The legislative mandate of Committee on Foreign Investment in the United States (CFIUS) is to protect the United States against national security threats that might emerge from foreign takeovers of US firms.
The regulations that surround the operations of CFIUS grew by accretion following the initial attachment of the Exon-Florio provision to the Omnibus Trade Act of 1988. In 2009 they were comprehensively revised under the Foreign Investment and National Security Act (FINSA) in the face of widespread concern across the political spectrum in Washington that the treatment of foreign acquisitions had become too politicized and erratic to adequately serve US national interests.
This paper argues that since 2009 the assessments of proposed acquisitions by the Committee on Foreign Investment in the United States (CFIUS) have grown steadily more rigorous and predictable, with the aim of separating plausible national security threats from implausible apprehensions on a case-by-case basis, up to the present.
The paper goes on to suggest that the CFIUS experience in evaluating those conditions under which genuine national security threats might emerge when foreigners acquire US firms, and when not, might provide useful lessons and principles for other nations to adopt, in particular the European Union and its member states.
The paper opens by examining the tension between appreciation of the substantial benefits to the United States from foreign investment, including foreign investment via acquisition of US companies, on the one hand, and concern about threats to US national security, on the other. The paper then introduces a “Three Threat” framework for identifying genuine national security threats that can be inferred from CFIUS cases, and illustrates the application of this framework to concrete acquisition proposals, leading thereby to approvals in some instances and rejections in others.
This paper points out that CFIUS investigations in the United States take a deliberately narrow look at potential national security threats that precludes more sweeping approaches to approving or denying foreign acquisitions: CFIUS focuses on identifying threats within sectors (such as within the energy industry or within the telecom industry), for example, not precluding entire sectors from foreign acquisitions. CFIUS devotes heightened attention to State-Owned-Enterprises (SOEs) but limits such attention to national security concerns, not possible unfair competition. CFIUS does not participate in designing an industrial policy for the United States, such as preserving national ownership in particular industries or thwarting the extraction of commercial technology by foreigners. CFIUS does not apply a national economic-benefits test to foreign acquisitions, nor does CFIUS base approvals or rejections of specific transactions on reciprocal treatment for US investors in the country of the acquiring firm.
This narrow focus by CFIUS on national security threats is currently being challenged across many fronts, however, by the economic advisers of the Trump administration, by the US-China Commission on Economics and Security, by diverse members of the House and Senate, and by the Council of Advisers on Science and Technology of the former Obama administration. At the direction of Congress, the Government Accountability Office (GAO) is preparing an assessment of recommendations to empower CFIUS with fundamental and significant new mandates (due early 2017). These possible new directives include excluding entire sectors of the US economy from acquisitions by firms of certain national origin (such as Russia or China), designing an industrial policy to keep innovation and manufacturing in the United States while preventing technology transfer to outsiders, blocking acquisitions by state-owned enterprises (SOEs) that have access to cheap capital or other special treatment at home, conditioning CFIUS approvals on whether home-countries subsidize exports or dump products in the US market, and tying approval or rejection of individual acquisitions to reciprocity toward US investment in the home economy of the acquiring firm.
This paper evaluates proposals to require CFIUS to pursue new objectives beyond investigating national security threats arising from specific cases, and warns that broadening CFIUS’s mandate along such lines opens the door to protectionist moves on the part of other countries, invites retaliation against US investors abroad, and threatens the on-going benefits that derive from freer flows of investment across borders.
This paper argues that maintaining CFIUS’s current approach to separating genuine national security threats from implausible apprehensions—on a case-by-case basis—is best for the United States, and best for the international economic system.
The paper finishes by examining contemporary debates about foreign acquisitions and national security in the European Union.1 The paper concludes that CFIUS’s narrow approach to threat assessment might serve as a framework for individual EU member states and for the European Union as a whole.
1. Guy Chazan. “EU capitals seek stronger right of veto on Chinese takeovers”. Financial Times. February 14, 2017. Jost Wübbeke, Mirjam Meissner, Max J. Zenglein, Jaqueline Ives, Björn Conrad. 2016. MADE IN CHINA 2025. The making of a high-tech superpower and consequences for industrial countries. Mercator Institute for China Studies. No. 2, December.