This is a big week for the future of American industry. Chinese Premier Xi Jinping will meet one-on-one with President Obama on the sidelines of a summit in Washington. The Chinese will apparently use the meeting to make a new offer on a bilateral investment treaty that would pave the way for more foreign direct investment in both countries. This is a top economic priority for both Xi and Obama.
While this discussion unfortunately detours into xenophobia too easily and unthinkingly, more investment in the U.S. from subsidized, state-owned or state-influenced Chinese enterprises would have a dramatic effect on domestic competition. And one already-proposed deal could provide an early preview of what that might look like.
China National Chemical Corporation wants to buy Syngenta AG, a Swiss agriculture company with substantial holdings in the U.S. Syngenta sells more pesticides than any company in North America, and is among the biggest sellers of genetically modified seeds. So this $43 billion deal would put a significant portion of U.S. food infrastructure in Chinese hands.
We actually have a parallel for this. Smithfield Foods wanted to enter the lucrative Chinese market for pork for many years. When Chinese middle-class incomes rose to a level where their protein consumption accelerated, instead of opening their pork markets to foreign producers, the country’s biggest meat company, Shuanghui International Holdings, simply bought out Smithfield (in a $7.1 billion deal, much smaller than the Syngenta purchase).
Michael Wessel of the U.S.-China Economic and Security Review Commission, explained to me a couple weeks ago what happened next. “Shuanghui was supported by $4.2-$4.7 billion of state-subsidized capital,” he said. “To please Wall Street, a company like this must get 6-8 percent returns. Shuanghui gets 0-2 percent. Does that come from cutting back on corporate retreats, or lower prices down the chain?”
A Chinese-owned corporation (and Shuanghui is effectively controlled by the government, contrary to the Smithfield CEO’s testimony before Congress at the time) can muscle into an industry, and undercut suppliers upstream and retailers downstream because of their ability to access subsidies. This gives them a major competitive advantage and an incentive to grow. Purchasing foreign food corporations was a key element of China’s five-year plan back in 2011.
Wessel told me that not one case study on Chinese-invested firms has been undertaken by an independent expert. But theoretically, it translates to lower wages across the food chain, and strains on already-thin margins for farmers. For the Syngenta/ChemChina deal, it means further consolidation of seed options, and more biotechnology products in the hands of the Chinese at a time when they need to satisfy growing internal demand, potentially at the expense of safety. By the way, if the bilateral investment treaty goes through, Chinese companies would have the ability to issue ISDS challenges, and potentially undermine U.S. laws under the effective direction of the Chinese government.
Lawmakers on both sides of the aisle are attuned to the potential supply chain effects of the merger, led by Republican Chuck Grassley:
Four U.S. senators called Thursday for the Committee on Foreign Investment in the United States to review the deal “with a specific focus on the potential effects on food security and the safety of our food system.”
One of the senators, Chuck Grassley of Iowa, told a local radio station earlier this week that the deal could create a conflict of interest, with the Chinese government both regulating biotechnology products and owning a company that makes them. Syngenta’s products, which are aimed at helping farmers get more out of their land, include genetically modified seeds for crops like corn, soybeans and sugar beet.
ChemChina disputed the claims and said it welcomes a full review by the U.S. government.
Here are Grassley’s comments to Iowa radio. “Because the food and agriculture sectors are part of the nation’s critical infrastructure this merger raises questions about the potential national security implications,” he said.
Syngenta has refuted this. But Grassley and the other Senators, which included his Iowa counterpart Joni Ernst, want the U.S. Department of Agriculture to have a formal role in the Committee on Foreign Investment (CFIUS) review of the ChemChina deal.
CFIUS has never rejected a foreign investment over food safety. But you can see why consolidation in the seed industry magnifies the potential for a problem in one strain of seed to have a much more dramatic effect on the global food supply, to say nothing of the impacts on farmers in Iowa and across the country. And this will define future dealings on Chinese investment. The country has announced nearly as much global mergers and acquisitions through March as they did all of last year.
Grassley and his fellow Senators are following a growing uneasiness with foreign investment: see this poll question that they would rather see a U.S.-owned factory in their neighborhood with 1,000 workers than a Chinese-owned one with 2,000. There’s an collective intuition that Chinese investment has more destructive capabilities to those outside the factory, in addition to the likely xenophobia that might creep into such a poll result. Setting that aside, there’s a good reason to be skeptical, not only about Chinese investment, but the consolidation it signifies. Senators, including Grassley and others, took on the disastrous enforcement of the antitrust laws earlier this month. Loss of competition has all these spiraling effects that drives so much of what has distorted the economy. The anxiety and uneasiness so many middle-skill workers feel, the stagnant wages, the dangers to the supply chain, the decline in quality of goods and services (the crapification of America, as Yves puts it), are all embodied in the Syngenta/ChemChina deal.
All of this is a backdrop to the Obama-Xi meeting. Even though they’re negotiating a deal that would accelerate more foreign direct investment, Ag Secretary Tom Vilsack (not coincidentally also from Iowa, where they understand this issue) has criticized the Syngenta deal. The Administration needs to make a coherent choice about whether to empower small farmers and domestic producers, or to put critical infrastructure up for sale to the highest bidder.