Sen. Richard Shelby (R-AL) received a letter on March 23 from a gaggle of organizations representing the financial industry. The group included the American Bankers Association, the Bankers’ Association for Finance and Trade, the Investment Company Institute, the Securities Industry Association, the Bond Market Association, the Financial Services Forum, and the Financial Services Roundtable. They wrote in opposition to strengthening the Committee on Foreign Investment in the United States (CFIUS), a reform effort that Senator Shelby, chairman of the Senate Banking Committee, is leading.
CFIUS was created in 1975 to review the impact of foreign transactions on national security and the defense industrial base. Its powers were expanded in 1988 with the adoption of the Exon-Florio amendment to the Defense Production Act. Shelby’s concern that CFIUS is not being vigilant enough was triggered last summer when the state-owned Chinese National Overseas Oil Company tried to buy American-owned Unocal, which possessed oil reserves around the world that Beijing coveted. CFIUS has become more famous in recent months in the wake of the attempt by state-owned Dubai Ports World to gain control of several U.S. ports through the acquisition of the British firm Peninsular and Oriental Steam Navigation Company. CFIUS has the authority to block foreign takeovers of U.S.-based assets or mandate changes in the terms of any foreign acquisition if it affects national security.
The bankers and financiers want CFIUS to continue rubber-stamping all deals. The moneymen profit from making deals. The content and the consequences of the deals do not matter to them, nor do they care who is involved, so long as their checks clear. This self-centered, laissez-faire attitude is not how national-security policy should be made.
The bankers and financiers paid lip service to national security, of course, writing, “The Congress has rightly taken a strong position on the importance of national security concerns arising from international trade and foreign investment. The financial services sector shares Congress’ commitment to national security.” But the rest of the letter was an argument against actually doing anything to fulfill the commitment to security.
The core of the letter reads as follows: “We are concerned, however, that recognition of the beneficial role played by foreign investment in U.S. job creation and economic growth is being lost in the current environment. . . . These relationships have greatly benefitted America, with foreign companies employing nearly 5.3 million Americans, while bringing to the U.S. new ideas, technology, and innovative products and practices.” It would be hard to cram more misleading comments into such a concise statement.
Foreign direct investment (FDI) can create jobs for Americans, if it is used to build new factories, research labs, or infrastructure in the United States. But most FDI is used simply to buy up existing productive assets. Such takeovers can cost jobs as redundant positions are eliminated. For example, French-owned Alcatel has recently announced a “merger” with U.S.-owned Lucent Technologies. The resultant corporation will be 60-percent French-owned with a majority of French (or European) directors, and it will be headquartered in Paris. The Alcatel-Lucent combination is expected to lay off 8,000 employees, and most (if not all) are likely to be in the United States, as its French managers consolidate operations in their own country.
The famous Bell Labs is part of Lucent, so Alcatel’s purchase will also be an example of foreign finance being used to acquire American technology, not to infuse the U.S. economy with foreign innovation. This is almost always the case in defense capability, CFIUS’s area of concern. The United States spends five times as much on military research and development as do members of the European Union. As Richard Olver, chairman of BAE, Britain’s largest defense firm, told Defense News (February 25, 2005), “It’s obviously clear that the extent of R&D in the United States is a very different order of magnitude to the R&D investment in the rest of the world, including the United Kingdom. . . . so our first line of strategy is to have a bias to grow in the United States.” Why take the risk of investing in R&D when a firm can just wait and buy up the results later? The French are particularly keen on this strategy, with France’s leading defense-electronics firm Thales announcing last month a new campaign to acquire “second-tier” U.S. defense contractors.
If American firms tried to buy French firms in similar industries, they would be prohibited from doing so. Thales, for example, is one-third owned by the French government, whose “golden shares” would block any deal. Last August 31, Paris announced that it would protect from foreign buyouts firms in strategic domestic industries. French Finance Minister Thier-ry Breton stated that the country’s “very sensitive sectors” would be shielded from foreign bids. While the complete list of protected industries has not been made public, some information has leaked out. Telecommunications companies are on the protected list, so Lucent could not take over Alcatel. Defense, biotechnology, space technology, casinos, encryption, IT security, and some medical suppliers are also reportedly on the list.
Paris has openly opposed a takeover bid by the world’s largest steel maker, Mittal Steel (headquartered in India), for Europe’s Arcelor. And it has been accused by Rome of brokering a merger of two French firms, energy giant Gaz de France and the energy and environment services group Suez, to head off an anticipated takeover bid for Suez by the Italian firm ENEL. France’s turn toward protectionism follows a global pattern in which states are shielding their strategic industries from foreign rivals. It is time the United States got serious about protecting her technological and industrial preeminence and joined this trend.
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