Polarization has defined American politics for the past decade. But one area where Democrats and Republicans have stood side by side is growing concern over Chinese investment in the United States.
Shared concern that Beijing-backed companies could seize control of strategic US assets has led to a rare bipartisan effort to empower the Committee on Foreign Investment in the United States, an interagency group that reviews inbound investment for security risks, in order to deter unwanted transactions. .
The strengthening of Cfius, as the federal agency run by the Treasury Department is commonly known, has enabled various US administrations to thwart agreements that would have given Chinese companies access to critical data and technologies that could potentially be used to harm the United States.
The new barriers erected to protect American consumers and businesses have, however, made the execution of agreements with companies from allied countries – including Japan, Britain and the Netherlands, three of the largest sources of investment foreign direct – more costly and resulted in longer closed periods.
Cfius reviewed a record 436 transactions in 2021, according to its latest annual report. Most of the attention has been reserved for companies based in countries perceived as hostile to the United States, including China and Russia. But allied nations that have operations in countries like China and Russia are also affected. Although transactions are rarely blocked, approval times have lengthened.
“The world has changed and risk has changed over time,” says Ivan Schlager, a partner at law firm Kirkland & Ellis and a leading adviser to companies navigating the Cfius process. “So reviews are taking longer to get started and the complexity around both the technology and the supply chain has increased even for friendly investors.”
Cfius was created in 1975 by President Gerald Ford as a defense mechanism to protect American companies from being taken over, first by sovereign wealth funds from oil-rich countries and later by fast-growing Japanese conglomerates.
The committee, which in addition to the Treasury also includes members from the Departments of Defense, Homeland Security, State and others, has generally operated in obscurity, giving foreign investors little information about its decision-making process. . However, its main objective has been to block the transactions of a selected group of investors from hostile countries.
Under Donald Trump’s more protectionist administration, Cfius was reorganized and given greater powers to prevent a wider variety of transactions, including minority investments.
Trump’s Foreign Investment Risk Review Modernization Act of 2018 introduced for the first time a de facto mandatory review of foreign investments in US companies that supply technologies essential to more than two dozen industries. . Before the legislation, Cfius deposits would be mostly voluntary.
Trump’s main target was Chinese companies trying to buy essential American technology, infrastructure and goods near military, air and naval bases. While in office, Trump blocked Broadcom’s $142 billion bid for US chipmaker Qualcomm on the grounds that the then Singapore-based company had ties to China. He also pushed Cfius to shut down TikTok, the Chinese-owned video platform.
President Joe Biden, who defeated Trump in 2020, followed in his predecessor’s footsteps. It recently passed an executive order to deepen scrutiny of deals involving foreign investment in high-tech industries such as artificial intelligence, quantum computing and biotechnology.
While Biden’s order did not target any particular country, it pointed out that “some countries use foreign investment to gain access to sensitive data and technology for purposes harmful to the national security of states. United” – a clear reference to China and Russia.
Aimen Mir, former head of Cfius and now a partner at law firm Freshfields Bruckhaus Deringer, says despite greater scrutiny of critical industries, most deals close with few problems.
“The scrutiny to which certain transactions are subjected should not be taken to reflect the broader investment environment in the United States,” Mir said.
Cfius, he adds, is “certainly more of a deal consideration” for investment banks and M&A lawyers than 10 years ago. “But I think it’s the rare case, where it’s actually something that’s stopping deals moving forward.”
That sentiment was echoed by Janet Yellen – who, as US Treasury Secretary, chairs Cfius – in a statement at Biden’s behest in September. The move, she said, “highlights Cfius’ growing attention to national security risks in several key areas. . . while maintaining the open investment policy of the United States.
The data shows that the more rigorous examination of Cfius is having the desired effect. Investment by Chinese companies has plummeted from $59 billion in 2016 – a peak year for foreign buyouts in the United States – to $4 billion in 2021. Over the same period, European companies increased their overall investment from $248 billion to $261 billion.
Schlager says that in many ways, Cfius has created an opportunity for buyers from US allies to take over assets that would otherwise have fallen into the hands of wealthier buyers based in more hostile countries.
“It’s true that it takes longer to close a deal, but it can be done,” he says. “What has changed is that you need strategic planning ahead of a transaction.”