China Assails US Protectionism Before Dialogue

China is criticizing US protectionism, as revealed in its proposed regulations for overseas investment, shortly before the fourth Sino-US Strategic Economic Dialogue (SED) which is to be held next week.

The US Treasury is revising regulations of the Committee of Foreign Investment in the United State (CFIUS). If the proposals are adopted, CFIUS could launch investigations into any "change of control" in sensitive assets, regardless of whether the foreign investment is beneath the 10% threshold.

The proposals also encourage foreign minor equity investors, in order to avoid a national security review, to give up rights that might appear to give them influence in a company, such as seats on the board of directors or the right to hire or dismiss management.

China views these proposals with definite dissatisfaction. In a letter to the US Treasury, the Chinese Securities Regulatory Committee said the proposals left CFIUS with "excessive authority" and "too much room for interpretation."

The proposals are also being criticized by China’s Ministry of Commerce. "This discriminating provision apparently tilts toward investment protectionism and is tinged with the color of politicizing economic issues," it said.

CFIUS was present in Lenovo’s deal with IBM in 2005. It carried out a 45-day investigation, and eventually approved the acquisition. When the China National Offshore Oil Corporation bid for Unocal in 2005, CFIUS refused to vet the deal until it was approved by Unocal, essentially immobilizing the process until Congressional hostility forced CNOOC to withdraw its superior bid. It is also because of CFIUS that Huawei’s joint attempt with Bain Capital to acquire 3com was stymied. Now the proposed new regulations indicate economic protectionism is being reinforced in the US.

Some analysts in the US believe the proposals merely aim to beef up CFIUS’s investigative powers and are not at all protectionist measures, and that US Treasury Secretary Henry Paulson is going to have to explain that to China at the coming SED.

But China is not the only country to criticize these proposals. The UK and Germany also showed dissatisfaction. The British Insurance Association believes the proposed regulations to be a signal that the US is not opening sincerely to overseas investments. The German Representative of Trade and Industry said it could understand the concern of the US over national security, but the reinforcement of control over foreign capital will lead to discrimination and increase the costs of foreign investment.

China’s Ministry of Commerce warned Chinese firms in May that once the new Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons (Draft), implementing regulations of the Foreign Investment and National Security Act of 2007, were signed into law, it would directly affect the M&A activity by Chinese companies in the US.  It also collected responses of Chinese companies and conveyed them to the US government. But it did not directly name the protectionist trend of the new regulations.

At the June 9 WTO meeting held in Geneva to review US trade policies, Sun Zhenyu, China’s ambassador to the WTO, said the downturn in the US economy had led to domestic trade protectionism, which might threaten global trade and the multilateral trade system. He said WTO members were worrying about emerging US trade protectionism, using as examples the refusal by Congress to extend President Bush’s Trade Promotion Authority and its approval of new agricultural subsidies.

"The openness and transparency of the US trade regime have been key contributing factors to the efficiency that characterizes the US economy. In the face of economic uncertainty, US welfare would be best promoted by continuing to reduce barriers to market access and other distorting measures, including those that result from high levels of assistance in agriculture and energy," said the WTO Secretariat in a report on the trade policies and practices of the United States.

Henry Paulson said in a speech at the Carnegie Endowment for International Peace that increased openness to competition and international trade is critical for continued economic growth in the US, and that China and the US would discuss the best way to promote and protect bilateral investment and counter protectionist pressures during the forth SED.