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CFIUS Scrutiny on Chinese Investment

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Trans-Pacific View

CFIUS Scrutiny on Chinese Investment

Insights from Robert Hockett.

CFIUS Scrutiny on Chinese Investment
Credit: Official White House Photo by Shealah Craighead

Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Robert Hockett Edward Cornell Professor of Law at Cornell University and fellow at the Century Foundation is the 122nd in “The Trans-Pacific View Insight Series.”

Explain the significance of Congress’ plans to reform the Committee on Foreign Investment in the United States (CFIUS).

This is a very important development. Perhaps the best indicator of its perceived importance is the fact that the reform bills in both houses of Congress are bipartisan – it isn’t often, these days, that Democrats and Republicans agree on anything. But these reforms are not merely perceived to be important; they are important.

There are at least two related reasons. The first is that national security, which is what CFIUS is meant to bear in mind when reviewing proposed foreign investment in U.S. firms, is nowadays about much more than contemporary weapons systems, terrorism concerns, and the like. It is about long-term technological prowess, long-term economic and financial health, and the long-term privacy of citizens’ medical, financial, and other forms of data. This means that many proposed foreign involvements in American firms that wouldn’t have required review in the past do require review now and will in the future as well – national security, in short, is now imperiled by many more threats than it was in the past.

The second, albeit related, reason that these reforms are important is that many of our peer nations, especially China, do not treat markets and the firms that operate in them as mere private sector spheres of activity and actors in relation to which governments act merely as “umpires.” Rather, they treat markets and firms as instruments of national policy, to be shaped, encouraged, and utilized as means of assuring national greatness in both productive and geostrategic endeavor. They’re playing, in other words, the long game. Investment on the part of those nations’ firms in the U.S. must be viewed against that backdrop. That is, after all, how those nations themselves view prospective investments by American firms in their own firms, and they treat U.S. firms accordingly – they even condition their openness to U.S. investment on U.S. firms’ sharing their high-end technologies. The United States’ boosting the role of CFIUS is in this sense best viewed as ending the prior American practice of “unilateral disarmament.”

What are implications of expanding CFIUS oversight to include joint ventures with U.S.-based companies?   

This is pretty straightforward. Until the recent past, the primary means by which foreign firms accessed American technology was by merging with or purchasing large stakes in those firms. For this reason CFIUS focused primarily on proposed mergers and acquisitions in pursuing its mandate. But you needn’t permanently merge with or acquire a firm in order to access its technology, its trade secrets, or other forms of nonfinancial capital. You can temporarily merge or partner up with it – i.e., form a joint venture, which is a sort of temporary partnership, with it – for specific or more limited projects, and then acquire what you’re ultimately looking for via that route. This is what many state-owned or state-sponsored firms from our peer nations, especially China, have been doing in recent years as a way around CFIUS rejections of proposed mergers and acquisitions. By making clear that joint ventures and other forms of partnership are just as potentially dangerous as mergers and acquisitions when it comes to accessing sensitive data and technology, the new legislation works to close what has become a gaping loophole.

Assess political concerns over Chinese acquisition of U.S. companies behind these reforms.  

I don’t think these are political concerns unless “political” is understood to include long-term economic and strategic security concerns, as defined in my reply to the first question. Here again it is significant that, as mentioned before, both Democrats and Republicans in Congress are pushing for these reforms. Were this all about politics we wouldn’t be seeing that rare degree of consensus. I think that rather than politics, what is driving this is a perception that the U.S. has been playing a very different, much more laissez faire game than its trading partners where global economic relations are concerned, and that the U.S. has accordingly been losing the real game – the game that matters. That is the game of global economic competition between nation-states rather than just firms. Congress is accordingly acting to end U.S. “unilateral disarmament” where global economic competition is concerned.

How might expanded powers of CFIUS impact future Chinese investment in the U.S.?  

I think these expanded powers will essentially just close the loophole that joint ventures have afforded non-American firms in escaping CFIUS oversight. This means that more proposed ventures between Chinese and American firms will be scrutinized than before. That needn’t mean that fewer deals can be done, it only means the fewer deals will escape oversight, hence that more deals will include safeguards that preserve American economic security.

Now of course, in the months immediately following the new legislation, some Chinese firms might seek access to advanced technologies and sensitive data elsewhere – e.g., from British, European, Japanese, or South Korean firms – where scrutiny of joint ventures remains light or non-existent. But this will not work in the long run, for at least two reasons. The first is that these jurisdictions, much like the U.S., are growing concerned about the motives for and consequences of Chinese investment in domestic firms. Germany, for example, seems to be worried even more than the U.S., and other economically developed nations are sure to follow suit. The second reason is that most of the data, technology, and market share that Chinese firms seek through involvement in U.S. firms cannot be had through involvement in other nations’ firms.

I think, then, that in the longer term what we are going to see is a much more level playing field between Chinese and non-Chinese firms where foreign direct investment is concerned. China until recently has benefited from a now-outdated perception that it is a “lesser developed country” that both deserves special advantages and can be afforded those advantages without anyone’s being harmed. But that perception has long since ceased to be accurate, and other nations, including the U.S., are now realizing and catching up to that fact. Now that China and its firms are equals, they are coming at long last to be treated as equals.

Examine the notion of CFIUS as a tool of leverage in U.S. foreign policy.   

It is easy to imagine some people’s wishing to use CFIUS as a means of leverage in U.S. foreign policy, but it is less easy to imagine their actually succeeding in doing so. Suppose Mr. Trump, for example, wanted to apply a bit more leverage to China in hopes that it would afford more assistance in reining in North Korea. It is easy to imagine his instructing Treasury Secretary Mnuchin, who chairs CFIUS, to ride harder on some proposed venture between a Chinese firm and an American firm, as a means of sending a signal to the Chinese.

The problem for Mr. Trump in this scenario is that neither he nor Mr. Mnuchin have the legislative authority simply to dictate the outcomes of CFIUS reviews. For one thing, CFIUS is an inter-agency body comprising the heads of a multitude of government agencies, many of them independent not only of Treasury, but even of White House dictates. Among them are the heads not only of Treasury, but also of Justice, Commerce, Energy, Homeland Security, State, Science and Technology Policy, and others. This is no mere tool of the president. For another thing, the decisions of CFIUS are bounded by a specifically worded mandate set by Congress in the legislation that both establishes and instructs the Council.

Finally, there remains also the ongoing influence exerted by profit opportunities. It will probably never be the case that the White House, the Congress, or the CFIUS are uninterested in the prospect of economic gains that can be had from U.S. firms’ partnering with other firms. The ideology of most Americans long as been and probably long will be that the prospect of “making a buck” is in general a good thing. What CFIUS is meant to do is simply to ensure that short-term prospects not come at significant expense to longer-term prospects. It’s pretty hard to get Americans even to think about those “longer-term” prospects. Against that backdrop, CFIUS rejections of proposed deals will almost certainly remain always the rare exception rather than the common rule.