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Is Chinese-owned bacon a threat to U.S. national security? That's a question now before the U.S. Treasury Department's Committee on Foreign Investments in the United States (CFIUS) after Chinese company Shuanghui International Holdings struck a friendly deal on Wednesday to buy U.S. pork giant Smithfield Foods for $4.7-billion (U.S.) cash.
There is little doubt the deal will be approved. Could we say the same if Shuanghui went after Canada's Maple Leaf Foods Inc.? It's impossible to tell, based on Ottawa's imprecise new foreign takeover rules.
CFIUS rules are fairly straightforward and limited in scope: "Unless a transaction presents a threat to U.S. national security, we not only permit it, we welcome it," Marisa Lago, the U.S. Treasury Department's assistant secretary for international markets and development, told an audience in Beijing 18 months ago. So when Chinese interests last year bought control of AIG's aircraft leasing unit and movie distributor AMC Entertainment Holdings Inc., the deals raised little fuss.
By contrast, Wanxiang Group only won approval this year to buy A123 Systems after the American electric car company spun off a unit that executed contracts for the U.S. government. And U.S. President Barack Obama last September stopped a Chinese-owned company from building wind farms near a U.S. navy base – a move that was defensible on national security grounds. (While the failed bid by China's state-controlled CNOOC Group for Unocal Corp. in 2005 is frequently held up as an example of U.S. resistance to Chinese takeovers, the U.S. government did not technically block the deal. CNOOC changed course after encountering heavy political opposition.)
So are there any national food security concerns in the Smithfield takeover? Any such arguments would be specious. Smithfield is eager to sell more American pork in China, which is hungry for it. Besides, Shuanghui is not a state-owned enterprise (SOE), but owned by private investors, including Goldman Sachs and Irish food flavour firm Kerry Group plc.
The debate might be different, though, if a similar deal were to unfold in Canada. If Shuanghui were to bid for Maple Leaf, Canada's pork leader, it could very well be labelled an SOE by the Canadian government, and the deal would face greater scrutiny and uncertainty at a political level.
Under the government's proposed amendments to the Investment Canada Act, a company can be labelled an SOE if it is deemed to be acting under the direction or influence of a foreign government – even if it is "not controlled in law or fact by foreign governments," law firm Osler, Hoskin & Harcourt wrote in a recent briefing. So long as the company "may have minority government investment, commercial relationships with foreign governments or significant relationships with officials within government" it runs the risk of being labelled a state enterprise, the law firm says. All of a sudden, Shuanghui becomes an SOE, given that chairman Wan Long is a long-time member of China's National People's Congress and has strong political connections – like every other Chinese business leader.
This is a hypothetical situation, but it suggests that in its rush to craft new takeover rules to stem further SOE moves in the oil sands, the Canadian government's approach to Chinese concerns leaves much to be desired. China's corporations are still in the early stages of a multi-year global expansion, and the company that its corporate leaders keep would likely brand every one of these firms a state-owned enterprise under the proposed new rules in Canada.
This stance will not serve Canadian interests if it deters potential investment. If the Canadian government wants to protect against Canada becoming a second-rate destination for foreign investment in a century that has so far belonged to China, it needs to forge a more workable approach.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .
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Sean Silcoff