Foreign Investment and National Security
February 20, 2018
Review of U.S. foreign investment policy, as well as the process by which that policy is implemented, appears to be a major item for 2018 for both the administration and Congress. Today’s commentary will make a brief foray into the issues, and I’ll come back to them as the debate develops.
For the administration, the issue presents itself in its consideration of what to do about China. As I wrote two weeks ago, if the alleged “crime” is intellectual property theft or forced technology transfer, then an appropriate remedy would be measures that restrict the further flow of critical technology to China. Currently, such restrictions take two forms: limits on inward investment implemented through review of proposed mergers or acquisitions by the Committee on Foreign Investment in the United States (CFIUS); and export controls implemented through licensing mechanisms managed by the Department of Commerce’s Bureau of Industry and Security (BIS) and the Department of State’s Office of Defense Trade Controls.
If the president wants to further restrict technology flows, he could tinker with those processes in ways that would lead to the rejection of more investments and the denial of more export licenses. If he wants to go big, as some have speculated, he could use other statutes, most likely the International Emergency Economic Powers Act (IEEPA), to establish a more sweeping investment control policy based on reciprocity specifically for China.
Unlike other actions, such as slapping new tariffs on Chinese imports, investment-related actions are, for the most part, not covered by World Trade Organization rules, and since Chinese limits on inward investment are already more restrictive than ours, the threat of retaliation is not quite so compelling as it is in the case of tariffs. That does not, however, mean there would be no consequences. The United States has long had an open investment policy and has benefitted significantly from the money flowing in (as well as out). Changing that, even for one country, sends a signal to all potential investors that the United States is no longer the welcoming place it has been, increasing the likelihood that investors will pursue growth opportunities elsewhere.
On the other hand, there are inevitably national security issues that come up, which is why we have CFIUS in the first place. To date, the authority to block inward investments has been used conservatively, with only four rejections so far, although a growing number of others have been withdrawn in the face of likely rejection.
A growing concern in Congress, however, is the suspicion that a large number of transactions escape CFIUS review, including greenfield investments and those that do not involve an acquisition, such as acquiring a minority share in a company or joint ventures or even licensing agreements. Reliable data is hard to come by, but the commonly used estimate is that while CFIUS reviews up to 250–300 cases per year, there are between 7,500 and 10,000 other transactions that are not examined.
Legislation pending in Congress, the Foreign Investment Risk Review Modernization Act (FIRMMA), sponsored by Senator John Cornyn (R-TX) and Representative Robert Pittenger (R-NC), is intended to plug that gap by expanding the universe of transactions CFIUS may review. That bill, however, has run into opposition from the left (because it does not broaden the process beyond national security to include an economic benefit test) and the right (because it would require an enormous bureaucracy to handle all the new cases, slow down the decisionmaking process, and introduce more uncertainty into the system). Whether the bill gets caught in the cross fire or there is a path to enactment remains to be seen.
There is, however, another way that should be a larger part of the debate. Our export control system already covers the “missing” transactions because export licenses are required for any export of designated technology regardless of whether it is through a merger, acquisition, joint venture, licensing agreement, or simple export, and there is an existing bureaucracy and interagency process to make those decisions. The simplest step would be to use that process, but there are two issues.
First, it is an ongoing challenge to make sure that all critical technology is covered, which means having technical experts who can keep up with rapidly evolving innovation. Second is the larger problem of enforcement—making sure the exporters, joint venture partners, licensees, etc. know the rules and adhere to them.
These issues have their own challenges. It is not enough to have technical experts keeping up with innovation; we need to make sure they are communicating effectively with the licensing authorities. On enforcement, the problem is not with established companies that have compliance offices; it is more often with start-ups, the proverbial three guys in a garage with a brilliant idea who get offered a lot of money by a foreign company. They don’t know that they have to file with CFIUS and get an export license for their new creation. Note that these problems apply to both processes—CFIUS and export controls—although only the latter has an already existing enforcement apparatus in the Department of Commerce.
As both congressional and executive branch consideration of what to do moves forward, I hope that both will focus their attention on these enforcement issues rather than reinventing the wheel with a new bureaucracy.
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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