May 31, 2013

Robert Herzstein was undersecretary of commerce for international trade in the Carter administration and had responsibility for assisting U.S. companies to open trade with China in 1980. In law practice he represented Fairchild and Fujitsu in the acquisition attempt that gave rise to the Exon-Florio amendment governing foreign investment in the United States.

Although it shakes some revered traditions, the acquisition of Virginia-based Smithfield Foods by a Chinese company does not, on its face, seem to jeopardize critical U.S. interests. But this transaction poses real threats — and no U.S. government agency has the responsibility to explore those risks and, if necessary, to stop or regulate the transaction.

Foreign investment in the United States has helped build our infrastructure and develop our resources since the 19th century, and in recent decades, U.S. companies have reciprocated with major investments abroad. A 2007 presidential statement on open economies proclaimed that “our prosperity and security are founded on our country’s openness.”

A limitation on this policy was established about 25 years ago, after Congress was alarmed by the potential acquisition of a major chip manufacturer, Fairchild Semiconductor, by the Japanese electronics company Fujitsu. Although that deal fell apart in the face of adverse comments by the secretaries of defense and commerce, Congress passed an amendment to the 1988 Omnibus Trade and Competitiveness Act authorizing the president to prohibit any future foreign acquisition that “threatens to impair the national security of the United States.”

Smithfield has said it is voluntarily submitting the $4.7 billion deal for review by the Committee on Foreign Investment in the United States, the federal panel responsible for ensuring that national security interests are not harmed by foreign acquisition of U.S. assets. It could, of course, be a stretch to conclude that Chinese ownership of Smithfield, the world’s largest pork producer, might impair U.S. national security. But this case underscores the need for Congress to expand the president’s authority to examine the impact of foreign acquisitions on U.S. interests other than national security.

Since Congress passed the Exon-Florio amendment in 1988 granting that presidential authority, the global economy has evolved to the point where each of the world’s major economies can affect the welfare of others in critical ways that would not be conventionally viewed as national security. Among the issues at stake here (some of which were noted in The Post’s initial reporting on the deal):

●Food safety: Will health standards at Smithfield be undermined when the company is controlled by Shuanghui International, which closed a plant after reports that its pigs were fed a chemical that makes the meat lean but sickens humans? U.S. food regulations would continue to apply to Smithfield’s operations in the United States, but such oversight is notoriously spotty. Much of our regulation of food companies and other enterprises depends on voluntary compliance, not just enforcement. Reports of egregious food adulteration in China suggest a culture where companies have little concern for safety and health standards.

●Technology transfer: Shuanghui is expected to use Smithfield’s animal gene technology in its production in China, potentially displacing the export market for U.S. pork products in that country and perhaps, in a few years, reversing the course of trade. Meanwhile, U.S. companies seeking to invest and sell in China’s state-dominated economy have been forced to share their intellectual property and manufacturing and marketing know-how with Chinese competitors.

●Reciprocal investment and market opportunities: U.S. firms seeking to operate in China face additional demands, including sharing ownership with state enterprises or including local firms in their supply or distribution chains. Sometimes they must make other formal and informal deals and concessions. Yet Chinese investors in U.S. companies, such as the businesses that acquired the AMC movie theater chain and IBM’s personal computer business, operate free of such demands in an open market governed by transparent rules.

The United States and other Western nations that rely on open trade and investment badly need leverage to induce China — with its enormous state-dominated economy, vastly different business culture and potentially adverse strategic interests — to give up its protectionist practices and assume greater responsibility for the health of the global economic system. One of their few sources of leverage comes via regulation of China’s opportunities for investment in open-market Western nations. The world has changed enormously since 1988. The Exon-Florio law should be broadened to account for the new ways foreign investment can affect U.S. interests and the global economic system.

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