Theodore Roosevelt – a U.S. president known for his aggressive foreign policies – summed them up in seven words: “Speak softly and carry a big stick.” In foreign trade, Donald Trump’s version appears to be the near opposite: “Speak loudly and swing a big stick,” or in his case two big sticks—tariffs and CFIUS.
In a city known for its branded institutions with global name recognition (e.g., CIA, FBI, FDA and IRS), CFIUS (pronounced “SIFF-ee-yuss”) is one of Washington’s longest acronyms (five letters, instead of three) and, arguably, the least well-known.
CFIUS stands for the Committee on Foreign Investment in the United States. It is the gatekeeper for any business deal that could lead to foreign ownership of an American company, though gatekeeper doesn’t quite capture the committee’s actions under Trump.
The “ultimate regulatory bazooka”
CFIUS “is the No. 1 weapon in the Trump administration’s protectionist arsenal,” investment banker Hernan Cristerna told The New York Times. Cristerna – co-head of Global Mergers and Acquisitions at JPMorgan Chase – calls CFIUS the “ultimate regulatory bazooka.”
The bazooka may have just become a howitzer. On Monday, the U.S. President signed the biggest defense budget in U.S. history—the National Defense Authorization Act for fiscal year 2019. Amended to the $716 billion spending bill is legislation to expand the powers of CFIUS.
Protecting U.S. intellectual property has been a cornerstone in Trump’s foreign trade agenda. He considers CFIUS essential to this effort, saying in a White House Statement that the committee “better protects the crown jewels of American technology and intellectual property from transfers and acquisition that threaten our national security—and future economic prosperity.”
Current White House priorities have put CFIUS at the forefront of U.S. conflicts with its largest trading partner, China.
The Cabinet By Another Name?
So, who belongs to this powerful committee that just got more powerful? Well, it is a virtual clone of roughly half the president’s cabinet. Chaired by the U.S. Secretary of the Treasury, CFIUS has nine voting members, including six other cabinet secretaries and the U.S. Trade Representative. When Trump promised to work with Congress to strengthen CFIUS, he was, in effect, vowing to enhance his own authority over foreign direct investment in the U.S.
Attorney Christopher Ott, who specializes in national security and U.S. government enforcement actions, worked with CFIUS while at the U.S. Department of Justice from 2016-2018. He said CFIUS investigates a deal when it involves three issues:
- If the company works in an area related to national security.
- If the company is being acquired by a foreign entity.
- If the acquiring company is controlled by a foreign government.
Parties to a merger or acquisition involving a foreign entity file a voluntary notice of the deal to CFIUS. Under the new regulations, this initiates a 45-day review. If the committee decides the proposal warrants further investigation it has another 45 days to approve it, or recommend cancellation.
As Ott also explained, threats to national security can be indirect. The committee looks at the big picture, he said, including “the loss of production control” in strategic industries such as steel and aluminum, semiconductors, 5G wireless and artificial intelligence.
CFIUS does not want too much production of goods such as these concentrated in any particular country, “and some deals receive scrutiny for this reason,” he said.
Expanding CFIUS Powers to Address ‘Made in China 2025’
The new defense bill requires the U.S. Commerce Secretary to deliver a “Report on Chinese Investment” in the United States to Congress and CFIUS every two years through 2026. The bill singles out Beijing’s ‘Made in China 2015’ plan for close scrutiny. The Commerce Department report must identify and analyze “patterns of investments” that appear to support that plan.
The reforms grant the committee authority to review any transaction involving foreign investments in U.S. “critical infrastructure or technology companies”—even when they don’t involve the foreign entity acquiring a controlling stake.
NDAA also expands CFIUS scrutiny to include real estate deals, mandating a review for any foreign purchases of property near U.S. military installations, or sales of real estate located in U.S. ports.
While portions of the bill focused on military capabilities cite China, Russia and Iran as “potential adversaries”, the U.S. Congress only singled out one nation’s investment as a security threat—the People’s Republic of China.
