1 AUGUST

Day in court for Manafort

Former Donald Trump campaign chairman Paul Manafort faced court for the first time Tuesday in his bank and tax fraud trial. Manafort is the first American charged in the inquiry by special counsel Robert Mueller, looking at Russian interference in the 2016 presidential election.

In opening arguments, Mueller's prosecutors painted Manafort as a man with no qualms about committing tax evasion to fund his "extravagant lifestyle" by hiding at least US$15 million in income earned from consulting work in Ukraine.

This trial — the first of two currently scheduled — relates to allegations he failed to pay taxes on millions he made from his work for a Russia-friendly Ukrainian political party, then lied to get loans when the funds stopped coming in. Manafort has been in jail for nearly two months in the lead up to this trial after he was charged with witness tampering.

NEWS WRAP

Indo-Pacific investment

• Australia, the United States and Japan have announced a trilateral partnership to invest in projects in the Indo-Pacific region that would build infrastructure, address development challenges, increase connectivity, and promote economic growth. Secretary of State Mike Pompeo made the announcement during a speech to the US Chamber of Commerce in Washington, DC. Director of the Centre's Trade and Investment program, Stephen Kirchner, provided some more detail about the announcement to Bloomberg. READ MORE HERE.
   

• President Trump said he'd be willing to meet Iranian President Rouhani without first demanding diplomatic concessions. The remark came in response to a question at a White House press conference Monday, just a week after he traded threats with his Iranian counterpart. Tensions with Iran were among the foreign policy issues unpacked by USSC's Ashley Townshend and Gorana Grgic on Radio National's Saturday Extra last week. LISTEN HERE.
   

• Income eases anxieties in the United States — but not so much in Australia. That's one of the takeaways from the Centre's latest polling with YouGov, which was featured in ABC News' "Chart of the Day" yesterday. Overall, Australians report a higher level of anxiety across various issues. As you might expect, higher incomes tend to reduce the level of anxiety people report, but the effect is much more consistent and pronounced in the United States. READ MORE HERE.
   
• National security should become the top priority for the Foreign Investment Review Board, which should strengthen its links with the similar US body to deal with growing concerns over Chinese investment. That's the takeaway from the Centre's latest research report, released last week, and covered by The Australian today. READ MORE HERE.
   
• Sacha Baron Cohen is back, with a new series called Who is America? His comedy can be powerful stuff – exposing hypocrisy, outlandishness and racism. It has also outlived its usefulness, according to honorary associate Nicole Hemmer, who writes for Fairfax newspapers that in the Trump era, the salience of shame and ridicule has largely disappeared. Something evident in Baron Cohen’s skits. READ MORE HERE.
   
• CBS chief Leslie Moonves has been accused of sexual misconduct in an article published by The New Yorker. Written by Ronan Farrow, who is in Sydney next month for as part of the Sydney Opera House's Antidote series, the story features allegations by six women of harassment and intimidation by Moonves, and dozens more describe abuse at his company. Farrow spent much of 2017 investigating Harvey Weinstein's alleged abuse of women. READ MORE HERE.

Like so many of our Asian allies and friends, our country fought for its own independence from an empire that expected deference. We thus have never and will never seek domination in the Indo-Pacific, and we will oppose any country that does.

Secretary of State Mike Pompeo
 Indo-Pacific Business Forum, US Chamber of Commerce
30 July 2018

ANALYSIS

National security begins at home and not at the border

Stephen Kirchner
Director, Trade & Investment Program

Revelations that foreign and domestic intelligence agencies penetrated the communication networks of leading Australian mining firms, including Rio Tinto, provides an important lesson in how Australia should secure its vital interests in regulating foreign direct investment (FDI). The 2008 attempt by China’s Chincalco to raise its stake in Rio Tinto exposed weaknesses in both the policies and processes Canberra then applied to screening foreign investment applications. The transaction was remarkable for being referred by the Rudd government to the National Security Committee of Cabinet.

The Australian government was deeply ambivalent about large scale Chinese investment in the mining sector at the time and struggled to respond coherently to the growing number of proposed transactions, often making policy on the run. The Foreign Investment Review Board (FIRB) opposed the increased stake in Rio for reasons that would change every time Chinalco sought to address them. Ironically, China’s National Development and Reform Commission, which approves China’s outward FDI, was also unenthusiastic about the acquisition.

The Australian government announced it would screen all transactions by entities owned by foreign governments and suggested preferences for the ownership stakes that would be viewed more favourably, although the criteria remained frustratingly opaque to foreign investors. One of the concerns raised was that Chinese enterprises were potentially conflicted as potential owners of businesses producing commodities that they also consumed. From China’s perspective, it was only natural to hedge exposure to commodity prices through such acquisitions.

Concerns were also raised that Chinese firms would gain knowledge of production costs and other information that might help them in negotiations over long-term bulk commodity price contracts.

We now know that domestic and foreign intelligence agencies, including China’s, likely had access to such sensitive corporate information anyway. The change in the composition of Rio’s share register was not the real security issue. These revelations come at the same time the United States has revealed that Russian hackers have compromised critical US infrastructure and Chinese hackers gained unprecedented access to US federal employee data through a government contractor. These episodes demonstrate that foreign ownership is only one of many avenues through which national security can be compromised. A domestically-owned and operated business may be just as vulnerable as a foreign-owned one.

National security needs to be secured behind the border over time and not at the border at a particular point in time when a foreign acquisition is first proposed. This is a task for domestic law enforcement and intelligence agencies. These agencies should assume a larger and more systematic role in the foreign investment review process, but screening foreign investment cannot by itself mitigate threats to national security.

A report written by myself and Jared Mondschein that was released last week examines the risks to national security that can potentially arise from foreign acquisitions. It calls on the Australian government to focus the FDI screening process on national security, leaving economic and other policy issues to existing domestic regulatory frameworks that already operate behind the border to regulate business investment. The FIRB already largely defers to domestic regulators in its consideration of these issues.

The United States provides a good model for how the Australian FDI screening processes could be improved. Rather than an open-ended ‘national interest’ test, the US process focuses squarely on transactions that could threaten national security. The Committee for Foreign Investment in the United States plays a similar role to FIRB in advising the president on the use of his discretion to reject foreign investment, but without being over-burdened by the confusing array of policy considerations that have been introduced by successive Australian governments into our FDI screening process.

Australia’s foreign investment policy trivialises the concept of the national interest by associating it with foreign investment decisions that are often more about domestic politics and protectionism than national security. The United States also has clear statutory principles that are applied as part of its screening process. Australia should look to develop a similar set of principles while clearly flagging to foreign investors those assets that are likely to raise national security concerns.

Given the joint nature of Australian and US security and intelligence interests, defence industry and technology, a coordinated approach to screening foreign acquisitions is also required. A memorandum of understanding between the Australian and US governments for sharing information and coordinating on foreign investment decisions should also be put in place. These changes would increase certainty for foreign investors, benefiting the inflow of foreign capital, while protecting Australia’s legitimate security interests.

DIARY

The week ahead

• Thursday, 2 August: President Trump will travel to Pennsylvania for a rally and roundtable with supporters.
   

• Thursday, 2 August: Tennessee primaries.
   

• Thursday, 2 August: CBS reports quarterly earnings.
   

• Tuesday, 7 August: Primaries in Kansas, Michigan, Missouri and Washington.

EVENT

Uni-Capitol Washington Internship Programme – Alumni Insights Series, Canberra

VIDEO

Former President Barack Obama & Vice President Joe Biden spotted at DC bakery

THE WEEK IN TWEETS

#PlasticGuns

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University of Sydney NSW 2006

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