New Foreign Investment Scrutiny Pushed

Some congressional leaders are seeking tighter controls on foreign investment in the U.S. after the failed Chinese bid for Unocal, but business groups say such moves could scare away much-needed foreign funds.

The Senate Banking, Housing and Urban Affairs Committee will hold a hearing today to consider revamping the Committee on Foreign Investment in the United States, an obscure inter-agency group responsible for screening foreign investments for national security concerns.

Critics, prompted by fears over China’s recent forays into the U.S. market, argue that the group has failed to aggressively police foreign acquisitions that could undermine U.S. military or economic security.

The group never reviewed the proposed Chinese bid for El Segundo-based Unocal because the offer was withdrawn, in part because of the firestorm that erupted in Congress. Critics said the purchase would have put scarce U.S. energy resources and sensitive technology in the hands of a large state-controlled Chinese firm.

Sen. James M. Inhofe (R-Okla.) said Wednesday that the screening process was broken, leaving the nation “vulnerable to foreign threats.” He has proposed legislation that would require the group to report all of its transactions to Congress and would broaden the definition of national security to protect “sources of energy and other critical resources and materials.”

Inhofe also wants Congress to have the final say on any proposed foreign purchase. Under the current system, the foreign investment committee reviews any deal it considers potentially troublesome and provides a recommendation to the president for final action.

Congress established the committee in 1988, prompted by fears about the economic power wielded by oil-rich nations in the Middle East.

Experts on China warn that these tensions are certain to increase in the coming years, as that country’s biggest companies step up their search for natural resources, technology, distribution networks and markets. At the same time, the U.S. badly needs foreigners to help keep funding its deficits.

“Put it all together and there’s a huge momentum for acquisitions and a huge need for the U.S. to bring in cash or sell assets,” said Kenneth Courtis, vice-chairman of Goldman Sachs, Asia.

Sen. Evan Bayh (D-Ind.) was particularly disturbed by the committee’s decision in 1995 to approve a Chinese consortium’s takeover of Magnequench Inc., a company that supplied 80% of the guidance devices used to direct America’s “smart bombs.” In 2003, the owners closed Magnequench’s Indiana plant and moved the production to China.

Bayh’s concerns were bolstered last week when the nonpartisan Government Accountability Office released a report critical of the group. The report said the committee limited its scope to a “traditional and narrow” definition of national security, making it difficult to address broader concerns such as the preservation of technological superiority.

The report also said the committee was reluctant to initiate investigations or take other actions that would scare away foreign investors. The accountability office produced the report at the request of Bayh and Sens. Richard C. Shelby (R-Ala.) head of the Senate banking committee, and Paul S. Sarbanes of Maryland, the committee’s ranking minority member.

But the Organization for International Investment, a trade group representing U.S. subsidiaries of foreign firms, and other business groups strongly oppose the proposed changes. They said any additional restrictions would raise the cost of investing in the U.S., scare away foreigners fearful of getting caught in political battles and trigger retaliation against U.S. investors in other countries.

Such a move could also increase U.S.-Sino tensions if China believes it has been labeled an “enemy of the United States,” said Robert Kapp, a business consultant and former head of the U.S.-China Business Council, a Washington trade group.

Treasury spokeswoman Brookly McLaughlin said the accountability office report revealed a “fundamental misunderstanding of how CFIUS operates.” She said the screening process was “rigorous and expeditious.”

Of the more than 1,500 acquisitions the committee has reviewed, only one -- a Chinese purchase of a Seattle aerospace firm -- was turned down. But the committee often requires firms to make substantial changes before a deal is approved.