Hill’s Folly

July 4, 2008 by Jonathan C. Movroydis | Filed Under Asia, International Affairs | Leave a Comment 

In his article in the National Review, James Rosen explains that in accepting North Korea’s partial declaration of its nuclear program, the Bush administration has capitulated to conditions less favorable than earlier proposed concessions dismissed by Undersecretary of State Christopher Hill:

Time and again, the top State Department official on the North Korean account, Assistant Secretary Christopher Hill, insisted the United States and its allies in the Six-Party talks would accept nothing less. “We can’t go with something that’s 80 percent or 90 percent,” Hill told reporters at the Okura Hotel in Tokyo this past January, when the deadline for the declaration’s submission had already passed. “We really need to go with something that’s complete.” “Frankly speaking,” Hill added at the Japanese Foreign Ministry, “a partial declaration is really no declaration at all.” Asked about the lapsed deadline, Hill exalted comprehensiveness over timeliness: “We felt it was better for them to give us a complete one and correct one even if it’s going to be a late one.” The following month, Hill reiterated, in testimony before the Senate Foreign Relations Committee, that “we cannot accept a declaration that is incomplete or incorrect.”

Half a year later, the declaration we have accepted is by all accounts far from “complete” or “correct.” First, it omits the number of plutonium-based bombs produced at the massive and aging reactor at Yongbyon, which the North Koreans, having tested a nuclear device in October 2006, have now begun to disable. Equally concerning, the declaration also fails to provide any data on two other key issues: the regime’s secret highly enriched uranium (HEU) program, which the U.S. intelligence community judges with “high confidence” to have existed, and with “moderate confidence” to be ongoing; and the North’s proliferation of nuclear technology to other state sponsors of terrorism. This latter issue came to the fore last September, after Israeli fighter jets destroyed a nuclear facility North Korean workers were building in the deserts of northeastern Syria.

If You Can’t Get Olympics Tickets

April 28, 2008 by John H. Taylor | Filed Under Asia, Nixon Library | Leave a Comment 

News of our upcoming ping pong diplomacy rematch.

Fear and Loathing at CFIUS

April 28, 2008 by Joshua Trevino | Filed Under Asia, China, International Affairs | Leave a Comment 

Cross Posted From Joshua Trevino.

This is an extended version of this piece, which originally appeared in the Wall Street Journal Asia on April 28th, 2008.

Japan isn’t the only place flexing its regulatory oversight of foreigners these days. Now, the U.S Treasury Department wants to look at transactions involving stakes of less than 10% of the acquired American company.

But before Treasury does that, how about first explaining the criteria bureaucrats use to weigh the transactions they already review? That step – so obvious that it’s surprising it hasn’t been done yet – would offer much greater benefits to U.S. and foreign companies and investors, not to mention the American economy overall.

The Committee on Foreign Investment in the United States, or CFIUS, has existed in its present form since the late 1980s. This intergovernmental panel is empowered to review any acquisition of more than 10% of a U.S. company by a foreign entity when the U.S. company does business important to national security. But only this year, on April 8, did Treasury, which coordinates CFIUS, announce it will release clear guidelines on how CFIUS conducts these reviews. That will likely happen sometime next month.

Meanwhile, CFIUS remains a regulatory black box, issuing contradictory rulings with abandon — and without meaningful explanation. Unfortunately, what explanation exists is too often nakedly political.

The political nature of CFIUS becomes especially stark when considering the China National Offshore Oil Corporation’s 2005 effort to acquire Unocal. The proposed acquisition was scuttled by vigorous political opposition within the United States that included the employment of CFIUS as a bureaucratic obstacle. CNOOC’s leadership grasped that American security concerns would have to be assuaged for Unocal shareholders to approve the bid, and so it voluntarily submitted to CFIUS review. Incredibly, CFIUS refused to conduct that review until after Unocal accepted CNOOC’s buyout. CFIUS’s withholding of review was a major factor in the erosion of CNOOC’s bid, which thus ultimately failed.

By contrast, during the 2006 fracas over the United Arab Emirates-based Dubai Ports World’s bid for port operations contracts within the United States, it approved the firm’s doomed bid. CFIUS was right in that case, but it’s notable that the argument against its decision had some objective merit on national-security grounds. The argument against the CNOOC/Unocal deal, by contrast, was more tenuous — and, troublingly, rests upon an assumption of China as a power hostile to the United States.

