A Pivotal Juncture in Investment Security

The U.S. Treasury Department’s new pilot program to “protect critical American technology and intellectual property from potentially harmful foreign acquisitions” makes no mention of China, but is clearly driven by concerns about that nation’s role in these transactions. This will certainly further ratchet up tensions between the U.S. and China, and likely reinforce global perceptions of American protectionism.

However, even as tensions between China and the United States escalate in the area of foreign direct investment, a little-noticed and unexpected effort is underway to increase harmonization and cooperation with America’s European allies in the use of these same FDI screening tools.

Amidst escalating concerns that other countries, particularly China, are exploiting mergers, acquisitions and other foreign investments in the United States to access cutting-edge American technology or threaten national security, President Donald Trump this summer signed into law the Foreign Investment Risk Review Modernization Act.

This legislation is the biggest overhaul to regulations governing the Committee on Foreign Investment in the United States, an interagency body chaired by the Treasury Department, in more than a decade. It is also the product of a vigorous debate about the extent to which the United States should employ a more expansive view of national security when assessing FDI in the United States.

On the face of it, the legislation attempts to strike a new balance between maintaining an open investment posture and protecting national security. But Treasury’s pilot program – included in interim regulations announced recently – for all practical purposes ensures that the United States will be less welcoming to foreign investment in sensitive technologies across a range of industries for the foreseeable future.

As in the United States, the distinction in Europe between economic security and national security is becoming less and less clear. Within both the European Commission and member states like Germany, France and Italy, policymakers are drawing on enforcement tools and introducing new frameworks to enable greater scrutiny of FDI. Indeed, in an unprecedented move just weeks ago, the German government effectively blocked the takeover of the machine tooling company Leifeld Metal Spinning by China’s Yantai Taihai due to security concerns.

If the perception that industrialized Western nations may now be politicizing a national security process in tandem with erecting other barriers to commerce is born out, it could stifle economic growth and be another stake in the heart to multilateral cooperation.

Yet despite the rhetoric – and certain policies – there are clear signs that transatlantic cooperation in FDI screening has not been abandoned. Certain largely overlooked provisions of FIRRMA require CFIUS to establish a process to share information with foreign partners and allies. The law also requires CFIUS to pursue the harmonization of actions with allies regarding investment and technology trends that could threaten our respective interests. While looked at by some as the embodiment of a new protectionist era, FIRRMA quietly acknowledges that a go-it-alone strategy in a world of cross-border commerce will not advance our national security.

The inclusion of these provisions in FIRRMA serve to protect the sharing of best practices between CFIUS and, for example, the European Commission’s Directorate General for Trade – a cooperation which has become more regular even in the absence of legislation.

Harmonization and coordination across jurisdictions is critical to the success of increasingly complex cross-border transactions. Ensuring that transactions are compliant across myriad legal regimes from a competition, privacy, labor or other perspective is hard enough – and the politically volatile environment in which we live today makes those challenges exponentially more difficult to navigate.  Indeed, investors from China and Europe are concerned about a revised transaction approval process in the U.S. that lacks clear rules of the road – at least until regulations are finalized.

In the months to come, CFIUS will define “critical technology,” “critical infrastructure” and “sensitive personal data” in final regulations that govern which transactions are subject to screening in the United States, while the European Commission determines how to define “security and public order” in its framework. As this work takes place, the ability of regulators to withstand the protectionist rhetoric of the day remains an open question.

For the United States, dialogue and coordination on investment security with allies around the world can help protect our national security interests and unlock economic growth and opportunity at home and abroad. The channels of communication that make this possible are more important than ever when looking inward seems to be the order of the day.

Victoria Esser served as assistant secretary of public affairs in the U.S. Treasury Department under President Barack Obama; Brett O’Brien served as national security adviser to House Minority Leader Dick Gephardt and Senate Majority Leader George Mitchell. Both are managing directors at The Glover Park Group.

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