With trade punishment being a watchword of the Trump Administration, I thought I’d take a brief look at one of America’s key trade bodies, the Committee on Foreign Investment in the United States or CFIUS and the role that it plays in this important part of the U.S. economy.
The CFIUS was established by an Executive Order of President Ford in 1975 with this stipulation:
“the primary continuing responsibility within the executive branch for monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy on such investment.”
The CFIUS is also directed to:
1.) arrange for the preparation of analyses of trends and significant developments in foreign investment in the United States
2.) provide guidance on arrangements with foreign governments for advance consultations on prospective major foreign governmental investment in the United States
3.) review investment in the United States which, in the judgment of the Committee, might have major implications for United States national interests
4.) consider proposals for new legislation or regulations relating to foreign investment as may appear necessary
At that time, OPEC held $32 billion in deposits at U.S. banks domestically and abroad, $12.4 billion in U.S. Treasuries, $3.6 billion in non-U.S. government debt securities and $3.9 billion in stocks and equity. Here is a sampling of the American assets held by OPEC member nations over the period from 1974 to 1977:
report by the Congressional Research Service on the CFIUS regarding the U.S. approach to foreign direct investment and the role that CFIUS plays:
“The U.S. policy approach to international investment traditionally has been to establish and support an open and rules-based system that is in line with U.S. economic and national security interests. The current debate over CFIUS reflects long-standing concerns about the impact of foreign investment on the economy and the role of economics as a component of national security. Some Members question CFIUS’s performance and the way the Committee reviews cases involving foreign governments, particularly with the emergence of state-owned enterprises. Some policymakers have suggested expanding CFIUS’s purview to include a broader focus on the economic implications of individual foreign investment transactions and the cumulative effect of foreign investment on certain sectors of the economy or by investors from individual countries. Changes in U.S. foreign investment policy have potentially large economy-wide implications, since the United States is the largest recipient and the largest overseas investor of foreign direct investment.”
The Ford Executive Order also stipulated that the information used in the CFIUS deliberations would not be disclosed to the public.
During the late 1980s, Japan took over as one of the world’s leading foreign investors. As such, the Exon-Florio provision was amended to the Defense Production Act, an amendment that allowed the President the authority to block proposed or pending foreign mergers, acquisitions or take-overs of persons engaged in interstate commerce in the United States that would impair national security. In 1992, the Exon-Florio statue was amended again; the “Byrd” amendment requires the CFIUS to investigate proposed mergers, acquisitions or takeovers when these two criteria are met:
1.) the acquirer is controlled by or acting on behalf of a foreign government
2.) the acquisition results in control of a person engaged in interstate commerce in the United States that could affect the national security of the United States
Once again in 2007, the CFIUS process was amended under the Foreign Investment and National Security Act of 2007 (FINSA). This amendment grants the President the authority to block or suspend pending foreign mergers, acquisitions and takeovers that threatened to impair national security, however, the President must conclude the following:
1.) other U.S. laws are inadequate or inappropriate to protect the national security
2.) the president must have “credible evidence” that the foreign interest exercising control might take action that threatens to impair the national security
Under FINSA, CFIUS establishes national security risk by considering these three issues:
1.) the threat, which involves an assessment of the intent and capabilities of the acquirer
2.) the vulnerability, which involves an assessment of the aspects of the U.S. business that could impact national security
3.) the potential national security consequences if the vulnerabilities were to be exploited
Here is a graphic showing how the CFIUS functions and the steps taken before a final determination is made by the President:
The formal review process has a set deadline; 30 days to conduct a review, 45 days to conduct an investigation and 15 days for a presidential determination.
Here is a table showing the foreign investment transactions reviewed by the CFIUS between 2008 and 2015:
Here is a table showing the industry composition of foreign investment transactions review by the CFIUS between 2008 and 2015:
Here is a table showing the country of foreign investors and industry reviewed by the CFIUS between 2013 and 2015:
As you can see, China is responsible for nearly 20 percentage of all foreign investment transactions reviewed by the CFIUS over the latest three fiscal years for which data is publicly available.
Lastly, here is a table showing the home country of foreign acquirers of critical American technology between 2013 and 2015:
In closing, you may wonder how many transactions have actually been blocked by the CFIUS since its inception. Here’s the complete list:
1. In 1990, President Bush directed the China National Aero-Technology Import and Export Corporation (CATIC) to divest its acquisition of MAMCO Manufacturing.
2. In 2012, President Obama directed the Ralls Corporation to divest itself of an Oregon wind farm project.
3. In 2016, President Obama blocked the Chinese firm Fujian Grand Chip Investment Fund from acquiring Aixtron, a German-based semiconductor firm with U.S. assets.
4. In 2017, President Trump blocked the acquisition of Lattice Semiconductor Corp. of Portland, OR, for $1.3 billion by Canyon Bridge Capital Partners, a Chinese investment firm.
5. In 2018, President Trump blocked the acquisition of semiconductor chip maker Qualcomm by Singapore- based Broadcom for $117 billion.
It is important to keep in mind that some potential acquisitions were simply cancelled once it appeared that they might be blocked.
Considering its importance to the U.S. economy, it is interesting to note that the Committee on Foreign Investment in the United States is both little known and very poorly understood by most Americans. Given that foreign investment in the United States is actually a very important job creator (think Toyota, Honda and other Japanese and Korean carmakers as a few examples), the role that the CFIUS plays in the United States is critical for anyone looking for a job now and in the future. Given the protectionist mentality prevalent in Washington today, one suspects that the current administration will reject an increasing number of foreign direct investments in the U.S. economy.
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