Well, the news is a flutter with talk of a new “Asian Invasion“. The Chinese state-owned CNOOC (China National Offshore Oil Corporation) has made an unsolicitated offer for the US-based UNOCAL which trumps the current offer by Chevron. This bid follows hot on the heals of the acquisition of IBM’s perosnal computer arm by the Lenova Group as well as another bid for an American company, this time Maytag, by the China-based Haier. One cannot help but see parallels (state-led–or state-‘influenced’–industrial policy combined with cheap financing) between this incarnation of the Asian Invasion and the original involving the Japanese in the 80s and 90s. The obvious difference between the two cases is that we were long time Japanese allies when the great shopping spree began. This is obviously not the case with China. Additionally, the Japanese seemed more preoccupied with purchasing “trophy assests”, such as Rockefeller Center, than firms which could be construed as vital to our economic and national security. This last point is both interesting and salient: How one defines or conceptualizes “national security” can have a significant impact on the kinds of policies one sees as imperitive as well as eventual state behavior.
In this way, definitions are significant factors in world politics. Rather than dismissing debates over definitions as mere semantical debates (implying that they are of no practical import), the brewing row over CNOOC’s attempted take-over offers a wonderful example of just how important definitions are. The FT article I linked to above (subscription only) has an interesting insert which sheds light on the Committee on Foreign Investments in the US (CFIUS), a body that will play a potentially important role in the case of the UNOCAL sale. The body was established to determine whether the potential sale of US assests to a foreign country should be allowed given national security concerns. Ostensibly this requires that the body first define what counts as “national security grounds” and then determine whether the sale constitutes a threat. But what counts as a “national security issue” is not self-evident, as illustrated in the insert quoted below.
Definition of ‘national security’ to be tested
Whether Fu Chengyu, the chairman and chief executive of CNOOC, is able to take over Unocal will ultimately be decided by an opaque government panel in Washington: the Committee on Foreign Investments in the US.
The committee was established in its current form during the administration of former president George H.W. Bush to vet foreign acquisitions of US assets and companies on national security grounds. Today, the question of what role it should play in approving or blocking international acquisitions of US companies is hotly contested.
The committee has blocked only one deal – the takeover of Mamco Manufacturing by a Chinese company in 1990 – but through indirect political pressure it has derailed a handful of other transactions. Under CFIUS guidelines, the committee must decide whether it will review a case within 30 days of receiving notice of the intended transaction and is given up to 90 days to investigate the deal.
At the centre of the arguments over the committee is the question of how the inter-agency panel should define national security. Should the US, as some argue, treat the preservation of its economic interests – whether through trying to maintain leadership in some industries or through control of natural resources – as fundamental to its national security?
Critics say that the committee, which is chaired by the Treasury department and includes representatives from the departments of commerce, homeland security, justice and defence, has been too lax in its oversight of acquisitions and too narrow in its focus.
Dick D’Amato, the chairman of the US-China Economic and Security Review Commission, who helped draft the statute that created the committee, says he believes it is not functioning properly.
“The Treasury has been unwilling to stop many of these transactions or even call them into question. After thousands of transactions they have intervened in less than five. There is something about that that bothers me,” he says.
One Washington lawyer and CFIUS expert says there have been two shifts in the way the committee has operated in recent years. “The first is that the government is now interested in a much broader set of acquisitions that affect critical infrastructure and not just defence or other security-related companies. The second is an obsession with China,” the person says.
That obsession was made evident to IBM this year, when the technology company’s planned Dollars 1.75bn sale of its personal computer business to Lenovo, a Chinese PC maker, was reviewed by the committee under intense political pressure from some Republican congressmen, who said the deal raised national security concerns.
Although the sale was ultimately approved with some security-related modifications, the three-month review underscored the political sensitivity of deals with Chinese companies.
Mr D’Amato says he believes CFIUS needs a revamp, beginning with its leadership. He proposes that the office of homeland security should chair the committee, that it ought to be more transparent and that it should report to Congress.
Donald Manzullo, an Illinois Republican who chairs the House of Representatives’ small business committee and a critic of the
Lenovo deal, calls the Committee on Foreign Investments a “secret society” that lacks accountability and must begin vetting deals beyond the traditional definition of national security.
Oil, Mr Manzullo says, fits into that category. “With Unocal, the Chinese have a great need for energy. Should the Chinese government – because the Chinese government equals CNOOC – be allowed to buy Unocal and further manipulate prices? What happens if the world oil supply is hoarded? Isn’t that a national security issue?“
I am betting that the committee turns up the heat on this one given the growing concern over China in the US–i.e. look for the definition of “national security” used by the committee to reflect US economic and resource interests (of course, scholars and policy makers have, at various times, considered both of these as crucial to national security. However, from what I can glean from the article the committee to date has used a more narrow, defense or military view–the transfer of sensitive technologies was more important than the practical effects on US economic power). And while I am prone to agree with the idea that we should at least consider whether acquisitions of leading US corporations and energy firms constitute a threat to national security1, I wonder to what degree these acquisitions truly constitute a threat.
Just a thought: China has clearly decided on a policy of acquiring “global brands” as a short cut to technology and international markets. Given this, the Chinese have an accute interest in maintaining their ability to make further acquisitions in the future. This means that the acquisition game will be iterated, forcing the Chinese to behave in ways that will not draw the ire of the US. I wouldn’t be surprised if the US attempts to use the Chinese acquisition of UNOCAL (and their subsequent behavior) as a signal of Chinese intentions. By coupling the acquisition in this way, the Chinese will be aware that all future decisions on acquisitions will depend on what the US learns about the Chinese and their intentions–e.g. do they intend to horde oil? to distort global market prices? to sell off pipelines? In turn, the Chinese will have an incentive to signal their benign intentions in order to undercut the more hawkish voices in the US. In any event, it will be interesting to see how this all turns out.
1 On the amorphous nature of the concept “national security”, see the excellent essay “National Security as an Ambiguos Symbol” by Arnold Wolfers in Discord and Collaboration (coincidently the inspiration for the name of my other blog)