With the U.S. running a current deficit of $176.4 billion, the Treasury is obsessed with attracting foreign money into the economy, ignoring the security risks this could create William Hawkins argues.
In early May, President George W. Bush asked Saudi Arabia to increase its oil production to meet rising global demand and lessen the upward pressure on prices. Riyadh responded with a minor increase of 300,000 barrels a day in June, which President Bush admitted was not enough. “Our problem in America gets solved when we aggressively go for domestic exploration. Our problem in America gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancing of alternative energies as well as conservation,” he said. Dependency on the generosity of foreign governments for resources vital to the United States is not an acceptable situation for the nation that is supposed to be the world’s leading power.
Even more humiliating than begging the Arabs for more oil, is begging them for the return of the money already paid for oil. On June 2, Treasury Secretary Henry Paulson was in Abu Dhabi doing just that. Speaking to the U.S.-UAE Business Council, he said, “Surging oil revenues have led to a massive accumulation of capital in the Gulf in a very short time. To put this in context, GCC [Gulf Cooperative Council] countries will provide about 18 percent of global capital exports in 2008, more than double their share just five years ago.” Paulson wants a lot of that capital to come back to America. With the U.S. running a current account deficit of $176.4 billion in the first quarter of 2008, the Treasury is obsessed with attracting foreign money into the economy to stay afloat in the sea of red ink.
Concerns in Congress and among the American people that there are negative consequences to selling off productive assets to finance consumption, including possible threats to national security, are not shared by Paulson. “Since coming to Treasury, and in the aftermath of Dubai Ports World, I have actively worked to ensure that the United States continues to benefit from open investment,” said the treasury secretary. “In fact, in the two years following DP World, the number of U.S. acquisitions by Gulf country investors rose by more than 100 percent and the combined value of those deals rose by more than 400 percent. Despite what the headlines may say, our investment review process has looked at just over 10 percent of the publicly announced acquisitions by Gulf investors, and all of those transactions were allowed to proceed.”
The incident that Paulson mentioned involved the sale of British-owned Peninsular and Oriental Steam Navigation Company (P&O) to Dubai Ports World (DPW), a state-owned firm in the UAE. P&O managed and operated in 22 U.S. ports. The sale had been approved by the Committee on Foreign Investment in the U.S. (CFIUS), a multi-agency group chaired by the Treasury that has the power to block or modify deals threatening American security. The Coast Guard had some concerns, and when the deal became public in February 2006, there was an outcry that shook Congress. Eventually, P&O spun off its American operations to a U.S.-owned firm to calm the controversy.
The DPW case was one of the factors leading Congress to strengthen and expand the CFIUS process by passing the Foreign Investment and National Security Act of 2007. This was the first major piece of legislation of the 110th Congress, passed unanimously in the House and by voice vote in the Senate. It placed particular emphasis on investigating deals involving state-owned firms or involved shifting control of infrastructure to foreign hands. Unfortunately, the law still left Treasury in the CFIUS chair, and President Bush confirmed Treasury’s dominant role in an executive order. These actions ignored a warning from the Government Accountability Office (GAO) that the process “in protecting U.S. national security may be limited because Treasury – as Chair of the Committee on Foreign Investment in the United States – has narrowly defined what constitutes a threat to national security.”
The other event that prompted Congress to reform CFIUS was when state-owned China National Offshore Oil Company attempted to acquire the Unocal energy firm in 2005. The House of Representatives passed a resolution against the deal, prompting Unocal to accept an offer from another American firm instead. The first successful test of the improved CFIUS process also involved a Chinese firm. Huawei Technologies tried to purchase a stake in 3Com, a U.S. firm that makes computer network security software for the Pentagon. When it became apparent in March that CFIUS was not going to approve the deal, due in part to objections raised by the Director of National Intelligence (who had been named as an advisor to CFIUS in the 2007 bill), the offer to buy 3Com was withdrawn.
But in an alarming turn, Treasury Special Envoy Alan Holmer told a Chinese audience on May 21 that new CFIUS rules had been issued by his department to “reinforce strong open investment principles” so Beijing should not worry unduly about future national security reviews! Speaking at Wuhan University, Holmer said, “We often hear concerns from China about the U.S. investment review process and whether the United States truly welcomes Chinese investment. U.S. legal authority in this area is narrowly targeted to address acquisitions that raise genuine national security concerns, not broader economic interests or industrial policy factors.” So the grounds for the GAO warning persist.
