Are We Outsourcing Our Security?

Outsourcing — that ignominious phenomenon of domestic companies cutting costs by hiring workers from abroad — has long been a source of contention. Jobs that could go to Americans are instead given to foreigners, and at a time of chronic high unemployment.

Yet, the practice of selling whole companies or parts of them to foreign investors has attracted relatively less attention, presumably because it does not necessarily entail job loss. It is a kind of outsourcing on a mega scale that goes on all the time, and the economic or other consequences, which may not be so benign, cannot be ignored.

Just a few days ago, Japan’s Mizkan Group took over Ragu, part of Unilever’s North American food production, in a $2.15 billion cash deal. It was, of course, only the latest of numerous Japanese incursions into the U.S. economy.

Thus, Unilever gets added to the long, distinguished list of companies in which foreign investors, led by Japan and China, have acquired significant interests. Just consider: 7-Eleven is owned by Japan’s Seven and I; the Chinese own shares in Morgan Stanley, IBM (100 percent of its PC business), the General Motors Tower, Visa, Smithfield Foods and Teledyne. Anheuser-Busch was scarfed down by Belgium’s InBev; French’s Mustard got gobbled up by Reckitt Benckiser, a British conglomerate; and Dial soap, pride of a squeaky-clean America, is these days a product of Henkel KgaA, Germany.

All this is besides the huge holdings of U.S. debt by China and Japan. Chinese holdings of U.S. Treasuries last year passed the $1.3 trillion mark, with Japan not far behind. China’s foreign-exchange reserves overall were pegged at an astronomical $3.82 trillion. That’s the most ever.

Of course, Americans aren’t the only ones selling off some of their most iconic brands to the highest bidder.

The sale of Israel’s flagship Tnuva Food Industries to the state-owned Chinese Bright Foods last week was an occasion of unmitigated joy at Apax, the British firm that held a controlling interest in Tnuva.

But in Israel, the joy was mitigated by the inevitable question mark in that security-minded country: Should the government allow its biggest food supplier to be owned by a foreign power?

Apparently, the answer will be what it usually is in such cases: Yes.

This has usually been the response in the United States. But not always. Although the U.S. economy is less vulnerable to foreign manipulation, the wisdom of selling off important properties to corporations abroad has been raised repeatedly in recent years.

In 2005, the answer was no to a Chinese oil giant that bid $18.5 billion to buy Unocal Corporation. Congress and the media reacted negatively and the Chinese backed off. It was not the first time.

Aside from the blow sustained to chest-thumping Americanism (Made in the U.S.A. — But Owned in Beijing doesn’t sound too good), do such business deals pose a real threat to security?

Conventional wisdom has it that if we do not live in the best of all possible worlds, where all are at peace, then we live in the next best, where all are afraid of war. In other words, the vast swathes of American economy owned by the heirs of Mao and Hirohito should not be cause for concern; the very size of their holdings is the measure of their stake in the general stability and prosperity. China would never dump U.S. T-bills, since such action would end up boomeranging right back at Beijing. By selling off U.S. debt, China would depress the value of its own national wealth and undermine its most important trade partner. So say the purveyors of conventional wisdom.

On the other hand, Cornell University economist Eswar Prasad thinks that the Chinese may not be as afraid of the boomerang effect as we think. The costs of dumping are not as large as many analysts believe, he says. They tend toget overstated in popular discussions, and so he rates the Chinese threat to move aggressively out of Treasuries as reasonably credible.

The conventional wisdom in any case offers little comfort. For putting all such calculations aside, the interdependence of the global economy is a dubious guarantor of national security. It presupposes that nations can be relied upon to act rationally in their self-interest. But not only do nations not always do so; their perceptions of acceptable risk in the pursuit of national goals may differ profoundly from ours.

For example, Mao Zedong’s perspective on a possible nuclear war defied Western notions of the thinkable: “Let us imagine how many people would die if war breaks out. There are 2.7 billion people in the world, and a third could be lost. If it is a little higher it could be half … I say that if the worst came to the worst and one-half dies, there will still be one-half left, but imperialism would be razed to the ground and the whole world would become socialist. After a few years there would be 2.7 billion people again.”

The incumbents in Beijing and Tokyo are certainly moderates compared to their mid-20th-century predecessors. But the future is unpredictable. Weapons of economic mass destruction might not hold sufficient deterrent power should these leaders decide in favor of war.

It behooves Western governments to take a tougher stance on these deals, to be on guard lest we take unacceptable risks in outsourcing our security.

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