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SepOn August 13, 2018, the US Foreign Investment Risk Assessment Modernization Act (FIRRMA) was officially signed by US President Trump as part of the National Defense Authorization Act of 2019 (NDAA), which contains many major reforms of the foreign-funded review mechanism. Although it is equally effective for all investing countries, it is self-evident that China is core target. Since the United States clearly denied China’s market economy status in November 2017, Sino-US economic and trade relations have turned down sharply. At the beginning of 2018, Sino-US trade frictions continued to escalate, and now trade frictions have further spread, and the investment field is quietly becoming a new field in which the United States economically suppresses China.
Fully tightening foreign investment controls
The regulation of foreign investment in the United States began in the 1970s with the establishment of the Committee on Foreign Investment in the United States (CFIUS). As a specialized agency for reviewing foreign security risks, CFIUS gradually expanded from a research and consulting institution to a powerful watchdog for review foreign investment in the past reforms. FIRRMA is the fourth legislative reform that CFIUS has undergone, including the following core elements: Firstly, the scope of CFIUS has been expanded; Secondly, the CFIUS review power has been enhanced; Finally, the CFIUS review process was revised.
In short, after this round of reforms, CFIUS has a broader scope of review, greater review power, and more complex review procedures when reviewing foreign investment, which means that the US foreign investment access policy has undergone severe changes and became stricter. Although this reform is equally effective for all foreign investment, due to the sharp increase in Chinese investment in the United States in recent years and the increasing amount of security review in China's investment, this new bill is clear to China's intentions.
Containing Chinese technology upgrades
Although Trump has repeatedly expressed his welcome to Chinese companies investing in the United States, he has hoped to attract foreign investment through substantial tax cuts, which is mainly based on the contribution of foreign capital to US employment and taxation, but the demand for foreign investment doesn’t mean that the United States is always open to all foreign investment. The US attitude toward foreign investment has always been a combination of expectations and doubts. It requires both foreign investment to boost the domestic economy and foreign investment as a means for other countries to challenge US national security and economic advantages. The main purpose of this round of CFIUS reform is to protect the country's cutting-edge technology from being easily acquired by other countries and investing in the United States, while the focus is aimed at Chinese technology-based enterprises.
Before the launch of the new bill, China was already the focus of the US national security review. In the history of the United States, there have been five cases in which the president personally vetoed a foreign-funded transaction on the grounds of national security, and all five transactions were related to China. In addition, CFIUS's latest annual report shows that China has become the country with the most CFIUS review for the fourth consecutive year in 2015. Since Trump took office in 2017 to the end of July this year, the United States has frequently blocked China's acquisition of US companies on the grounds of national security. More than a dozen investment transactions have been aborted, and they are mainly concentrated in semiconductors, information and communication, financial services, big data, new materials and other emerging high-tech sectors, such as Trump vetoed the Canyon Bridge Fund's acquisition of Lattice Semiconductor in September 2017, and many other transactions that failed due to CFIUS security review, including TCL's acquisition of Novartis Wireless Communications in June 2018, Ant Financial’s acquisition of MoneyGram in January 2018, and Xinlun Technology acquired the Akron polymer system in May 2018.
That China’s investment in the United States frequently encountered obstacles is on the surface because it touches the red line of US national security, but it has reasons in the deeper layer. First of all, the US National Security Strategy has fundamentally laid the negative tone for China's investment policy toward China as a new positioning for China's "strategic competitors." Secondly, "Made in China 2025" directly triggered doubts and vigilance in the US domestic investment in China. Finally, investment protectionism is good for Trump's political support.
The investment situation in the United States is getting more and more severe
As Sino-US trade frictions intensified, the CFIUS reform cast a new shadow on Chinese companies' investment in the United States and bilateral economic and trade relations. Under the rigorous security review, it will become more and more difficult for Chinese companies to acquire the US technology companies.
First, the introduction of the new bill will increase the difficulty and risk of Chinese companies investing in the United States. Secondly, under the background of Sino-US strategic competition and trade friction, China's normal business investment in the United States may face more serious pan-political obstacles. Finally, the more important impact of the reform lies in the psychological impact on all parties to the transaction, which may lead to the continued downturn of Chinese investment in the United States.
As the economic competition between China and the United States intensifies, the United States is likely to link investment restrictions with trade negotiations, thereby increasing the bargaining power of China's economic and trade games. In the context of the rise of US investment protectionism, Germany has also begun to take the lead in tightening foreign investment censorship, and European attitudes toward Chinese investment have generally tightened. In this regard, the Chinese government should maintain its strategic strength, deepen domestic reforms while expanding its openness, and commit itself to independent innovation of core technologies. In addition to increasing capital investment, it is necessary to strengthen intellectual property protection and provide legal guarantees and institutional incentives for technological innovation. At the same time, companies need to be vigilant about this, do risk assessment and response preparation before investing overseas, and strive to achieve compliance management, learn to use legal weapons to protect their legitimate rights and interests.
(Li Wei is the Professor of the School of International Relations, Renmin University of China; Zhao Li is the member of Economic Diplomacy Program of the School of International Relations RUC and Associate Research in NADS.)
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