The Costs of Perceived Hypocrisy: The Impact of U.S. Treatment of Foreign Acquisitions of Domestic Enterprises

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ABSTRACT

The People's Republic of China's revised rules governing foreign acquisitions of domestic enterprises, promulgated in the fall of 2006, disappointed many observers who had hoped for a more open and transparent approach to Chinese foreign investment. On closer inspection, however, the United States' own laws and policies restricting foreign acquisition of domestic enterprises influenced the Chinese rules' protectionism. The costs of U.S. trade policy have extended beyond Chinese law. Both the U.S. and Chinese rules limiting foreign investment likely violate each country's respective GATS commitments. These violations bring consequences beyond the borders of these two nations, undermining free trade in the global economy.

INTRODUCTION

"If American companies are allowed to buy out any Chinese company they like, but Chinese companies are prevented from doing the same in the U.S., that's not fair." (1)

In August of 2006, the People's Republic of China (China) promulgated its long-awaited revised regulations governing foreign acquisitions (2) of Chinese companies, the Provisions on Acquisition of Domestic Enterprises by Foreign Investors (Chinese M&A Rules). (3) Despite hopes that the revised rules would provide clearer guidance than earlier acquisition regulations, (4) the revised rules continue to lack precision. More controversially, the revised rules continue to give the Ministry of Commerce broad power to review and refuse acquisitions of China's domestic companies by foreign entities on a case-by-case basis with few concrete judging criteria. (5) The crux of the controversy is the vaguely worded Article Twelve, which allows the Ministry of Commerce to refuse and even undo acquisitions if they affect "economic security." (6)

The United States is one of China's biggest trading partners, (7) and American investors and others reacted strongly to the Chinese M&A Rules. (8) Many observers both in the United States and abroad saw the revised rules as a step back in China's progressive economic liberalization. (9) The United States, however, may have actually contributed to the content of the new rules. Although the U.S. Congress did not pen the words of Article 12, U.S. policies resisting acquisitions of domestic American companies by foreign entities had a discernible impact on the content of the revised rules. After the United States prevented a Chinese company from acquiring a California corporation, China responded with revised rules that heightened Chinese protectionism. (10)

Both the Chinese and U.S. acquisition rules may also run afoul of World Trade Organization (WTO) commitments. The United States has argued that its own acquisition (11) rules are no more restrictive than necessary to maintain national security. (12) Even if this argument is accepted, the perceived hypocrisy of the United States blocking politically unpopular acquisitions of U.S. entities by Chinese companies while simultaneously urging more openness in the global market undermines American influence and credibility. The costs of this perceived hypocrisy are not always clearly defined or restricted to national borders.

Part I of this Note examines the relationship between the U.S. and Chinese policies regarding acquisitions of domestic enterprises by foreign investors. It describes how U.S. policies have triggered heightened protectionism in China. Part II analyzes the legality of U.S. and Chinese acquisition rules in light of both countries' commitments to the WTO's General Agreement on Trade in Services (GATS). It concludes that both countries have violated their obligations under the GATS, and it argues that these violations carry potential costs to the United States, China, and the world economy. Given U.S. commitments to free trade in services through the GATS, the United States must consider the impact of the perception of its own seemingly anti-free trade policies on the rest of the world, both in terms of developing the policies of their trading partners and in terms of the economic costs of violating treaty obligations. …