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After Huawei: A New Approach To Foreign Direct Investment in a World of Increased Security

In today’s global economy, “state capitalism” and state-owned enterprises (SOEs) play a significant role in trade regulation. Naturally, when trade matters intersect with those of national security, the roles of state actors take on particular importance. Industries deemed sensitive for national security are considered off-limits to SOEs, with the idea that the companies are extensions of their home governments and therefore have the ability to conduct intelligence gathering on their behalf or play the role of Trojan horse during times of hostility. Limitations can be in the form of prohibitions on government contracts, acquisitions of domestic assets and participation in auctions for infrastructure development. While some American industries, such as semiconductors and aerospace, have blanket regulations on types of foreign participation, other situations are evaluated on a case-by-case basis. Notable examples are those of the (a state-owned port operator based out of the U.A.E.) and (a Chinese petrochemical SOE). While the regulations are certainly clear-cut for SOEs that are directly controlled by foreign governments, recent measures have been targeted at companies from “state capitalist” nations who exhibit a lack of transparency regarding the degree of their home government’s influence. A recent situation that has illustrated the inherent difficulty of dealing with such firms is that of Huawei, a Chinese telecom equipment manufacturer.

Huawei is a massive, privately controlled company that is one of the largest suppliers of network and telecom equipment in the world. It was started by Ren Zhengfei, who during his younger years was an engineer in the Chinese military, eventually reaching the position of deputy director in its information technology research unit. The company is particularly active in developing nations, and like many other Chinese firms, it has received government subsidies in the form of low-interest loans and “export financing” although the exact figures are undetermined. Some nations, such as India and Australia, see the government subsidies as a maneuver to implant a corporate agent into foreign networks. In response, Australia blocked Huawei’s participation in the auction for one of the nation’s broadband networks. Last year, Huawei sought to purchase assets of 3Leaf, an insolvent American server manufacturer. After the deal closed, the Defense Department requested Huawei retroactively submit a disclosure document to the Committee on Foreign Investment in the United States (CFUIS), an inter-agency committee chaired by the Treasury Secretary that approves business transactions with national security implications. Congress has also been focusing on Huawei and its rival, ZTE, citing concerns over Chinese government influence.

The security concerns hovering over Huawei are not based on direct ownership and control by the Chinese government, but instead on Huawei’s lack of transparency. Specific areas of concern are the government subsidies and “export financing”, CEO Ren’s past ties to the Chinese military, and the role of an internal “Party Committee”, a feature common among Chinese SOEs. There is no doubt that the US, and Western nations in general, must come to realize that dealing with SOEs, state-capitalist economies and firms with a relative lack of transparency is a necessary feature of today’s international economy. Blocking transactions for unspecified security concerns, such as the measure taken by CFIUS in the Huawei deal, is a measure that lacks transparency and is something Western nations are quick to judge developing nations for. Instead, the US should lead the charge in developing a transparent, systematic framework for vetting foreign direct investment transactions that have national security implications.

The actual structure of such a program can take many forms. In the UK the government has a separate body, the signals-intelligence agency known as GCHQ, that works closely with foreign companies to essentially security-clear their technology for use in domestic markets. Huawei has an internal team in their UK division comprised of security-cleared employees, some of which used to work at GCHQ, devoted strictly to that aspect of compliance. An American version could exist within various departments, including Treasury, Defense and the Commerce Department’s Bureau of Industry and Security, but it is unlikely in a world of and increasing deficit and budget cuts, not to mention the private-sector opposition if increased costs would be passed on downstream.

A more realistic and beneficial approach would be to create a specific set of criteria, such as industry, technology and asset type involved in the transaction, and automatically subject foreign trade transactions to government approvals. The approving body can be Congressional or an inter-agency committee within the executive branch, such as the CFIUS, but should be chosen based on efficiency and transparency. Foreign companies should be automatically required to provide disclosure about their operations, such the role of internal government departments, corporate structure, and supply chain sourcing. A good model to adopt would be one that is similar to those of stock exchanges, where public companies have to submit detailed disclosures before the exchange approves a public listing. And finally, to make the process fair and free of rumors of protectionism, all foreign companies should be subject to approval. To streamline the process for well-established foreign companies with no security implications, a pre-approved expedited process can be issued similar to the Nexus program for international travel.

By adopting such a transparent process, the US can begin leading the transition to a new system of foreign direct investment that is in-tune with the prevalence of SOEs and state-capitalist economies. Such a radical approach would no doubt have its costs, but it would be a big step in the direction of aligning the interests of international trade and development with those of national security.


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