Both Congress and the executive branch have been considering the notion of a new regulatory regime to limit certain types of US outbound investment in other countries. While such a regime would certainly constitute a sea change in US national security and economic policy, most commenters have largely overlooked the potential for US regulation of outbound investment to trigger similar regimes abroad, and thereby exponentially increase the effect on industry.
Herein, we briefly describe draft legislation in Congress that would establish an outbound investment review system; examine the potential for the president to restrict outbound investment even if Congress winds up not acting; discuss why we believe such a regime should be relatively narrow in scope; and finally explain why a US outbound investment regime could catalyze similar efforts by the governments of other nations.
The House of Representatives passed the America COMPETES Act on February 4 as a counterproposal to the Senate’s US Innovation and Competition Act (USICA); it contains a provision, the National Critical Capabilities Defense Act, that would establish a National Critical Capabilities Committee (NCCC) headed by the Office of the US Trade Representative (USTR).
The NCCC would be an interagency committee, somewhat similar to the Committee on Foreign Investment in the United States (CFIUS), that would review, and be empowered to block, outbound investment by a wide range of US businesses engaged in manufacturing or otherwise developing identified critical national capabilities. The reviews would be specifically focused on investment in a “country of concern,” which would include “foreign adversary” nations as well as “non-market economy” nations. Although China was certainly top of mind for the legislative sponsors, it seems Russia would likely now also be a focus.
The House bill defines “covered transactions” to include any transaction by a US business that “shifts or relocates to a country of concern, or transfers to an entity of concern, the design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving one or more critical capabilities” identified by the legislation, as well as any transaction that “could result in an unacceptable risk to a national critical capability.”
The bill further defines national critical capabilities as “systems and assets, whether physical or virtual, so vital to the United States that the inability to develop such systems and assets or the incapacity or destruction of such systems or assets would have a debilitating impact on national security or crisis preparedness.” In a nonexhaustive list of such capabilities, the bill includes such items as medical supplies and equipment related to critical infrastructure, as well as services and supply chains related to such items.
Outbound investment screening is one of the most contentious issues facing House and Senate negotiators in the America COMPETES/USICA conference committee, as US business groups and congressional opponents successfully removed outbound investment screening from USICA, only to see it reemerge in the America COMPETES Act. While it is uncertain whether the provision will be included in the final consensus legislation, there is enough bipartisan support that companies should begin thinking about what the establishment of an outbound investment regime could mean for their operations.
Potential for Unilateral Executive Action
Even if Congress winds up not legislating a new outbound investment regime, however, it is entirely possible the executive branch could choose to unilaterally put one in place. National security officials, including national security advisor Jake Sullivan, have reportedly been advocating for the president to issue an executive order implementing an as-yet-undefined scheme to regulate outbound investment. Reportedly, the Departments of Commerce and Treasury are pushing back, arguing that an outbound regulatory program would have a negative effect on US economic competitiveness.
Although specifics about an executive order have not been discussed publicly, the White House would likely have to rely on the International Emergency Economic Powers Act (IEEPA) as the basis for jurisdiction for such an order. Such an action would be consistent with other executive actions in similarly sensitive and contentious areas.
For example, Executive Order 13873, issued under the Trump administration, established a new and significant regulatory regime to protect supply chain security for information and communications technology and services (ICTS). That executive order was issued under the authority of IEEPA and provides the secretary of commerce with broad powers to either prohibit or mitigate transactions that involve foreign ICTS that pose a risk to US national security.
If Congress does not act in this area, an executive order to regulate outbound investment could wind up looking quite different from the America COMPETES Act. For example, the president might not elect to put the USTR in charge of outbound investment review, especially after a March 31 Senate Finance Committee hearing at which the USTR did not express strong support for the idea, stating merely that the government should “look at” that kind of tool.
By contrast, the secretary of commerce has been vocally supportive of regulating outbound investment, and the White House might therefore determine to vest any new authority in the Department of Commerce or another more supportive agency. As discussed below, an executive order would likely also provide at least a basic scope of an outbound investment review regime, to establish at a high level the types of investments that would and would not be subject to review.
A unilateral effort to establish outbound investment controls by executive order could occur either if and when Congress fails to establish one by legislation, or preemptively as an effort by the president to head off congressional action by setting up a new regime tailored to the administration’s policy preferences. For example, the president might want to use an executive order to create a regime more narrow in scope than what might come out of Congress; or, as discussed above, put another agency in charge of the new committee.
While a preemptive move by the Biden-Harris administration would not guarantee that Congress would not still legislate, it could very well decrease the momentum in Congress to expend political capital on this issue, and encourage Congress to use the executive action as a learning mechanism, much like what initially happened with CFIUS.
The language in the America COMPETES Act indicates the potential breadth of an outbound investment review regime, should one be implemented through legislation. Of particular note, the bill states that in identifying additional articles, supply chains, and services to recommend for inclusion as national critical capabilities, a new National Critical Capabilities Committee should conduct a review of industries including energy, medical, communications, defense, transportation, aerospace, robotics, artificial intelligence, semiconductors, shipbuilding, and water.