Major policy decisions should not be implicit, and certainly not in the hands of an inter-bureaucratic committee; and CFIUS should strive for consistency rather than present the appearance of politicization. It is difficult to avoid the conclusion that CFIUS approved the DP World deal because the American Executive branch supported it.

Meaningful reform would entail the promulgation of definitive rules for CFIUS’s authority and operations. Under current law (50 U.S.C. app. § 2170), the factors purportedly affecting CFIUS decisionmaking are sufficiently vague as to be easily subjected to the politicization already noted. The law requires the CFIUS to “consider among other factors,” “domestic production needed for projected national defense requirements,” “the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security,” and other similarly-worded criteria. With “national security” meaning nearly anything that a politician may wish it to, this must change.

A reformed CFIUS would restrict itself to the scrutiny of deals involving actual enemies of the United States — for example, states on the list of terror sponsors. Barring that, it would subject itself to judicial appeal, rather than operating as an economic Star Chamber with a capricious power over business and entrepreneurial life.

Until such a list comes out, expect more debacles like the thwarted merger between 3Com and Bain Capital, two American companies that wanted to merge with cash from Huawei, a Chinese firm that would have then owned a minority stake in the company. That deal failed last month when CFIUS refused its permission.

It is undeniable that 3Com is involved in the production of sensitive and advanced technology products. However, a Huawei minority stake under the proposed deal with Bain Capital would not meaningfully alter China’s access to those products. For starters, they are already freely available for purchase by private parties — and Huawei already participates in the manufacture of many of them. The 3Com facility in Hangzhou, China, at the Zhijiang Science Park, has operated under a partnership with Huawei for some time, to the apparent unconcern of CFIUS.

Were CFIUS genuinely concerned with foreign acquisition of critical national-security products, it would not have approved the 1995 sale of Indiana-based Magnequench, Inc., to a China-based consortium. Magnequench was and remains a key manufacturer of the rare-earth magnets needed for American precision munitions — and its entire production operation has since left Indiana for China. CFIUS apparently believes that 3Com’s routers, network intrusion-prevention systems, and network cards, available to any purchaser, are more vital to American security than actual advanced war materials whose sole market is the Pentagon itself. This is, to be charitable, a remarkable proposition.

Arguably worse than its rejection, though, is that CFIUS didn’t deign to tell the parties, or anyone else, precisely why it had rejected the deal. Given the costs involved, such an explanation was the least CFIUS could have done. Bain Capital shareholders are now out $66 million, which must be paid to 3Com as a termination fee for the deal.

Upon CFIUS’s scuttling of the deal, 3Com’s shareholders saw their company swiftly lose 12% of its market capitalization, with its stock dipping to its lowest level since the early 1990s. The prospects of the acquisition had driven 3Com’s total capitalization to approximately $1.8 billion in fall of 2007: as of this writing, it stands at about $960 million — barely half its prior value. That is a tremendous amount of havoc, in a few short months, for an unaccountable bureaucracy to wreak on an American company and its shareholders.

Indeed, that market reaction helps clarify exactly what is at stake here. America needs foreign trade and investment. By introducing an element of unpredictability into such trade and investment, CFIUS does more harm than good. And the problem appears to be getting worse just at a time when the U.S. economy appears to be wobbling and needs all the help it can get.

CFIUS defenders point to the potential threats to national security that would result from the sale to foreigners of a company manufacturing critical military technology. On its face, this is a good thing. Who wants an Iranian firm to purchase an American manufacturer of uranium centrifuges? Why should we allow a Venezuelan business to acquire American technical expertise that abets Caracas’s destabilization of Latin America?

Yet this noble-sounding purpose is confounded by the government’s failure to explain how it evaluates deals in practice. The number of “obvious” cases – an Iran buying centrifuges, say – is exceedingly rare. Among other reasons, this is because most of America’s post-Cold War state enemies are too poor to buy any American assets. So CFIUS does most of its work on “marginal” cases where there might be some grounds for concern but the potential threat to security interests isn’t clear.

And all too often those cases seem to get decided by politics. This should hardly be surprising, given CFIUS’ origins. The law creating the committee was passed in 1988 amid fears that newly wealthy Japanese companies were gobbling up America. Security concerns would hardly seem to have justified opposition to the bulk of those deals. Japan was then, and is now, a strong ally and a thriving democracy.

China presents a different situation. It’s neither a strong ally nor a thriving democracy. But given the history of CFIUS, the burden is still on the committee to prove that it’s making decisions that are rooted in national security rather than protectionism. The only way to do so, and take another step toward encouraging the foreign investment America needs, is for CFIUS to be clear and consistent about its standards.