The Political Underpinnings of U.S. Foreign Investment Policy

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A recent federal report reveals the effects of increased scrutiny of foreign investment in the United States.

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Although much media scrutiny on foreign investment in the United States focuses on concerns about Chinese influence, Chinese investments in the United States are actually trending downward, according to a recent report by the Committee on Foreign Investment in the United States (CFIUS).

This trend corresponds with the recent expansion of power of CFIUS, a federal interagency committee that assists the President in reviewing certain transactions involving foreign direct investment (FDI) in the United States. The central function of the committee is to determine how these transactions affect U.S. national security.

Although the stated goals of CFIUS are to safeguard the national security and economy of the United States, political motivations can also underlie the agency’s regulatory decisions. In fact, soon after the Ford Administration established CFIUS in 1975, U.S. government officials and legislators began to critique the agency’s decision-making as being driven by purely political considerations instead of actual economic assessments.

In general, attempts to make changes to CFIUS are often spurred by increased national security concerns over a specific foreign investment transaction. As such, CFIUS’s regulatory power tends to grow whenever the federal government becomes worried about a powerful foreign country increasing its investments in the United States.

For example, the Reagan Administration significantly broadened CFIUS’s mandate in the 1980s in the wake of U.S. concerns over increasing Japanese investment in the U.S. economy. Although CFIUS initially had rather limited power as an administrative body, these types of changes over the years transformed the agency into a stronger authority with the power to advise the President on FDIs and suggest transactions to be blocked or suspended.

Today, with emerging economies such as China playing a more active role in the global economy, some U.S. policymakers are arguing for greater and expanded CFIUS scrutiny of FDI from China. Specifically, many members of Congress are concerned with the increase in foreign investment activity by Chinese state-owned firms. For example, some members of Congress suspect that these investments are part of a broader Chinese government strategy or worry that the governmental support given to some Chinese firms gives these companies unfair competitive advantages over other private firms.

Congress’s passage of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) responded to these concerns by broadening the scope and jurisdiction of CFIUS, refining CFIUS procedures, and requiring actions by CFIUS to address certain types of national security risks. The new law cited national security risks related to foreign investment, particularly from China and Russia, as warranting the modernization of CFIUS processes to meet current technological advancements. The law also expanded CFIUS’s mandate from assessing the national security concerns of individual transactions to more extensive reviews of transactions in the aggregate.

As such, FIRRMA gives CFIUS the mandate to, in reviewing investment transactions, disfavor foreign investors from countries with goals to collect important technology or infrastructure that may impact U.S. national security leadership. In addition, as a result of the new law, CFIUS is now required to investigate the effects of particular types of real estate transactions by foreign entities as well as the possible impacts of foreign investment in start-up companies that are creating new technologies.

In CFIUS’s latest annual report published this summer, the agency provides the first official data on U.S. FDI released since FIRRMA’s provisions took effect in February 2020. This data is important because the United States is the largest recipient and the largest overseas investor of FDI, and any impacts on U.S. foreign investment policy due to these recent developments can have major implications for the global economy.

Following the release of this report, many law firms and economic analysts have published their own analyses of the data, trying to determine how the FIRMMA provisions, if any, have affected FDI policy in the United States.

Fried, Frank, Harris, Shriver & Jacobson LLP attorneys, for example, have speculated that the low number of reported Chinese investments may be the result of increasingly strict scrutiny by CFIUS of inbound Chinese investment, including “high-profile decisions by President Trump to block transactions involving Chinese acquirers.” The new law in turn may deter Chinese investment from investors who perceive the current FDI environment in the United States as “hostile.”

In addition, in a client alert issued this summer, lawyers at Covington & Burling LLP highlighted the impacts of the expansion of CFIUS’s authority over U.S. businesses involved with critical technologies, infrastructure, and personal data. Based on its own analysis of the CFIUS report, the law firm predicted that parties seeking to invest in U.S. companies involved with such technologies will face “rigorous scrutiny” concerning their investments going forward.

Similarly, attorneys at the law firm of WilmerHale LLP predict that the increase in regulatory scrutiny of foreign investment in the United States will continue in the Biden Administration, which has “already called for a reshoring of supply chains and voiced suspicion of Chinese technological theft.”

In light of these recent changes in U.S. FDI trends, Congress has some important questions to grapple with surrounding CFIUS’s future, including how to balance the safeguarding of U.S. national security interests with the goal of preserving government policies that sustain FDI.