On December 12, 2017, President Trump signed into law a defense authorization bill* requiring the Defense Secretary to submit a report to Congress in three months on improving US foreign investment screening procedures. While this tasking has no immediate consequence for current transactions, it reflects growing concerns in Washington and capitals of other advanced markets over national security implications of foreign investment, particularly in emerging technologies whose strategic significance is not yet known. The report is no doubt meant to influence legislative debates over amendments to the US foreign investment screening procedure.

The existing screening procedure, which was created in 1988 and updated with the Foreign Investment and National Security Act of 2007, allows the President to block or unwind any foreign investment that he deems creates a national security threat. The legislation created a notification procedure administered by the Treasury Department-led interagency Committee on Foreign Investment in the United States (CFIUS). While filings are typically voluntary, CFIUS approvals provide a safe harbor from subsequent questioning.

The defense authorization legislation enacted this week tasks the Defense Secretary, with concurrence of the Secretaries of State and Treasury and the Director of National Intelligence, with assessing the effectiveness of CFIUS. The Defense Secretary is to make recommendations on improving (1) CFIUS’ prevention of foreign investments that could threaten national security, and (2) cooperation with US allies on foreign investments threatening national security. He is to examine:

  • “[M]ajor vulnerabilities of the defense industrial base”;
  • Whether CFIUS
    • Is adequately resourced,
    • Allows sufficient time to thoroughly review transactions,
    • Adequately assesses threats posed by foreign governments’ influence over investors, and
    • Provides adequate mitigation measures to prevent national security risks;
  • The extent of industrial espionage against U.S. companies to obtain commercial secrets related to “critical or foundational technologies”; and
  • The potential of foreign investments to reduce U.S. technological or industrial advantage, and increase the vulnerability of the United States to “information operations.”

This study is remarkable. First, the drafting task is assigned to the Pentagon, rather than the Treasury Department that chairs the inter-agency process that is the target of the study. If there is an effective White House-run interagency process, the allocation of the study to the Defense Department might not matter. At this early stage, however, it is not clear that the administration has straightened out its policy directions and coordination procedures.

Second, the study’s mandate reflects the heightened concern in US security circles with implications of state-directed industrial and investment policies of other countries, and in particular China. These concerns were growing in the Obama administration, but have become more acute during the Trump administration as demonstrated by increasingly protracted CFIUS reviews.

Third, the focus on cooperation with other advanced governments indicates an awareness that a US-only approach will be insufficient. The United States is not the only location for the development of emerging technologies. Indeed, a number of other advanced governments are also re-assessing their investment regimes.

Fourth, the study’s terms of reference do not consider any of the potential economic, social and security benefits of foreign investment. A key driver of US economic and technological success has been its vast open and competitive market. However, the CFIUS review process has become longer and more unpredictable in the past year, just as US trade policy has also changed directions. It would be better if the Defense Department took into account these broader implications, but it is becoming uncertain whether the United States remains committed to the open investment policy that has served it well.

*National Defense Authorization Act for Fiscal Year 2018, s. 1069.

Rod Hunter is a trade and investment partner in the Washington, DC office and has substantial experience managing foreign investment reviews. He served as Senior Director for International Economics at the National Security Council, the White House office that supervises the national security reviews conducted by the Committee on Foreign Investment in the United States (CFIUS). In that White House role, he managed CFIUS cases, including negotiating resolution of the most sensitive cases, coordinating the administration’s legislative, communications and diplomatic outreach in particular cases, and developing the government’s procedures for incorporating intelligence agencies’ assessments. Earlier in his career, he served as Senior Counsel at the U.S. Trade Representative’s office where he litigated cases before the World Trade Organization.

Sylwia Lis is a member of the Firm’s International Trade, Compliance and Customs Steering Committee. Ms. Lis has extensive experience advising companies on US laws relating to exports and reexports of commercial goods and technology, defense trade controls and trade sanctions — including licensing, regulatory interpretations, compliance programs and enforcement matters. She also has advised clients on national security reviews of foreign investment administered by the Committee on Foreign Investment in the United States (CFIUS), including CFIUS-related due diligence, risk assessment, and representation before the CFIUS agencies.