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Reform CFIUS to Stop Foreign Raiders from Dismantling the Defense Industrial Base
William R. Hawkins
Friday, October 21, 2005
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William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.
Strong statements by Members of Congress in both chambers, and a vote in the House of Representatives had much to do with persuading the board of directors of Unocal to accept a takeover by Chevron rather than by the Chinese National Overseas Oil Company.  On June 30, the House adopted H.  Res. 344 stating that “a Chinese state-owned energy company exercising control of critical United States energy infrastructure and energy production capacity could take action that would threaten to impair the national security of the United States.” This resolution passed 398-15, sending a clear message.  The Unocal story had a happy ending, but the system by which foreign takeovers of U.S. firms are monitored and regulated remains a failure..  There is hope that Congress will continue its oversight role and push forward with reforms.  

On October 6, the Senate Committee on Banking, Housing and Urban Affairs held a  hearing on the Committee on Foreign Investment in the United States (CFIUS), a little known group created by executive order in 1975 to review foreign transactions in respect to their impact on national security and the defense industrial base.  Its powers were expanded in 1988.  CFIUS is a rather unwieldily organization with 12 members: the Cabinet departments of Treasury, Commerce, Defense, Homeland Security, Justice, and State; and six from the Executive Office of the President, the U.S. Trade Representative, National Security Council, National Economic Council, Council of Economic Advisors, Office of Management and Budget, and the Office of Science and Technology Policy.  Like all bureaucracies, CFIUS has tended to grow over time as agencies expand their turf.  CFIUS started with only four members: Defense, State, Commerce and Treasury.  With so many diverse constituencies represented, CFIUS has lost its focus.

The most problematic aspect is that CFIUS is chaired by Treasury.  Sen. James Inhofe (R-OK) has proposed shifting the CFIUS chair to the Pentagon, to assure that national security is its priority.  Treasury’s main concern is to support the dollar and maintain stability in financial markets.  It thus favors anything that recycles the U.S.  trade deficit back into the American economy.  If foreign consumers will not buy enough American products, then foreign investors must be able to buy American productive assets to bring the dollars back home.  Of 451 acquisitions referred to CFIUS between 1997 and 2004, only eight investigations were conducted and only two cases were sent to the president for action.  

It is this inattentive record that prompted Banking committee chairman Sen.  Richard Shelby (R-AL) to declare at the hearing, “We have enough insight...from anecdotal information emanating from press accounts of individual cases, GAO reports dating from 1992, and Committee research, to hold firm the belief that improvements to the current system are warranted.” Sen. Shelby was not happy that the Treasury failed to send anyone to testify, which lent credibility to his argument that the process “is too opaque to allow for the appropriate level of congressional oversight into a process established by Congress with passage in 1988 of the Exon-Florio amendment to the Defense Production Act.  That is why Congress has repeatedly tasked its investigative arm, the Government Accountability Office, to conduct studies on this subject.”

Because the United States has found itself unprepared for war so often in its history, the Defense Production Act (DPA) was adopted in 1950.  The DPA allows the government to require any U.S.  entity to accept and give priority to contracts or orders deemed "necessary or appropriate to promote the national defense" defined very broadly.  The departments of Defense and Commerce share authority over the defense industrial base.

The DPA has come up for preauthorization twice during the Bush administration, in 2001 and 2003.  The Office of Management and Budget endorsed preauthorization in 2001, including the president’s power to “suspend or prohibit a foreign acquisition of a U.S. firm when that acquisition would present a threat to the nation's security.” In 2003, Undersecretary of Defense for Industrial Policy Suzanne Patrick told the Banking committee, “A strong domestic industrial and technology base is one of the cornerstones of our national security....  The authorities in this Act continue to be of vital importance to our national security.” Last spring, Patrick launched her own probe into how mergers and acquisitions are impacting the defense industry to make sure we are not "inadvertently giving away our capability.”

The GAO revealed its new study of CFIUS at the October 6 hearing.  Its main recommendation was to expand the time available to CFIUS to review and investigate acquisitions, from the standard 30 days to the full 75 days allowed under current law.  Yet even this modest reform was opposed by the usual suspects -- the Chamber of Commerce, National Association of Manufacturers, Business Roundtable, et al., objecting to any constraints on foreign commerce, even for reasons of national security.  In a letter to the Senate committee, these special interest groups argued that “amendments are unnecessary” to the present CFIUS process.  Since this coalition does not want the system to work, their endorsement of the status quo was the best evidence that the system has failed.  

China’s ambitions are not the only concern.  Europeans have been very aggressive in buying American technology firms to gain their secrets.  Often, acquisitions are sought to improve the chances of landing Pentagon contracts that would move a larger share of military procurement overseas and out of reach of the DPA, or other policy decisions affecting weapons programs.  In a dangerous  world, America cannot allow its defense industry or other high-tech productive assets to either wither away or become the prey of foreign rivals.  CFIUS as it currently operates is not up to the task of protecting the economic base upon which U.S. military superiority depends, and it does not seem willing or able to reform itself.  It is up to Congress then to strengthen the system, and it must act as soon as possible to do so.

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.