Although an outbound investment regime would no doubt be a shock to the business ecosystem, businesses likely would lobby aggressively to ensure that any new authority were scoped as judiciously as possible. The US government would be acutely sensitive to any detrimental effects on US economic competitiveness, and would presumably seek to manage those effects by impacting outbound investment only to the extent necessary to protect national security.
To the extent that an outbound investment regime were implemented, it likely would be applied where technologies have been identified as being so sensitive that export controls alone are insufficient to protect US interests. In fact, a significant argument advanced to support the underlying idea of an outbound investment regime is the failure of export controls to adequately protect US national security interests over the last three decades. That argument asserts that significant national security interests exist beyond tech transfer issues, and an outbound regime is needed to address risks arising from US capital that is used by certain other countries to develop indigenous capabilities.
An outbound investment regime might also restrict investments that are not based on the inherent sensitivity of particular technology, but instead are based on whether the US investment benefits adversary military interests. Such matters could be deemed inherently harmful to US national security interests, and therefore worthy of regulation.
Finally, the discussion of outbound investment regimes also includes the consideration of regulating investments harmful to US foreign policy interests, even where not based purely on national security. Indeed, there is policy precedent of a sort in Executive Order 13959, as amended by Executive Order 14032, which restricts US investment in publicly traded securities of companies determined to support China’s military-industrial complex or its surveillance technology sector.
Two recent examples are instructive in thinking about how the US government would likely endeavor to balance national security equities and economic equities. The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) reformed CFIUS and greatly expanded its jurisdiction. The new jurisdiction raised industry concerns that it could require (or allow for) reviews of a greater number and type of transactions than envisioned by its proponents, and thereby chill a much wider swath of transactions than intended. Ultimately, the implementing regulations were scoped more narrowly than what the statute permits, and while they remain a cause for trepidation for both US and foreign companies, they are nonetheless not resulting in an overwhelming number of cross-border transactions being subject to such reviews.
As a second example, industry was similarly concerned about Executive Order 13873, mentioned above. Unlike with FIRRMA, the implementing regulations in that instance did not significantly contract the breadth of the new authority. However, the executive order—which was developed and drafted by the US Department of Justice, National Security Division, Foreign Investment Review Section, which is the same office that carries out the Department’s CFIUS and Team Telecom responsibilities—was intended to be a relatively surgical tool, and to reach particularly high-risk transactions that fall outside either CFIUS or Team Telecom authorities.
Although the new regulatory regime established by Executive Order 13873 is still in its relative infancy, if the US Government uses the authority only when warranted for especially high-risk transactions, its impact on will likely be lesser than that of even CFIUS and Team Telecom.
These examples demonstrate that the government can carefully scope an outbound review regime in one or both of two ways. First, it can devise scoping criteria in implementing regulations that filter the types of transactions that come before the review body in the first place. And second, even for transactions that come before the review body, that entity can make case-by-case judgment calls on whether to allow a particular transaction to go forward—similar to how most transactions that are subject to CFIUS jurisdiction are ultimately cleared by the committee, and only a relatively small number of those are even subject to mitigation as a condition of clearance.
In considering the possibility of a US outbound investment review regime, the potential effect of such a regime beyond the United States has generally not been recognized. If past is prologue, this type of action by the US government—to regulate and potentially curtail outbound investment—would be accompanied by a strong diplomatic push to convince other nations to follow suit.
The reason is simple: Although the United States has more available capital than any other country, the United States accounts for a fraction of available capital worldwide.
While recent data is to some extent affected by the COVID-19 global pandemic, according to the Organization for Economic Cooperation and Development (OECD) International Direct Investment Statistics 2020, in 2019 the US direct investment outflow was approximately $119 billion—or about 10% of the total worldwide outflow of approximately $1,183 billion. Although the leading role of US capital markets should not be understated, especially taking into account the ability to raise capital through US exchanges, if the United States limits or seeks to ban certain outbound investment, capital will still be readily available elsewhere.
A Coordinated Approach
Therefore, absent a coordinated approach by multiple nations, not only will a US outbound investment regime fail to achieve its purpose, but it will disadvantage US companies in the process.
Accordingly, it seems that if the US government makes the decision to regulate outbound investment, it will need to convince partner nations to do likewise. Countries with high proportions of global capital would be especially likely targets for such US outreach. According to the OECD data, the five countries with the highest foreign investment outflows, aside from the United States or China, are Japan ($227 billion), Germany ($139 billion), the Netherlands ($75 billion), Canada ($79 billion), and France ($39 billion).
Foreign Direct Investment in Europe
Would other nations in fact follow America’s lead? Recent experience with foreign direct investment (FDI) suggests they very well might.
A few years ago, the United States had a robust regime for reviewing inbound investment, in the form of CFIUS, but most other countries lagged behind. When the government revamped CFIUS through FIRRMA, in addition to expanding CFIUS jurisdiction, it also increased its efforts to advocate for stronger investment review regimes abroad.
