On January 24, a day ahead of a Senate Banking Committee hearing on reforming the Committee on Foreign Investment in the United States (CFIUS), the White House issued its official endorsement of Senator John Cornyn’s (R-TX) bill, “Foreign Investment Risk Review Modernization Act” (“FIRRMA,” S. 2098). Congressman Robert Pittenger (R-NC) has introduced companion legislation in the House of Representatives (H.R. 4311).
In its press statement, the White House noted that CFIUS modernization as outlined in FIRRMA would “achieve the twin aims of protecting national security and preserving the longstanding United States open investment policy.” If passed, FIRRMA would expressly expand CFIUS’ scope to review certain additional transactions, such as purchases of land near sensitive U.S. military facilities and joint ventures where U.S. firms share technology with foreign entities, although as a practical matter, CFIUS already reviews many such transactions. Of particular note, FIRRMA would direct CFIUS to more closely examine foreign investment in “critical emerging technologies,” which may have military uses in the future.
Critics of the FIRRMA legislation point to the bill’s broad and vague language as potentially deterring foreign investment into the United States. The statement from the White House emphasized the importance of maintaining an open investment environment – a theme that was echoed during President Trump’s speech at Davos when he claimed America was “open for business.”
Given the need to strike the right balance between protecting national security and attracting foreign investment, Congress has convened several hearings within the past three months to debate how best to approach CFIUS reform. Conveying a sense of urgency to address the perceived gaps within current CFIUS review, some Members of Congress have even indicated that they would like to put a bill on the President’s desk before the August recess. FIRRMA remains the most widely supported legislation both within Congress and the Trump administration. However, a difficult legislative year and mixed reactions from the U.S. business community could delay passage of a final bill.
The following lists the key takeaways from witness testimony during the four most recent Congressional hearings on CFIUS reform:
- China dominates the conversation: Across Members of Congress and witnesses, there is agreement that China’s aggressive industrial policy is a real threat that can come from the private sector in addition to state-owned enterprises. Proponents of FIRRMA suggest that China has weaponized foreign investment in emerging technologies to erode U.S. military advantage and U.S. dominance in high-tech industries. These proponents further assert that an expansion in CFIUS’ scope will help close perceived gaps in the U.S. investment review process that have allowed potentially malicious Chinese firms to invest in emerging critical technologies.
- Critics of FIRRMA worry about the impact on U.S. enterprise: Among some in the U.S. business community, there is concern that an expansion of CFIUS’ review of minority investments and joint ventures would disadvantage U.S. firms. The regulatory burden imposed by FIRRMA on transaction reviews might dissuade foreign companies from entering into deals with U.S. partners, which could diminish U.S. competitiveness in the long run.
- Export controls vs. CFIUS: Other critics of FIRRMA emphasize that CFIUS was meant to act as a complement to existing export control regimes that already regulate technology transfers to countries of concern and that the CFIUS process is a blunt instrument that cannot and should not attempt to supplant those controls. Existing export controls can be updated to encompass new categories of critical technologies and would also invite coordination with other advanced markets like Europe and Australia to ensure consistency and thoroughness of control.
- CFIUS needs more resources: There is a near-unanimous plea for more resources for CFIUS. FIRRMA would introduce filing fees at 1 percent of the transaction value (capped at $300,000) for each written notice and would and facilitate the addition of staff to undertake what will likely be an increase in the transactions identified to the Committee through the new contemplated process of voluntary and in some cases mandatory declaration.
Even without FIRRMA, Chinese transactions have faced increased scrutiny over the past few years, a trend continuing under the Trump administration. In September 2017, President Trump acted on a recommendation from CFIUS and blocked a $1.3 billion M&A deal between Oregon-based Lattice Semiconductors and Canyon Bridge Capital Partners – a private equity firm with Chinese backers. More recently this year, a $1.2 billion transaction between Dallas-based MoneyGram and AliPay (the financial payments subsidiary of Chinese internet giant Alibaba) collapsed after CFIUS indicated that it would not clear the proposed acquisition by AliPay.
While the Lattice-Canyon Bridge deal raised concerns about the dual-use capabilities of Lattice’s semiconductor technologies, the MoneyGram-AliPay transaction drew national security concerns around access to personal data. If AliPay had successfully acquired MoneyGram, then it (and presumably its parent company Alibaba) would have received access to the personal information of U.S. citizens. CFIUS’ failure to clear the transaction demonstrates the broad view of U.S. national security that the Committee has taken.