Companies & Industries

Pork Protectionism Is a Threat to U.S. Business


China has surpassed the United States as the worlds top pork producer, raising and slaughtering 700 million pigs a year.

Photograph by Imaginechina via AP Images

China has surpassed the United States as the worlds top pork producer, raising and slaughtering 700 million pigs a year.

The Senate Agricultural Committee recently held hearings to investigate the acquisition of Virginia-based pork producer Smithfield Foods by China’s Shuanghui International Holdings under the premise of “protecting national security.” Concerns by some members of the U.S. Senate ranged from food safety to protecting “valuable intellectual knowledge of meat processing.”

Unfortunately these hearings are a case of misguided nationalism by elected officials who fail to understand the benefits of global business.

Shuanghui’s acquisition of Smithfield (SFD) is a great deal for the U.S. economy. As U.S. pork consumption has slowed over the past decade, Smithfield has gone through a series of layoffs and plant closures and the company struggled to earn a profit (average 2 percent profit margin since 2003).

In China, however, demand for pork is growing. Pork is the favorite meat there, and a growing middle class means more Chinese families can afford to eat it more often. U.S. pork is particularly popular and commands premium prices, as it is viewed as higher quality due to our strict food safety laws.

Shuanghui is the leading pork producer in China, and its strong distribution network means it can sell Smithfield products throughout the country—something Smithfield could never do on its own. This in turn would increase Smithfield production and Shuanghui’s sales and profits.

If ever there was a win-win-win, this is it. U.S. farmers will sell more hogs, Smithfield plants will ramp up production, creating more jobs, and Smithfield shareholders would be paid a 31 percent premium on their shares. The deal would also help reduce the U.S. trade deficit, strengthen relations with China, and help improve nutrition in a developing country by making protein more affordable. What’s not to like?

Some U.S. senators expressed concern that the deal would somehow undermine food safety. But the fact is that U.S. food today comes from all over the world, including many countries that have less stringent food safety laws, such as Thailand, Mexico, Venezuela, Ecuador, and China.

Smithfield will not be importing products from China; all its meat will still be produced in the U.S., under U.S. laws, and by U.S. workers. Shuanghui’s track record—which included an incident in which pigs in China were fed food with banned chemicals—was cited by the senators as evidence this is a risky deal.

But under U.S. ownership, Smithfield has not exactly been a model citizen, either. It has been criticized for overuse of antibiotics in its pigs. In the late 1990s, Smithfield was charged with more than 22,000 violations for illegally discharging of nitrogen, chlorine, and hog waste into the Chesapeake Bay and with falsifying and destroying records. Smithfield was ultimately fined $12.6 million, at the time the largest water pollution fine ever.

The real issue, it seems, is that many senators see Chinese companies as extensions of the Chinese Communist government. The fact is most Chinese companies are capitalist enterprises that operate exactly the same as U.S. companies and are motivated by profit, not by a secret political agenda. Many are even partly owned by U.S. citizens, so when they succeed, U.S. investors make money.

Shuanghui is a publicly traded company (under the name Henan Shuanghui Investment & Development (000895:CH)) with U.S. investors. In 2006, U.S. investment bank Goldman Sachs (GS) actually controlled the company, as it led an LBO of Shuanghui with a group of other private equity investors; the Chinese government approved the acquisition. Three years later Goldman sold half its holdings and earned a 500 percent return. Today, according to proxy filings, a Goldman fund still owns 5.2 percent of Shuanghui. It’s possible some of these concerned senators may unknowingly own Shuanghui stock themselves.

The U.S. financial ties don’t stop there. Shuanghui is taking out a loan to finance the $4.7 billion acquisition, with $3 billion coming from U.S. investment bank Morgan Stanley (MS).

The U.S. government is requiring that the Smithfield acquisition be approved by the Committee on Foreign Investment in the U.S. (CFIUS), which is made up of presidential cabinet members who are authorized to veto unilaterally any business transaction they deem represents a national security risk. Its decisions are all made through a secretive process that does not allow public hearings or debate. The original intent of this committee was to protect national security by stopping enemy nations from getting access to critical U.S. information or technology.

Originally, many experts believed a CFIUS review was not even warranted for the Smithfield transaction, as it is difficult to imagine how pork production could ever be deemed a threat to national security. But this week’s grandstanding by the Senate committee was clearly an attempt to politicize the process and extend government oversight into all areas of international commerce—something that will be bad for all business.

If CFIUS rejects this deal, it will be a major blow to the free-market economy we enjoy. We can only hope President Obama’s CFIUS committee has had a lesson in Global Economics 101.

 

Larry_popelka
Larry Popelka is founder and chief executive officer of GameChanger, an innovation consulting firm.

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Companies Mentioned

  • 000895:CH
    (Henan Shuanghui Investment & Development Co Ltd)
    • $31.53 CNY
    • 0.63
    • 2.0%
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