From OPEC to China
President Gerald R. Ford created CFIUS in 1975 to analyze foreign investments after members of the OPEC oil cartel started investing heavily in U.S. Treasuries. In the decades that followed, the committee evolved into what it is today—a potential killer of multi-billion dollar business deals. The foreign bid for U.S. chipmaker Qualcomm, spiked by CFIUS in March, was worth $117 billion—more than the annual GDP of countries like Costa Rica, Bolivia or Lebanon.
Since September 2017, the Trump administration has opposed nine such deals involving attempted Chinese purchases of U.S. technology or financial services companies—including chipmakers Lattice Semiconductor Corporation and Xcerra, money transfer company MoneyGram and asset manager Cowen Investment Management.
When CFIUS recommended in January against Ant Financial’s bid for MoneyGram, Trump blocked it. At the time, a commentary published by the Chinese news service, Xinhua, criticized the committee’s review process for being “like a ‘black box’ with low transparency and a high likelihood of political interference.” Washington needs to get over its “severe allergy to Chinese investment,” Xinhua said.
“Allergy to Chinese Investment”?
According to an analysis by the Congressional Research Service (p. 27), about 20 percent of deals CFIUS reviewed from 2013-2015 involved Chinese investments.
Ott says China has been a primary target of CFIUS, in part, due to concerns over alleged industrial espionage. While at the Justice Department, Ott worked on the 2014 investigation that led to the indictment of five alleged hackers in the Chinese military.
“My colleagues and I were responsible for indicting, by name, Chinese military officers for hacking American industries and then specifically handing the information over to competing Chinese industries,” Ott said.
China contested the indictment. Foreign Ministry Spokesperson Qin Gang said the investigation was based on “deliberately fabricated facts.”
“The Chinese government, the Chinese military and their relevant personnel have never engaged or participated in cyber theft of trade secrets,” Qin said.
Qualcomm & China
China was the real focus CFIUS concern when a company formerly based in Singapore made a hostile takeover attempt on Qualcomm. Aimen N. Mir, an official with the Treasury Department, which chairs CFIUS, said the committee was concerned the sale might undermine Qualcomm’s ability to innovate. He said any weakening of Qualcomm expenditures in R&D could “leave an opening for China to expand its influence on the 5G standard-setting process.”
5G is a figurative battlefield—and, once perfected, will be deployed on a literal one. Military forces want 5G technologies because 5G is faster and more secure. In July, Qualcomm announced the world’s first integrated 5G-capable antenna module for mobile devices. For these reasons, Mir said the U.S. believes China would “compete robustly to fill any void left by Qualcomm,” adding that this would have “substantial negative national security consequences for the United States.”
Heightened CFIUS scrutiny appears related to declining Chinese investments in the U.S. tech sector. There were 165 Chinese investor-backed deals in U.S. tech startups in 2017, compared to 188 deals in 2015.
“Restrictions on Chinese investment, for instance, disrupt not just sources of capital for American startups but their plans to expand, grow and do new things,” said Scott Kupor, managing partner of Andreesen Horowitz—a California-based private venture capital firm.
Kupor is also chairman of the National Venture Capital Association. He warned against confusing national security with trade protectionism. That’s when “it becomes a concern for the future of U.S. innovation,” he wrote.
Nearly identical arguments can be heard from the other side of the Pacific. “Protectionism in the guise of ‘national security’ will eventually devastate its own interests,” Xinhua wrote after Trump blocked the MoneyGram deal.
Steve Hoffman, the chief executive of Founders Space, a San Francisco startup that has locations in China told Reuters that he also worries the Trump administration will use the rationale of protecting national security as a weapon in a larger trade conflict with China.
“We don’t want to go down the path where they use ‘national security’ as a reason to get us out of their market,” said Hoffman told Reuters.
CGTN Intern Drew Butler contributed reporting for this story.