Tightening the Vise on Chinese Investment in U.S. Tech

Pressure has long been mounting for tighter controls on Chinese technology investment in the United States. With the introduction last week of identical legislation in the House and Senate, the shoe has finally dropped. Arriving with bipartisan support of powerful lawmakers, the Foreign Investment Risk Review Modernization Act (FIRRMA) looks likely to become the law of the land. China is not named in the bill itself, but the legislation’s sponsors have justified it by singling out Chinese investments for “degrading our country’s military technological edge.”

FIRRMA is designed to upgrade the powers of the Committee on Foreign Investment in the United States (CFIUS), the group tasked with evaluating security risks from foreign investments, to deal with an increasingly complex web of international technology entanglements. The result is a dramatic expansion in the types of China-US technology deals that will be subject to security review by CFIUS. FIRRMA broadens the categories of investment that can be reviewed and potentially rejected, and then moves beyond investment to include review of a wide range of relationships between US companies and foreign entities that involve intellectual property (IP) transfers. But beyond this practical expansion of oversight, the bill also signals a more fundamental philosophical shift in how the US government views the interplay of technology, economic competition and national security.

To understand where its advocates are coming from and where they hope the US is headed, a close reading of the bill’s language is necessary.

The Status Quo

For decades, CFIUS has monitored deals in which foreign entities acquired control over companies with operations in the United States, and then decided, after largely voluntary filings, whether to block these transactions on national security grounds. But outright rejection of a deal was a power that CFIUS used sparingly, instead allowing potential acquirers to proceed with tough acquisitions by working out mitigation agreements. Most security reviews occurred in cases where an acquisition had a direct bearing on a relatively narrow understanding of national security: suppliers to the US military, makers of dual-use technologies, or in industries such as telecommunications and energy.

But as Chinese acquisitions of global technology companies have picked up pace in recent years, competitiveness concerns, not just national security imperatives, have begun to factor into CFIUS-related debates. Meanwhile, a number of Chinese deals have either been outright blocked or left to rot in regulatory purgatory. Earlier this year the Trump administration rejected a bid to take over Lattice Semiconductor after Reuters revealed that the buyer’s funds were sourced from the Chinese central government. Ant Financial, the financial affiliate of Alibaba, has been held in suspense by CFIUS for over six months while the committee evaluates its bid to buy American money-transfer provider Moneygram.

To avoid the regulatory thicket and potential delays, US companies have looked for ways to get foreign cash without going through CFIUS. Since an acquisition by Chinese buyers can require approval, some companies have opted instead to forge joint venture and licensing deals with Chinese counterparts. The New York Times recently reported on how chipmaker Advanced Micro Devices (AMD) used a joint venture with Chinese company Sugon to avoid regulatory scrutiny of its sensitive technology.

Deals like that have led US government officials to criticize these firms for auctioning America’s technological advantage to the highest bidder, “selling out” the industrial future in these areas for short-term partnerships and profits. Chinese industrial policy, particularly the “Made in China 2025” plan (which my colleague Damien Ma wrote about here), have heightened fears that the Chinese government is funding the purchase of foreign companies and IP with the goal of dominating these sectors in the future.

And this has also raised questions about what technologies do and don’t affect US “national security”—high-performance processors? leadership in artificial intelligence (A.I.)? data on Americans’ financial transactions? food or energy security?—and whether CFIUS is adequate as a tool for protecting a broader definition of what constitutes national security.

The New Bill

FIRRMA makes many tweaks to CFIUS security reviews, but I’ll focus on the most consequential changes: two expansions in the scope of deals covered, and one expansion in the criteria for evaluating those deals. (For a rundown of the bill’s other key provisions, see this appendix provided by Lawfare Blog.)

