Following Up: A Big China-Related National Security Hole May Get Plugged, and Trade Derangement Syndrome Keeps Spreading

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CFIUS, China, Committee on Foreign Investment in the United States, consumers, East Asia-Pacific, Following Up, foreign direct investment, LG Electronics, manufacturing, Samsung, South Carolina, tariffs, technology, Tennessee, Trade, washing machines

Yesterday alone produced a news item that provides important grounds for hope that America’s policy toward China might finally be getting coherent, and one that shows that Mainstream Media coverage of international trade issues remains almost determinedly brain-dead. And conveniently, both items concern developments recently reported on by RealityChek.

The first came in The Wall Street Journal, and describes some important new provisions in legislation proceeding through Congress that would update the federal government’s standards for approving or blocking prospective foreign proposals to take over U.S. businesses with defense-related implications. The current process for screening such investment enables Washington to nix (and this is just an obvious hypothetical example) a Russian or Chinese proposal to buy a company that makes jet fighter craft.

Most cases examined by the inter-agency group that makes recommendations to the President for final action (the Committee on Foreign Investment in the United States, or CFIUS) aren’t such easy calls, which is precisely why lawmakers seem determined to expand the grounds for blocking potentially dangerous takeovers. That’s an idea I’ve long favored.

But at least as important is a provision in the bill that addresses a problem I’ve written on, but that Washington has been slow to recognize – even under the Trump administration. That’s the growing tendency of American technology companies to share their best knowhow with partners in places like China. In some cases, the U.S. firms voluntarily hand over the keys to these kingdoms. In others, they invest capital in Chinese start-ups and other ventures.

It’s true that the United States maintains a system for controlling exports of national security-related technology to problematic countries like China. But the proliferation of these corporate transfers and investments makes clear it’s too sieve-like. And plugging holes is particularly important now because China has so aggressively challenged America’s position as the lead power in the economically vibrant East Asia-Pacific region.

I’ve long opposed the U.S. strategy of maintaining major military forces in this far-off area decades after the Cold War’s end in order to fend off the Chinese and North Koreans. But if American leaders stay determined to ignore my advice (!), it’s nonsensical to keep pushing for bigger and bigger military budgets and stronger forces (in part to buttress its East Asia strategy) while allowing American companies in effect to help China strengthen the military against which Americans may fight. So let’s hope Congress sends a CFIUS reform bill to President Trump’s desk tout de suite.

The second, more dispiriting news item came from Reuters, and dealt with those tariffs Mr. Trump last week imposed on certain imported washing machines from South Korea. As I wrote on January 24, these actions seemed to infect officials in South Carolina with a case of Trade Derangement Syndrome – the utter mindlessness produced by announcements or fears of even small-scale restrictions on trade flows. In this case, South Carolina officials were criticizing the tariff decision even though it undoubtedly led one South Korean manufacturer – Samsung – to announce that it would begin producing washing machines in the Palmetto State, thereby avoiding the tariffs and creating hundreds of jobs for South Carolinians.

Yesterday, Reuters reported similarly looney reactions on the part of the other South Korean company fingered – LG Electronics. LG, too, clearly has been convinced by the prospect of tariffs to manufacture some of its products in the United States – in this case, in Tennessee. But the company clearly is not thrilled with the prospect. It’s grousing that, because of the tariffs, it will need to raise the prices it charges American consumers.

That’s pretty par for the course – though has anyone who’s bought a major appliance lately seen many producers or retailers that are full of confidence that they can charge more? But what was completely doofy was what the company spokesperson quoted by Reuters reporter David Lawder (with a figurative straight face) said next. He fretted that the price increase could cost the company market share, therefore reducing the demand for the new Tennessee factory’s products and for local workers. And then he noted that the costs could be long-lasting: “If you lose floor space at retail, it can take years to get it back.”

I don’t blame the LG spokesperson for trying to drum up American opposition to the tariffs any way possible. But maybe Lawder could have asked him why on earth the company would take actions that it’s admitting would lose it money – for “years”? Or pointed out that these adverse consequences do a great job of explaining why LG is not remotely likely to raise prices? Instead, Lawder simply permitted the LG flack to get away with arrant nonsense – and reinforced my claim that nothing, but nothing, is as badly, and as tendentiously covered by the media as anything having to do with international trade.

