American Politicians Should Stop Worrying About Chinese Pork

By ChinaFile
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(From L) Sentors Debbie Stabenow (D-MI), Thad Cochran (R-MS) and Pat Roberts (R-KS) listen to Larry Pope, president and chief executive officer of Smithfield Foods Inc. (Joshua Roberts/Reuters)

Last week the U.S. Senate held hearings to question the CEO of meat-producer Smithfield Farms, about the proposed $4.7 billion sale of the Virginia-based company to Shuanghui International, China's largest pork producer. The sale is under review by the Committee on Foreign Investment in the United States or CFIUS, an interagency panel headed by the U.S. Treasury that reviews foreign investments for national security threats.

Samuel Kleiner, a student at Yale Law School, argues in his Viewpoint on the subject that, "the Smithfield Farms deal threatens to undo a lot of good will between the U.S. and China on Foreign Direct Investment issues precisely because there is no plausible national security issue in the deal."

"At stake is the largest-ever Chinese investment in an American corporation and the future China's perception that it has fair access to the U.S. market," writes Kleiner.

We asked contributors to the ChinaFile Conversation to comment on the deal, the CFIUS review, the involvement of Congress and what deal augurs for the future of U.S-China trade.


Arthur R. Kroeber:

The Senate Agriculture Committee's decision to hold high-profile public hearings on what ought to be a simple pork industry takeover deal is a nice illustration of my "odd-year" rule of U.S.-China relations. This rule holds that in odd-numbered years -- that is to say, non-election years -- legislators loudly beat the gong of the China Threat. Because China is big and can be vaguely scary, it's an easy way to score publicity points, with absolutely no downside. Then in even-numbered years, when elections draw nigh, the politicians put away their gongs and change the subject. That's because elections are won on the issues that American voters actually care about, which turn out not to include China.

I first noticed this pattern in 2005 and 2007, when Congressional screeching about the harm that China's cheap currency was doing to U.S. industry reached its highest pitch, only to dissipate almost entirely in the mid-term and presidential elections of 2006 and 2008. Worries about the currency revived briefly in 2011, and former Ambassador to China Jon Huntsman launched a presidential campaign based largely on a promise to be tough on China. That campaign went nowhere, and after some bellicose rhetoric early in the Republican primary season Mitt Romney pretty much shelved the China issue. There are a few localized exceptions to this rule -- Sherrod Brown won his Ohio senate seat partly on an anti-China platform -- but on the whole we can be pretty sure that senatorial Sinophobia in 2013 will be forgotten by 2014, especially if the underlying issue is a silly one.

And as China threats go, the pork problem is surely one of the silliest.

And as China threats go, the pork problem is surely one of the silliest. Shuanghui International, an arm of China's biggest and best pork producer, wants to take over Smithfield Foods, America's biggest pork company. Smithfield is happy to sell, and Shuanghui's most likely motive is that it wants to learn from Smithfield how to improve the notoriously unreliable Chinese pork supply chain and meet international quality standards so that it can consolidate its domestic market position and increase exports. It's hard to see how a Chinese company's effort to clean up its own country's food safety system, and perhaps increase the globally traded pork supply, could be construed as a threat to U.S. national security.

Nonetheless, some committee members and their chosen experts gave it their best shot. Three reasons were given why the Treasury Department's Committee on Foreign Investment in the United States (CFIUS) should block the deal. Two are utterly specious and one points to a real problem -- but not one that would be solved by preventing the takeover.

Utterly Specious Reason #1: U.S. food security is threatened, either because we would become dependent on imports of Chinese pork or because Smithfield would start selling all its products to China, rather than American consumers. Fortunately, no one really seems to take this idea seriously.

Utterly Specious Reason #2: U.S. consumers could be harmed by a surge in imports of unsafe Chinese pork. There's a simple solution to this worry: simply enforce, and if necessary improve, the U.S.D.A.'s and F.D.A.'s food safety standards. If Chinese-origin pork is consistently found to fall short, trade rules would allow the U.S. to restrict or ban imports until the standards are met. Shuanghui owning Smithfield, or Smithfield owning Shuanghui, is irrelevant to the question of whether the U.S. government upholds its own food safety rules.

The more serious concern is that China's government doesn't practice reciprocity in international mergers. Beijing is perfectly happy for Shuanghui to take over Smithfield, but if the deal went the other way, it's almost certain Chinese regulators would block it. This is a legitimate issue, one of a host of market-access problems that U.S. trade negotiators need to keep pressing China on.

