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The U.S.-China Economic and Security Review Commission, a standing commission established by 22 U.S.C. § 7002 (2001) (the Commission) met on February 15, 2012, to discuss the unique policy challenges created by the growth of Chinese state-owned enterprises (SOEs) in the global marketplace. The Commission, which is co-chaired by Robin Cleveland and Michael Wessel, includes current government officials, business leaders, retired military officers and policy analysts. Panelists included practicing attorneys, academics, members of think tanks, members of policy groups and members of the U.S. House of Representatives.
There was broad agreement among the commissioners and panelists, who see serious challenges to U.S. economic and national security. The issues discussed included:
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transparency regarding the operations and finances of SOEs;
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alleged subsidies, including direct grants, access to low- or no-cost loans, and “market clearing,” (i.e., central government prohibitions on competition with particular SOEs, effectively ensuring a monopolistic revenue stream to the SOE);
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potential access to unfairly cheap component parts due to weak labor and environmental standards;
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currency policies favoring China’s exports;
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technology transfers from U.S. businesses to SOEs;
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allegations of IP theft and infringement; and
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allegations of cyberespionage.
A central issue addressed by the panelists involved the symbiotic relationship between the Chinese government and Chinese enterprises (both private and SOEs), and whether the policies implemented to promote so-called “national champions” in sectors of strategic importance undermine U.S. economic and national security objectives.
Other panelists urged a more nuanced understanding of intra-PRC policies, arguing that not all SOEs should be viewed alike, because the evidence does not bear out that most SOEs serve the policy agenda of the PRC (and similarly do not receive favorable treatment). The panelists noted that SOEs often are at odds with one another in intensely competitive domestic markets and face additional competition from local-government-supported business as well as private enterprises. It was noted that while some SOEs threaten the U.S. economy, any additional protectionist measures enacted by the U.S. too drastically would deter foreign investment in the U.S.
The commissioners and panelists discussed a wide range of options for U.S. policymakers to address the host of challenges SOEs pose to U.S. economic and strategic security. Regarding SOE investment in the United States, the Committee on Foreign Investment in the United States (CFIUS) was hailed as the “gold standard” of a depoliticized regulatory process. Currently CFIUS operates under a narrow mandate to review “control” investments in U.S. companies that own or operate “critical infrastructure” (each as defined in the CFIUS regulations). Panelists and commissioners generally agreed that a bolstered CFIUS (or CFIUS-like) review of transactions that may undermine economic security would address many of the threats SOEs pose to the U.S., although one panelist noted that the mere possibility of a CFIUS review deters a great deal of investment by foreign companies.
Other discussed methods of addressing issues posed by SOEs included:
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required reporting by SOEs seeking to invest in the U.S. coupled with continued monitoring of the SOE’s activity;
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enhanced SEC disclosure requirements by SOEs regarding the SOE’s relationship with the PRC, and the ability of the PRC to directly influence SOE operations;
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continued diplomatic pressure on Beijing by the U.S. and other nations;
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continued advocacy of the World Trade Organization in cases of unfair subsidies and illegal dumping; and
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continued pursuit of bilateral and multilateral trade agreements, including of the currently unsigned Trans-Pacific Partnership.
Commissioners and panelists noted that the U.S. is not alone in its concerns, emphasizing that Australia and Canada already have in place economic security review policies, which generally have been successful in balancing the need for foreign investment against the threat of unfair competition posed by some SOEs. In addition, several panelists noted that China itself could benefit from the economic rebalancing changes to its policies would bring.
The hearing highlights the political sensitivity surrounding inbound investment and reemphasizes the need for thorough legal, public relations and government relations planning prior to signing or announcing SOE transactions during an election year.
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