Congress working on Cfius bills that could redefine national security reviews for foreign acquirers

1 March 2017. By Curtis Eichelberger, Joshua Sisco and Matthew Tracy.

Senate and House members are planning to introduce bills this year that will expand the national security review for foreign acquirers of US companies.

The Committee on Foreign Investment in the United States, or Cfius, which conducts the reviews, is chaired by the Treasury Department and includes representatives from federal agencies including the Departments of Defense, State and Commerce.

A group led by Texas Senator John Cornyn could have a draft ready within the next few weeks, while a House measure, led by North Carolina Representative Robert Pittenger, could either be part of Cornyn's effort, or be presented later. New York Senator Chuck Schumer is working independently on a third bill.

Key issues legislators are debating as they draft their Cfius bills:

  • Lawmakers have discussed adding an economic benefits test or reciprocity requirement as part of the Cfius review. These measures would allow Cfius to consider the economic impact a foreign purchase could have on the US economy and whether US investors are being treated fairly abroad.
  • Legislators are looking at a tier system that would give nations with defense treaties or an alliance with the US expedited security reviews, while hostile nations would receive a more intense review. The tier system could also be extended to industries, particularly semiconductors, where there are concerns about technology transfer.
  • Lawmakers wonder if a special focus should be placed on state-owned enterprises and whether any Chinese SOEs should be permitted to buy American companies. One issue would be defining what constitutes an SOE. Does the government need to own the company outright, or by some minimal percentage? Where does the US draw the line?
  • Should Cfius block transactions that allow the personal data of American citizens to fall into the hands of an acquirer's government?
  • Should Cfius review expand to include joint ventures with US companies and green field investments where the foreign buyer builds its operations in the US from the ground up, rather than buying an existing company.
  • Is Treasury the most appropriate agency to chair Cfius? Commerce has been mentioned as an alternative. And should Cfius be expanded to include additional agencies, such as the Department of Agriculture, whose addition has the support of Iowa Senator Charles Grassley?


Standing up to China

Cornyn's office said the senator's greatest concern is acquisitions that allow sophisticated technology to be transferred into the hands of foreign governments, particularly China.

The Texas senator wants Cfius to maintain a classified list of all countries identified as potential military threats to receive additional scrutiny, while acquirers from allies and those with US treaties would have their applications expedited.

Cornyn also wants to increase scrutiny of transactions that involve transfers of technologies with both commercial and military applications. And he wants to expand Cfius's review to include joint ventures and real estate transactions that are in close proximity to military bases and other sensitive national security facilities.

Broader mandate

The bills being prepared by Congress are also likely to introduce political and economic components to a national security analysis currently focused on protecting defense secrets, the military supply chain and combat research and development sites and personnel.

New York Senator Chuck Schumer is working on a reform package that would expand the Cfius mandate to address economic harms.

In a letter to then-Treasury Secretary Jacob Lew and then-US Trade Representative Michael Froman — and copied to then-President-elect Donald Trump last November — Schumer said China was making strategic investments in the US while simultaneously constructing barriers to US investment in China.

He said Congress would be working on legislation in 2017 to expand Cfius oversight authority to "reflect today's challenges and look at other ways we can enforce reciprocity with China."

Schumer's approach embodies the type of Cfius expansion that strikes fear into the Cfius bar. Attorneys fear that the government will use what has been an effective national security tool to achieve trade and economic goals the US has been unable to negotiate or legislate otherwise.

Critics say these issues are not national security matters, and that changes should be addressed by the Securities and Exchange Commission, the US Trade Representative, or even by re-writing century-old US antitrust laws.

Daniel Rosen, a founding partner of Rhodium Group with more than two decades of experience analyzing China's economy, said he is "skeptical that any changes are necessary" to Cfius.

Rosen was a senior adviser for International Economic Policy at the White House National Economic Council and National Security Council in 2000-2001 and is now a member of the Council on Foreign Relations and a board member of the National Committee on US-China Relations.

If the chairmanship were moved to an agency such as the Commerce Department, there would be an increased risk of politicized investment reviews at the expense of national security, Rosen said.

If every Cfius review is politicized on broader economic grounds and used to defend US businesses, then it will be difficult to know whether the national security issues are prioritized, he said. Likewise with reciprocity, which would "open the door to massive horse trading and bargaining from special interests."

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