Cfius bar fears Trump to use security review for leverage on trade deals

13 January 2017. By Curtis Eichelberger.

Attorneys who help foreign investors acquire US businesses say their worst fear is that  in order to gain an advantage in trade negotiations with countries such as China, US President-elect Donald Trump will modify the regulatory definition of “national security” as it applies for foreign investment in the United States.

National security reviews of mergers and acquisitions involving a foreign investor are conducted by the Committee on Foreign Investment in the United States, which is chaired by the US secretary of the Treasury. The Cfius panel includes the heads of the Defense, State, Homeland Security, Justice, Commerce and Energy departments, the Office of the US Trade Representative and the White House’s Office of Science and Technology Policy.

Cfius is tasked with examining mergers and acquisitions to identify potential national security concerns, such as when a foreign-owned company buys a US firm that supplies the government with computers, develops advanced defense technologies or is located next to a top secret government facility.

The committee can recommend blocking a deal or propose mitigation measures to resolve security issues. If the companies refuse, Cfius sends the matter to the US president for a final ruling.

‘Food security’ 

A Trump transition team draft memo laying out the incoming administration’s trade policy for its first 200 days in office was leaked to US cable network CNN in November.

According to the CNN report, Trump “would order the Committee on Foreign Investment in the US to review food security in trade and reciprocity in international corporate takeovers (i.e. whether a US company would be able to buy a Chinese company like a Chinese company would be able to buy a US company).”

Trump’s transition team didn’t respond to a request for comment.

Some executives currently working for the committee believe that Republicans, who control both houses of Congress and have key advisory roles in the administration, can slow-walk Trump back from ill-considered changes in Cfius policy. They note that no policies have been formally announced.

Private attorneys and Cfius executives argue that reciprocity is about ensuring foreign markets are open to US investors and is better left to trade negotiators. They say it should be separated from Cfius’ task of reviewing mergers to ensure national security is protected.

Some attorneys believe the president would need congressional action if he wants to redesign Cfius into a multipurpose agency that protects both national and economic security — similar to those in other countries.

Canada, for example, examines whether a foreign acquisition will have a net benefit to the Canadian economy, and it can also review a deal for national security implications.

If Trump wanted to broaden the committee’s purview to considering every foreign merger’s net benefit, attorneys say, Cfius could conceivably increase its workload from about 175 deals a year to potentially thousands, requiring longer review times, more staffing and a much larger budget.

It would be easier for Trump to use his presidential powers to redefine ‘national security’ and have Cfius consider reciprocity as part of its existing mandate. He could then give additional weight to economic concerns raised by the USTR or Commerce and could threaten — publicly or privately — to block a deal unless a foreign country opened its markets to US investment.

What is legally uncertain, lawyers say, is the limit of Trump’s power to make changes via executive order, versus needing Congress to introduce, debate and write a new law.

“‘National security’ is not a defined term under the relevant regulations and statute, so even without regulatory or statutory changes, the Trump administration could seek to expand the scope of CFIUS’s reviews by interpreting ‘national security’ to include food security and reciprocity in cross-border investments,” said a report by the Washington, DC, law firm Hogan Lovells.

“Chinese media reports and our discussions with Chinese investors suggest that, at least in the short term, some Chinese investors might be cautious about certain investments in the United States until they better understand the Trump administration’s likely approach to (foreign direct investment) in the United States,” the Hogan Lovells report said.

Foreign direct investment in the US has become more geographically diverse in recent years. From 2005 to 2007, Cfius reviewed four transactions from China and 79 investments from the United Kingdom. From 2012 to 2014, Chinese investors filed a top-ranking 68 notices, while UK companies were second with 45.

Attorneys caution that Trump has not yet taken office and that their thoughts are speculative. One thing everyone agrees on, though, is that any Cfius changes to include reciprocity would focuse on China.

Momentum for change 

In September 2016, members of the US House of Representatives asked the US Government Accountability Office to investigate and report on whether Cfius’ authority has kept pace with foreign acquisitions in strategically important sectors. They asked the GAO to consider whether Cfius’ powers need to be expanded to include:

  • Mandatory review of transactions by companies owned by the Chinese government, especially in the telecommunications, media and agriculture sectors.
  • An economic benefit test in addition to the existing national security test.
  • Reciprocity — a prohibition on investment in a US industry by a foreign company whose home government prohibits investment in the same industry.

Lawmakers aren’t alone in their concern. The US-China Economic and Security Review Commission, created by Congress in 2000 to investigate and report on the national security implications of the countries’ bilateral trade and economic relationship, recommended in November that Congress amend Cfius to prevent Chinese government-owned companies from buying or controlling US companies.

Last week, a White House panel led by President Barack Obama’s top scientific adviser, suggested that the US increase its export controls on technology and increase scrutiny of Chinese investments in US chip companies.

A report by Washington law firm Covington and Burling said “while the legislative landscape in the next Congress is still to be defined, there is a greater chance now than at any time in the last decade of potential legislation to amend CFIUS.”

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