Perhaps most strikingly, FIRRMA contains a provision that moves certain FDI outside its purview if the investor comes from an “excepted foreign state,” which is a country deemed by CFIUS to have adequately robust foreign investment review mechanisms of its own. This element of the statute was expressly designed to help push other countries toward prioritizing foreign investment review in the same way the United States does.
FIRRMA also contains a provision requiring the CFIUS chair to establish a formal process to exchange information with international partners, and states that such a process should “be designed to facilitate the harmonization of action” between the United States and its allies.
Today, two-thirds of EU member states have adopted, and others are in the process of adopting, FDI screening mechanisms, which a few years back either did not exist or were very rarely used. The acquisition of a number of key technology companies by non-EU investors in the last 10 years served as a wake-up call to the European Union and its member states, and prompted a move to adopt CFIUS-style foreign investment controls.
The COVID-19 pandemic further accelerated that process and led to very restrictive regimes or temporary FDI regimes, a great number of which have since been extended. Although national security remains an EU member state prerogative, the European Union itself nonetheless adopted an FDI screening regulation, which lists the sectors that should be covered by FDI controls and introduced an EU FDI mechanism through which EU member states and the EU Commission must exchange information and coordinate on notified cases prior to any decision by an EU member state at the national level.
Three key features have begun to crystallize in the few years of application of European FDI control. First, FDI control in Europe has been extended far beyond classic national security considerations that were at the origin of some of the preexisting FDI regimes—to capture industries or technologies of strategic interest in a global economy—which reflects the fact that European industrial and technological sovereignty is now at the very top of the policy agenda.
The EU Screening Regulation, directly applicable in EU member states’ domestic regimes since October 2020, lists key technologies such as artificial intelligence, robotics, cybersecurity, semiconductors, quantum computing, biotechnology, and supply of critical inputs (e.g., raw materials and food safety). The impact of FDI on projects of EU interest funded by EU funds, such as aerospace, telecom, transport, and energy infrastructure, also has to be assessed in any review at the member state level.
Second, in an attempt to be all-encompassing, a number of regimes are drafted in a very broad and vague manner and allow for severe sanctions for noncompliance. This has led to a wave of filings, a great many of which are eventually found to be not in scope and decided by nonjurisdiction letters. This will inevitably require cutting back some of these provisions to better target FDI of genuine concern.
Third, albeit an exception that is highly questionable under EU internal market rules, FDI regimes in some member states also capture investment by EU investors, even if often limited to a subset of industry sectors.
Outbound investment control does not appear to be on the European agenda yet. However, following the rationale of strategic sovereignty, in May 2021, the European Union updated its 2020 industrial strategy to identify 137 products for which the European Union is dependent on other countries, and presented an in-depth review of six sectors of strategic dependency: raw materials, batteries, active pharmaceutical ingredients, hydrogen, semiconductors, and cloud and edge technologies. Where EU domestic production is possible, e.g., in semiconductors, the European Union tabled legislation (the EU Chips Act) in April 2022, pursuant to which companies subsidized through EU or member states’ funds for investing into semiconductor technology can be constrained to supply within the EU only. In addition, some existing or forthcoming European FDI regimes also capture investment by domestic companies.
It would be a significant further step to constrain outbound investment by EU companies, to the point that it may seem inconceivable today—especially in light of the freedom to conduct business, which is one of the cornerstone principles of the EU Treaties. Then again, 10 years ago no one expected a full-blown FDI regime in Europe.
Potential Multilateral Next Steps
Although outbound investment does not present the same opportunity for the US government to offer “carrots” to partner nations in the way it did through FIRRMA’s excepted foreign state mechanism, the United States could likely devise other types of creative incentives for partner nations to set up outbound investment review processes.
Even without such incentives, of course, it is possible that at least some partner nations would consider regulating outbound investment review because they share US policy goals, such as preventing adversary advancement in certain key areas of technology or impacting human rights abuses.
It is worth noting that the current discussion of outbound investment review comes against the backdrop of a remarkable display of global unity in taking financial and other actions against Russia due to its operations in Ukraine. Few predicted such rapid and coordinated action by multiple nations to impose sanctions on Russia, and although it is too soon to assess the full effect of such sanctions, it is clear that the impact of sanctions has been vastly increased by virtue of multiple nations acting in concert.
While the situation with Russia is unique, it is possible that coordinated international sanctions against Russia could at least create some collective muscle memory that would increase the likelihood of future multilateral efforts to use other forms of economic leverage in other contexts. Of course, that also highlights a potential collateral effect of outbound investment review, which is that it could trigger retaliatory responses, similar to measures implemented by both China and Russia in response to US unilateral sanctions.
As US companies start to ponder how a new outbound investment regime might affect their business operations abroad, non-US companies would be well advised to do likewise.
The good news for non-US companies is that there would likely be some latency between implementation of a US regime and any corresponding actions by partner nations; and how the US chooses to scope such a regime could provide some clues as to how other nations might do so.
For all these reasons, even companies not directly affected by a US outbound investment regime will want to track this issue due to the potential for collateral effects on policymaking abroad.