Saturday, October 6, 2007

Treasury Secretary Henry Paulson made the right decision by recusing himself from a government review of the merger between 3com, a U.S. network-equipment maker, and a Chinese company with links to Beijing’s military. Given his position as a former chairman and CEO of the investment firm Goldman Sachs, which is advising 3com on the $2.6 billion deal in which Huawei Technologies and Bain Capital Partners assume control of 3Com, it would have been a serious mistake for Mr. Paulson have any involvement in the review of the sale by the Treasury Department’s Committee on Foreign Investment in the United States, which must review whether this very problematic merger would jeopardize national security.

Pentagon officials have expressed skepticism that the Treasury committee would block the deal because 3Com is being advised about the merger by Goldman Sachs. Critics also point out that Mr. Paulson has aggressively promoted trade with that Communist-ruled nation. A senior administration official told this newspaper that in one meeting with Chinese officials, Mr. Paulson included a Goldman Sachs executive in the delegation, causing the Chinese officials to wonder whether “they were talking to the Treasury secretary or to Goldman Sachs.” Beyond Mr. Paulson’s former ties with the company, White House Chief of Staff Joshua Bolten is also a former Goldman Sachs executive.

Treasury’s committee needs to take a careful look at this merger, because what is already known about the deal is deeply troubling. The firm in question, Huawei Technologies, has been linked to illegal high-tech exports to Saddam Hussein’s regime and the supply of telecommunications equipment to Taliban-ruled Afghanistan. Huawei wants to join with 3Com, which provides the Pentagon and the Army with intrusion-detection equipment to keep hackers out. The deal follows a July computer attack on the Pentagon that U.S. intelligence officials say involved Chinese military hackers who were found breaking into (among other things) a system close to Defense Secretary Robert Gates.

Huawei, founded by a Chinese military officer in 1988, got its start building military communications networks. “Huawei is up to its eyeballs with the Chinese military,” a Pentagon official told Bill Gertz of The Washington Times. A second Pentagon official said the deal is taking place at a time when the Pentagon has mounted an aggressive effort to stop computer intrusions from Chinese hackers and spies: “And now we are proposing to sell the PLA [the People’s Liberation Army, as the Chinese military is called] a key to our front door. This is a very dangerous trend.”

The important question now is whether a new review process instituted in the wake of last year’s bitter debate over the attempt by Dubai Ports World to manage six U.S. seaports will work. Some Pentagon officials express skepticism that the Defense Technology Security Administration, the office in charge of Treasury committee issues, is up to the job. And there are legitimate questions whether the Treasury Department, which has as a primary mission promoting commerce and the free flow of capital, is the best agency to oversee the committee. The 3Com-Huawei merger calls for deliberate scrutiny.

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