April 9, 2018
A CFIUS Rewrite Looms
President Trump’s trade agenda has taken center stage as of late. High-profile developments; such as the recently announced $50 billion worth of trade tariffs on Chinese imports (with the possibility of $100 billion more on the horizon), the steel and aluminum tariffs announced in early March, the 30% tariffs on imported solar panels and washing machines, the completion of an U.S.- Korea bi-lateral trade agreement, and the ongoing NAFTA renegotiations; have taken most of the oxygen out of the media’s recent trade coverage, however, little attention has been given to an equally important development occurring on Capitol Hill.
Established by Executive Order 11858 and signed by President Ford in 1975, CFIUS is responsible for reviewing foreign acquisitions of domestic companies which may be deemed to constitute a threat to national security. CFIUS acts as an interagency review board to ensure that foreign entities can invest in the United States, without leaving key domestic industries susceptible to nefarious foreign influence that could impede national security or hinder them in wartime. The Secretary of the Treasury chairs this inter-agency committee; its membership currently consists of the heads of the Departments of Justice, Homeland Security, Commerce, Defense, State, and Energy – as well as the U.S. Trade Representative and the White House Office of Science and Technology Policy.
CFIUS is constructed to review “any merger, acquisition, or takeover … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States” and decides to what extent such a deal would threaten national security.
When assessing the risk of a transaction, CFIUS considers three questions:
- What is the threat posed by the foreign investment in terms of intent and capabilities?
- What aspects of the business activity pose vulnerabilities to national security?
- What are the national security consequences if the vulnerabilities are exploited?
This review process is limited mostly to transactions in which a U.S. business would become controlled by a foreign government or entity, and rarely reviews foreign lending to domestic companies. If the committee decides a transaction endangers national security, the matter is referred to the President for final decision on whether to block the sale, and any information that leads the committee to come to their conclusion is not disclosed to the public. The President is not obliged to follow the committee’s advice and can choose whether to block a sale.
While CFIUS is still formidable in its current form, many in Congress believe that it has become outdated, limiting its effectiveness. This has led to the creation of the bi-partisan coalition – led by Sen. Cornyn, with the help of 10 Senate co-sponsors – which, late last year, introduced legislation to address these weaknesses.
S.2098, also known as the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA), is intended to significantly broaden CFIUS’ review authority to account for foreign – in particular, Chinese – acquisitions of U.S. technologies by modernizing and increasing the funding of CFIUS, so that it remains effective. It is likely that this legislation could receive a mark-up as early as the end of April, although circumstances could push movement until May. A companion bill to FIRRMA has also been introduced in the House by Rep. Pittenger, and it has received 40 co-sponsors thus far.
If passed in its current form, FIRRMA would require the CFIUS review process to evaluate nearly double the number of security factors when reviewing transactions, and would greatly expand which purchases can be reviewed. Real estate purchases near key military facilities will be subject to review, and all purchases that require technology transfers to other countries will be suspect; including joint venture projects, R&D projects, and even minority stakes in domestic technology companies. Furthermore, technology deemed “emerging” or “critical” will be subject for review, as will all purchases from “countries of special concern” – a phrase that is remarkably unspecific, but can easily be interpreted to include several Middle Eastern countries and China. Some countries – such as those in NATO – will likely be exempt from this process, but the standards for which countries are exempt must be made by CFIUS.
While the strong bi-partisan push in both chambers of Congress, coupled with support from the Trump Administration, make the eventual passage of this legislation feasible, it will likely undergo a significant re-write to address concerns in the business community that FIRRMA makes the CFIUS review process too onerous on companies, and would interfere with typical commercial sales. Business advocates are seeking clarification on key terms; such as “emerging technology,” “critical technology,” and “critical infrastructure;” which they argue must be clearly defined to limit confusion and regulatory overreach.
While it remains to be seen if this legislation – or an altered, narrowly-tailored version – will be brought up for a vote this year, FIRRMA’s importance should not be overlooked and should receive the same level of media scrutiny as the rest of President Trump’s trade agenda.