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(What’s Left of) Our Economy: A Major China-Related Conflict of Interest Ignored by the Media

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Canyon Bridge Capital Partners, CFIUS, China, conflicts of interest, EETimes, foreign direct investment, journalism, national security, Ray Bingham, transparency, {What's Left of) Our Economy

EETimes is a great source of information about the technology world that I’ve long found invaluable for following and understanding the development of the microelectronics industry in particular and its implications. So it genuinely pains me to report that this news site did a major disservice to its readers yesterday by posting a column on Chinese investment in the U.S. economy written by an author whose close ties to the Chinese government went completely unmentioned.

The column, by venture capitalist Ray Bingham, failed badly on substantive grounds, too – so badly, in fact, that it represents a significant failure of the site’s editorial process. After all, it’s one thing – and an entirely legitimate thing – to argue, as per the author, that the federal government’s process for screening prospective foreign acquisitions of American companies for national security reasons (known by the acronym CFIUS) might be making some serious mistakes. Its mandate is to balance the national security threats with the economic benefits that such investments might create, and it’s always possible when such judgment calls are involved to overemphasize one consideration and underemphasize the other.

But EETimes should by no means have had Bingham to get away with simply describing China as a “perceived threat” and a country that is thought “to have motivations beyond the standard economic drivers.” The site should have at least required to the author to acknowledge that Beijing is mounting a serious challenge to American security interests throughout East Asia, and especially in the South China Sea, and that China’s state-dominated system as a whole operates in ways having absolutely nothing to do with “the standard economic drivers.” By letting Bingham off the hook, EETimes wound up publishing not an opinion article, but a piece of propaganda.

At the same time, even this serious failing pales against EETimes‘ blunder on the transparency front. Readers of all opinion pieces must always be told by media organizations when the author or authors of these articles have self-interested stakes in propagating certain viewpoints. (Think tanks and individual researchers should be held to the same standards.) Bingham qualifies in spades.

As EETimes told its readers:

“Ray Bingham is co-founder and partner at Palo Alto-based Canyon Bridge Capital Partners, a global private equity investment fund focusing on the technology sector. He has considerable experience in identifying growth and mature technology firms for investment, giving them new life and helping them to reach their full long-term growth potential.”

As it should have added, Canyon Bridge (in the words of the Financial Times newspaper) “sits at the end of a long chain of Chinese funds and investors with ties to the government. “

“The parent company of its largest backer, Yitai Capital, is China Venture Capital Fund Corporation Limited, which Chinese state media reported last year has a mandate to ‘carry out our national strategies and to mainly invest in projects about technological innovation and industrial upgrading’.

“One of CVC’s state-owned investors, China Reform Holdings Corporation, aims to help state ventures invest domestically and internationally. Benjamin Chow, Canyon Bridge’s [other] founder and managing partner, previously worked for a CRHC-controlled fund, China Reform Fund Management. The website for China Reform Fund Management describes CRHC as a ‘state-owned assets management corporation under direct supervision from central government” that among other priorities makes strategic investments in “new emerging industries as well as other sectors related to national security and economic lifelines.'”

In other words, Bingham and his company work for the Chinese government. He contends that Canyon Bridge’s Chinese investors were merely “‘limited partners’, with no active role in how the fund is run. ‘They have no decision-making authority over what we invest in, how we manage it or the disposition of those assets ultimately,’ he said. But so what? Can anyone seriously doubt that when these ‘limited partners’ say ‘Jump!’, Bingham and colleagues respond, ‘How high?’”

Therefore, Bingham’s job, along with Canyon Bridge’s, is representing Chinese government interests. Whatever you think of the morality or wisdom of this choice, the information is absolutely essential to a reader’s ability to judge the accuracy of his claims, merits of his arguments, and the critical issue of what he might be concealing about the subjects he discusses.

And in this vein, something else EETimes should have forced Bingham to disclose:  He and his Chinese backers had just been rebuffed by that same U.S. government investment-screening system in their effort to take over the American-owned microchip semiconductor firm Lattice Semiconductor. So small wonder the author has problems with its operations. It’s crimped his own income stream.

Again, Bingham asd others like him have every right to work for the Chinese government, and EETimes has every right to publish them. But EETimes failure to reveal Bingham’s enormous personal stake in loosening Washington’s foreign direct investment policies is a flat-out breach of journalistic ethics. And the site should correct this mistake and tell its readers the whole story without delay.

