National Security and Foreign Direct Investment: The Exon-Florio Amendment

Edward M. Graham and David M. Marchick’s book entitled, US National Security and Foreign Direct Investment analyzes the relationship between the national security implications of Foreign Direct Investment (FDI) from other nations into the United States (US), and the Exon-Florio Amendment to the Defense Act in the Omnibus Trade and Competitive Act of 1988. The book was published in May 2006 by the Peterson Institute for International Economics. The Institute is a private, nonprofit, and one of the few economic think tanks that are widely regarded as nonpartisan. Graham was a senior fellow at the Peterson’s institute as well as an economist for the US Treasury while Marchick is a partner with Covington & Burling and is recognized as one of the leading experts on the Exon-Florio amendment. The book contains six chapters as well as an executive summary. The book provides an encompassing analysis of the effects of the Exon-Florio amendment on the international political economy eighteen years after its legislation.

Chapter One illustrates the history of FDI in the US economy. They provide an analysis of US reactions to surges in FDI during World War I, World War II and the late 1980s leading to the Exon-Florio amendment. Even though FDI has become critical to the vibrancy of the US economy the notion that foreign firms could become dominate over US-developed technology caused rising concerns over the implications of FDI on national security. Chapter Two analyzes the legislative history of the Exon-Florio amendment. The amendment states that the President can block a transaction only if credible evidence exists that the foreign acquirer might take action that threatens national security. The evidence is reviewed by the Committee on Foreign Investment in the US (CFIUS) and then presented to the President. Chapter Three examines the positive, such as efficiency spillovers in the auto industry, and negative, such as domestic firms cannot compete with some foreign firms causing a migration of labor toward foreign firms, economic effects of FDI. Chapter Four introduces their case study on the recent surge of Chinese FDI into the US. From a strategic perspective China’s attempt to acquire parts of US companies causes a variety of issues. Out of the ten largest trading partners with the US, China is the only country that is not considered a strategic or political ally. CFIUS reviews cases that usually involve highly sensitive exports of technology and China, during the last decade, has been linked to a series of high-profile breeches of US export control laws and regulations. Therefore, FDI from China will most likely be seen by CFIUS as well as various intelligence agencies as an attempt to build military strength. However, Graham and Marchick suggest that the US should continue to support China’s integration into the global economy as a positive step toward China’s economic development and possibly democratization. Chapter Five portrays the effects of the CFIUS process becoming more politicized. US companies have attempted to influence or politicize the CFIUS process to advance commercial interests unrelated to national security. Graham and Marchick conclude that this process costs the US economy by increasing uncertainty for foreign investors shying them away from acquiring US companies which therefore lowers the value of US companies. Chapter Six concludes with ideas to be included, such as adding protection of critical infrastructure as a factor for CFIUS consideration, and rejected, such as including an economic security test, by Congress to improve the Exon-Florio amendment and CFIUS.

In 1995 Edward M. Graham and Paul R. Krugman published Foreign Direct Investment in the United States. This book became the scholarly foundation for studying the effects of FDI on the US economy. Eleven years later, Graham and Marchick book utilize that foundation to elucidate on the effects of the Exon-Florio amendment on the US economy. They conclude that without FDI, US manufacturing, employment, competitiveness, and innovation will be at risk. However, as firms attempt to influence the CFIUS process toward their own self-interest the aggregate of the US economy could also become at risk but their own profit margins would be sustained in the short-run. The debate within the CFIUS between protecting US corporations’ global economic hegemony and the fundamental neoclassical economic theory free markets hovers throughout the book.