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China’s Alibaba Should Have Nothing to Fear from a CFIUS Review, or Should It?

Every now and then I read a post, usually a rant, making flippant commentary about whether or not China poses a national security threat to the United States. The relationship between the U.S. and China is a complex one; however, spend enough time studying it and you’ll learn that there is more to this relationship than cheaply manufactured toys and electronic goods.

China remains a threat to U.S. national security and it will do so for some time. Even Jon Huntsman, the borderline Republican who served a Ambassador to China says so. Huntsman by the way has no chance of securing the GOP nomination for President. He is an accomplished fellow but there is no room in the party right now for Rockefeller Republicans. Anyhow, back to China. Over at the China Hearsay blog, lawyer Stan Abrams penned a piece recently that raises some good points, but misses the mark when it comes to the China card. “In Quest for Yahoo, Alibaba Goes Full Power Jew in D.C.,” Abrams makes many outlandish statements including this gem:

anti-China rhetoric is rampant not only in D.C. these days, but across the nation as know-nothing, smarmy douchenozzles (i.e. Republican candidates) vie for high offices in the 2012 elections.

We’ll leave the politics for another post, but I think he’s spent one year to many in the People’s Republic of China. What really makes no sense is his contextualization of the CFIUS process and a proposed Chinese investment in a technology company that is part of the nation’s critical infrastructure. For those of you that do not know a lot about the CFIUS review process, follow this link. The Cliff Notes summary of the CFIUS process is as follows: a government review of foreign investment in the U.S. to make sure our competitors and rivals do not get access to things they can use against us some day.

Abrams’s blog talks about the proposed acquisition by the Chinese Internet-based business Alibaba Group, along with other unnamed investors, of the U.S.-based Yahoo! Inc. As a high-tech entity that possesses personal information about millions of U.S. citizens, as well as part of our nation’s technology and Internet backbone, this acquisition should receive closer scrutiny by the CFIUS review process, among other checks that include our export control laws. According to Abrams he has …

shot down the idea that Alibaba has close ties with the Chinese government or military […] and questioned whether a CFIUS rejection would simply be an excuse for protectionism. On the whole, I think that a rejection based on national security would be a joke, and I can’t think of any other reason that would justify blowing up a Yahoo acquisition.

You can read his post here. I tried to find the back up for his arguments on the site but could not do so.

While Abrams and other pro-China trade folks claim otherwise, the Alibaba Group has been heavily subsidized by the Chinese government and has many links to the Chinese military. The onus is on the Alibaba Group to show otherwise. If they do not have such links, then why take issue with a review process that will only take about a month or so to complete?

The CFIUS regulations are not the most complex, however, the process can become politically charged, rather quickly. But if the folks at Alibaba think CFIUS is their only problem, I’d take a closer look at our export control laws. Start with our Export Administration Regulations (EAR). There are several categories likely impacted by this proposed transaction. The national security Committees of the U.S. Congress should also be of concern (that could be why they retained a lobbying firm as well).

Last month a bipartisan investigation was initiated by the House Permanent Select Committee on Intelligence (HPSCI) that will review the national security threats posed by Chinese telecommunications companies working in the United States or seeking to do business in our country. Among other things, the investigation will “review the extent to which these companies provide the Chinese government an opportunity for greater foreign espionage, threaten our critical infrastructure, and further the opportunity for Chinese economic espionage.” Read more about it here. It is reportedly going to take a look at this proposed Alibaba transaction, among many others.

You do not need to wait for the HPSCI investigation to end to read about the China threat to our high-tech sector. There is plenty out there in the public domain. I recommend you start with a report published by the Office of the National Counterintelligence Executive (ONCIX), “Foreign Spies Stealing US Economic Secrets in Cyberspace: Report to Congress on Foreign Economic Collection and Industrial Espionage, 2009-2011.” Alibabi and other Chinese companies can hire all the high-priced lawyers and lobbyists they want, this will not change the facts that there are significant issues that need to be addressed in these proposed transactions. And that no Member of Congress, no matter how hard the lawyers and lobbyist try, will bend to accommodate where U.S. security is at stake, especially in a post-09/11/01 world.

Foreign companies seeking to do business in the United States, no matter the country of origin, will continue to see increased CFIUS and other regulatory reviews for years to come. If Alibaba were our firm’s client, the last thing I recommend that they do is engage in a traditional DC shuffle. Hiring high-priced lobbyists, no matter how well connected or qualified, cannot overcome the legal, regulatory, and political hurdles that these transactions can pose to U.S. national security. Trying to game the system is not the way to win the debate of ideas. Opening your books and being 100% transparent is the way to go.

A final note to Abrams. Just because some of us believe foreign companies should be subjected to CFIUS reviews, this does not make us protectionist. Not only is it the law, but also common sense. As Americans, I’d like to think our high-tech products are only going to people and countries that we trust; folks that will protect them from falling into the wrong hands or be used against us. When it comes to China, it is not a Democratic or Republican thing, but an American imperative to be focused on these issues. We cannot afford another Loral/Hughes crisis.




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