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.
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You gotta love the “selective” application of the love of the market and contradictory laced mixed messages on capitalism, free markets and China.
How is a USG official going to complain about China’s government providing “billions” in low cost/subsidized capital to their firms, yet be silent on when our Fed provides “trillions” in low interest capital to US banks?
How is a USG official going to complain about lack of anti-trust enforcement and the decline in competition (one of those assumptions about the invisible hand) when it involves a Chinese investment, yet be silent on when it involves regulatory approved “mergers” between two US firms?
How is a USG official going to convince China to agree to a BIT with the US, and yet expect China to accept the USG blocking an foreign direct investment for “food safety, lol” and or not exercise its right to ISDS?
i didn’t know what to say. Politics as usual? Yet another “national security issue” caused by the short sighted American business quarterly balance sheet.
Exactly. Quote “if the bilateral investment treaty goes through, Chinese companies would have the ability to issue ISDS challenges, and potentially undermine U.S. laws.” Unquote
The global trade agreements are American initiatives. Grassley and his group can hardly object to their application to US companies, can they?
Who benefits when multinationals compete with “nationals?”
last year an article in asia times reported on china’s stance on their state owned enterprises. they agreed not to compete internationally if it became harmful to the private enterprises, but held a position that their soe companies should be allowed to function as long as they were not harmful because china felt they could still accomplish this to the benefit of china. i’m a little skeptical. probably the only way it would not be harmful would be for the u.s. to subsidize our industries, which we have done for big ag forever. another thing is that global warming might not devastate agriculture globally, it might enhance it. not much info on those projections, but if agriculture becomes more viable, the u.s. will lose market share and it’s our biggest export.
“For sale to the highest bidder” – isn’t this a Third World strategy for countries with nothing else to sell? We’re busy sending our raw materials to China so they can make cheap stuff to sell back to us at a discount, of course, because we cannot afford the good stuff anymore.
People are starting to catch on, however. Up here in the PNW, a yuuuuge methanol plant project owned by the Chinese government and a private British company (colonization, anyone?) continues to draw critical scrutiny:
http://www.thenewstribune.com/news/politics-government/article47202115.html
http://www.healthybay.org/index.php?option=com_content&view=article&id=212:proposed-methanol-plant-in-tacoma&catid=42:news-and-events&Itemid=74
Seems the locals just aren’t that excited about not only putting their neighborhoods and health at risk, but also paying higher rates for water and utilities while the Chinese-owned plant gets tax breaks and a better deal, all for a puny payoff of 200 jobs.
This scenario is actually frightening.
If it was suggested that the American government purchase this enterprise, there would be great anger and outrage.
But it’s ok to sell it to a company owned and controlled by China.
The linked article by Halverson is full of information.
“The Chinese government acts like a de facto board of directors for the country’s domestic industries – even for publicly traded companies like Shuanghui. The Communist Party issues the five-year plan, and Shuanghui is expected to follow that direction. The government can say it wants the Chinese meat industry to employ certain strategies, and all domestic companies are expected to adhere. Yet the day-to-day management of the company, how it chooses to carry out those directives, is left to the company’s management. And if there is no directive, the company is free to proceed as it views best.”
There wasn’t much opposition when China invested billions of dollars in the Canadian tar sands.
This makes no sense:
“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?”
What it really means is that a ‘company like this’ would have to potentially cut back on something to show that level of profit, whereas the Chinese company, being happy with a lower return on capital, could live with higher cost, assuming the same revenue/pricing power.
good point
All the national economies seeking for growth are concerned for market share not today’s profit.
This issue perfectly illustrates conservative thought…. It’s not really a problem unless it happens to me or to someone in my family.
Here, you have Chuck Grassley, who is wrong on virtually everything under the sun, but suddenly discovers that whoa, maybe giant multinational corporations might not have the best interests of his constituents at heart. Whadayano?
This ‘deal’ will go through. Sure, ‘concerns’ will be voiced; hands will be wringed; platitudes will be spoken… but corporate profits will not be denied. Watch for the token giveaway like ‘extra FDA oversight’ or something, and then continue to enjoy your delicious GMO food. Chuck Grassley answers to someone, and it ain’t you.
‘It’s a big CLUB. And YOU AIN’T IN IT.’
— George Carlin
and from the same piece, ‘It’s [education] never gonna get any better. Don’t look for it. Be happy with what you’ve got.’ Hillary, is that you ?
Interesting post. My mother’s second husband is a contract “grower” (hog farmer) for Smithfield Foods. His profits are way down and both his workload and issues with the new corporate entity are way up since the Chinese takeover of Smithfield Foods. Extremely anecdotal and narrow in scope, but very much in keeping with; “…lower wages across the food chain, and strains on already-thin margins for farmers. ”
Remembering the Clinton’s wholesale give-way of American industry and state secrets to the Chinese during their first 2 terms, I can only imagine how quick a President Hillary Clinton would rubber stamp the Chinese purchase of damn near anything in exchange for either a 5 million donation to the Clinton Foundation or a 1 million dollar speaking fee paid to the other President Clinton. If Sanders can’t clinch the nomination the future looks dark.
ANYTHING for the Chair(wo)man Yellow Pantsuit and her cronies……am I right?
selling America down the soon to be re-polluted river, all for a wad of cheap Chinese beads !!
obama just loves to make deals, cpi, tpp, this one. tell me that the psychology of individual presidents doesn’t make a difference. with eisenhower no vietnam. with gore no iraq – and maybe no 9/11.
This is then entire freakin’ problem with our $3T trade deficit. US can not own a business in China, must take a 51% Chinese partner. China never distributes is vast holdings of u.s. dollars to it’s slave wage workers to increase their standard of living. Nor does china by “stuff” back from U.S. They buy ASSETS in the u.s….with 100% ownership. Will eventually turn us workers into slave wage employees here too.
Assets = Ownership = Control = Corruption….make no doubt. The u.s. is selling it’s soul because of dipstick deal makers cashing the u.s. out for a couple of quick bucks for themselves. Very bad long term issues. Hence why Trump is very popular with folks who pay attention to trade policy and on the short end of the stick.
I think it’s funny. Chinese communists being better at running their own country than American capitalists are.
The root cause is of course that American capitalists are much more concerned about looting their country than building- or running- anything in it, never mind the country itself. In China, many kinds of the US C-segment behavior buys a $1.35 ticket (cost of bullet) to the organ-banks.
I think deficits are inevitable in our commercial ideology. When you control the globe with overwhelming issues of currency you are bound to have huge inwards investment.
Yes, Syngenta is part of the nation’s “critical infrastructure,” to use Senator Grassley’s words, and you should add the adjective “agricultural.” Syngenta is at the moment the center of a huge class-action lawsuit, in which every literate farmer in the country has joined, because they marketed a genetically-modified corn seed which had not been approved by China, one of our major corn importers. The lawsuit says that China’s resultant turning away all US corn exports wrecked the corn market (findable on the CME) by billions. I suppose if China manages to buy Syngenta, they will wind up as defendants.
…could create a conflict of interest, with the Chinese government both regulating biotechnology products and owning a company that makes them.
As opposed to American companies both making products and owning the government that regulates them?
It’s ok…the capitalists have already strip-mined this and other food businesses. Maybe we should
give them McDonald’s as a freebie…they sell food-like substances, so it’s a good pairing.