Our So-Called Foreign Policy: Trump’s China Strategy Seems Troublingly Silo-ed

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CFIUS, China, Committee on Foreign Investment in the United States, Diplomatic and Security Dialogue, foreign direct investment, industrial policy, James Mathis, mercantilism, national security, Our So-Called Foreign Policy, Rex Tillerson, semiconductors, Steven Mnuchin, super-computing, technology transfer, Trump, Wilbur Ross

Secretary of State Rex Tillerson and Secretary of Defense James Mathis are meeting with Chinese counterparts today in Washington, D.C. to conduct a “Diplomatic and Security Dialogue” – a stripped down Trump administration version of some of the ginormous official bilateral sessions the two countries have held periodically in recent years.

It’s unclear whether these talks will turn out to be more than the elaborate gabfests their predecessors quickly became. But it’s much clearer that their potential to contribute significantly to America’s security will be limited unless the administration starts taking many more urgently needed steps to move the nation’s Asia grand strategy into the twenty first century. And the major missing piece of this effort continues to be a serious effort to deny China the advanced technologies it will need to continue becoming a more formidable military competitor.

Some promising decisions have been taken, or are being considered. For example, Commerce Secretary Wilbur Ross is thinking of launching a national security review of U.S. trade in semiconductors with an eye toward fending off what he describes as an increasingly dangerous Chinese challenge in this defense-critical sector. Mathis and Treasury Secretary Steven Mnuchin have both publicly called for updating the interagency U.S. government process for screening prospective Chinese and other foreign investments in all defense-related companies (the Committee on Foreign Investment in the United States, or CFIUS). And they along with Ross have strongly suggested that they’re thinking of redefining the relevant statute’s mandate to include economic dimensions of national security. Just as encouraging, prominent members of Congress are drafting legislation along these lines.

And most recently, the administration has announced a big new effort to ensure continued American leadership over China in super-computing (although the semiconductor industry isn’t happy with some other features of Mr. Trump’s stance on federally sponsored research and development).

Moreover, the Trump administration is responding to the Chinese challenge much more promptly than its predecessor, which prioritized this cluster of problems very late in its tenure. Its proposed responses to mercantile Chinese industrial policies in technology industries were especially weak beer.

But as with the Obama administration, Team Trump seems to be paying little attention to the continued outflow of cutting-edge defense-related American knowhow to China – including to entities that are unquestionably controlled by the Chinese government. It’s unmistakably paying much less attention to these investments than to spending billions more to upgrade American military forces in East Asia – which of course could wind up facing Chinese weapons based on U.S. tech advances.

Today’s U.S.-China talks in Washington are due to be followed up later this summer by a session devoted to economics. Maybe by then, President Trump and his advisers will be pursuing the comprehensive, integrated approach that meeting the China challenge adequately requires?

Our So-Called Foreign Policy: Worries About Another U.S. Screening Process – For Defense-Related Technology Assets

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CFIUS, Committee on Foreign Investment in the United States, foreign investment, Hewlett-Packard, Integrated Silicon Solutions, national security, Our So-Called Foreign Policy, Philips, Qualcomm, semiconductors, technology, Tsinghua University, Western Digital

As Americans have embroiled themselves in a heated debate over how adequate screening procedures are for refugees from the war-torn Middle East, some big, possibly dangerous holes in another key security government screening system may have opened wide – the inter-agency process for vetting proposed foreign takeovers of or investments in U.S. companies when the deals have national security implications.

According to a valuable report by the tech industry publication EE Times, China has proposed buying outright or acquiring important stakes in no less than five major American technology firms this year alone. One such bid, for leading memory chip maker Micron, has been squashed – at least for now – in part because of likely opposition from the inter-agency group, known as the Committee on Foreign Investment in the United States (CFIUS).

Two more are awaiting CFIUS analysis. The first is the purchase of a 15 percent stake in hard disk drive manufacturer Western Digital by the investment arm of China’s government-controlled Tsinghua University. The second is Hewlett Packard’s sale to the same Chinese entity of its telecommunications hardware, server, storage, and technical services assets in China.

