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14 November 2019, Gateway House

U.S. law tackles Chinese investments

The Committee on Foreign Investment in the United States (CFIUS) is an inter-agency body which reviews in-bound foreign investments for their impact on national security. The Treasury Department recently proposed draft regulations, strengthening it. An analysis of the effect these amendments have had – and their applicability in an Indian context

Senior Researcher, International Law Studies Programme

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In October 2019, the Committee on Foreign Investment in the United States (CFIUS) decided to investigate ByteDance Ltd., a leading Chinese company valued at $75 billion, for its 2017 acquisition of U.S.-basedcompany, Musical.ly, a video-sharing platform, for $1 billion.[1] It is undertaking the review on grounds of national security concerns, arising from reports that China uses these applications to further its foreign policy agenda, including censorship of content sensitive to it. ByteDance is also the parent company of TikTok, a popular mobile application, with a user base of 96 million in the U.S. as of February 2019.[2]

CFIUS is an inter-agency committee, comprising the heads of departments, such as the Treasury, State, Commerce, and Energy and the U.S. Trade Representative, has the authority to review in-bound foreign investments to ascertain their impact on national security.[3] It was established in 1988 under Section 721 of the Defense Production Act, 1950.

While CFIUS has evolved since its establishment, the latest amendment in August 2018 by introduction of the Foreign Investment Risk Review Modernization Act, 2018 (FIRRMA)[4], significantly expands its scope and operation. One of the primary reasons for the introduction of FIRRMA was global concern about Chinese tech giant, Huawei, and its rollout of 5G in the U.S., against the backdrop of increasing investments by Chinese technology companies in Silicon Valley, and their implications for national security.

As early as 2012, lawmakers in the U.S. had raised concerns regarding the control and/ or influence that the Chinese government has through opaque beneficial ownership structures that link back directly to Chinese government entities[5] . FIRRMA was introduced in the Senate and House of Representatives by Senator Cornyn and Representative Pittenger respectively, both Republicans, alongside co-sponsors, including Democratic Senator Feinstein.

There is now clear recognition that the Chinese government can misuse U.S. technologies in the garb of an investment transaction.[6] For example, in 2017, CFIUS blocked Canyon Bridge Capital Investment Limited, an affiliate of a Chinese company’s acquisition of U.S.-based Lattice Semiconductor Corporation, which was in possession of critical technology used for military purposes. [7]

Thus, FIRRMA protects the U.S. from unauthorised surveillance through unbridled market access, and misuse of technology and monopolisation by foreign governments. A country must prioritise and address national security concerns as CFIUS does, but equally, balance the impact of this on investments, current and potential.

To implement the new provisions related to CFIUS contained in FIRRMA, in September 2019, the Department of Treasury issued two draft regulations, i.e. Provisions Pertaining to Certain Investments in the United States by Foreign Persons [8] and Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States[9] (collectively, Regulations).

These Regulations expand the scope of CFIUS in the following ways:

1) Mandatory disclosure: Foreign investors must mandatorily disclose any investment in critical technology in 28 specified activities, including in the oil and gas, power and telecom sectors.

2) It calls for the review of:

  • non-controlling investments by a foreign investor in a U.S. entity in critical technology or where there is collection of sensitive personal data;
  • certain transactions in the real estate sector;
  • transactions where the foreign government has a direct or indirect substantial interest.

3) It defines ‘sensitive personal data’: which includes non-public electronic communication, biometric, health and financial data, government identification data, and personal insurance.

4) It provides for an extended timeline for investigation and review.

CFIUS continues to have power to investigate even those matters that do not require mandatory disclosure at any time after an investment.

Furthermore, CFIUS has only limited public disclosure requirements which, coupled with this increase in its scope and jurisdiction, has made the investigation process even more opaque than it was prior to FIRRMA. For foreign investors, the uncertainty of closing a cross- border Mergers & Acquisitions (M&A) deal increases exponentially; the usual due diligence process prior to an M&A deal will become more complex due to an unpredictable regulatory environment.

Will this make the U.S. a less attractive investment for foreigners? It could, but to alleviate the impact of the Regulations, the Treasury Department is expected to release a “safe list” of low-risk foreign investors. [10] The impact of CFIUS on FDI flows has been limited until now, but with the broadening of its powers and jurisdiction, it will now be at the core of U.S. FDI transactions.

This has significant implications. The U.S. is the largest single recipient of FDI in the world,[11] with the total incoming FDI at $4.03 trillion[12] in 2017, out of which FDI from China and India was approximately $39.5 billion[13] and $9.8 billion[14] respectively. This contributes tremendously to employment generation and socio-economic growth: 8.5% of the labour force in the U.S. has jobs resulting from foreign investment.[15] A major attraction is regulatory stability. Uncertainty or over-regulation of investments in the U.S. can adversely impact FDI inflows.

For the last three decades since 1988, CFIUS has imposed only five formal blocks on foreign investment, four of which were on Chinese transactions on grounds of misuse of personal data, technology transfer etc.[16] No Indian investment into the U.S. has been formally blocked yet. In the past, companies such as China’s ENN Ecological Holdings Company and Dutch company, Philips, have voluntarily suspended deals due to CFIUS-related concerns. The maximum number of filings seeking approval from CFIUS for investment has been by Chinese companies, followed by Canada.[17]

Currently, India has no direct equivalent of CFIUS and it critical that India considers the creation of a similar body given the increasing strategic Chinese investments in the tech and social media sectors. Incoming FDI into India is routed through either of the following two ways: the ‘government route’, where investors require prior approval from the government, or the ‘automatic route’, where investors do not require prior government approval.

