China Wants Our Bacon — and Our Hot Dogs

A Chinese firm wants to purchase Smithfield. Here's the government panel that could stop them.

Chinese company Shuanghui is set to buy U.S. pork producer Smithfield Foods for $4.7 billion. (National Journal)

Chinese and U.S. markets are becoming closer and closer by the day, but there is one government agency that stands to keep this in check: the Committee on Foreign Investment in the United States.

Known most commonly as CFIUS, this committee is back in the news this week for its upcoming role in approving the biggest takeover of a U.S. company by a Chinese company with the merger of U.S. pork-producer Smithfield Foods and Shuanghui International Holdings. The Chinese corporation is acquiring Smithfield in a $4.72 billion deal. But the deal is not yet finished.

This is where CFIUS comes into play.

What is CFIUS?

The committee is chaired by the treasury secretary, with representatives from the Departments of Defense, State, Justice, Homeland Security, and 12 other departments. If it finds that a merger could hurt national security, it can recommend the president to block the deal.

CFIUS was established by Gerald Ford in a 1975 executive order, which cited the Defense Production Act of 1950 as its legal precedent. This law was passed after the start of the Korean War and seen as a response to a broadening Cold War.

After announcing an upcoming merger, companies voluntarily submit a request to CFIUS, which has 30 days to approve the deal or launch an investigation. If the committee choses the latter, it has 45 days to approve or block the transaction.

These recommendations rarely reach the president's desk, as companies usually find a way to fix whatever unresolved problems a CFIUS report finds.

Does it have a Chinese problem?

Because it has blocked several deals between U.S. and Chinese companies, particularly in the high-tech arena, the Chinese business community has developed a perception that the committee is working to shut out Chinese investment. Opponents of the president's power say the process is not transparent and is not subject to judicial review.

This current bid might face some hurdles in the coming months as the federal government reviews the merger. With the outbreak of the bird-flu and other health issues in Chinese factories, the committee might have concerns with the merger. However, Smithfield tried to tamper down concerns by saying they would maintain their "world-leading" food quality and safety.

China is the world's leading producer of pork and the third-largest importer of U.S. pork.

Has CFIUS blocked mergers before?

Deals between U.S. and Chinese corporations have failed in the past. Last year, Chinese-owned Ralls Corp. lost its bid to build wind farms in Oregon because CFIUS thought the deal was a risk to national security. The company filed a lawsuit against President Obama and the committee for the company is claiming is a violation of its constitutional rights. CFIUS argued the wind turbines were near or within restricted Navy airspace.

This was the first time in 22 years that a president has blocked a business deal on the basis of national security. George H.W. Bush blocked the merger of U.S. motor manufacturing company MAMCO with China National Aero-Technology and Export Corp. because of national security fears.

In 2005, the Chinese National Offshore Oil Corporation attempted to buy California-based oil company Unocal for $18.5 billion. Seen as a political and national security risk, the House referred the matter to the Bush administration. Soon after, CNOOC withdrew its bid to acquire the company and Unocal merged instead with Chevron, amid concerns that the Chinese takeover of that company could lead to national security risks.

The committee remains involved in approving many international mergers. Just this week, CFIUS approved the purchase of Sprint by Japanese company Softbank for $20.1 billion, finding that there were no unresolved national security risks with the merger.

CNOOC has also had its fair share of luck through the committee. In February, CFIUS approved the $15.1 billion merger of the Chinese oil company with Canadian gas company Nexen. Because Nexen does business through the Gulf of Mexico and other locations in the U.S., the deal required CFIUS approval.