Technology & Trade
Commentary

To Invest or Not to Invest

in Program

By William Reinsch

Looking ahead at possible Congressional trade activity later this year, the list seems fairly short with one exception. The list is not short because of lack of things going on in the administration, but because it will take some months for them to come to fruition and, in any event, many of them will not in the end require Congress to actually do anything aside from praising or criticizing as the case may be.

One area that may be different is foreign investment. A GAO report reviewing the operation of the Committee on Foreign investment in the United States (CFIUS) requested last September by 16 House members is due out in the next several months, and it will tee up a debate on whether changes should be made in the way we review incoming direct foreign investments. Indeed, it appears that some members are not waiting for the report. Sen. John Cornyn (R–TX), the Republican Whip, is reportedly preparing a bill, as are Sen. Dan Sullivan (R-AK) and others.

While CFIUS reviews can apply to any foreign investment and any changes in the law are likely to be couched in general terms, everyone knows that this will be a debate about China (the Chinese certainly know it, which is one of the reasons they continue to press for concluding negotiations on a Bilateral Investment Treaty (BIT)). This is so for three reasons:

1) We continue to have significant security concerns about China, which are magnified by the many stories of technology theft or forced transfer.

2) Chinese investment in the U.S. has begun to grow sharply. A recent Baker McKenzie/Rhodium Group study said that Chinese direct investment in North America tripled last year compared to 2015.

3) American firms suffer extensive discrimination in China, including on their ability to invest there.

These are not circumstances that lead to an informed, rational debate, and we know from past experience how sensitive an issue foreign investment can be. We went through a period of serious paranoia on the subject in the 1980s with respect to Japan, and they were a friend and ally, unlike China. The paranoia, which focused on Japanese investments in highly visible real estate like Rockefeller Centre and Pebble Beach and allegedly in Midwestern farms — which turned out to be untrue — subsided once people realized that these investments were not threats to security and could not, in any event, be moved back to Tokyo.

So, prepare yourselves for a nasty ride and be ready to duck to avoid the flying fur and slinging demagoguery, but pay attention because there are actual issues that will be debated:

1) Whether to broaden the definition of “national security” — the current basis for blocking an investment. The most popular one appears to be to include food, a legacy of the Smithfield acquisition where CFIUS decided that our national security did not depend on bacon. 

2) Whether to go beyond national security to include other factors. The most popular one appears to be a “net economic benefit” test which some other countries, including Canada, apply.

3) Whether to adopt a reciprocity policy rejecting investments here if the U.S. is not permitted to invest in the same sector there.

4) How to ensure that CFIUS looks not only at the specific transaction on the table but at the broader implications multiple acquisitions in the same sector might have.

5) Whether to have a list of countries that require some form of special scrutiny. This would probably be a short list – China and Russia. We don’t get much investment from North Korea or Iran.

6) Whether to have a list of technologies whose acquisition by definition would raise security issues.

7) Whether to make filing with CFIUS mandatory — it is not currently — or through some other means expand the scope of covered transactions to allow a look at greenfield investments, joint ventures, technology licensing agreements, or other arrangements short of an outright acquisition. There are thousands of these every year and only 271 CFIUS filings last year, so a lot of activity is going unreviewed.

8) Whether to make process reforms such as changing the chairman, adding to the membership, or altering the timetables. 

My own view has long been that CFIUS has sufficient tools to deal with acquisitions that pose national security risks, and therefore some of these “reforms” are not necessary. The idea of reciprocity, in particular, needs to be thought through rather than rushed into. It is fundamentally a reactive strategy – we define what is important to us based on what is important to others. A better, proactive strategy would be to decide for ourselves what is important to our security and then act to defend it. 

The two most serious issues, in my view, are #4 and #7 above. We have encountered in the past situations where each individual transaction may not raise red flags but taking a number of them together in a single sector raises serious national security issues. The challenge for CFIUS is broadening the case-by-case review process demanded by the statute to also focus on the bigger picture.

It also seems clear that there is a lot of activity we are missing. An April 7 piece in the New York Times, “China Tech Investment Flying Under the Radar, Pentagon Warns,” provides a good description of the challenges we face protecting our intellectual property — the crown jewels of our economy. Mandatory filing may not be the answer — it would surely overload the system — but there clearly is a problem here that needs to be addressed. Hopefully the debate will focus on real problems like these two rather than on easy demagoguery.   

_____

William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.

Photo credit: Sunset Noir via Flickr
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