The United States Prepares to Screen Outbound Investment
The Biden administration is purportedly close to releasing an executive order (EO) establishing an outbound investment screening mechanism. This has been described as “reverse CFIUS,” referring to the Treasury Department’s Committee on Foreign Investment in the United States, which reviews inbound investments. In his April 2023 speech at Brookings, National Security Advisor Jake Sullivan explained, “We’re making progress in addressing outbound investments in sensitive technologies with a core national security nexus. These are tailored measures: they are not, as Beijing says, a technology blockade.”
The administration’s pursuit of a pilot program represents a significantly narrower version of previous proposals that emanated from Congress, including initial versions attached to the Export Control Reform Act (ECRA) discussions in 2018 and, more recently, proposals during deliberations over chips spending. Failure of the legislative branch to pass this law has left the Biden administration to design its own tool. A major difference between the legislative proposals and the White House tool is that the legislative proposal would have established a notification regime, which the White House regards as incomplete, arguing for the addition of a set of targeted prohibited transactions.
The White House measure was originally broader in scope, though it has been significantly honed during months of debate within the administration, including attempts by the Treasury Department to ensure that the EO is sufficiently surgical. Supporters of the measure claim that this new authority would close a gap in U.S. policy that export controls and CFIUS are unable to track, although skeptics of the tool fear that it will increase burdens on U.S. high-tech sector investors and that it duplicates existing authorities under export control rules.
Existing Outbound Investment Screening Regimes
Although often regarded as a new and creative tool that stands separately from export controls and CFIUS, the concept is not entirely new. Taiwan and the Republic of Korea both have existing authorities that govern the outflow of investments. In Taiwan, outbound investments are subject to review by the Ministry of Foreign Investment. Investments under $50 million must be filed, while those over $50 million undergo case reviews. As established by Taiwan’s 1992 Act Governing Relations between the People of the Taiwan Area and the Mainland Area, Taiwan maintains additional regulations on outbound investments in China, which vary based on the technology category in question and include a prohibition on high-tech industries. The general category, on the other hand, institutes a cap on small and medium enterprises’ investment to China of $2 million or 60 percent of their net assets. The cap for individuals is $5 million, while it is set at 60 percent of net assets for larger corporations. In Taiwan, MOEAIC oversees outbound investment screening.
In the Republic of Korea, outbound investment is subject to the Act on Protection of Industrial Technology. This act is intended to “prevent undue divulgence of, and protect, industrial technology in order to strengthen the competitiveness of Korean industries and contribute to national security and development of the national economy.” This law provides the Korean government with the authority to review financial transactions involving acquisitions, mergers, and joint ventures. It focuses on preventing leakage of items in the “National Core Technology” list, which includes items such as biotechnology and battery technology. In the Republic of Korea, the Ministry of Trade, Industry and Energy (MOTIE) oversees outbound investment screening.
Policy Considerations for the United States
The U.S. government will need to sort through a set of complex problems during the launch of its pilot program. Immediate considerations relate to the availability of data about outbound investments in foreign entities of concern. A pilot program is likely to generate additional information about the quantity and nature of outbound investments into national security critical sectors in countries of concern but also increase the burden on the Treasury Department to sort through the data.
The December 2022 appropriations package provides $20 million in federal funding for a joint initiative between the Departments of Treasury and Commerce to carry out the outbound screening mechanism. In April 18 testimony before the House Appropriations Committee, U.S. secretary of commerce Gina Raimondo requested an additional $5 million for International Trade Administration (ITA) to assist the Treasury Department with an outbound screening mechanism since ITA has historically aided the Treasury Department with CFIUS matters.
Another concern centers around how to define “investment” and whether this covers passive investment such as the transfer of “know how” or pension fund investments. However, administration officials have publicly expressed a desire to avoid unnecessary and unintended consequences, suggesting that the tool could instead cover active investment such as joint ventures, equity investments, minority investments, and mergers and acquisitions.
