The Biden administration is taking steps to expand the U.S. national security toolkit by regulating, and possibly blocking, some investments into foreign companies. While still in the early stages, the new “outbound” investment rules aim to hamper Chinese development of advanced technologies – including semiconductors, artificial intelligence, biotechnology, and quantum computing – tools which the administration believes have both commercial and military uses.
For decades, the Committee on Foreign Investment in the United States (CFIUS), an executive-branch committee chaired by the Treasury Department, has screened foreign investments into U.S. companies that operate in certain areas related to national defense and advanced technologies. Now, a new outbound investment program could limit how U.S. companies are allowed to merge with, acquire, or invest in businesses abroad. As the Biden administration sees it, once finalized, the new program may help prevent foreign adversaries from exploiting U.S. intellectual property along with financial and reputational resources to increase their own economic competitiveness and warfighting capabilities.
But, the ambitious new program is not without risk – proposed regulations could deepen divides between the West and China, erode liberalized international trade, delay global technological development, and prompt economic blowback for U.S. investors and companies, especially for investors and innovators in the tech industry.
A Potential New Outbound Investment Regime
In August, President Joe Biden issued an Executive Order establishing a so-called “outbound investment program.” Once complete, the rules, which are among the first of their kind, would govern where and how U.S. firms can invest in certain types of industries abroad.
Following on the heels of the Executive Order, the Treasury Department sought public feedback, posing 83 questions about how to maximize the efficacy of the forthcoming regulations. Experts, law firms, and tech companies made 61 submissions. Now that the comment period has closed, the Treasury Department will consider the public input and parse out key definitions, including what technology should qualify as “semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence capabilities.” It will then craft and publish a “proposed rule,” which will again be subject to public feedback before the implementation of a finalized rule.
Though the new program is distinct from its inbound counterpart, it already shows potential signs of following in CFIUS’ footsteps in a major way: inspiring the creation of similar regulations in other jurisdictions, particularly among U.S. allies like the United Kingdom and the European Union. If regulations on outbound foreign direct investment proliferate among peer nations as inbound review regimes have in recent years, new barriers to foreign investment will amplify the impact of the U.S. outbound regulations.
The Spread of Investment Reviews
CFIUS is an independent, multi-agency committee that reviews certain transactions featuring foreign-origin investments into U.S. firms to determine potential negative effects on national security. It is empowered to block or unwind transactions if those effects cannot be mitigated but may also opt to permit an investment to conclude subject to certain conditions. CFIUS can require, for instance, that certain functions or facilities remain in the United States, partial divestment by sensitive entities or individuals, limits on the transfer of intellectual property and trade secrets, and reporting and monitoring requirements for ongoing business. CFIUS has forcibly unwound the purchase of Grindr, a gay dating app, by Chinese investors and blocked the sale of Qualcomm, a U.S. chip manufacturer. Though it is over four decades old, the committee has undergone several rounds of legislative reforms increasing its scope and authority.
Most recently in 2018, new legislation amended CFIUS to keep pace with security threats in the evolving tech industry. Congress directed the Treasury Department to “harmonize” investment screening efforts with allies through information-sharing and regular consultation.
The 2018 amendments also created a category of so-called “excepted foreign states” and exempted their nationals from some of the strictest requirements of the CFIUS review process, including some mandatory filing obligations and the broadest reaches of the committee’s jurisdiction. This exemption allows allied nations to invest in, merge with, or acquire U.S. companies without extensive security reviews that would otherwise be required. But the Treasury Department will only grant foreign countries this status if they maintain acceptably robust investment screening regimes of their own. It considered factors such as whether foreign programs are bound to CFIUS-like confidentiality provisions, whether they are legally allowed to share information with the U.S. program, and overall program effectiveness.
The carrot-based approach is designed to inspire allies to strengthen their investment screening practices. For instance, the Treasury Department only confirmed the U.K. as an excepted foreign state earlier this year after London overhauled its screening program and satisfied U.S. regulators. It joined a very exclusive club: since 2018, only the other Five Eyes countries have been approved as accepted foreign states. Australia and Canada were added in 2020, and New Zealand’s approval came alongside the U.K.’s this February.
These cooperative strategies that emphasize investment facilitation, information sharing, and communication, combined with current economic tensions with China, also inspired the European Union to bolster its own approach to investment screening – a new regulation raises the floor for EU members’ national-level foreign investment review mechanisms.
In addition, U.S. political pressure and diplomatic advocacy coincided with other key factors influencing the proliferation of inbound investment regimes in recent decades. The adoption of, and revisions to, screening regimes accelerated during the 2008 global financial crisis and peaked during the height of the economic downturn from the COVID-19 pandemic in 2020 and 2021. The expansion of investment review regimes has also coincided with a period of rapid technological development that contributed to a widening of States’ interpretation of what constitutes “national security.”
The Flip Side of the Coin: Distinguishing the Outbound Program from CFIUS
The new outbound program is not a true “reverse CFIUS” as many observers have dubbed it. Rather than having interagency experts evaluate proposed transactions case-by-case, the new program will identify risky jurisdictions and industries and regulate outbound investments on the basis of those determinations.