The two expansions in scope pertain to the types of investments monitored, and the inclusion of non-investment activity. Whereas existing law only covers acquisitions in which a foreign firm takes control of a US entity, the proposed law covers any (non-passive) investment in a “critical technology company,” with the definition of “critical technology” left up to CFIUS. As written, this would appear to bring a wide range of seed, angel, venture, and minority investments by Chinese entities (a trend I’ve written about here) within CFIUS’ purview.

For non-investment activity, the bill would give CFIUS the power to review and reject any arrangement in which a US technology company transfers intellectual property to a foreign entity. This explicitly includes joint ventures, and presumably licensing agreements as well, and appears to be a direct rebuke to deals like the AMD example described above.

These two provisions would directly expand the number of deals that CFIUS could block on national security grounds, but more interesting is the expansion of the definition of national security. Existing legislation tells CFIUS to weigh a deal based on whether it affects “international technological leadership in areas affecting United States national security” [emphasis added]. The new bill keeps that language in place, but then tacks on a clause that expands its scope: “including whether the transaction is likely to reduce the technological and industrial advantage of the United States relative to any country of special concern.’’ (Countries of “special concern” are defined as those posing a significant security risk to the United States, and it’s clear that the bill’s authors have China in mind.)

As written, that provision broadens the definition of national security to include all forms of “technological and industrial advantage,” whether or not they touch directly on fields tied traditionally to national defense (missile and nuclear technology, energy, munitions, etc.). By expanding the writ to include all technological and industrial areas, the legislation implicitly acknowledges that the United States’ edge in these areas is not something that can be left up to the market; the bill’s authors believe it must be actively protected from being bought up by foreign entities, even if that transaction occurs in a free market. This is basically a light-handed form of industrial policy based on exclusion.

On some level, this set of developments is to be expected: political rhetoric has long framed US-China economic competition as a battle to “win the future” by leading in key technologies. Americans often fear that China is “winning” in green energy, for example, so we must invest in certain fields to make sure the next great company is built here.

The Difference a Decade Makes

But it is striking how far Washington has come in the decade since Congress last tweaked CFIUS. Congress passed the Foreign Investment and National Security Act of 2007, in part to respond to a Chinese state-owned oil company’s failed bid for a California company, Unocal. The act bolstered CFIUS in some ways, but shortly after its approval, the US Treasury Department felt the need to issue a guidance notice reiterating that “CFIUS focuses solely on any genuine national security concerns raised by a covered transaction, not on other national interests.”

Analysts described this 2007 guidance as specifically disavowing the use of CFIUS for protecting economic security or promoting industrial policy. It reflected a strong ideological belief that economic openness was valuable and a defining characteristic of the American economy, to be protected and upheld even when other countries might not reciprocate.

But in the last ten years, the debate has evolved considerably. The Chinese economy has gone from one-quarter of the United States’ to 60 percent, and along the way, has evolved into a technological power faster than many anticipated. The country is now home to a world-class high-speed rail network, cutting-edge advanced manufacturing, and some of the most valuable internet companies on Earth. Many of these successes were achieved on the back of muscular and pro-active industrial policies, making a strong contrast to the United Sates in the years following the global financial crisis. Looking ahead, leadership in game-changing fields like A.I. is up for grabs, and the Chinese government is making strong plays to dominate them, both at home and abroad.

Gone is the cool confidence of American political and business leaders, a faith that if we simply stick to our core values of openness and free markets then the arc of history will bend in America’s favor. In its place is a creeping anxiety about our eroding competitive advantage, a sense that if we don’t keep America’s best technology companies under lock and key, China will snatch them up and then use them against us. Insecurity about our technological edge has led to the bill’s broadening of “national security.”

That defensive crouch is unsurprising, but it does signal a shift toward mimicking certain aspects of China’s own investment protectionism and industrial policies. As our government does this, it’s worth remembering that industrial policy and protectionism aren’t the entire story of China’s success: another is the rapid and broad-based increases in government funding for higher education, 21st century infrastructure and basic research. Here, America’s recent moves may be turning away not just from China’s new example but also from our own history of economic and technological achievements.