While there is no legal criterion for foreign investment solely on the grounds of national security, the Ministry of Home Affairs has issued guidelines for assessment of certain proposals from this perspective.[18]

To strengthen the existing regulation, the Ministry of Commerce should:

1) review the CFIUS legislations to emulate them in India;

2) consider incorporating similar foreign investment checks on the grounds of national security in its FDI Policy;

3) consider forming an inter-ministerial committee, including Department for Promotion of Industry and Internal Trade, Ministry of Home Affairs, Ministry of External Affairs, Ministry of Finance, National Security Council to suo-moto review investments from certain countries such as China across sectors. As CFIUS does, this body too should send intimation to the Parliament on completion of review and investigation of a case, in addition to an annual reporting of all matters reviewed by it.

This will be beneficial for the Indian economy, especially after its recent withdrawal from the Regional Comprehensive Economic Partnership (RCEP) due to concerns such as those regarding the import surge from China and corresponding market access.

Ambika Khanna is Senior Researcher, International Law Studies Programme, Gateway House

Amrita Menon is Management Associate at Gateway House.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in

© Copyright 2019 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

References

[1] Roumeliotis, Greg; Yang, Yingzhi; Wang, Echo; Apler, Alexandra, “Exclusive: U.S. opens national security investigation into TikTok – sources”, Reuters, 1 November 2019, https://in.reuters.com/article/us-tiktok-cfius-exclusive/exclusive-u-s-opens-national-security-investigation-into-tiktok-sources-idINKBN1XB4IL

[2] Yeh, Oliver, “Tiktok surpasses One Billion installs on the App Store and Google Play”, Sensor Tower, 26 February 2019, https://sensortower.com/blog/tiktok-downloads-one-billion

[3] U.S. Department of the Treasury, “The Committee on Foreign Investments in United States (CFIUS)”, Government of United States,

https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius

[4] U.S. Department of the Treasury, “Title XVII – Review of Foreign Investments and Export Controls”, Government of United States, https://home.treasury.gov/sites/default/files/2018-08/The-Foreign-Investment-Risk-Review-Modernization-Act-of-2018-FIRRMA_0.pdf

[5] Rogers, Mike & Ruppersberger, C.A. Dutch, “Investigative Report on the U.S. National Security issues posed by Chinese telecommunication companies Huawei and ZTE”, Government of United States, 8 October 2012,

https://fas.org/irp/congress/2012_rpt/huawei.pdf

[6] Congressional Record, “Foreign Investment Risk Review Modernization Act of 2018; Congressional Record Vol. 164, No. 107″, United States Congress, 26 June 2018, https://www.congress.gov/congressional-record/2018/6/26/house-section/article/h5674-4?q=%7B%22search%22%3A%5B%22FIRRMA%22%5D%7D&s=4&r=6

[7] Executive Orders, “Order Regarding the Proposed Acquisition of Lattice Semiconductor Corporation by China Venture Capital Fund Corporation Limited”, White House, 13 September 2017, https://www.whitehouse.gov/presidential-actions/order-regarding-proposed-acquisition-lattice-semiconductor-corporation-china-venture-capital-fund-corporation-limited/

[8] Department of the Treasury, “Proposed FIRRMA Regulations Part”, Government of United States, 11 September 2019, https://home.treasury.gov/system/files/206/Proposed-FIRRMA-Regulations-Part-800.pdf

[9] Department of the Treasury, “Proposed FIRRMA Regulations Part”, Government of United States, 11 September 2019,

https://home.treasury.gov/system/files/206/Proposed-FIRRMA-Regulations-Part-802.pdf

[10] (Section 800.219 of FIRRMA Regulations part 800)

[11] Schaefer, Elizabeth, “More than Four Trillion Dollars: FDI in the US in 2017″, International Trade Administration, 2 August 2018,

https://blog.trade.gov/2018/08/02/more-than-four-trillion-dollars-fdi-in-the-usa-in-2017/

[12] Office of the United States Trade Representatives, “The People’s Republic of China”, Government of United States, https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china

[13] U.S.-China FDI, “The US-China Investment Hub”, The US-China Investment Project, 2019, https://www.us-china-fdi.com/us-china-foreign-direct-investments/data

[14] Office of the United States Trade Representatives, ” India – U.S. -Bilateral Trade Investment”, Government of United States, https://ustr.gov/countries-regions/south-central-asia/india

[15] U.S. Department of the Treasury, “Title XVII – Review of Foreign Investments and Export Controls”, Government of United States, https://home.treasury.gov/sites/default/files/2018-08/The-Foreign-Investment-Risk-Review-Modernization-Act-of-2018-FIRRMA_0.pdf

[16] 1990: China National Aero-Technology and Export Corporation’s acquisition of Mamco Manufacturing;

2012: Ralls Corporation’s acquisition of four wind farm project US companies;

2016: Fujian Grand Chip Investment Fund’s acquisition of Aixtron SE;

2017: Canyon Bridge Capital Investment Limited’s proposed acquisition of Lattice Semiconductor Corporation;

2018: Broadcom’s acquisition of Qualcomm.

[17] Blumental, David; Croley, Steven; Xu, Hiu, “CFIUS and Chinese Investments in the United States-A Closed Door?”, Latham & Watkins, 4 June 2018, https://www.lw.com/thoughtLeadership/CFIUS-chinese-investments-united-states-reprint

[18] Press Information Bureau, “Guidelines on Security Clearance”, Government of India, 4 August 2015, https://pib.gov.in/newsite/PrintRelease.aspx?relid=124270

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