(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?
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
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
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
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.
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
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
"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
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
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
"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
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,"
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
"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
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
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
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
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
"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
"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."