Defense industry protection

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The Chinese National Overseas Oil Co. attempt to buy the American oil company Unocal had a happy ending, with Chevron winning control instead. But Congress is reviewing how foreign takeovers of U.S. firms are monitored and regulated.

Oct. 6, the Senate Banking Committee held a hearing on the Committee on Foreign Investment in the United States (CFIUS), a little-known group created by a 1975 executive order to review foreign transactions' effect on national security and the defense industrial base. Its powers 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 Advisers, Office of Management and Budget, and the Office of Science and Technology Policy.

Like all bureaucracies, CFIUS has tended to grow as agencies expand their turf. CFIUS started with 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, Oklahoma Republican, has proposed legislation shifting the CFIUS chair to the Pentagon, to ensure 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 U.S. economy. If foreign consumers will not buy enough American products, 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 were investigated and only two sent to the president for action.

This inattentive record prompted Banking Committee Chairman Richard Shelby, Alabama Republican, 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." Mr. Shelby was unhappy that Treasury sent no one to testify, which lent credibility to his argument 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 U.S. historically has often found itself unprepared for war, 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 Defense and Commerce departments share authority over the defense industrial base.

The DPA has come up for preauthorization twice during the Bush administration, in 2001 and 2003. The OMB 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, Defense Undersecretary 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, Ms. Patrick launched her own probe into how mergers and acquisitions affect the defense industry to make sure we are not "inadvertently giving away our capability."

The GAO revealed its new study of CFIUS at the Oct. 6 hearing. Its main recommendation was to expand the time for CFIUS review and investigation of acquisitions from the standard 30 days to the full 75 days allowed by current law. Yet even this modest reform was opposed by a coalition of business groups (Chamber of Commerce, National Association of Manufacturers, Securities Industry Association, et al.) opposed to any, even national security, constraints on private enterprise.

In a letter to the Senate committee, these special-interest groups argued "amendments are unnecessary" to the present CFIUS process -- the best evidence the system is not working.

China's ambitions are not the only concern. Europeans have been very aggressively buying American technology firms to gain their secrets. Acquisitions often are sought to improve the chance of landing Pentagon contracts that would move more military procurement overseas and out of the DPA's reach or beyond U.S. weapons policies.

In a dangerous world, America cannot allow its defense industry to either wither away or become the prey of foreign rivals. If CFIUS is not up to protecting the economic base of U.S. military superiority, Congress must strengthen the system.

William Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council.