Judging from CFIUS’ decisions in two previous cases, though, the Chinese government – and its U.S. partners-to-be – have little reason for concern. For Washington has approved the sale of Omnivision to a Chinese investment consortium, and Integrated Silicon Solutions Inc. to similar buyers. Omnivision makes image sensors important for semiconductor design and manufacturing, while Integrated Silicon Solutions is a fabless memory chip producer. Apparently CFIUS saw no significant national security potential in either transaction, even though semiconductors are vital building blocks of all advanced weapons systems, and even though all Chinese investors prominent enough to bid for such key foreign assets are either directly or indirectly controlled by Beijing.

In addition, another tech publication has reported that CFIUS is looking into the sale to yet another group of Chinese investors of Philips’ LED lighting division, including “a broad patent portfolio of more than 600 patent families related to LED manufacturing and automotive lighting.” And EE Times has recently explained why financially struggling American communications chip giant Qualcomm could be China’s next target.

More ominously, the Tsinghua investment arm has announced intentions to spend $47 billion over the next five years to build up China’s tech sector by purchasing foreign companies and knowhow, and that America’s tech sector is its top target. So it looks like, at the least, CFIUS will be kept pretty busy going forward. Then again, since prospective foreign buyers aren’t legally obligated to notify CFIUS of their intentions, who’s to say?

(What’s Left of) Our Economy: Follow the Money, Not the Pundits, to Understand the Chinese Tech Challenge

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Ali Baba, CFIUS, China, cyber-security, forced technology transfer, foreign direct investment, IBM, innovation, Intel, Qualcomm, technology, Thomas Friedman, Xi JInPing, Xiaomi, Yahoo, {What's Left of) Our Economy

Few stereotypes are as hardy (and seductive, at least for Americans) as that of copycat Asians who come from cultures incapable of fostering creativity and innovation – at least not on the scale for which the USA is known. And few are as as misleading. If you’re skeptical of either proposition, just consider Thomas Friedman’s column today in The New York Times about China’s economic and technological future, and a spate of news reports about the activities of U.S. and Chinese technology companies themselves.

In Friedman’s words, there’s a major conflict between Chinese leader Xi Jinping’s push to move his economy from labor-intensive manufacturing to “more knowledge-intensive work” and his determination to censor the internet as well as university research. “Alas, crackdowns don’t tend to produce start-ups,” Friedman concludes.

It’s hard to argue with the logic, but oft times the world thumbs its nose at sensibileness – or at least as it’s defined by particular peoples. And however Americans cherish the notion that the political freedoms and inventiveness go hand in hand, and vice versa, lots of U.S. tech firms don’t seem to agree.

Cosmically, today also saw the appearance of a Wall Street Journal piece describing how Some of Silicon Valley’s largest companies have deepened their China partnerships in the past year.” The article mentions Intel and IBM, and could have added Qualcomm as well. Many of these deals and investments are simply responses to China’s longstanding policy of forcing foreign companies to transfer technology to Chinese partners in exchange for access to the potentially enormous Chinese market.

Lately, moreover, Beijing has added two big new wrinkles. First, its professions to fear spyware insertions in technology imports and high-profile decisions to curb purchases from U.S. firms in particular have given these companies major incentives to team up with Chinese entities. These are easier for the Chinese government to control – that is, when it doesn’t own them outright or indirectly. Second, China has begun to accuse foreign companies in numerous industries of violating Chinese laws in areas like anti-trust and bribery, and handed out some stiff fines. Non-Chinese firms have gotten the message that carrying out Beijing’s bidding in areas like tech transfer is a great way to stay on the Chinese authorities’ good side.

Nonetheless, it’s also clear that China has developed some technology winners – like Xiaomi, the up-and-coming smartphone producer that’s received Qualcomm funding ever since it held its first financing round. And let’s not forget the Yahoo stake in Chinese e-tailer Ali Baba – which may be the most valuable assets it owns.

Also ignored by Friedman is how, thanks to the literally trillions of dollars in trade profits it’s made with the United States and the rest of the world, China can now buy outright much of the advanced knowhow it needs – and has made acquiring U.S. companies a priority. Chinese takeovers with national security implications can be blocked or quietly deterred by an inter-agency American screening panel, but this Committee on Foreign Investment in the U.S. has more often acted like a rubber stamp than like a guardian.  

So the choice is pretty clear: When trying to understand innovation and economics in China, you can listen to the pundits, or you can follow the money. Hardly a close call if you ask me.