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Manufacturing is still critical to the economy United States. Clyde Prestowitz, says it's time to start realizing the positive spillovers that manufacturing creates... Read more  

Events & Activities

Stephen Olson at Chinese Development Institute Conference

 

 Clyde Prestowitz giving presentation to CDI...

 

Steve Olson teaching trade negotiations at the Mekong Institute...

 

Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

(07/09/05) Clyde Prestowitz quoted in The Chicago Tribune

(07/09/05) Clyde Prestowitz quoted in The Chicago Tribune
China's investment wave: Good or bad?
Chicago Tribune (KRT)
Copyright 2005 Chicago Tribune
July 9, 2005

China's investment wave: Good or bad?
David Greising
Chicago Tribune     

Jul. 9--A Chinese company's bid to buy Unocal Corp. seemed destined to stir up a storm in Washington. With China asserting itself as a global power, with oil topping $60 a barrel, the case was custom-made for controversy.     

If the government-controlled Chinese National Offshore Oil Co. succeeds with an $18.5 billion bid, which tops the price Chevron Corp. agreed to pay for Unocal by $2.1 billion, the matter will go to a little-known government entity that reviews proposed takeovers for their national security implications.     

It may sound like a daunting obstacle, but it has been surprisingly easy for many foreign companies to win approval from the government entity charged with reviewing foreign takeovers for national security risks.     

In the 17 years since it was created, the Committee on Foreign Investment in the U.S. has completed reviews of more than 1,500 foreign takeovers. Of those, it has forwarded only 12 for presidential review. And only one--a Chinese takeover of a Seattle aerospace parts-maker--was rejected, in 1990 by President George H.W. Bush.     

CFIUS was mandated in 1988 by Congress to examine the national security impact of foreign investment in the U.S. Headed by the treasury secretary, with major input from the Defense Department and Justice Department, the committee includes representatives from eight other executive agencies.     

One of the most controversial CFIUS cases involved Magnequench Inc., a company that supplies guidance magnets used in the U.S. military's precision-guided "smart bombs." CFIUS approved a Chinese consortium's takeover of Magnequench in 1995. Then, when the Chinese owners in 2003 shut down Magnequench's Valparaiso, Ind. production plant and moved equipment to China, CFIUS offered no response when Sen. Evan Bayh (D-Ind.) requested an inquiry.     

Bayh became concerned that the Chinese might corner the market on a sensitive military technology. Defense Department contacts informed his staff that Magnequench provided 80 percent of the guidance magnets used in smart bombs.     

Still, CFIUS refused to provide information about its Magnequench review despite requests from Bayh and from two key Senate committees: the Senate Armed Services Committee and the Senate Banking Committee, which oversees CFIUS, according to a former Senate aide who sought to contact CFIUS.     

"If the Chinese are on a mission to acquire a monopoly on these magnets, is that a good thing?" asked the former aide. "They were ending production in Indiana. We wouldn't want any single source out of the country. But out of China? That would be disturbing."     

Bayh wrote a letter to President George W. Bush noting that CFIUS had approved the Chinese purchase of Magnequench in 1995 and Magnequench's buyout of the Valparaiso plant, a former General Motors facility, in 2000. "The potential transfer of these operations to China raises new questions" about national security, Bayh wrote.     

Bayh received no White House response to the letter, his spokeswoman said.     

Anger in Congress over CFIUS' lack of response to the Magnequench queries has prompted a review by the Government Accountability Office, the congressional watchdog group. Sen. Paul Sarbanes (D-Md.) of the banking committee and Sen. Richard Shelby (R-Ala.) of the armed services committee requested the GAO review, which has been drafted but not yet published.     

The GAO first examined CFIUS in 2002 and criticized the committee for a lack of diligence. The review found cases in which companies did not file for CFIUS approval until after they had completed acquisitions. After CFIUS notified them of national security concerns, the companies merely withdrew their applications, did not promptly refile and went ahead business as usual.     

"Potential threats to national security, such as foreign access to export controlled technology, remained," the GAO report stated.     

CFIUS did enter into agreements with some acquiring companies that limited their access to technology or sought to protect the U.S. by other means. However, the GAO found, agreements could be vague. At least one contained no time frame for compliance, and another contained no penalties for non-compliance.     

The current GAO review will share many of the same criticisms, said Ann M. Calvaresi-Barr, the GAO's director of acquisition and sourcing management. "Many of the issues that we raised in the 2002 report still resonate," she said.     

Officials from the Treasury, Justice and Defense Departments filed letters disagreeing with the GAO's 2002 conclusions. The agencies are reviewing the new draft report now.     

Concerns about the Bush administration's response to China's investment in U.S. companies have been elevated by the fact that President Bush has not fulfilled a congressional mandate to report every four years on whether foreign companies or governments use acquisitions or industrial espionage to target critical technology companies.     

