Why are we letting China buy American companies?

By Diane Francis

December 15, 2013 | 9:20am

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China recently bought the world's largest pork producer, Smithfield Foods of Virginia.Photo: Reuters

This takeover, the largest takeover of a US company by a Chinese firm, represents a precedent that will damage the American economy and cost jobs in the long run.

It also may have emboldened China. Weeks after permission was granted by Washington, Beijing claimed the airspace over some contested islands in the East China Sea as “a defense identification zone.” Chinese saber rattling forced the Pentagon to dispatch two unarmed B-52 bombers to fly in the airspace to send a message to China that it was overstepping its bounds.

China’s ambitions are multi-pronged and the Smithfield Foods transaction is another questionable invasion by Beijing. Currently, American authorities only evaluate foreign takeovers on the basis of national-security issues or shareholder rights and securities laws. But these criteria are inadequate.

A fairer test in the case of Smithfield, and future buyout attempts by China, should also require reciprocity: Only corporations from countries that allow Americans to buy large companies should be allowed to buy large American companies.

That’s not the case with China, Middle Eastern sheikhs or Russians. Critics of reciprocity label this as protectionism. It’s not. It’s protectiveness.

Here’s why.

Last year, Chinese banks were also allowed for the first time to buy several financial institutions. Next year, in the absence of curbs, China will likely launch a bid for a sizeable resource company. This was last attempted in 2005, when a Chinese oil giant bid $18.5 billion to buy Unocal Corporation. Congress and the media reacted negatively and the Chinese withdrew the bid.

But Wall Street has been lobbying to allow China in to make big takeovers so it can earn larger fees.
They and others argue that restricting China would be unfair and foolish because American companies have been allowed to invest billions in China. But investments there are restricted to “green fields” — high-risk start-up operations or minority ownership. The fact is that Coca-Cola or General Motors or Maytag cannot take control of an existing, established Chinese rival.

Smithfield has become the branch plant of its new proprietor — a holding company called Shuanghai International Holdings Limited, the biggest meat processor in China. But the ultimate beneficial owner is the Chinese government, and Shuanghai answers to the politics, policies and edicts of Beijing. This is the nature of “China Inc.”

The Smithfield buyout is a great loss because the company has become a huge exporter, to Japan and elsewhere, and has developed, with taxpayer assistance, systems and technologies that are best in class.

Of course, that was why it became a target and why China Inc. overpaid to get it. But the only American beneficiaries will be a handful of investors. The rest of Smithfield’s stakeholders, and the American economy, will be bruised.

The damage includes the fact that Smithfield’s technology, research and development and patents will be transferred to the Chinese parent company. Smithfield will be hollowed out and the head office will be moved to China. Talent will leave.

Smithfield’s export initiatives will be transferred to China and exports to Japan and elsewhere will likely be done out of China — not the US. Smithfield will be scaled back to serve the US market only. Eventually, it likely will be closed and become an importer of rebranded products made in China.

The current American workforce will be capped or reduced over time as production and exports shift to low-cost China. American suppliers will face tougher, remote procurement terms from China. Prices will drop to compete with low Chinese production costs.

Lastly, Smithfield will be obliged to market Chinese products in the United States, a worrisome prospect given that country’s lack of health and safety protections.

This trajectory is predictable, and, if replicated enough times, represents a long-term disaster for the American economy.

That’s why Washington must impose new foreign ownership restrictions based on the principle of reciprocity. The rule must be that foreigners can only buy companies if Americans can make similar buyouts in their countries.

Otherwise, Fortress China and others in partnership with Wall Street will continue to hollow out their guileless trading partners without providing commensurate opportunities. In trade terms, this would be like eliminating all tariffs on Chinese goods but allowing China to impose 1,000% tariffs on all American goods.

Globalization can mean a more efficient economy and lower-cost goods for consumers. But it only works if countries play by the same rules.

The Smithfield deal is not free trade or fair trade. It’s simply dumb business, a foolish as it would have been to let Beijing grab the airspace over Japan’s islands.