Recent public reports indicate Senate Chuck Schumer (D-NY), the Senate Democratic Leader, has authored a letter to President Trump requesting the President order the Committee on Foreign Investment in the United States (CFIUS) to suspend the approval of all covered transactions by Chinese entities. Sen. Schumer explains that such action would place severe economic pressure on China and force the country to take more stringent action against North Korea. While President Trump has publicly expressed “disappointment” with China over its perceived lack of response to recent North Korean missile tests, it is unclear what actions, if any, the President might take to spur action from China.
In his letter, Sen. Schumer notes that China has largely maintained normal economic relations with North Korea, despite the sanctions put in place by numerous United Nations Security Council (UNSC) Resolutions. Accordingly, he suggests that one option for the U.S. to place pressure on China to address North Korea is to prohibit China’s ability to acquire U.S. businesses. In making this argument, Sen. Schumer explains that the security threat posed by China’s continued trade arrangements with North Korea justifies suspending approval of all CFIUS covered transactions where Chinese entities could gain a controlling interest. CFIUS, an inter-agency committee headed by the U.S. Treasury Department, is tasked with reviewing foreign acquisitions of U.S. businesses to resolve any potential national security concerns. By statute, CFIUS considers a list of national security factors outlined Section 721(f) of the Defense Production Act of 1950, as amended. One such factor is the adherence of the subject country to nonproliferation control regimes, including treaties and multilateral supply guidelines. However, to date CFIUS has never implemented an outright ban on all covered transactions by acquirers from a specific country.
Sen. Schumer’s letter comes at a time when several new pieces of legislation modifying CFIUS could soon be introduced in Congress. We previously wrote about new details emerging in connection with a potential bill to be introduced by Sen. John Cornyn (R-TX). As explained in our blog, this bill would focus on certain nations (such as China) that pose the greatest threat, as well as give CFIUS clearer authority to review certain types of transactions. Sen. Schumer is also reportedly preparing a bill that will focus on adding a net economic benefit test to the CFIUS national security mandate. Both bills could be introduced soon, though there is no clear timeline on when this might occur.
We will continue to monitor the situation for any updates. As Sen. Schumer notes in his letter, there are as many as 30 current transactions being reviewed by CFIUS that involve China. Any executive action could potentially impact pending transactions as well as future covered transactions including both notified and non-notified transactions. While the CFIUS process is voluntarily, parties who engaged in a covered transaction, whether notified or not, could be subject to this potential prohibition.