The only time an administration delivered such a report--in 1993 in response to a new requirement under the Defense Production Act of 1992--the Clinton administration did not even include China among the 12 countries it singled out for review. Taiwan was among the group.     

"This is a real failure on the part of the administration to carry out the law in this regard," said C. Richard D'Amato, chairman of the U.S.-China Economic Security and Trade Commission. Congress established the commission to examine the national security implications of economic dealings with China.     

Tony Fratto, the Treasury Department's chief spokesman, would not comment directly on the GAO report or the Magnequench case. But he defended the Bush administration's record in defending key technologies.     

CFIUS, in particular, is staffed adequately, has appropriate expertise, and takes its work seriously, Fratto said.     

"The members fully understand that their duty is to protect the national security of the United States. That's why CFIUS exists," Fratto said.     

Still, critics of CFIUS say the group is compromised politically and situations such as Magnequench show that it sometimes does not vet deals aggressively enough. Members of the U.S.-China Economic and Security Review Commission say CFIUS does an inadequate job, in part because the Treasury Department, which takes the lead on CFIUS matters, is particularly conflicted on deals involving China.     

The Treasury Department is responsible for funding the U.S. budget deficit, and it relies on China to purchase billions of dollars in U.S. debt each year. This makes the department reluctant to risk alienating China by blocking a government-backed takeover bid, these critics contend.     

"It seems to me there is a conflict in looking at an acquisition on national security grounds and then looking at the larger issue of how you're going to finance the budget deficit," said Patrick A. Mulloy, a member of the U.S.-China Economic and Security Review Commission.     

The Treasury Department's Fratto dismisses such concerns. "There is no validity to it. Treasury is part of the president's National Security Council. It plays a significant role in fighting terrorism and financial crimes. It is an economic policy department, but it also is a department with significant national security resources and takes that role very seriously."     

Todd M. Malan, executive director of the Organization for International Investment, which promotes foreign investment in the U.S., defended CFIUS' record. The group does thorough work, including field visits and background checks of key individuals, and assessments of sensitive technology, Malan said.     

"It's a full body search when they do these things," Malan said.     

The CFIUS review process has forced 13 companies to withdraw applications and not resubmit them, Malan noted. The group forced NTT DoCoMo to keep Americans on the board of a company it acquired. And the review of Lenovo Group's purchase of IBM's personal computing business this year prompted restrictions on access to certain IBM technology by employees who are not U.S. citizens.     

Still, CFIUS hurts itself by not offering more information about its activities, Malan acknowledges.     

"There could be a better system for reporting the CFIUS process, or better transparency to congressional committees or staff that has security clearances. Maybe those are concerns," Malan said.     

Some see the criticism of CFIUS as a sideshow to a bigger national security concern: the decline in U.S. leadership--and China's rising role--in key high-technology industries.     

The effort to acquire Unocal is raising hackles in Washington, where several congressional committees are planning reviews and a House resolution late last month asked the Bush administration to block CNOOC's bid. Even traditionally conservative organizations and free traders such as the Heritage Foundation have raised questions about the Chinese government's role in the bid for Unocal.     

While the Unocal bid is drawing much attention, the larger national security concern may come in the area of high technology, trade experts say.     

According to recent testimony before the U.S.-China Economic and Security Review Commission, the Chinese are pursuing a multipronged approach: technology transfers through foreign trade, from the more than 600 foreign-owned research and development centers in China, and through acquisition.     

The U.S. government is unprepared to measure the effect of China's efforts, the U.S.-China Economic and Security Review Commission reported in a June 29 letter to Congress. "Although China has recently made high-level breakthroughs in nanotechnology, computer chip and semiconductor design, satellites and supercomputing, the U.S. government does not currently produce an assessment of the implications of these advancements for China's overall technological development or its military growth," the commission reported.     

The commission recommends the creation of a new U.S. "competitiveness strategy," along the lines of the U.S. national security strategy. And its calls for an aggressive posture at the World Trade Organization aimed at reining in China's expansion.     

A February Defense Department report focusing on military access to high-performance microchips found that the shrinking U.S. production capacity, combined with a surge of production from China, Hong Kong, and Taiwan, is jeopardizing security. It "endangers the security of classified information embedded in chip designs," the report found. And it creates the possibility of "Trojan horses"--chips intentionally designed to malfunction in certain military applications, the report said.     

"There is real concern in the government about what the future sources of integrated circuits are going to be," said William Howard, chairman of the task force that studied the issue.     

Clyde Prestowitz, president of the Economic Policy Institute in Washington, said the concern over China's economic growth as a possible national security threat is a byproduct of the huge budget deficits and trade deficits that are putting the U.S. at a competitive disadvantage.     

"We're at odds with ourselves," said Prestowitz, whose new book, "Three Billion New Capitalists: The Great Shift of Wealth and Power to the East" details China's surge to power. "We're like a spoiled rich kid who realizes he's drowning in debt and doesn't like it."

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