The White House directed the Treasury Department to issue rules prohibiting, or at least requiring notification of, certain outbound investments into “countries of concern” – a list that, for now, only includes China. The new program specifically targets investments into China (and its Special Administrative Regions of Hong Kong and Macau) that pertain to one of three key sectors: semiconductors, quantum computing, and artificial intelligence.
By using the proposed outbound program to deny Chinese firms the “intangible benefits,” such as prestige, access to financing, and expanded talent pools, that come with being associated with U.S. firms, the Biden administration purportedly hopes to stifle its rival’s innovation in technology sectors that may be turned against the United States down the road. The outbound program’s initial focus on China is nothing new. Past CFIUS reforms and recent rhetoric from both the EU and U.K. orbit around the primary concern of monitoring investment into and out of China.
In addition, departure from the case-by-case review model may reflect recent, bipartisan congressional scrutiny of CFIUS. In the eyes of some lawmakers, the committee has failed to quickly or effectively address security threats posed by the Chinese social media company TikTok despite reviewing the foreign investment transaction that gave the social media platform a beachhead into the domestic U.S. market: its Chinese parent company’s purchase of Musical.ly, a Shanghainese company with a significant U.S. user base and an office in California.
Compared to the relative speed and conviction with which CFIUS reviewed and unwound the purchase of gay dating app Grindr by Chinese investors in 2020, some members of Congress contend that CFIUS’ review of TikTok has been slow and silent. The committee is required to operate behind closed doors: CFIUS cannot publish information about ongoing reviews and cannot even confirm or deny whether the parties have submitted a transaction for review. Thus, the full extent of CFIUS’ efforts to assess potential security threats from China, like Beijing’s level of influence over TikTok, remains shrouded in mystery.
The Biden administration’s creation of the outbound investment program comes after Congress tried, and thus far failed, to craft a similar investment review regime through legislation. Though the proposed version of the program is pared down in comparison to what has been previously attempted by Congress, it still reflects a concern that CFIUS’ inbound reviews do not sufficiently target the United States’ main economic adversary: China.
Still, in the United States, a relatively rare bipartisan consensus recognizes trade in advanced technology as a veritable national security threat – this summer, the Senate voted 94 to 6 to tack the proposed Outbound Investment Transparency Act, which would mandate certain reporting requirements for outbound investment in sensitive tech sectors, onto its iteration of the National Defense Authorization Act. Another bipartisan team in the House of Representatives reintroduced a bill earlier this year to establish a full CFIUS-like committee for reviewing outbound investments.
Compared to these proposals, the Biden administration’s new program aims to split the difference – it could provide for outright prohibitions on investment in certain jurisdictions and sectors, which is a step beyond the Senate’s proposal, but will not go as far as to craft a veritable reverse-CFIUS as the House’s proposal would. Ultimately, however, Congress may build on the executive branch’s outbound investment regulations through these (or other) proposals. In fact, some lawmakers already argue the yet-to-be finalized regulations should be more robust than planned.
Signals that Allies will Follow in the U.S.’s Lead
U.S. regulatory incentives are not the only factor driving the proliferation of foreign direct investment screening. European allies, also wary of the security concerns posed by economic dependence on China, have walked back efforts to facilitate international investment. Concerns of security threats around Chinese technological development and trade seem to motivate the U.K.’s interest in regulating outbound foreign investment, and Germany noted the security concerns posed by outbound investments in its “Strategy on China,” published this July. In March, EU President Ursula von der Leyen, while emphasizing the importance of Chinese trade to the European economy, expressed concerns over China’s “explicit fusion of its military and commercial sectors.”
And, the majority of States to develop screening programs since 1995 are European, nations around the world, some of which are not even U.S. allies, are paying attention to the security implications posed by incoming investment. For instance, Japan, New Zealand, India, Russia, and China have all implemented some form of incoming investment review. This trend seems to align more closely with broader economic factors than U.S. efforts to purposefully broadene investment review. As mentioned earlier, global economic strain has been accompanied by surges in efforts to strengthen investment review regulations and regimes in recent decades. Thus, rising geopolitical and economic tensions may underpin wider interest in limitations on and oversight over where domestic investments wind up.
Though the tea leaves indicate outbound investment review programs may gain international momentum after the implementation of U.S. regulations, the economic and geopolitical factors at play could make them a more difficult sell. Despite her concerns as to China’s strategic interests and the risk of unregulated foreign investment, von der Leyen believes “it is neither viable – nor in Europe’s interest – to decouple from China.”
Even for those who agree with assertions that China’s technological advancements pose a looming threat to the United States and its allies, yet another regulatory quagmire may not be the answer. Overly restrictive measures risk impediments to global technological advancement, blowback for domestic industries, and high administrative costs (which are projected to reach $10 million simply to start the program).
Until the Treasury Department issues these final regulations, the impact restrictions will have on outbound foreign investment and, more broadly, the tech industry itself remains unclear. However, the United States has historically set the bar for investment review, and key economic and geopolitical allies share well-established security concerns regarding outbound investment into China. This sets the stage for another wave of national-level investment restrictions that will likely hold China in the crosshairs.