President Obama just strengthened American military primacy — but not through boosting counterintelligence or buying missiles. Instead, he used domestic investment law to prevent a Chinese company from purchasing a German firm whose semiconductor technology has broad military applications. The president blocked the deal after the Committee of Foreign Investment in the United States argued that the $714 million-dollar acquisition of Aixtron has unprecedented security risks.
It is only the third time in the past three decades that the United States has used a national security concern as an intervention rationale, but the second time Obama has pulled the trigger.
Domestic regulation can serve grand strategy ends
People often think that globalization strengthens firms at the expense of states. In fact, though, states can increasingly press foreign multinational corporations into the service of the ‘national interest’ through a process that my co-author and I call Networked Liabilities in a new article for the European Journal of International Relations. This is because multinational firms operate across borders, and have to comply with the laws of the different countries they operate in, even when those laws clash. This means that these companies’ foreign affiliates leave them vulnerable to state pressure. By targeting a multinational corporation’s domestically rooted affiliate, states can alter the entire corporate group’s governance and business activity.
When can domestic laws have big global consequences? We argue that the success of states into forcing firms into service depends on two factors — whether the firm has assets within the state in question, and whether there are other jurisdictions with substantially different rules that the firm could move to. In other words, the key factor determining the state’s power is whether firms can easily flee.
This explains why Aixtron is vulnerable to U.S. pressure. As the New York Times reports, over a fifth of Aixtron’s revenue and a fifth of the firm’s 700 employees are in the United States, leaving the firm with limited room to move. Ironically, we find that the Chinese government also regularly utilizes merger interventions to strengthen its security by using antitrust investigations to bolster access to natural resources.
But you need strong regulators to do it …
States generally have a variety of economic regulations, such as sanctions, competition law or even just safety standards that they can use to extraterritorially regulate global-firm behavior. If they actually want to use these rules, they need strong, well-financed and well-connected regulators with enough expertise to go after multinational corporations. In the German-Chinese deal, the secretive Committee on Foreign Investment in the United States did the legwork. The committee is composed of the heads of a different government departments such as Commerce, Homeland Security and Justice. These departments subject questionable transactions to long review processes that require in-depth knowledge of esoteric technologies and arcane law. However, in other areas, such as privacy and data security, the United States is playing catch-up because it simply doesn’t have the right bureaucratic resources.
One of Donald Trump’s rallying cries is to get tough on the Chinese. The Aixtron intervention illustrates that the president-elect has some underappreciated tools that might allow him to do this. The comittee and the president only need vague justifications to block mergers. This means that Trump could easily exploit these rules against the Chinese or for his own benefit.
Trump’s problem is that using those tools would require him to break another of his campaign promises — to curb those bureaucrats. Trump repeatedly lambastes the bureaucratic excesses of Washington and has even called for a freeze on federal government hiring. However, cutting the resources of the bureaucracies that Trump needs to fight these battles would set him up to lose the battles before he even starts fighting them.