THE WASHINGTON FACTOR : Approval Is Expected for McDonnell Deal

Although McDonnell Douglas’ proposal to sell 40% of its commercial airline business to Taiwan investors has set off alarm bells on Capitol Hill--with 30 senators asking President Bush to intercede--experts said Wednesday that it will probably win relatively easy approval from the Administration.

Blocking the deal would be inconsistent with the Bush Administration’s free-trade ideology, experts said. Also, the fact that the Taiwanese investors are seeking a stake only in McDonnell Douglas’ commercial aircraft business--and not more sensitive military operations--will probably make it easier to win approval, said Joseph F. Dennin, a former assistant secretary of commerce who now practices trade law in Washington.

“I don’t see any immediate problems,” Dennin said. “At the end of the day, I think this is something that will probably gain approval.”

But in the eyes of critics, the fact that this historic deal is likely to sail through only underscores the deficiencies and limits in the process that the government uses to evaluate major foreign investments in this country.

“It raises troubling economic security concerns,” said Rep. Mel Levine (D-Santa Monica), the author of legislation that would significantly expand the government’s role in scrutinizing foreign investment. “I’m bothered by the idea that we are selling a substantial part of a critical industry at what appears to be a bargain-basement price without meaningful review.”

Under a 1988 law, a controversial interagency group known as the Committee for Foreign Investment in the United States (CFIUS) was elevated from merely monitoring foreign investments to actually reviewing them to determine whether they pose a threat to national security.

Once it is notified of a major foreign investment, the committee, chaired by Treasury Secretary Nicholas F. Brady, has 30 days to make an initial review. If it finds grounds for concern, it undertakes an investigation of as many as 40 days. And if those doubts are still not put to rest, the decision goes to the President’s desk, where he has 15 days to make a final determination.

A number of laws come into play along the way. Under the Defense Industrial Security Program, for example, foreigners are allowed to own classified information and technology, but not to have access to it. Thus, the company must assure the government that adequate “walls” are in place.

It also must guarantee that it will honor U.S. export control laws, so that sensitive technologies will not end up in the hands of countries that are deemed dangerous. The Pentagon can block the deal if it would put the sole source of any defense components in foreign hands. And the Justice Department will look at the firm’s market share to determine whether the deal poses a potential antitrust problem.

Edward Graham, a research fellow with the Institute for International Economics, expressed doubt that antitrust concerns would play much of a role in the decision. In fact, he noted, it could easily be argued that the deal will enhance competition if it keeps McDonnell Douglas in a commercial market that otherwise would be dominated by Seattle-based Boeing and Europe’s Airbus Industrie.

But Levine and other critics contend that the real problem is that CFIUS acts as little more than a rubber stamp, because the Bush Administration is ideologically committed to unfettered trade. “This Administration draws no lines,” Levine said.

Of the 650 notices that have been filed before the committee, 13 have been subjected to the 45-day investigation. Nine of those were sent to the President, who blocked only one, involving a Chinese acquisition.

Levine has urged that, in a world where the military threat is fading and economic security concerns are growing, the government’s definition of what undermines this nation’s security should be broadened. His legislation would require the government to take into account the question of whether this country’s “critical technologies” are threatened by foreign investment.

He is also seeking to insert language in the Defense Production Act that would require the government to help companies deemed vital to national security find U.S. partners when they need new capital.

But the Administration insists that the law is working well. At a time when foreign investment in this country has dropped sharply, officials say, it should be welcomed in most cases.

“The government should be reluctant to contemplate new restrictions or new burdensome regulations on foreign direct investment for national security purposes,” Assistant Treasury Secretary Olin L. Wethington testified earlier this week before a Senate subcommittee. “To do so risks causing investment to go to other countries at a time when domestic saving falls short of our investment needs.”