CNAS Commentary: CFIUS Reform Gaining Momentum

Washington, November 16 – With Congress considering legislation that would expand the mandate of the committee that reviews foreign investment in the U.S. – the Committee on Foreign Investment in the U.S. (CFIUS) – Center for a New American Security (CNAS) Adjunct Senior Fellow Peter Harrell has written a new commentary arguing why reform is necessary. In the commentary, Harrell also provides a detailed description about what the proposed legislation would change.

Please find the full commentary, “CFIUS Reform Gaining Momentum,” below:

Momentum is growing for a major overhaul of how the U.S. government reviews foreign investment in the United States for national security risks.

Last week, Republican Senator John Cornyn and Democratic Senator Diane Feinstein introduced legislation that would significantly expand the mandate of the U.S. government committee that reviews foreign investment in the U.S., the Committee on Foreign Investment in the U.S. (CFIUS). North Carolina Republican Rep. Robert Pittenger introduced a parallel bill in the House that also has bipartisan support.

With Trump administration officials from Defense Secretary James Mattis to Commerce Secretary Wilbur Ross already publicly on record supporting more aggressive review of foreign investments in the U.S. and bipartisan congressional support for action, it is increasingly likely that Congress will act next year to pass the first major CFIUS legislation since 2007.

Foreign direct investment (FDI) in the U.S. provides major economic benefit, with foreign-owned companies directly employing more than 6 million Americans and indirectly supporting nearly 2.5 million additional jobs. The Commerce Department estimates that the U.S. has a total stock of $3.7 trillion in total foreign investment, making the U.S. by far the world’s leading destination for FDI.

But shifts in the nature of foreign investment in the U.S., particularly the growth of FDI from China and other countries with heavy state control of their economies over the past decade, have raised new policy challenges. For example, aggregate Chinese investment in the U.S. surpasses $130 billion as of mid-2017, including $45 billion of Chinese investments made in 2016 alone. Chinese companies like insurance giant Anbang have made major real estate plays like acquiring New York’s Waldorf Astoria Hotel, while Dalian Wanda group purchased the AMC movie theater chain. 

Beyond these headline-grabbing deals, and more critical from a national security perspective, an unpublished 2017 Pentagon study found that Chinese investors were aggressively acquiring stakes in a number of U.S. tech startups, including companies involved in semiconductors, robotics, and artificial intelligence. Recent press disclosures based on the leaked “Paradise Papers” suggest that Russia, too, has been funneling money into U.S. companies, including U.S. tech companies, in recent years. Many of these stakes are minority stakes, which are generally not currently subject to CFIUS review. Other investments don’t necessarily pose a national security risk as CFIUS has interpreted its mandate in recent years, which has tended to focus on near-term issues like military supply chains and sensitive defense technologies, rather than over-the-horizon national security risks, such as emerging technologies—though CFIUS did block a planned Chinese purchase of a U.S. semiconductor firm earlier this year. Defense officials and many outside policymakers, however, are concerned that investments by China, Russia, and other at times adversarial countries in technologies like artificial intelligence and robotics may erode America’s technological edge in the years ahead. 

Another significant emerging trend has been the explosion of joint ventures between U.S. firms and Chinese firms, driven in large part by Chinese requirements that U.S. companies establish joint ventures with Chinese partners in order to get access to large parts of the Chinese market. Many of these joint ventures involve high-value technologies, like chip design and advanced manufacturing techniques. And in a number of cases, the Chinese have managed to commercialize the technologies on their own—which then compete with U.S. companies both in China and globally. As White House trade official Peter Navarro wrote in an August op-ed, the risk is that “When an American company turns over its technology in exchange for access to the Chinese market of today, it has effectively created a Chinese competitor in the global markets of tomorrow.”

Cornyn’s bill and other CFIUS reform proposals circulating on Capitol Hill aim to address these challenges by expanding CFIUS’s mandate and improving the Committee’s operations. 

For example, Cornyn’s bill would expand CFIUS’s purview to cover not only acquisitions of controlling interests in U.S. companies, but purchases of stakes of 25 percent of more when the purchasing company is at least 25 percent owned by a foreign government. It would also direct CFIUS to cover joint ventures involving “critical technologies” in which a U.S. company provides intellectual property and related support to a foreign company. The specific technologies would be defined through regulation. The bill would also direct CFIUS to cover foreign real estate purchases that are adjacent to U.S. military sites or other sensitive national security sites, out of concern that foreign-owned real estate can be used for espionage purposes. 

However, Cornyn’s bill, unlike several other proposals circulating on Capitol Hill, would not alter the core of CFIUS’s purpose as a review process focused on national security threats. This distinguishes it from proposals to demand “reciprocity” as a condition of allowing foreign investment in the U.S., such as demanding that China allow greater access to U.S. investors if the U.S. is to continue accepting Chinese investment.

Congress and the administration will have to resolve a number of thorny issues as consideration of CFIUS moves forward in the coming months. 

First, both the text of any new law and the implementing regulations will need to ensure that CFIUS does not unduly burden legitimate, desirable investment in the U.S. The U.S. has strong economic incentives to continue attracting foreign investment, and the overwhelming majority of such investment poses no national security risk. Cornyn’s bill contains provisions that would enable the government to create an exemption for investments from allied countries, such as countries that have mutual defense treaties with the U.S., which is a good starting point.

Second, CFIUS will need to continue to be flexible to adapt to changing technology, trade, and investment trends. Technologies that today we think may be critical in the future may turn out to be less important, while technologies that seem trivial today may serve critical military and economic purposes in the future. Congress will need to provide wide latitude for the executive branch to keep definitions of critical technologies up to date, and the executive branch will have to work closely with both policymakers and the private sector to stay on top of emerging trends.

Third, the process will need to work in practice. Over the past several years many in industry have complained that CFIUS has moved slowly and that too many chokepoints have emerged. Companies often need to conclude mergers quickly for business reasons, and simply can’t wait months or years to obtain a government approval. Especially if CFIUS is going to increase its mandate, it will need additional funding and personnel to keep up with the greater caseload.

If CFIUS is going to take on joint ventures, CFIUS is also going to need to address the fact that technology transfer can go both ways. While it is true that the U.S. is the leader in many technologies, it doesn’t lead in all of them: for example, China’s use of mobile payments has grown 17 million percent since 2012 and will amount to more than $5 trillion in 2017, more than 50 times the size of the U.S. market. While the U.S. wants to ensure that American companies do not transfer its technological crown jewels overseas, it also wants to ensure that U.S. companies can collaborate with their foreign counterparts to develop better projects—and bring the best of foreign technology back to the U.S.

Like other areas of global economic policy, CFIUS will work better if the U.S. coordinates its review of foreign investment with like-minded allies. Several members of Congress have expressed support for the U.S. working with the European Union and other like-minded countries to develop a harmonized approach to reviewing foreign investments, and the European Union is also beginning to consider how to address this issue. The Trump administration should begin working with allies now to develop a coordinated approach.

Finally, policymakers need to recognize that CFIUS alone will not be the magic bullet in America’s economic competition with China. A smart CFIUS reform bill can help address specific challenges in the U.S.-China relationship, but CFIUS is not the right vehicle to address every important issue, such as China’s refusal to allow any U.S. investment in a number of Chinese economic sectors. In taking up CFIUS reform, Trump and Congress should not lose sight of the other issues in the relationship, or in the need to use diplomacy, trade tools, and other parts of the U.S. toolkit to protect U.S. security and ensure a balanced economic relationship.

Harrell is available for interviews. To arrange one, please contact Neal Urwitz at 202-457-9409 or nurwitz@cnas.org.