Body
President Joseph R. Biden Jr., former President Donald Trump, and Vice President Kamala Harris all oppose the proposed acquisition of US Steel by Japan-based Nippon Steel, no doubt influenced by the opposition of the United Steelworkers union. But the only legal basis for voiding the deal is not steelworker job security but national security. And applying that rationale is the responsibility of the interagency Committee on Foreign Investment in the United States (CFIUS), headed by Treasury Secretary Janet Yellen.
Probably hoping to defuse political pressure on all sides, CFIUS recently put off its decision until after the US election. Politically, the acquisition attempt pits a US ally crucial to a united front on China, and the right of foreigners buying US firms, against a labor union that could tip the scales in a key battleground state in November. But the impending decision is shaping up to be a test of CFIUS’s independence and ability to assess national security concerns on the merits rather than politics.
The agency recently signaled in a letter to the companies that it was taking seriously a concern that Nippon Steel might cut supplies of steel to the US industrial base and would not be as active in applying tariffs, including on China, when imports threaten US production. But if CFIUS ends up recommending that President Biden block the Nippon Steel deal, it would be extraordinary—his first presidential CFIUS decision and one of only seven such deals officially blocked by CFIUS in its history.[1]
Nippon Steel is the highest profile example of a new normal in the age of US-China tensions, in which legitimate concerns about Chinese investment have led CFIUS to expand its remit, ensnaring allied investments in cost and delays. CFIUS needs to attain a difficult balance: scrutinizing transactions that could harm national security without discouraging beneficial investment that could enhance the US economy and security.
Chinese investors have faced the most reviews of any country in recent years, but they have accounted for only 14 percent of reviews under President Trump and 10 percent under Biden. Instead, most reviews scrutinize investment from allies like the countries in the European Union, Japan, Canada, and the United Kingdom. CFIUS has a well-earned reputation for objectivity on these sensitive matters. On the other hand, it needs to do more to ensure that useful investments from allies do not become collateral damage. US leaders should also be careful to avoid putting political pressure on CFIUS, in part to avoid sowing distrust among allies and the possibility that other countries could in turn block politically unpopular investments from US firms.
What does CFIUS do and how does it work?
Foreign firms and the American companies they invest in report deals to CFIUS, mostly on a voluntary basis. CFIUS can clear the transaction quickly, demand changes called “mitigation agreements,” or in rare cases recommend that the president block the transaction. Mitigation agreements can, for example, force an investor to impose safeguards for sensitive data, exclude from a deal any subsidiaries that supply the US government, or even allow CFIUS to appoint directors who can monitor compliance. Failing to report a deal that CFIUS later identifies as posing security risks can lead to a costly forced reversal of the deal, as happened when the United States demanded that China force a Chinese company to sell the LGBTQ dating app Grindr due to concerns about sensitive data. Firms asking for CFIUS clearance tend to help it identify risks by informing it of the nationality of the investors, any links to foreign governments the investors may have, and whether the investee is in a sensitive industry or has US government contracts.
Perhaps of necessity, CFIUS is opaque. It avoids comment on specific cases and publicly explaining its decisions, in part because they are based on sensitive intelligence and data shared with the government in confidence by parties to a transaction. Only the members of CFIUS, the lawyers, and the parties to a transaction get to see what concerns CFIUS raises, making it difficult for firms and investors to learn from others' past experiences whether they should even file for approval by CFIUS or how long it might take to get a transaction cleared.
Its remit was expanded with the Export Control Reform Act of 2018 (ECRA), which gave CFIUS more resources and new powers to review deals such as ones involving venture capital, which fall short of controlling a US business but give the foreign investor access to or influence on US firms involved in critical infrastructure or technology, or possessing sensitive data. Some investors from countries on the “excepted foreign states” list can qualify for exemption from these new powers.
Politics Over Security on Nippon Steel?
Nippon Steel’s proposed acquisition of US Steel announced late in 2023 was condemned by union leaders, who worry that Nippon Steel may transfer steel production to nonunion plants in the south and have expressed concern about whether a foreign firm could be held accountable if it fails to live up to its investment and labor commitments. A senior Biden administration official declared that the deal merited “serious scrutiny” for national security implications.
Defenders of the deal argued that it could in fact enhance national security by injecting needed capital and advanced technology into an ailing US steel producer, and that selling to a domestic producer would make the industry more concentrated and likely less competitive, harming steel-using industries that are also important for national security. Blocking the deal, they contended further, would harm relations with Japan, which is helping control flows of critical technology to China. The Biden administration has reportedly admitted to Japanese diplomats that the opposition to the deal is rooted in politics.
Data Show Reviews Falling with Investment
Amid heightened US concerns about leakage of sensitive technology and data, CFIUS reviews have become more numerous in the last decade, including on allies. According to CFIUS data, corrected here for double filing, an average of 89 new transactions a year were subject to review under President Barack Obama’s first term, but the average grew to 132 per year in his second term.[2] Trump’s annual average increased to 243, and Biden’s average has climbed to 312. However, these averages have been coming down since their peak in 2021, when CFIUS’s new powers were fully implemented, from 348 to 264 in 2023. While some have expressed legitimate concern about negative side effects of increased CFIUS reviews on the United States’ ability to attract investment, at least fears of reviews ballooning out of control and overwhelming both investors and CFIUS’s limited resources have eased.
