Dubai ports world under Exon-Florio: a threat to national security or a tempest in a seaport?

• Author: Mostaghel, Deborah M.

1. INTRODUCTION

   In January and February of 2006, Congress and the public played a variation of the game "Which of these things does not belong?" This variation instead asked "Which of these transactions does not belong?" The list included a Singaporean company taking over a U.S. telecommunications business, (1) a Dutch company acquiring a U.S. semiconductor company, (2) a German company buying a U.S. telecommunications provider, (3) a Chinese company acquiring a U.S. personal computer business, (4) and a United Arab Emirates (U.A.E.) company named Dubai Ports World (DP World) acquiring rights to run terminal operations at six U.S. ports. (5) The answer seemed obvious. The DP World transaction did not belong.

   Congresspersons of both parties vociferously opposed this transaction, causing the Executive Branch, which had championed it, to withdraw its support. This Article examines the debacle of the DP World transaction, in light of the statute and regulations that govern foreign acquisitions of U.S. assets, to see if the brouhaha was warranted. It concludes that the statute and its implementing regulations protect U.S. national security and that the reaction to the DP World transaction was a tempest in a seaport.

   As a result of ever-increasing foreign investment in the United States, Congress created a mechanism to review transactions in which foreign companies seek to acquire U.S. companies. This is the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988 (1988 Trade Act). (6) Under Exon-Florio, the Committee on Foreign Investment in the United States (CFIUS), which is composed of representatives of twelve U.S. government agencies and departments, may review proposed transactions to see if they pose a threat to national security. (7) If CFIUS believes a transaction does pose such a threat, it recommends that the President take action. (8) The President has the power to block a contemplated acquisition or to order divestment of a transaction already completed. (9) From the beginning, implementation of Exon-Florio has resulted in pitting the goal of "[s]purring the U.S. [e]conomy" (10) against the goal of enforcing national security. (11)

   Part II of this Article discusses foreign investment in the United States as background for understanding passage of Exon-Florio in 1988. Part III discusses how Exon-Florio works. Part IV discuses two transactions that prompted calls for revision of Exon-Florio, culminating in the passage of the Byrd Amendment (Byrd). Part V discusses the passing of Byrd in 1993. Byrd's changes remain in effect today.

   Part VI discusses economic and political concerns as they affect transactions subject to Exon-Florio review. If there is a fly in the Exon-Florio ointment, it is the intrusion of economic and political protectionism during CFIUS review or thereafter. The proposed acquisition of Unocal in 2005 by a subsidiary of the state-owned China National Offshore Oil Corporation (CNOOC) was derailed by a combination of political and economic protectionism. This kind of protectionism is further complicated by the national preoccupation with terrorism. DP World, a company owned by the government of the United Arab Emirates, wanted to acquire Peninsular and Oriental Steam Navigation Company (P&O), a U.K. company that ran terminal operations at six U.S. ports. (12) The acquisition passed CFIUS review. (13) The transaction ultimately failed, however, because of the enormous political backlash that followed the announcement of the deal. (14) While the politicizing of decisionmaking is often decried, CNOOC and DP World present textbook cases where this happened.

   Part VII examines the implications of the CNOOC and DP World transactions. As a result of the CNOOC transaction, some in Congress called for changes to Exon-Florio by demanding more reviews in a more public manner, focusing more specifically on economic protection. (15) The DP World deal also generated criticism of Exon-Florio that focused, predictably, on the ownership of the acquiring company. This section concludes that Exon-Florio does not need to be changed. It functions as it was intended. Executive review of mergers and acquisitions examines transactions that may implicate national security. Economic welfare is protected as a byproduct of protecting national security. The process was designed not to be open because of the sensitive nature of the information involved in mergers and acquisitions. The statute already mandates that review be carried out in any transaction where a foreign government has a controlling interest in the acquiring company. (16)

   Political quarterbacking should not subvert the CFIUS review process. The statute provides for information sharing with Congress. (17) Congress should fight against blindly espousing economic protectionism. Two views of national security motivate economic protectionism. One is the historically entrenched view that national security is synonymous with economic security. (18) The other is the more recent but emotionally powerful drive to make terrorism the only lens through which to view national security. (19) Revising Exon-Florio based on these views is a mistake. First, a revision does not necessarily protect us. Further, such revision does not consider the realities of our increasingly global economy. In today's economy, focusing on narrow views of economic and political security can have serious repercussions for the review process, foreign companies seeking to invest in the United States, U.S. companies seeking foreign investment partners, the U.S. economy itself, and for our reputation and relationships with the world as a whole.

   Part VIII concludes that CFIUS review need not be changed. CFIUS must follow its own rules properly, and Congress must play its behind-the-scenes role without political grandstanding. If these recommendations are followed, CFIUS reviews will continue to protect the national economy and security.

2. BACKGROUND--FOREIGN INVESTMENT IN THE UNITED STATES

   Foreign investment has played an important role in our economy since the nation's inception. Even though foreign investment has always been seen as necessary, foreign imports have often been perceived as a threat to the U.S. economy. The stock market crash of 1929 led to the passage of the Smoot Hawley Tariff Act of 1930 (Tariff Act), which "set some of the highest rates of tariff duties in the history of the United States." (20) In 1934, Congress amended the Tariff Act to authorize the President, for a period of three years, to enter into trade agreements with foreign nations. (21) The focus under the early Act was on economic protection. For example, section 307 of the Tariff Act was enacted "'to protect domestic producers, production, and workers from the unfair competition which would result from the importation of foreign products produced by forced labor.'" (22)

   The focus widened over time to include national security. The President's authorization to enter into trade agreements was extended into the 1950s through various trade and tariff acts, so long as the President's decisions considered national security. (23) The 1954 extension, however, was treated differently than the previous ones. It enabled the President to intervene in trade agreements if the foreign investment would threaten national security not only directly but also by depressing "domestic production needed for projected national defense requirements." (24) The extensions of trade and tariff legislation throughout the later 1950s continued to give the President authority to limit imports when the President believed that these imports would damage national security through curtailing industries vital to the national defense. (25) The Trade Agreements Extension Act of 1958 obligated the Executive to comply whenever a government department or other interested party requested an investigation. (26) If a trade transaction was found to pose a threat to national security, the President may take action to adjust imports "'to a level that will not threaten to impair the national security.'" (27)

   The acts of the 1930s through the 1950s generally pertained to products imported into the United States. At first the focus was on the effect of imports on the domestic economy. Later, it included the ability of the domestic economy to meet defense needs. The Trade Expansion Act of 1962 (1962 Trade Act) brought these two strands together, enunciating the philosophy that the Executive "shall 'recognize the close relation of the economic welfare of the Nation to our national security, and shall take into consideration the impact of foreign competition on the economic welfare of individual domestic industries.'" (28) This Act was considered necessary because the amount of foreign funds invested in the United States had nearly doubled 1950s levels. (29) The Act maintained the Executive's obligation to investigate, vesting it in the Director of the Office of Emergency Planning. (30) The investigative function was later transferred to the Secretary of the Treasury. (31) Investigations continued to be triggered in response to requests from heads of government departments or other interested parties--principally individual domestic industries.

   Some in Congress had feared that the voluntary nature of the investigative process would result in overwhelming numbers of U.S. industries requesting investigations. (32) Such numbers did not materialize. From 1962 to 1986, private industry requests for investigations came from manufacturers of metal alloys and refined metals, miniature and precision instruments makers, and makers of metal cutting and metal forming machine tools. (33) These investigations were either terminated at a company's request or because the import was not deemed to threaten national security. (34) Whereas investigations triggered by private industry requests did not generally garner protection under the Act...