White House Signals Support for Upgraded National Security Review of Foreign Investments

28 June 2018

The administration of US President Donald Trump is planning to support legislation that would upgrade existing measures for preventing “harmful foreign acquisitions” from foreign firms that could risk sensitive technologies. The announcement comes after weeks of uncertainty over whether Washington may move to impose investment restrictions on Beijing. 

In a statement issued on 27 June, Trump noted that this would follow on previous announcements of Section 301 actions targeting allegedly unfair Chinese trade practices, specifically in relation to forced technology transfers, discriminatory licensing practices, and other intellectual property rights (IPR) concerns. 

“I have often noted, consistent with the Section 301 action initiated by the United States Trade Representative, that certain countries direct and facilitate systematic investment in United States companies and assets in order to obtain cutting-edge technologies and intellectual property in industries those countries deem important,” said Trump on Wednesday. 

He also welcomed Congress’ efforts to draft a new law known as the Foreign Investment Risk Review Modernisation Act, or FIRRMA. 

It will “enhance our ability to protect the United States from new and evolving threats posed by foreign investment while also sustaining the strong, open investment environment to which our country is committed and which benefits our economy and our people,” he said. 

The proposed FIRRMA legislation would specifically affect how an existing panel, known as the Committee on Foreign Investment in the United States (CFIUS), reviews moves from overseas companies to acquire US businesses, namely regarding the national security implications. 

The legislative process to update CFIUS reviews has been underway for several months. CFIUS is an interagency committee, with representation from over a dozen US agencies. 

Experts such as John Tiaihu Pitt, in a piece for The Diplomat, have noted that the respective House and Senate bills have several elements in common, such as more detailed definitions of “critical technology” and expanding CFIUS’ jurisdiction to cover additional transactions, beyond those that currently fall under the agency’s purview. 

However, they also have some remaining differences that will need to be reconciled before a final version can make it to Trump’s desk for signature, Pitt noted.

The House lent its backing to the planned CFIUS bill this week, with 400 votes in favour and two against, drawing suport from Republicans and Democrats alike. A Senate version of FIRRMA was included in the Senate’s National Defence Authorisation Act. 

On Wednesday, Trump indicated that he may reconsider his options if lawmakers are not able to advance a version of FIRRMA that is sufficiently robust, while suggesting that he has asked Commerce Secretary Wilbur Ross to conduct additional analyses on issues such as US export controls and other policies that may have implications for technology transfers.

“Should Congress fail to pass strong FIRRMA legislation that better protects the crown jewels of American technology and intellectual property from transfers and acquisitions that threaten our national security – and future economic prosperity – I will direct my Administration to deploy new tools, developed under existing authorities, that will do so globally,” he said. 

Over the past two decades, only a handful of deals have been vetoed via CFIUS on national security grounds. The most recent involved Trump’s rejection of Singapore-based Broadcom’s multi-billion dollar bid for Qualcomm, the US semiconductor and telecommunications equipment firm, in March. 

Weighing policy options 

Wednesday’s announcement follows months of speculation over what investment restrictions the US might impose, if any, as part of its Section 301 actions involving China. While the White House statement does not name China, it does refer to the wider Section 301 process involving the Asian economy. 

The US is already due to impose tariffs on over Chinese 1000 products, worth tens of billions of dollars, starting on 6 July, which will eventually cover US$50 billion in goods. These are among other Section 301 actions that Trump announced earlier this year, which also involved a WTO dispute on allegedly discriminatory Chinese licensing practices.  

China has signalled that it plans to impose tariffs in kind, should the US tariffs go forward next month. (See Bridges Weekly, 21 June 2018

When Trump first announced plans to impose such tariffs, he warned of further restrictions for Chinese companies, including on investment, while indicating that this would be pending additional examination under the auspices of the US Treasury. 

Initially, Treasury officials had indicated that they would be ready to announce these investment restrictions by Friday 29 June. Meanwhile, statements from US trade officials in recent days had indicated that the administration was still debating its approach internally, particularly in terms of how aggressively to pursue any such restrictions. 

While the decision to back the CFIUS process, rather than endorse some of the stricter policy options on the table, is widely considered to be a less harsh approach, the continued focus on national security in relation to investment, trade, and technology has prompted questions over the implications for drawing in foreign investment from other sources, beyond solely China. 

Investment levels

When Trump first indicated plans to endorse investment restrictions, the Chinese Ministry of Commerce (MOFCOM) said that Beijing is ready to respond, should such a move go forward. Gao Feng, the spokesperson for the Ministry, spoke of the vital contribution Chinese investment has made to US jobs and growth, according to comments reported by state-run news agency Xinhua. 

At the time, Gao told reporters that China hopes the "US side does more things that are in line with the law of economic development." MOFCOM had not yet issued a public response to Trump’s latest announcement at the time of this writing. 

The Rhodium Group, a research organisation which analyses Chinese-US investment flows, have estimated that Chinese direct investment in the US hit a total of US$140 billion in the US in 2017 alone, though government figures have suggested that number may be lower. 

Gao, in the same Xinhua interview in April, warned that the uncertainty in the investment environment has meant that “enterprises have slowed their paces or even cancelled their plans for investments in the United States." 

Chinese state-backed firms such as Tsinghua Unigroup Co. have reportedly stopped buying or investing in US tech firms, according to sources cited by Bloomberg, though that trend is not universal. 

ICTSD reporting; “Trump softens threat of new curbs on Chinese investment in U.S. firms,” THE WASHINGTON POST, 27 June 2018; “Trump gets ready to slap China with investment restrictions,” POLITICO, 24 June 2018; “U.S. Plans to Curb Chinese Tech Investments, Citing Security,” BLOOMBERG, 25 June 2018; “Feds to slap China with investment restrictions, export controls,” DIGITAL JOURNAL, 25 June 2018; “Limiting Foreign Investment to Protect U.S. Economic Security: Business Implications,” THE DIPLOMAT, 19 June 2018; “China prepared for mooted U.S. restrictions on Chinese investment: MOC,” XINHUA, 25 April 2018; “U.S. Weighs Emergency Powers to Curb China Tech Investments,” BLOOMBERG, 19 April 2018; “Trump to bolster national security reviews of China investments,” FINANCIAL TIMES, 27 June 2018.

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