Without a comprehensive strategy to regulate foreign investment, China wins
Most Americans would agree that a competitor’s control of an important military resource would create a threat to U.S. national security. Unfortunately, the primary watchdog for such situations, the Committee on Foreign Investment in the United States, or CFIUS, does not have adequate resources or legislative authorities to monitor or prevent many of the sophisticated efforts that China and other nations have engaged in to control, influence, or eliminate American economic capabilities.
Chinese President Xi Jinping and the Chinese Communist Party are explicit about their desire for complete control of China’s economy, and foreign companies are regularly subject to the party’s often intrusive demands. When foreign companies seek to acquire a U.S. company, the CFIUS review process is voluntary or by the panel’s request. As a result, transaction participants have been able to skirt CFIUS authority. In order to protect America’s vital supply chains from foreign interference, regulations and laws governing CFIUS must be updated.
As illustrated by the recent acquisition of the United States’ only rare earth mine, foreign companies have found loopholes in the current CFIUS process. When MP Mine Operations LLC ― a Chinese-affiliated consortium including rare earth miner Shenghe Resources Holding Co. ― sought to acquire the only formerly operational U.S. rare earth mine, CFIUS, the very committee charged with evaluating deals of this nature, did not review the transaction, despite the fact that rare earth minerals are found in almost every major weapon system.
Proposed legislation in Congress aims to broaden the powers of CFIUS; moreover, this legislation provides an opportunity to scrutinize the very foreign investments that threaten to leave America reliant on China for critical military technologies.
Since it was established in 1975, CFIUS has not considered the long-term geopolitical implications that foreign investments in U.S. companies will have on the defense industrial base and on our military’s ability to fight — and win — wars. Not only is the United States the world’s largest recipient of foreign direct investment since 2006, but it is also the primary target of Chinese investment.
During the past 10 years, China’s investment in U.S. technology firms has amounted to approximately $35 billion. During this same time frame, foreign companies have continually evaded CFIUS scrutiny and threatened the United States’ technological advantage in a number of ways. For example, in 2012 a promising lithium-ion battery technology, developed in part with U.S. government funding, was sold to the Chinese conglomerate Wanxiang Group. Despite public concern that the acquisition would be used to supply advanced technology to the Chinese military rather than to American troops, CFIUS approved the acquisition with few reservations.
To prevent any further degradation of our military’s technological advantages, CFIUS must focus on the long-term implications foreign investment will have on the American defense industrial base.
CFIUS reviews hundreds of proposed transactions each year and recommends whether the U.S. president should prevent a transaction from being finalized. Over the 30 years of its existence, a U.S. president has prevented only five CFIUS-reviewed deals from being finalized. Two of those denials have happened under this administration.
Just this week, President Donald Trump blocked Broadcom Limited — a Singapore-based company tied to Chinese firm Huawei Technologies Co. — from acquiring Qualcomm Inc. Huawei and Qualcomm are the two dominant players in the market for next-generation wireless 5G. CFIUS was concerned that Broadcom’s links to Huawei, which many believe works primarily for Chinese government interests, and its hostile takeover bid of Huawei’s primary competitor would have given the Chinese company the lead in the race for 5G technology and forced consumers to turn to Hauwei or other Chinese companies for telecom gear.
The decision to block Broadcom from acquiring Qualcomm follows a presidential order last fall to prevent the acquisition of Lattice Semiconductor by a subsidiary of the state-owned China Venture Capital Fund Corporation Limited.
This rare uptick in blocked deals is promising and necessary to ensure American technologies are not easily sold to competitor nations. Unfortunately, these outcomes are rare exceptions in a long history of CFIUS reviews.
Recent legislation introduced by Sens. John Cornyn, R-Texas, and Dianne Feinstein, D-Calif., is an opportunity to strengthen CFIUS and ensure recent progress continues under future administrations. The “Foreign Investment Risk Review Modernization Act of 2017” would give CFIUS new tools to prevent mergers or acquisitions that could lead to the loss of technology critical to our military’s operations. This bill, the first to address the power and scope of CFIUS that Congress has considered in more than a decade, is an important opportunity to sharpen the national security focus of CFIUS and ensure that technology produced in the United States — and funded by U.S. tax dollars — is not surrendered to foreign entities seeking to take advantage of America’s open economic system.
In a period during which critical supply chains for U.S. military equipment and services are increasingly influenced or even owned by Chinese firms, CFIUS is one of the few tools America has to protect against foreign investments that may be designed more to weaken American national security than provide economic benefits. Accordingly, the need for a comprehensive policy that adopts a multi-decade, strategic view of foreign investment in critical technologies has never been more important. Without a holistic view of foreign investments and their long-term implications, CFIUS will fail to preserve the technologies needed to create disruptive, enhanced and enduring operational advantages over potential adversaries.
As the Department of Defense notes, “if we allow China access to [the technologies that enable our Third Offset strategy], then not only may we lose our technological superiority, but we may even be facilitating China’s technological superiority.”
Congress and the current administration seem aware of the dangers to national security posed by unrestricted foreign investment. Recent actions suggest that both are serious about taking a more holistic and long-term view of acquisitions of American technologies and manufacturers. Further codification and establishment of safeguards against hostile foreign acquisition should be strongly considered, lest we someday find ourselves overmatched on the battlefield by an adversary using our own technologies against us.
Jeff Green is the president of J.A. Green & Company, a government relations firm based in Washington, D.C. He previously served with the House Armed Services Committee and the Defense Department.