The Danger of Politicized Foreign Investment Reviews

At their Sunnylands summit this week, President Obama and China's President Xi Jinping are sure to discuss American attitudes toward Chinese investment in the United States. The announced takeover of US pork producer Smithfield by China's Shuanghui has stirred a public debate about foreign takeovers in the United States. Not surprisingly, many Americans have squealed at the idea of a Chinese firm with its hands on their morning bacon. And some experts are calling for an expansion of foreign investment reviews beyond just national security to include a wide range of public policy goals including food safety or labor rights. However, such an expansion of US investment screening would do little to address existing concerns while opening the door to protectionist abuse.

The US framework for screening foreign acquisitions consists of two pillars: The Committee on Foreign Investment in the United States (CFIUS), which investigates national security risks; and the Department of Justice (DOJ) and the Federal Trade Commission (FTC), which control for potentially anti-competitive impacts. Everything else is left to domestic regulators, including labor rights, environmental protection or industry-specific rules. This approach has served US interests well in the past, but the Smithfield deal has rekindled an old debate about expanding the scope of reviews to include other questions as well, similar to Canada's "net benefit" tests. The reactions to the Smithfield takeover show that this would be a bad idea.

One key concern from proponents of expanded reviews is that Chinese ownership of a major meat supplier could harm food safety in the United States. America indeed has regular food safety scandals, and there is a case to be made for better regulation of US food chains. However, this has nothing to do with foreign ownership. Saying American food safety regulations (and other regimes) don't work well enough, so we should implement investment approvals is like saying the officiating in basketball is suspect so we should control who can own a team. Foreigners have to comply with US rules as soon as they set foot on US territory—which regulations those are should be a matter of domestic policymaking, not a foreign investment review board that lacks the expertise to make such calls.

Another argument is that the government must investigate the potentially detrimental economic impacts on the US economy, for example the transfer of technology or operations to China. Such an approach would copy Chinese-style industrial policy and give government officials power to decide which Americans can sell their property to the highest bidder. The case of Smithfield illustrates that setting rules for the marketplace and then trusting rational actors makes sense. For Shuanghui, doubling down on "Made in the US" brand value and local staff is a no-brainer. Smithfield's 2012 balance sheet shows "goodwill" and other intangible assets of $1.1 billion. If the new owners neglect to maintain quality assurance or move operations to China, it would quickly see those assets evaporate.

The United States should also not incorporate reciprocity requirements in investment reviews. The federal government needs to work on further opening Chinese markets to US firms, but threatening to take the American private sector hostage is not the right solution. If China foolishly intrudes on private sector dealings in its own economy, why should the United States do the same? American leverage comes from its competitiveness and the attractiveness of US assets, not from threatening to suspend the market economy until Beijing decides to do things the American way. China's newly elevated leaders are conceding that they need to move in our direction and liberate the private sector from government intrusion—the moment when Beijing comes around to the virtues of private enterprise is not the right time for America to step up government intervention.

None of this is to say that national security is not important. In fact, we think it is far too important to be comingled with deeply politicized domestic debates. The United States needs a strong national security review system that looks at real concerns—in the case of Smithfield those might include supply contracts to the US army, or geographic proximity to US critical defense installations. And there is room for improving the transparency and the process of CFIUS, which should be part of the debate in Washington and elsewhere. The economic and social concerns from foreign takeovers, however, are best handled by respective domestic regulators, who know their field and can make decisions based on rationality and expertise rather than political interests, be it competition policy, food safety, or labor regulations.