The idea of an outbound screening mechanism has attracted skepticism from both sides of the aisle. House Financial Services Committee chairman Patrick McHenry said, “For the U.S. to compete with China, we cannot become more like the Chinese Communist Party,” highlighting a persistent aversion to increased scrutiny by the U.S. government into private sector activities. Industry groups have also largely resisted the implementation of the EO as a national security tool. As CSIS has previously outlined, an outbound investment screening mechanism would extend U.S. national security concerns to investments that have traditionally been regarded as purely economic.
Another major consideration is the added compliance burden this new tool would place on U.S. private sector entities. Semiconductor firms must already contend with an evolving export control landscape and are also subject to the CHIPS and Science Act’s guardrails, which function similarly to export controls. The added burden of reporting outbound investment flows could chill international business transactions and reduce efficiencies at a time when the United States is vying for renewed competitiveness against Chinese high-tech firms.
Furthermore, the same transaction could be subject to review in multiple jurisdictions simultaneously. This possibility highlights the importance of ensuring that remedies do not vary wildly across different countries. Furthermore, it is possible that the new instrument could encourage foreign-headquartered firms to run capital through non-U.S. jurisdictions, highlighting the importance of multilateralizing investment screening regimes.
There is a growing recognition, however, that the existence of an inbound investment screening regime and controls on exports leave an obvious gap in U.S. national security. For example, there are concerns that U.S. capital flows finance Chinese entities that ultimately cannibalize the business of its U.S.-based competitor. A February 2023 Center for Security and Emerging Technology (CSET) report found that, from 2015 to 2021, U.S. investors participated in transactions that cumulatively accounted for 37 percent of the $110 billion in global funding raised by Chinese artificial intelligence (AI) companies.
Where the European Union Stands
This new mechanism is already influencing EU policymaking and could result in a parallel statutory authority in the European Union. The European Commission 2023 work program promised to “examine whether additional tools are necessary in respect of outbound strategic investment controls.” A March 2023 joint statement from President Biden and European Commission president Ursula von der Leyen indicates that both parties “have a common interest in preventing our companies’ capital, expertise, and knowledge from fueling technological advances that will enhance the military and intelligence capabilities of our strategic rivals, including through outbound investment.”
In her major China speech on March 30, 2023, von der Leyen specifically urged the European Union to establish an outbound regime: “Europe should develop a targeted instrument on outbound investment. This would relate to a small number of sensitive technologies where investment can lead to the development of military capabilities that pose risks to national security.” While the European Union has moved closer to the U.S. approach to export controls following the Russian invasion of Ukraine, developing a screening tool to mirror their FDI screening program would create a significant burden for what is a lean department within the Directorate General for Trade.
A complicating factor for the European Union is that, unlike trade policy, investment policy remains the remit of member states. EU member states could thus adopt outbound investment screening mechanisms outside of EU institutions. In November 2022, the German Foreign Ministry’s draft document on a new China strategy indicated that Germany is contemplating an outbound screening tool. A major difference in the development of an outbound versus inbound screening tool is that 12 member states already maintained some form of inbound screening regulation prior to the institutionalization of the foreign direct investment screening regime in 2019, meaning it was far easier to establish. As it currently stands, no member state maintains an outbound investment screening system.
The development of a new screening tool offers the United States with an opportunity to close a critical gap in at the nexus of advanced technology and national security. In light of recent export controls on advanced AI chips to China and a generally tense environment that has significantly chilled bilateral diplomatic relations, it will be incumbent upon the United States to ensure that this policy is not perceived as overly hawkish and that it is rooted firmly within U.S. national security interests. Either way, it is clear that the United States is entering a new frontier in economic security and technology policy. What remains to be seen is whether the United States will succeed in selling this new vision to its allies, and whether allied economies, as Jake Sullivan said in his April 2023 speech, will produce the “dedicated commitment” it takes to advance this agenda.
Emily Benson is director of the Project on Trade and Technology and senior fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Margot Putnam is an intern with the Scholl Chair in International Business at CSIS.