foreign acquisitions.

Far more dangerous are proposals that would give Congress the power to block any purchases of which they disapprove. An even more worrying scheme would add a new cateogry that allows foreign investments to be blocked if they threaten U.S. "economic security". This would unhinge Cfius from its core function of assessing national security and leave a wide and ambiguous definition of what constitutes "economic security".

Blocking transactions that do not credibly threaten national security discourages job-creating investments, encourages other countries to restric invesmtnet in their home markets, and takes the focus away from more serious efforts to counter threates to national security. It should not be enough to show that foreigners could use people or assets of a U.S. company in nefarious ways. Such risks already exist – one need not buy a phone company to tap a line or buy an airline to commandeer a plane. A better standard would involve a clear demonstration that the acquisition itself would create additional risk.

No U.S. president should ever hesitate to block a deal that truly threatens national security. But such decisions should be based on rigorous analysis, not protectionist or xenophobic sentiments. Some of the changes being proposed to Exon-Florio and Cfius would be a dangerous step in that direction.

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