CHINA WATCH Ready, Aim...Ouch!

Every once in a while, Congress does something that earns some lawmakers political points but
ends up shooting the economy in the foot. The latest of these may be a bid to block China's thirdlargest
steel producer from buying a minority stake in an American steel company. Economists
say forcing China to back down almost certainly would backfire.

The rumblings began in mid-May, when Anshan Iron & Steel Group Corp. of China announced it
plans to make a limited investment in the U.S.-based Steel Development Co. The arrangement
initially would involve a small plant in the U.S. firm's hometown of Amory, Miss. Eventually, it
could cover five such mills.

Within a few days, some 50 U.S. lawmakers wrote Treasury Secretary Geithner demanding he
investigate the proposed venture on national security grounds. They warned that the deal might
give the Chinese firm "access to new steel production technologies and information regarding
American national security infrastructure products."

Derek Scissors, a China specialist at the Heritage Foundation, calls the lawmakers' action
"outrageous." There's no national security issue involved in Anshan's investing in the venture,
and no more danger of China's stealing new technologies now than existed before the two joined
forces.

Indeed, this month General Motors Corp. announced it was selling its steering-parts operation to
a Beijing-based venture in what could be the latest move by a government-owned Chinese
company to buy into the U.S. auto parts business. Yet you could hardly hear a ripple of complaint
from Capitol Hill.

The handwringing about national security is something of a cover. What the American steel
companies -- and thus the lawmakers -- really fear is that because Anshan, like many other large
Chinese companies, is heavily subsidized by the government, U.S. competitors will be put at a
disadvantage. Their solution: keep Anshan and other Chinese companies out.

But here, too, economists say keeping Anshan out isn't a solution. While Chinese companies may
be heavily subsidized -- enabling them to compete unfairly against their U.S. counterparts --
letting China invest in American companies will only bolster the American firms and lead to more
U.S. jobs, not fewer, they argue.

Japanese auto companies have proven that over and over. When Toyotas, Hondas and Nissans
were all made entirely in Japan, America lost jobs as U.S. companies failed to compete. In the
mid-1980s, however, the Japanese began building auto plants in the United States. That led to
more jobs for U.S. workers, from both the automakers and the suppliers.

By contrast, snubbing foreign investment here often has backfired. In 2005, efforts by the
Chinese National Offshore Oil Corporation to buy financially troubled Unocal created such a furor
in Congress that Beijing was forced to scuttle the plan. Humiliated, CNOOC went elsewhere to
invest, bolstering oil companies in Australia and Canada.

Nor is it just China that has felt Congress' misplaced wrath. In 2006, Dubai World Ports had to
scuttle a bid to manage terminal operations at six U.S. ports after Democrats threatened to push
legislation to block it, despite warnings by the president that he would veto such a measure. The
outcome strained relations with Dubai, a U.S. military ally.

The Heritage Foundation estimates China has invested some $25 billion in U.S. firms. More than
90 percent of that is in the financial sector, and almost all of the remaining $2.5 billion involves
the China Investment Corporation's stake in a single firm -- American Electric Power's windenergy
unit.

Ted Moran, a Georgetown University trade expert who has written extensively about what really
constitutes a national security threat in foreign investments here, argues that the Anshan bid
"poses no national security threat whatsoever."

The Chinese stake in the steel firm would be minuscule, and, as U.S. steelmakers and unions
keep pointing out, steel is available from so many sources worldwide that there's no chance of
Beijing's withholding supplies from American firms, another concern.

Even if the Chinese owned several big steel plants, how would they control the industry?
And economists caution that, after the CNOOC incident and a similar rebuff of China's bid to
lease part of the then-defunct Navy port at San Diego in 1997, blocking the Anshan deal could
have serious consequences, souring China on making any further U.S. investments outside of
Wall Street companies.

"If we tell them no, that's going to be the end of their non-financial investment in the U.S.,"
Scissors warns.

It's too early to tell whether the lawmakers will follow their letter to Geithner with serious
legislation, but that isn't really needed to kill the deal. Lawmakers never voted on the CNOOC
case; China got the message from the furor that the deal created on Capitol Hill.

Many economists argue that a better approach might be to complete the bilateral investment
treaty the previous administration started, which would provide China with guidelines on what
kind of investments are welcome and what aren't. But that might not win as many points in the
polls.

by Art Pine