But blocking Chinese takeovers of U.S. firms is a terrible solution. First of all, it would reinforce the already widespread belief among Chinese that the U.S. is engaged in a conspiracy to prevent China's rise. Moreover, when China blocks innocuous mergers it mainly hurts itself, because it thwarts the efficiency improvements that occur when capital gets re-allocated. One of the big reasons China's economy is stumbling now, while America's is slowly but surely recovering, is that China doesn't allow the free buying and selling of companies, thereby allowing wasteful and mismanaged firms to stay in business far longer than is healthy. This is not an example to emulate.


Steve Dickinson:

It is unlikely that the Senate hearing on the Smithfield ham deal will convince The Committee on Foreign Investment in the U.S. (CFIUS) to reject the Shuanggui purchase bid. It has been the consistent policy of the U.S. that CFIUS review is confined to military security. Economic security is never a factor in CFIUS review. Senator Stabenow has openly argued that CFIUS should overturn this longstanding policy and expand security review to include economic security and food safety.

What could be more American than convincing a naïve foreign company to pay an inflated price for a failing U.S. company?

It is highly unlikely that a majority of Senator Stabenow's colleagues in the Senate share her position. It is more likely that Senator Stabenow's colleagues are eager to encourage foreign direct investment (F.D.I.) in the United States. What could be more American than convincing a naïve foreign company to pay an inflated price for a failing U.S. company? Maintaining the restricted scope of CFIUS review is a key to maintaining the open flow of foreign investment in such projects. As is typical, the Senate hearing is all for show, with no other purpose than to express the minority view of Stabenow and her anti-China trade supporters.

What would happen if the Senate were actually able to convince CFIUS to abandon its longstanding policy by rejecting the Shuanggui bid on economic security grounds? This would clearly have a negative impact in general on foreign F.D.I. in the U.S. by making the review process excessively cumbersome. However, the impact on U.S. China economic relations would be negligible.

There are four areas to consider, none of which will be substantially affected by a CFIUS rejection of the Shuanggui bid:

1) F.D.I. from China to the U.S. It is true that a negative decision on Shuanggui could convince other Chinese companies that M&A in the U.S. is more trouble that it is worth. While many in the U.S. hope for or fear a flood of Chinese investment into the U.S., these hopes/fears are not based on reality, for two reasons. First, the notion that the Chinese companies are sitting on a mountain of money is simply false. Investment capital is limited and the Chinese are very careful where they use their limited investment capital. Second, in this tight market for investment, Chinese companies are reluctant to invest in the U.S. because of the fear that they will be forced to obey too many laws.

2) F.D.I. from the U.S. to China. There is a concern that an adverse decision on Shuanggui will cause Chinese regulators to retaliate by refusing to permit U.S. companies to engage in similar M&A deals in China. The fact is that the Chinese government already effectively prohibits U.S. and other foreign companies from purchasing strong and successful Chinese companies. Any response to an adverse decision on Shuanggui would do nothing to change that longstanding Chinese policy.

3) Exports to China. There is a concern that the Chinese government will retaliate by limiting or prohibiting U.S. food exports to China, particularly in the area of pork and other meat products. The fact is that China already limits U.S. the export of U.S. meat to China. Nothing about the Shuanggui decision will change the Chinese position, since the Chinese position is based entirely on the domestic political need to protect Chinese pork farmers without regard to international trade concerns. It is certain that the day the Chinese government decides that it needs U.S. meat products to feed its people, the door to exports from the U.S. will be opened wide, as is currently the case for soybean, corn and wheat exports.

4) Imports from China. China is addicted to dealing with its manufacturing surplus by exporting cheap goods and the U.S. is addicted to the import of those cheap goods. Rejection of the Shuanggui bid may result in some sabre rattling by the Chinese government, but such antics will have no impact on the fundamentals of this co-dependent relationship.


James Fallows:

Arthur Kroeber and Steve Dickinson make convincing, logically sound, and systematic arguments on why the U.S. government should not try to block the takeover of Smithfield by Shuanghui International. All of us should be grateful to them for doing the serious work of showing why the "controversy" over this sale is insane. 

What, have we really become a nation of morons?

Now that they've done the serious work, I think there is only one real question that remains. It is: What, have we really become a nation of morons? Can it really be true that politicians or policy experts are urging us to fret about the sale of a meat-packing chain? Even in (as Arthur Kroeber points out) an odd-numbered year?

