Controlling Investment: It Ain’t Broke; Why Are We Fixing It?
August 9, 2021
Two weeks ago I threatened to write about investment controls, and this week I am keeping my word, even though there is no new proposal to comment on. Sometimes a shot across the bow is appropriate.
The United States has historically maintained a fairly open attitude about foreign investment, both inbound and outbound. Over time, however, Congressional support for an open investment policy has deteriorated, largely in light of growing concerns about national security.
On the inbound side, we have the Committee on Foreign Investment in the United States (CFIUS) process, which reviews inbound investments and can recommend the president reject them if they threaten our national security. This process was updated in 2018 via the Foreign Investment Risk Review Modernization Act (FIRRMA), but it remains firmly grounded in national security, unlike some other nations’ guidelines, which permit rejection of proposed investments on broader grounds, including economic competitiveness.
National security concerns began to spill over into outbound investment when Congress was working on FIRRMA. The theory was that just as inbound foreign investment could result in the transfer of critical technology to an adversary through the purchase of a U.S. company, outbound investment could have the same consequence if it resulted, essentially, in technology following the money. For example, a U.S. company might decide to acquire an existing plant or build a new one in a problem country, and in order to operationalize that plant, would transfer critical technology to it.
In the end, Congress decided, and the Trump administration agreed, that it made more sense to use FIRRMA to control the technology than the money. First, because it was the technology that mattered. Second, because there is already an existing process in the U.S. government for the latter—our export control system—and it made no sense to reinvent the wheel with a redundant process. That means if a U.S. company decides to invest in a company overseas (aside from in embargoed countries like Iran and North Korea), it may do so, but if it wants to transfer controlled technology to that facility it has to obtain a license from the Department of Commerce. So, the money can go, but the technology is already subject to review. As part of this decision, Congress also updated our export control laws, which had not significantly changed since 1987. It repealed the old Export Administration Act and enacted the Export Control Reform Act, which, among other things, responded to increased security concerns by directing the Department of Commerce to identify emerging and foundational technologies for possible control. (In fact, the department already had that duty and the necessary authority.)
And so, there the matter rested until recently when the president’s national security advisor, Jake Sullivan, reopened the issue in remarks at the National Security Commission on Artificial Intelligence Global Emerging Technology Summit on July 13:
We are also looking at the impact of outbound U.S. investment flows that could circumvent the spirit of export controls or otherwise enhance the technological capacity of our competitors in ways that harm our national security.
Focusing on outbound investment flows is a bad idea. It ignores the thorough discussion of the issue three years ago and comes to a conclusion that was rejected by both parties. It focuses on the wrong thing—money rather than technology—and it ignores the existing process for controlling technology outflows. (Saying investment “could circumvent the spirit of export controls” [emphasis added] is effectively an admission that it wouldn’t bypass the actual controls.)
More important, play out how such a regime might work in the real world. “Looking at the impact” of outbound investment requires collecting data on individual transactions, and it means, inevitably, giving the government the authority to block transactions it doesn’t like. If the government is going to review and potentially block transactions, companies will have to report them in advance (or expose themselves to the risk of having to unravel a transaction after it has closed). And how do they know what to report?
The government’s response will be they should report transactions that could threaten U.S. national security, which will be a spectacularly unhelpful clarification. When pressed to be a bit more specific, the government may identify some technologies or sectors that are problematic but will likely include a catch-all “anything else we think is a problem but cannot identify right now” clause. So instead of clarity, we will have yet another debate over the definition of “national security.” Does it include buying foreign farms and promoting high-tech agriculture? There are plenty of people in the Midwest who would say “yes, indeed.” What about energy, even though we’ve become a net exporter? And so on.
In the absence of clarification, we will see two contradictory developments: a wave of filings of benign investments in an excess of caution by nervous investors, which will overload the system, and a holding back of other investments by the risk-averse. Some in the administration may say that would be a good thing because it would mean more investment here and less offshore. However, the more likely outcome is less investment everywhere as people hold on to their money until the situation clarifies. That may decrease the risk of technology transfer, but it also slows down growth and economic recovery, which helps no one. Despite what the China hawks may say, this is a classic case of “it ain’t broke, so don’t fix it.”
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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