AMERICA’S LEGISLATIVE LEADERS SPENT a good deal of time last week discussing what to do about “undesirable” foreigners. Illegal immigrants were the main target. The Senate and House so far are diverging widely on whether it is best to keep them in or throw them out. Since doing the first defies angry voters and doing the second defies implacable economic forces, it is not going to be an easy decision.
Rather quicker progress looks likely, however, on halting the other invasion that has the Lou Dobbs crowd steamed up–supposedly unscrupulous foreigners who want to buy U.S. companies. Richard Shelby, the chairman of the Senate Banking Committee, has proposed a bill that would significantly tighten the rules under which foreign takeovers are approved by regulators. It looks likely to gain widespread support in both the House and the Senate.
That’s hardly surprising. The political cost-benefit analysis of cracking down on foreign takeovers can be done in seconds, without pencil and paper. While even the hardest-hearted of immigration foes can be made to feel a bit queasy at the sight of half a million illegals and their families on the streets of Los Angeles, no one is going to get upset when British corporate lawyers, Swiss drugmakers, or Arab sheikhs are denied access to their acquisition targets.
Which is a pity. Because the law that Congress seems likely to pass could end up doing damage to the U.S. economy. Shelby’s proposal takes the sledgehammer of congressional oversight to a foreign investment review process that has served the country well for decades. The idea emerged from the collapse of the ill-starred effort by Dubai Ports World to buy six U.S. ports as part of its acquisition of a British shipping company. Fulminating at this surrender of U.S. infrastructure to untrustworthy Arabs, congressional foes identified a once obscure but now eagerly demonized interagency committee called CFIUS as the culprit and vowed “reform.”
The Committee on Foreign Investments in the United States is, as everyone now knows, the body tasked with reviewing takeover bids for U.S. companies that might have implications for American national security. Despite the rhetorical shellacking it took over the Dubai deal, CFIUS is a serious, deliberative process that considers, on their merits, the implications for U.S. security of potentially sensitive mergers.
Its congressional critics note that CFIUS has rejected only one bid out of thousands it has considered and deem it a soft touch. But that ignores the fact that really dubious takeover proposals do not get as far as CFIUS, but are sniffed out much earlier. If the government of Yemen made a bid for Lockheed Martin, you can safely bet the cost of an F-16 it would not get near a CFIUS review.
Indeed, for almost 20 years since it was established by the Exon-Florio Act, CFIUS has quietly managed to do its business without noticeably compromising the security of the United States. But Shelby, a few of his Republican colleagues, and almost all congressional Democrats are dissatisfied. They want the category of companies that are subject to the CFIUS process to be dramatically expanded–from defense contractors, satellite communications companies, and the like to everything from food producers to banks.
They would also greatly expand Congress’s own role in reviewing foreign investment. Though Shelby stopped short of Sen. Bill Frist’s proposal to actually give Congress a veto over takeovers, lawmakers would be involved in the process at a much earlier stage.
This politicization of the foreign investment process can have no good consequences. Many of the takeovers of U.S. companies that would be reviewed under the new rules are contested bids, often with an American company also in the running. Hand the approval process on those over to politicians seeking reelection, and you guarantee outcomes that will not serve the interests of American consumers, businesses, or taxpayers.
The United States now runs a current account deficit of more than $700 billion a year. There is nothing, despite the whining of some economists, intrinsically objectionable about that: Indeed, it reflects the openness of the U.S. economy and its superior attractiveness to international investors. But it does have to be financed from somewhere.
In an ideal world, foreign direct investment would supply much of that needed funding. It is longer-term and more stable than foreigners’ purchases of equities or debt, making the U.S. borrower less vulnerable to sudden shifts in the appraisals of international lenders. What is more, it creates jobs, and, as the Organization for International Investment in Washington has documented, these foreign-created jobs are generally much better paying than jobs with domestic U.S. companies.
The U.S. economy’s great success over the last 20 years is owed primarily to the triumph of free markets. Deregulation at home and, crucially, the embrace of free trade and free capital movements has opened up competitive pressures, driving down costs and raising productivity.
And yet, at key moments in the nation’s history, the temptation to fiddle with those free markets has proved too much for politicians. Whether it was slapping on protectionist tariffs in the Smoot-Hawley Act just as the Great Depression was getting started, or saddling business with billions of dollars in costs from Sarbanes-Oxley after the 1990s equity bubble collapsed, Congress has been a past master in undermining American prosperity and competitiveness. Closing American markets and companies in the name of national security would be another costly error.
Gerard Baker, U.S. editor of the Times of London, is a contributing editor to The Weekly Standard.