Also speaking recently in Beijing was Commerce Secretary Carlos Gutierrez. He called on China to invest more in the United States. “This $256 billion bilateral trade deficit is a problem,” he said, “It feeds the appetites of those who would build walls around our markets. In both our countries, there has been a rise of economic nationalism.” In China, economic nationalism has been central to rapid growth. It has declined in America, however, replaced by a corporate globalism no longer concerned with building, or safeguarding, U.S. capabilities.
Gutierrez cited Suntech Power Holdings as the type of foreign direct investment [FDI] he had in mind. This Chinese firm says it wants to manufacture solar power systems in America. But this is not the profile of the typical FDI enterprise. According to the Commerce Department’s Bureau of Economic Analysis, 92 percent of FDI in both 2006 and 2007 went to buy existing facilities. Meanwhile, the BEA reported on June 4 that annual foreign acquisition of the world-wide assets of U.S. businesses jumped by 72 percent in 2007, reaching $255 billion. FDI that simply buys up existing assets often eliminates American jobs and capacity as operations are consolidated with the foreign owner’s parent facilities. The American subsidiary then serves merely as a beachhead for importing more goods manufactured overseas.
This trend is so alarming that the BEA will no longer report it! As part of its June 4 report, the BEA announced, “In order to align its programs with available funding, BEA is eliminating the survey of new foreign direct investment in the United States … BEA will continue to collect extensive data on foreign direct investment in the United States, but it will no longer be able to separately identify the portion accounted for by investments in newly acquired or established U.S. affiliates.” The BEA is not trying to save money, but to save face for a trade policy that has piled one failure on top of another. Out of sight, out of mind.
In his opening statement to the 4th U.S.-China Strategic Economic Dialogue on June 17, Paulson said, “We will discuss the best way to promote and protect bilateral investment and to counter protectionist pressures.” A major result of the SED was the launch of negotiations for a bilateral investment treaty. Such an agreement could minimize CFIUS procedures and give Beijing a freer hand in the American market. Few can reasonably expect true reciprocity from the Chinese. It is expected that Beijing will exclude from talks any opening of its financial services sector, even though that has been a central U.S. objective.
The Joint U.S.-China Fact Sheet released at the end of the SED states that an Investment Forum “will focus on practical investor concerns, such as the process of investment reviews.” It also states that “the United States welcomes sovereign wealth fund investment, including from China.” Taken together, this is a promise to Beijing that the CFIUS process will be neutered, even when the Chinese government is directing the flow of capital.
Beijing has been using its surplus-generated cash to buy Treasury debt, rather than place FDI. This is the less dangerous course, and American policy should seek to contain Chinese capital within the public sector. Still, even this is not without risks. Writing in the Spring issue of the Army War College journal Parameters, business economists Felix K. Chang and Jonathan Goldman argue that China’s large block of Treasury securities gives it the power to disrupt U.S. financial markets. “No bombs need fall from the sky. Yet damage can be inflicted on the United States through market manipulation that would be as costly to recover from as any conventional attack,” they warn. Given that financial distress is already pushing the economy into recession, reducing America’s vulnerability to foreign pressure should be a high priority.
Disrupting markets would also be costly to Beijing, so a financial strike would depend on what larger strategic objectives were in play. A more “win-win” peacetime strategy for China would be to buy up productive assets to expand what its leaders call “comprehensive national power,” a melding of economic and military strength. As demonstrated by its past behavior, not only in the U.S. but world wide, its FDI targets are mainly natural resources and high-technology.
Beijing and Washington are geopolitical as well as economic rivals. In every world trouble spot, the U.S. and China are on opposite sides. Beijing has used the gains from trade and investment to strengthen its strategic capabilities. It has been foolish to allow China to amass its dollar hoard through an inattentive trade policy. It would be even more irresponsible to allow Beijing to use its money any way it pleases to support ambitions that are at odds with American strategic interests.
If the solution to curbing oil imports is more domestic energy production, as President Bush has said, then the solution to the trade problem in general – and the financial risks that flow from the deficit – is also more domestic production to replace manufactured imports as well.
William Hawkins is a Senior Fellow at the U.S. Business and Industry Council in Washington, DC.