Deborah Solomon reports that a number of countries are increasing legal and bureaucratic obstacles to foreign direct investment (FDI) [Wave of Protectionism Gains Force. U.S. Frets as Nations From China to Canada Curb Foreign Investment, WSJ, July 6] .
She notes that while there hasn't been a disruption of FDI yet (and in fact it appears to have been growing in 2005 and 2006),
...there has been a noticeable tightening. The U.N. conference found that in 2005, the most recent year for which data are available, "the number of changes making a host country less welcoming to FDI was the highest ever recorded by Unctad." In that year, 93 countries made policy changes related to foreign investment, with 20% ranked as "less favorable" to foreign investment, up from 14% in 2004.
The UN source appears to be the World Investment Report 2006 .
Among other reasons for the increasing interest in restrictions: (a) the example set by the U.S. in the Dubai Ports World and CNOOC controversies, and the reworking of the CFIUS process; (b) the large amounts of foreign exchange in the hands of East Asian and OPEC countries; (c) general backlash against globalization.
One interesting twist - some countries ostensibly try and duplicate the U.S. CFIUS process, while adding in "economic security" elements that the U.S. process doesn't contain:
Some countries -- including China -- aren't just emulating the U.S. by screening proposed foreign investments for national-security conflicts, but also are evaluating deals on "economic security" grounds.
"A number of countries have put the world on notice that they are putting in place measures that are supposed to emulate CFIUS. However, it is pretty clear that these processes go a step beyond by creating what is akin to a screening process that looks widely at industries as opposed to a national-security process that looks narrowly at risks of specific transactions," says Clay Lowery, acting U.S. Treasury undersecretary for international affairs.
The special interest enthusiasm radiating from this Korean newspaper story gives you a sense of the thing:
Business groups have teamed up with labor organizations to promote a Korean version of the U.S. Exon-Florio Act to protect key domestic industries from foreign takeovers. The two sides have formed an organization that aims to sway public opinion and lobby to pass the bill in this extraordinary session of the National Assembly. It's the first time business and labor have joined hands to form an interest group for a specific purpose.
The Exon-Florio Act was passed in 1988 to limit foreign investment in the U.S. Under the act, the president can restrict foreign investments in U.S. companies when there is evidence that it might allow foreign interests to harm the national security....
Labor and business groups... met to inaugurate a protective body for key industries, which was tentatively named the National Key Businesses Protection Policies Promotion Team...
General Secretary Choi of the UNI Korean Liaison Council said, "Labor and business circles have joined hands to prevent the harmful impact of foreign speculative capital. We will make an unwavering effort to pass the bill in the extraordinary session of the National Assembly this month."
[Biz, Labor Groups Come Together to Protect Industries (Chosun Ilbo, June 8); I not sure they've got the spirit of the thing... (Ben Muse, June 17)]
There have been many attempts to add "economic security" elements to the CFIUS process over the years, and these have always been rejected. Edward Graham and David Marchick provide a fairly complete history of these efforts in their study of the operation and evolution of the CFIUS process, U.S. National Security and Foreign Direct Investment (Peterson Institute, 2006, complete text can be read online).
They also explain why introducing these considerations is a bad idea:
- an "economic security" test would undermine the U.S. policy of openness to foreign direct investment ("...considering the economic security effects of an investment would create a broad-based investment review regime in the United States for virtually any significant foreign investment.."). And other countries would imitate us;
- economic security would be difficult or impossible to define, and would create additional handles that could be exploited by domestic firms eager to deter foreign competition (that's where the Dubai Ports World controversy came from by the way - Countdown to controversy: Dubai Ports World, March 6, 2006 );
- it would lead to increased politicization of the CFIUS review process, as domestic companies deploy arguments that a proposal's negative employment effects in a congressman or Senator's constituency pose a threat to U.S. economic security;
- the new criteria are likely to run foul of other U.S. treaty commitments, including bilateral investment treaties (BITs), treaties of friendship, commerce and navigation (FCNs) and free trade agreements (FTAs). BITs, for example, include national treatment commitments "under which the United States has agreed to accord investors from the other party 'treatment no less favorable than it accords, in like circumstances, to its own investors," although these provisions are qualified by national security - not economic security - exemptions.
Pages 172-173.
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