Wall Street Journal

Review and Outlook

Congress Inc.

Under current law, the executive branch reviews major foreign acquisitions of U.S. assets and companies under the Committee on Foreign Investment in the United States, or CFIUS process. This procedure was installed in 1988 during the height of the political hysteria over the Japanese buying up Rockefeller Center and Pebble Beach golf course. (They overpaid for both.)

CFIUS certifies that there are no adverse national security implications -- and has the power to block any sale. There are unquestionably instances where foreign ownership of defense and military-technology industries can pose potential threats to U.S. security. Ronald Reagan blocked commercial deals and technology transfers with the Soviet Union during the Cold War. Some 1,500 transactions have been filed for review under CFIUS, which has led to 25 formal investigations. Only one deal -- a 1990 purchase by the Chinese of an aircraft component company -- has been blocked, though many have been altered in one way or another.

Reagan signed the 1988 law only after hard negotiation that kept CFIUS reviews both confidential and confined to the executive branch. Democrats who then controlled Congress were pushing for tighter investment restrictions, but even they conceded the political dangers of letting Members sign off on every private transaction. But now Senate Banking Chairman Richard Shelby has joined with Democrat Paul Sarbanes to get Congress into the act. Their legislative proposal is still murky, but the danger is that it will give Senate and House committees de facto veto power over foreign-company acquisitions.

This is a dreadful idea, even by Congressional standards. It would instantly grant 535 Members new sway over private business transactions and potentially politicize every foreign acquisition. Keep in mind that the Dubai Ports World fiasco didn't begin as a genuine security concern. It flared up only after a small U.S. company (Eller & Co.) worried about its Pot of Miami contract began lobbying Congress. The two Democrats -- Rahm Emanuel and Chuck Schumer -- running this year's Congressional campaigns seized on the Arab buyer as a great political issue, and the rest of the demagoguery is history.

The Shelby-Sarbanes bill would open vast new opportunities for Beltway lobbying to disrupt foreign purchases -- with the excuse of "national security" but really in the service of private domestic interests. Labor unions and faltering company managements would have a field day. K Street would soon become A to Z Street. Precisely to avoid such political mischief, Congress has granted the executive the power to adjudicate antitrust cases, patent issues, and trade law violations. Foreign investment should be no different.

Meanwhile, House Armed Services Chairman Duncan Hunter wants to ban foreign ownership of U.S. "critical infrastructure." In the wrong political hands, that opaque term could apply to just about anything -- energy, software, banking, roads and bridges, pharmaceuticals, telecommunications, computer technologies, steel. Food safety is "critical" to some people, and a broad interpretation could prevent a foreign firm from buying Ben & Jerry's ice cream. Don't laugh. Earlier this year the French government intervened to block the sale of Groupe Danone, the yogurt maker, as contrary to France's national interest.

There are already signs that this Congressional sabre-rattling is delaying transactions. Toshiba's proposed friendly takeover of Westinghouse is being held up by the feds. And it is almost certain that a telecommunications deal in the works between French-owned Alcatel and Lucent will come under scrutiny by CFIUS. If the deals are blocked, U.S. shareholders will lose hundreds of millions of dollars in stock appreciation.

What Congress doesn't seem to comprehend is that in a global economy even the term "foreign ownership" is misleading. Some 40% of the shares in Nokia, the Finnish cell-phone maker, is owned by Americans. U.S. shareholders own $2.9 trillion of foreign-company stock, and foreigners own an even greater stake in American businesses. As many Americans are employed by foreign-owned auto manufacturers today as work for General Motors.

Congress is playing a dangerous game here that could do serious harm to America's economic security. At least 5.3 million Americans are directly employed by foreign companies in the U.S., and these jobs pay an average salary of $60,000 -- nearly a third more than the average American salary. This influx of foreign capital is one reason the U.S. economy is strong enough to be able to afford the defense and security spending that allows us to project force around the world and defend the homeland. Driving it away in the name of "national security" would make us less safe.

Mr. Shelby says that "national security cannot take a back seat to world trade." That's certainly true, but he, Duncan Hunter and their GOP colleagues need to understand that making America poorer won't make America any safer.