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  • Upgrading Trade Transparency

    AFP reported late last week that Sprint Nextel will not consider bids from two Chinese companies for large telecom contracts due to national security concerns expressed to Sprint Nextel by the American government. This is probably the right outcome, but it is the wrong way to achieve that outcome.

    One of the Chinese companies, Huawei, has been much discussed as being closely tied to the People’s Liberation Army. The other, ZTE, is not directly tied to the Chinese military but it certainly has close links to the Chinese government, operating in a sector required by Beijing to be utterly state-dominated.

    As such, it is reasonable that Huawei and ZTE are not allowed to supply equipment to be used in the U.S. on a large scale. However, determination of a national security risk should not be communicated behind closed doors on unstated grounds by seemingly random government actors. Nor should it be communicated by letters from groups of U.S. Congressmen and Senators, which are appearing with greater frequency. Such actions push Sprint Nextel and others to drop what can be competitively priced bids due to security restrictions that should not be implemented by private companies.

    Instead, determination of a national security risk should be made according to transparent standards, and by a clearly identified government body. The standards should be formulated by the Department of Defense and other relevant agencies and the role of American companies should be only to defer to those standards.

    Earlier this year the Senate granted the U.S. military authority to force companies to exclude suppliers considered risky on security grounds. If the agencies in question were to make their guidelines and decision-making open and explicit, this would be a far superior process to the informal one that exists now. But there is an even better option.

    The Committee on Foreign Investment in the United States (CFIUS) is already authorized to review incoming investment for potential national security threats. This creates a more transparent process by identifying one body to make final determinations. The CFIUS mandate does not extend to the supply of critical equipment, merely because such equipment supply from possibly untrustworthy firms was not an issue until recently.

    The logical solution in the Sprint Nextel case and others is to authorize the organization with expertise in evaluating investments on national security grounds, CFIUS, to evaluate certain equipment contracts on national security grounds. To ensure that CFIUS reviews do not interfere with American trade, the authorization should be limited to technology contracts of, say, $500 million or more. As occurs now, CFIUS would be informed in its decisions by the Department of Defense and other agencies both with regard to approval and with regard to the size and nature of the contracts that require review.

    The game for foreign firms in China is usually rigged, and often by protectionism hidden in vague and conveniently timed national security edicts. The U.S. has the means already in place to uphold our principles of commercial fairness and transparency, without sacrificing national security interests. CFIUS’ mandate should be broadened as soon as possible.

    Posted in International [slideshow_deploy]

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