The decline in recent years may have reflected investors adjusting to the new regime. As uncertainty about CFIUS’s red lines eases with experience, some investors will avoid sensitive deals likely to be blocked, and others can be more confident that nonsensitive deals do not require a filing. Fewer deals should mean fewer reviews. The year 2021 was a record year for investment with low interest rates and a boom in technology. Higher interest rates and a non-AI tech slump reduced venture capital investment value by half. Foreign mergers and acquisitions (M&A) in the United States has fallen by 44 percent in value and 18 percent in number of deals in recent years, according to data from the National Venture Capital Association and PitchBook, and the White & Case M&A Explorer.
A comparison of the number of foreign M&A deals with CFIUS reviews shows that after spiking during 2019–20 to around 30 percent, now reviews total 20 percent of the deal volume.[3] Helping to smooth the process, CFIUS set up a short-form declaration process to allow deals posing no threat the chance to get a quick approval, clearing more than three quarters of deals without requiring further review, compared to 58 percent in 2022.
Figure 1 also shows that the share of CFIUS cases that proceed to an in-depth investigation, which stretches the total review process to a median length of 90 days, has declined since the Trump administration, during which CFIUS investigated around 60 percent of deals that filed a full notice with CFIUS.[4] The Biden administration has investigated a somewhat lesser share, 53 percent of CFIUS notices. The share of deals that clear with mitigation agreements has also stabilized at around 15 percent.
Targeting China or Allies?
China’s emergence as a source of concern is shown in figure 2. In 2023 it was the most scrutinized country for the first time since 2018. Moreover, while Chinese investment in the United States has plummeted, the number of reviews has remained high, reflecting the fact that even smaller deals in nonsensitive sectors with Chinese investors require CFIUS clearance. It is of course not possible to know the number of deals deterred by the CFIUS process.
The other countries most targeted for scrutiny include US allies like Canada, Japan, Germany, and the United Kingdom. On the one hand, their review totals reflect both larger investment flows from these countries to the United States and more investments in sensitive sectors due to confidence that they could clear CFIUS, as Nippon Steel clearly but wrongly assumed. Japan for example put 10 times as much M&A value into the United States in 2023 than China did but faced 24 reviews to China’s 35. Note that CFIUS data broken down by country do not include re-filings, so these cannot be corrected for that omission. Therefore, these figures reflect total reviews for each country rather than new transactions as in figure 1.
The rise of reviews of Singapore, which became the most scrutinized country in 2022, was in part driven by its sovereign wealth funds tripping a mandatory filing requirement for certain especially high-tech investments. But interestingly reviews have fallen substantially in 2023. Instead, the United Arab Emirates has gone from having almost no reviews to becoming one of the most scrutinized, as it increases its investments in technology and finance and balances large investments in tech firms in China.
The Nippon Steel case may redouble the determination of allies like Japan to press for expanding the list of foreign states that are exempt from at least some CFIUS scrutiny requirements. While the exemption would not apply to full acquisitions like Nippon Steel’s, it would ease the headaches involved in other types of investments in the United States by allies, like venture capital and other strategic investments that fall short of giving control. The current partial exemption list, which only includes other members of the “five eyes” intelligence alliance (Australia, New Zealand, Canada, and the United Kingdom), was created to encourage allies to implement their own robust investment security screening systems to prevent backdoor Chinese financing into the United States. Many US allies like France and Japan have foreign investment screening mechanisms, but the United States has not expanded the list. Even so, multinational firms in the four countries on the list often have to jump through bureaucratic hurdles in order to benefit from the exemption. The United States should expand the list and make it more effective to facilitate allied investments.
Conclusion
The latest data add up to the conclusion that CFIUS has reached a new equilibrium with far more scrutiny of foreign investment from China and allies alike, but it has avoided a flood of reviews by using some of its new powers judiciously. However, CFIUS can do more to ensure that beneficial investment from allies are not unduly held up in security reviews, which would also help free up scarce resources to focus on the most significant threats to national security. After the political spectacle and security arguments that allies are unlikely to find convincing, at least based on publicly available information, blocking the Nippon Steel deal could harm the US reputation with allied countries far beyond Japan and deter their companies from investing in the United States at exactly the time when foreign investment in advanced technologies is needed to enhance national security. It could also damage the reputation of CFIUS itself.
Notes
1. In many cases, CFIUS can quietly block a deal without requiring a presidential decision, if the parties realize the agency will not clear their transaction, but the number of such cases is not easy to measure based on CFIUS data.
2. CFIUS’s data do not tell the whole story: A single deal like Nippon Steel’s that re-files will be counted twice, while a deal in which CFIUS informally tells a Chinese investor before filing that it will not go through does not show up in any data. The latter is impossible to measure, but it is possible to correct for double counting and find the true number of deals scrutinized formally by subtracting out double-counted repeat filers. CFIUS data do report numbers each year on deals that are re-filed in the same year and the subsequent year.
3. The comparison is a useful proxy but not the whole story, since CFIUS can review real estate, foreign venture capital, and other types of deals that are not necessarily in the M&A data. It is difficult to know much about the level of scrutiny of VC, because the author is not aware of any data sources that separate out foreign VC in the United States. CFIUS does not review domestic transactions that dominate VC fundraising datasets.
4. Investigations in figure 1 only pertain to notices that investors file with CFIUS, because if a declaration requires more scrutiny, the parties will need to file an additional full notice. If CFIUS deems that subsequent notice to require more scrutiny, only then will it investigate.
Data Disclosure
This publication does not include a replication package.
