TRADE & INVESTMENT: Halt! Who goes there?

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President, Congress favor greater scrutiny for critical acquisitions as trade relationships rise up the U.S. political agenda

By George W. Russell



 Extract from the CFIUS committee letter, March 5th

"The United States is open for business," insists Kurt Tong, the U.S. Consul-General in Hong Kong and Macau, echoing the sentiments of President Donald Trump. "The president made a special trip to the Davos forum just to say that."

Mr Tong's comments are reminiscent of the philosophy of Mr Trump's predecessor, Ronald Reagan, who in 1983 said: "The United States believes that foreign investors should be able to make the same kinds of investments, under the same conditions, as the nationals of the host country."

Yet just as Washington beefed up the powers of the Committee on Foreign Investment in the United States (Cfius -- pronounced SIFF-ee-uss) under Reagan's presidency in 1988, the Trump administration also envisions more careful monitoring of acquisitions and investment in U.S. companies by foreign entities.

Cfius is back in the news, with Mr Trump's decision on March 12, on the advice of the committee, to cancel the high-profile US$117 billion takeover of Qualcomm, the mobile-telecoms equipment maker, by Broadcom, a Singapore-based rival with substantial Chinese interests. AmCham HK held a timely seminar the same day, entitled Why Invest in USA 2018-Myths & Realities-Cfius.

"Cfius has become a very big word in the investing world," AmCham president Tara Joseph noted in her opening remarks.  

Cfius is a high-level interdepartmental group set up by president Gerald Ford in 1975 over concerns about Middle East oil-producing nations would use their vast wealth to acquire important companies in the U.S., and thus gain control of sectors of the U.S. economy. The executive order that established the committee gives it the responsibility to monitor the impact of foreign investment. Cfius submits its recommendations and analyses to the National Security Council and the President's Council of Economic Advisors.

Under proposed legislation introduced to the Senate in October 2017, a new screening procedure would vet economic implications for the United States of particular foreign investments. Under the procedure, the Commerce Secretary could block or require the restructuring of transactions that could result in foreign control of U.S. businesses due to certain "economic factors" including "long-term strategic economic interests," "the history of distortive trade practices" of the country of the foreign investor and "any other factors [considered] appropriate."

Under such sweeping language, more transactions would be subject to Cfius review, according to Eric Szweda, a Partner in the Hong Kong office of the Troutman Sanders law firm, who addressed the March 12 seminar. "The bill extends Cfius review to any non-passive foreign investment in a 'United States critical technology company' or 'United States critical infrastructure company'."

Cfius jurisdiction would cover any type of arrangement -- including licenses and joint ventures -- involving the contribution by a critical technology company of both intellectual property and associated support to a foreign person, he noted.

Many foreign investments in U.S. companies are not subject to Cfius review or any kind of import-export rules or other controls. "These include most real estate investments as well as investments in or acquisitions of U.S. businesses that do not involve critical infrastructure or impact the U.S. military," Mr Szweda said.

He pointed to successful Chinese investments, such as those of China Railway Rolling Stock Corp, which makes trains in Massachusetts, Goertek Inc, which established a micro-electronics research and development center in California, and Sentury Tire, now building a US$430 million manufacturing plant in Georgia.

However, Cfius has blocked most, but not all, of proposed Chinese acquisitions of semiconductor makers, expressing concerns about potential supply chain risks for U.S. customers as well as critical next-generation chip technology affecting sensors and the Internet of Things.

Cfius activism over new technology is not new. A decade ago, Cfius refused to approve the purchase of 3Com, a computer-networking-equipment maker, by Bain Capital because the deal included a 16% investment in 3Com by China's Huawei. (A 3Com unit, Tipping Point, provided software to the U.S. military).

In response, 3Com abandoned the U.S. for its new headquarters in Beijing. Some analysts suggested Cfius would be better off treating foreign investment with a light touch to avoid such reactions. It remains to be seen what effects a harder line by Cfius will have on the broader U.S. foreign investment climate.