THE BLOG

The Big Chickens Keep Coming Home to Roost

While it was not on either agenda when President Obama met with China's Premier and other leaders - probably because China is holding on to a staggering $2.1 trillion of mostly-dollar foreign reserves - it is about time that we in the U.S. also inquired about China's overseas investment plans and intentions.

Back in February 2006, I and others wrote with alarm about a proposed deal to turn over management of six major American ports to a United Arab Emirate, Dubai. We made the point then that this deal, without disparaging Dubai, was just the most recent controversial reflection of how the U.S. has offshored and outsourced its economic and national security in the post-September 11 world, in this instance its critical infrastructure.

Now we hear China's state-controlled investment fund, China Investment Corp. (CIC), plans to invest $2.2 billion to acquire 15% of the stock and, forebodingly, 35% of the actual wind-generation business of AES, the Arlington, VA-based company that is deeply involved in developing and managing vital aspects of our nation's critical infrastructure - specifically, our power grids, electricity transmission and alternative energy production.

Although the AES transaction, which inexplicably appears to be at a substantial discount to real value, does not formally set any requirements on where AES will purchase wind turbines and other components, anyone who has ever been in business knows that a massive 35% ownership stake will inevitably create "incentives" for Chinese-sourced products to be used in AES's projects here in the U.S., incentives which will undercut our domestic innovation and against which no fair-dealing American manufacturer can easily compete.

There are "passive" deals and then there are "passive" deals - Dubai's, except for our security concerns, would almost invariably have been genuinely passive. There is simply no way, however, that China, already the world's largest manufacturer of alternative energy components, is looking passively at AES which is a large consumer of such components.

And strong evidence of this predisposition can be found in the new Chinese-sponsored $1.5 billion wind farm in Texas that recently applied to the federal government for financing from the stimulus package - a wind farm that will create only 30 permanent jobs in the U.S. but 2,000 to 3,000 permanent jobs in China where the wind turbines will be manufactured.

Rather than allowing CIC and others to, on the one hand, use U.S. tax dollars to stimulate their economies and, on the other, often acquire the very technologies which represent much of our future jobs opportunity, our government needs to start buying American, bolstering domestic manufacturing, and protecting our intellectual property.

In the world today, there are two general sets of business and trade rules. One set resides in the older developed countries, such as the U.S. and Europe, where companies still compete mostly on their own on the basis of their business acumen and product value differentiation. The other set resides in the world's largest emerging markets, most notably China, where there are elaborate policies to protect domestic enterprises, induce foreign corporations to shift their production facilities and technology to them, and anoint selected "champions" as the nations' chosen global competitors - and, as we are seeing with the AES deal, make overseas investments that gobble up competing facilities and technologies.

In this global recession, China has actually solidified its lead in global trade by grabbing market share from its export competitors - especially in new technologies such as in alternative energy - and it is now clearly the world's export leader, with the United States having fallen to third. Of course the U.S. remains far and away the world's largest importer in general and of Chinese products in particular, with correspondingly the world's largest trade deficit.

AES will have to seek approval for its deal from the Committee on Foreign Investment in the United States (CIFIUS), an inter-agency group that reviews national security dimensions of foreign investments. The Committee often looks at transactions from the vantage point of export-controlled technologies - this time, as with the Dubai ports issue, critical infrastructure is an appropriate area for inquiry and demands CIFIUS's focused attention.

And while it is not specifically CIFIUS's area of concern, someone better start looking at the employment implications of large-scale investments from overseas - and the approvals from our government should be conditioned accordingly.

Hard-working taxpayers are literally helping finance the sunset of their own jobs. And at a time when the federal government should be leading the way to ensure that American citizens have the education, work force training and, especially, protections necessary to compete in the global economy, transactions like CIC-AES send completely misguided and hypocritical messages to American workers and private industry alike.

In the next 10 years, millions of high-quality American jobs - and the hundreds of billions of dollars of annual wages they produce - remain gravely at risk of being offshored in their own right. We certainly don't need an asleep-at-the-switch Commerce Department, CIFIUS and USTR giving them unnecessary and unfair additional pushes.

American workers have repeatedly been assured that they will be the primary recipients of the millions of jobs that the "greening" and "cleaning" of America will generate. If this is not the case - and the AES transaction clearly suggests it might not be - then what do they and we as a nation have to look forward to?

I urge the Obama administration and Congress to look carefully at this transaction - for what it means to our nation's interests and, indeed, for what it means directly for long-term employment here in the U.S.