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China Inc. and the CFIUS National Security Review (Page 3 of 3)

Huawei’s troubles underscore how mounting U.S. concerns regarding Chinese cyber activities and critical infrastructure protection are spilling into the investment domain. Consider the recent acquisition of Sprint, the third-largest U.S. mobile carrier, by Japan-based SoftBank. As part of securing Congressional support for the transaction, both parties had to assure members of Congress that they would not integrate Huawei equipment into Sprint systems. CFIUS approval  was conditioned on a National Security Agreement that required the appointment of an independent member to the Sprint board of directors to serve as a security director – a position since filled by retired Admiral Mike Mullen. In the aftermath of the Sprint-SoftBank deal and on the heels of various derailed transactions, Huawei’s Executive Vice President announced at the company’s annual analyst summit: “[w]e are not interested in the U.S. market anymore.”

What is notable in the Sprint case is not just the parties’ agreeing to “mitigation measures” at the request of Congress – not CFIUS itself – but also that Huawei was not a party to the transaction under review. Thus, foreign firms seeking to invest in the United States will have to assess the target, as well as perhaps look over their shoulders to gauge how their suppliers are perceived in the United States. In addition to Congressional opposition, Chinese and other foreign firms will also need to be prepared for media campaigns by local competitors. In the Sprint deal, Dish, the U.S. satellite broadcaster, launched a full-throttle campaign, placing ads in the Washington Post and even launching a website citing the national security risks associated with the transaction.

5)    “These are pork chops.”

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As the tempo of Chinese investment increases, the highest note to date has been the acquisition by China’s biggest meat producer, Shuanghui International, of Virginia-based pork producer Smithfield Foods. Following the announcement of the deal, the question of whether CFIUS review was merited quickly arose. Smithfield’s CEO, Larry Pope publicly made his company’s case: “[we]’re not exporting tanks and guns and cyber security…These are pork chops.” Nonetheless, both parties prudently left little to chance. In addition to submitting to CFIUS review up front, the transaction was reportedly structured such that if the deal fell apart, Shuanghui would pay Smithfield a $275 million reverse break-up fee – a payment that would not have applied had CFIUS blocked the transaction.

Although CFIUS ultimately approved the deal, probing the key considerations it may have assessed is illustrative. Three potential CFIUS angles on the transaction may have arisen in a sector that, once again, does not fall in an explicitly identified sector of national security concern. First, food security might have been seen through the prism of critical infrastructure. The Department of Homeland Security, which sits on CFIUS, has defined 17 critical infrastructure sectors, including “Food and Agriculture;” CFIUS, however, has stated that it will assess which target assets fall within the critical infrastructure sector on a case-by-case basis, denoting only the energy sector as definitely constituting critical infrastructure. Second, Smithfield reportedly had been a direct supplier to the U.S. Department of Defense and civilian government agencies, perhaps drawing scrutiny as a vendor with access to potentially sensitive information regarding the locations and staffing of government facilities. Third, the proximity of any Smithfield facilities to military installations would likely have raised concerns.

In addition to CFIUS review, however, both parties had to navigate a restive Congress where a bi-partisan group of senators wrote a letter to the U.S. Secretary of the Treasury calling for the Department of Agriculture and Food and Drug Administration to participate in the review given that “food supply is critical infrastructure that should be included in any reasonable person’s definition of national security.” Smithfield’s response was that “the combined company will not import any product from China into the U.S. As a result, the proposed combination does not have any implications for the U.S. food supply.” Following on the letter, the Senate Committee on Agriculture announced its July 10 hearing in which Smithfield’s CEO testified as to why the investment was not detrimental to U.S. interests and mollify Congressional concerns.

Interestingly, the hearing occurred the same day as the Fifth US-China Strategic & Economic Dialogue. The treatment of Chinese investments in the United States arose not just in the confines of the Dialogue but in an op-ed published in the Wall Street Journal that same week by Chinese Vice Premier Wang Yang who pointedly noted that “expanding business ties have also led to disagreements and doubts” between both countries and that “some Chinese wonder why their country’s corporate investments in America have suffered setbacks time and again, even as the U.S. is actively trying to expand employment.”

Although the approval of the Shuanghui deal cuts against such concerns, a long-term source of confidence may prove to be a US-China bilateral investment treaty – negotiations for which were announced by U.S. Treasury Secretary Jacob Lew during the Dialogue. The treaty, according to the Wall Street Journal, “would give China a lot more clarity about the rules of the road, give it a way to appeal for compensation if a deal is blocked, and provide China something of an overall seal of approval.” For now, perils aplenty lie ahead in the negotiations.

Open For Business

While the above cases demonstrate a process that is largely working, room for debate exists on transparency, due process, and the scope of national security considerations. Some contend that the scope of CFIUS review should be expanded beyond national security; others are pressing for explicit new criteria relating, for example, to intellectual property. Still others have cautioned about “Washington’s tendency to define American national security interests unreasonably broadly.” The scope of review and what poses a national security risk will need to be continually calibrated yet more tailored guidance can help reduce misunderstanding and Chinese perceptions of discriminatory treatment and establish a standard by which U.S. companies will want to be treated given China is reportedly studying CFIUS in creating its own security review mechanism.

For now, the Smithfield deal weaves together key themes derived from the recent experiences of Chinese firms seeking to invest in the United States in potentially sensitive sectors: the mitigation considerations of Wanxiang; the proximity issues of Ralls; the Congressional opposition that CNOOC encountered; and evolving areas of national security concern as seen in Huawei’s experience. These factors are leading Chinese firms like Shuanghui to adapt their transactions and to proactively engage CFIUS and Congress to make the case for the merits of their investment, providing important transparency and inflows. While considerations unique to Chinese firms exist and friction will likely rise in tandem with Chinese investment and an evolving strategic dynamic, the United States is and should remain open for business.

Ziad Haider is an attorney specializing in CFIUS matters and Director of the Truman National Security Project’s Asia Expert Group. He served as a White House Fellow in the U.S. Department of Justice and as a national security aide in the U.S. Senate. Follow him on Twitter @Asia_Hand.

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