There are lots of things to worry about in the U.S.-China relationship and China's emerging role in the world. Those range from the environment; to cyber issues; to military-civilian relations within China and their consequences for China's dealings with the the U.S. and other countries; to the consequences pro and con of China's economic "rebalancing"; and back to the environment again. We can all imagine Chinese takeovers of U.S. firms that would raise questions -- for instance, if Huawei wanted to buy Intel, or Baidu bought Google, or the China Daily purchased the New York Times. But by any sane analysis, a meat-packing deal comes nowhere on this list. Again, as our two previous analyses point out, what would keep Shuanghui from selling Chinese-style suspicious food to U.S. customers after the deal is the same thing that keeps them from doing so now: U.S. food-safety laws that apply within the U.S. (at least until The Sequester takes full effect). It's far more likely that this deal will have a "leveling-up" effect, of Shuanghui using it as a way to promote a safer-brand image in China, than the dreaded race-to-the-bottom leveling-down effect.

Is there any good side to this controversy? I would say yes: the very fact that it seems to be fizzling out. For all the reasons my two colleagues explain.


Damien Ma:

I saw the entire live Congressional hearing on the Shuanghui/Smithfield deal, and most of questions were, let's say, less than enlightened. Since I fully agree with Arthur's and Samuel's takes on the political and legal dimensions of this deal, I won't add much beyond the smart things already said. But a few quick additional points for thought.

1. It strikes me that food trade and investment is an area of natural complementarity between the United States and China. America has developed one of the most efficient agriculture sectors in the world -- with just about 2 percent of the labor force, we can waste a lot of food, feed 300 million people, often a little too well, and still export tons of surplus into global markets. The United States has been a food exporter for decades, and this is clearly not the case for China. To understand the opportunities in this sector better, the Paulson Institute recently published an investment paper from Dermot Hayes at Iowa State University that explores several investment ideas in agrobusiness to attract Chinese capital.

Those who worry Chinese buying up food companies will lead to the same result as moving production to China, job losses a la the last decade of manufacturing (itself a debatable point), fundamentally misunderstand China's comparative advantages. China could become a manufacturing powerhouse so quickly because it has (or had) a surplus of inputs critical to that sector: abundant labor. The rise of the Chinese labor force over the last 15 years arguably had a broadly deflationary effect on wages.

This is not the case at all on food. China sits on just 7-8 percent of world's arable land, and faces water scarcity that go back centuries. Chinese policymakers spend much of their time worrying about how to keep food cheap enough (the true cost of the inputs would be quite high without generous subsidies from the government), since China still has half a billion relatively poor who spend a disproportionate amount of disposable income on just feeding themselves. Unlike the United States, China is a victim of its resource fate, which means it simply does not have the comparative advantage in food production and agro-business that the United States has. If you talk to the average Chinese, they look at the United States as this people-less fecund land of vast soils: "there are no people in the middle of the country!"

2. Chinese food demand is shifting rapidly. A rising middle class is increasingly choosing a meat-rich and protein-rich diet, and we all know that the Chinese are major pork eaters. Chinese meat consumption has already far outstripped that of the United States. The Chinese now consume more meat than the entire world produced in 1950. As Smithfield's CEO testified, pork consumption is apparently declining in the United States for a variety of reasons, but in places like Mexico and China, that's not the case. If you're a pork company trying to prosper and increase market share, China is it. India is a big consumer market, but they're not pork eaters.

3. As for China, importing food has long been a sensitive subject. Unlike other commodities, say oil, food is an absolute necessity. And because of cultural and historical dimensions unique to China, food sits in a exalted position in the Chinese psyche. So it isn't a surprise that the Chinese government still officially maintains a "95% self sufficiency" policy on food. But in reality, China relies just as much on the global market for soybeans and corn (particularly from the U.S. and Brazil) as it does for its crude oil and natural gas. This is an intellectual issue that will need to be untangled for China to more fully "trust" global markets as a reliable provider of its foodstuffs. If recent trends and demand patterns are any indication, China may have little choice but to shift its stance on food security, if not formally, then through de facto action.


A version of this post appears at ChinaFile, an Atlantic partner site.

This article available online at:

http://www.theatlantic.com/china/archive/2013/07/american-politicians-should-stop-worrying-about-chinese-pork/277917/