A Misplaced Curb on Investment

Edward M. Graham (PIIE) and David M. Marchick (Covington & Burling)

Op-ed in the Financial Times

October 5, 2005

Some members of the US Congress have suggested toughening America's foreign investment rules in the wake of the failed attempt by CNOOC to acquire Unocal and a new report by the Government Accountability Office (GAO) criticizing the process for reviewing foreign acquisitions of US companies.

The Senate banking committee will hold hearings on the issue this week. The proposed changes, if adopted, would slow the flow of foreign direct investment (FDI) into the United States. This would be a huge error given America's need to attract such investment to finance its current account deficit ($58.8 billion/€49.3 billion in June alone) and the demonstrable economic benefits it can bring. Instead, the US government should welcome FDI while continuing to use existing legislation to block the rare foreign acquisition of a US company that truly threatens US national security.

Congress enacted this legislation, known as the Exon-Florio Amendment, in 1988 amid rising domestic concern about growing Japanese investment in America. Exon-Florio authorizes the president to block any foreign acquisition of a US company that “threatens to impair US national security” based on recommendations by the Committee on Foreign Investment in the United States (CFIUS). CFIUS is chaired by the US Treasury but includes 12 federal agencies with defense, security, and economic interests. Critics, including the GAO, argue the committee has dropped the ball because it rarely blocks agreements, operates in secret, and fails to involve Congress in its decisions. In support of these arguments, those who favor legislative change point out that CFIUS has reviewed more than 1,500 transactions since 1988 but blocked only one—a 1990 acquisition of a US aerospace company by China National Aero Tech. Some note that CFIUS has conducted only 25 extended reviews, while others contend that CFIUS embraces a definition of “national security” that ignores US economic interests.

To correct these perceived shortcomings, some members of Congress advocate broadening the criteria for reviewing transactions from “national security” to “national and economic security.” They also propose giving Congress the right to force CFIUS to conduct extended reviews of specific transactions, as well as to block transactions already approved by the president.

But the criticism is largely misplaced. First, the Exon-Florio Amendment gives the president a wide measure of discretion to block transactions that legitimately threaten US national security. And unlike other mechanisms for reviewing mergers and acquisitions, including antitrust reviews, the president's decisions under Exon-Florio are not reviewable by US courts. Moreover, Exon-Florio leaves it to the president to define national security on a case-by-case basis. The Bush administration has used the statute’s flexibility to apply a broader definition of national security than previous administrations. Whereas prior CFIUS reviews mostly viewed potential security threats as those created by the export of sensitive technologies, protection of critical infrastructure is now a leading concern. The level of scrutiny of foreign acquisitions has increased, especially for Chinese investment. From 2003 to last month, there were six extended reviews and five withdrawals of individual transactions, more than in the previous decade combined. It should also be noted that CFIUS has long negotiated security arrangements with foreign investors where proposed acquisitions raise security concerns. Both the substance and enforcement of these agreements have become much tougher in recent years. It is correct to say the CFIUS process is secretive. It was meant to be. The law provides an exception for sharing information with Congress. But this sharing must be done while ensuring that sensitive company-specific information is not divulged by congressional members to a competitor company that may be a constituent. Improvements to information-sharing should not be at the expense of compromising sensitive information provided by companies.

Congress should not be empowered to overturn the president's national security decisions on particular transactions. Even the threat of this would dampen FDI in the United States. Congress was not meant as a regulatory agency. Nor should Congress expand the scope of Exon-Florio reviews to include “economic security.” This would simply encourage protectionism, as well as violate numerous treaties. Rather, President George W. Bush should issue a policy statement—just as presidents Carter and Reagan did—to indicate that FDI is welcome. The United States should continue to negotiate and ratify bilateral investment treaties and investment provisions in trade agreements so as to establish ground rules for fair treatment of investment. The administration and Congress should ensure the CFIUS process remains balanced and focused on national security. And while the president should fully utilize his authority to block foreign acquisitions that genuinely threaten US national security interests, America should welcome all other FDI with open arms.