3Com deal dead

Somewhere, the ghosts of Smoot and Hawley and smiling this morning.

A Chinese firm, Huawei Technologies, has pulled out of its plans to buy 3Com because it became obvious a federal panel wouldn't approve the deal.  The reason: 3Com makes anti-hacker software for the military.  Can't have that falling into Chinese hands, according to the Committee on Foreign Investment in the United States, or CFIUS.  (Making matters worse is Huawei's alleged ties to the Chinese military.  But the same could be said of a lot of Chinese companies.)

This deal didn't get anywhere near the publicity of Unocal in 2005 or Dubai Ports in 2006.  No hue and cry from Congress.  This time, according to the New York Times, the mere threat of a hue and cry from Congress was enough to kill the deal:

The questions being raised in Congress over the deal — led by
Representative Ileana Ros-Lehtinen of Florida and Senator John Kyl of
Arizona, both Republicans, as well as many prominent Democrats — made
some people wary of another firestorm like the Dubai Ports deal of two
years ago.

“It’s hard to conceive that, at some senior levels in
the administration, there wasn’t an appreciation that if this were
concluded favorably, there might be an adverse political reaction,”
said a Republican aide, who was authorized to speak as long as he
remained anonymous. “There are growing concerns about cyber-security,
and it’s a presidential election year.”

We now have our answer to a question posed last month by the insider-Washington website The Swoop:

The Administration finds itself caught between two pressures on this issue. On the security front, new rules now allow agencies like the Office of Director of National Intelligence a
stronger voice inside CFIUS. By contrast, for reasons of economic
policy, Treasury officials do not wish to signal to Chinese investors
that they are not welcome in the US. The HuaWei example will test which
factor enjoys more weight. 


Thing is, in the current political environment, almost any asset class can be claimed to have national security significance.  Unocal?  Can't threaten what little "energy independence" we have.  Dubai Ports?  Why them Ay-rabs will nuke Long Beach in a heartbeat.  (The lone exception appears to be the finance sector, in which foreign rescues are welcomed with open arms.  Once upon a time, what was good for GM was good for America.  Now it's what's good for Citi.  Pathetic.) 

Prediction:  No matter who becomes the next president, he or she will hear the siren song of protectionism just as Herbert Hoover did.  Only this time it'll be dressed up in the clothing of "national security."  It'll be an easy way to look hawkish without actually committing any troops or tax dollars.

The difference of course is that in Hoover's time the United States was the world's biggest creditor nation.  Now we're the world's biggest debtor.  A protectionist, er, national security bill could be the proverbial bursting of the dam that finally brings the torrent of worthless dollars currently held overseas back to the United States.  If it coincides with significantly rising wages in China, look out.

The Daily Reckoning