The China Question

www.worldecr.com 34 ThE ChInAquESTIOn By Ryan Fayhee, Roy Liu and Tyler Grove, Hughes Hubbard & Reed T he Committee on Foreign Investment in the United States (‘CFIUS’ or ‘Committee’) has been a long-standing institution, but until recently was treated by some as merely a ‘check-the-box’ exercise in merger and acquisition activity involving US businesses. However, with growing bipartisan anxiety over strategic competition with China, CFIUS has transformed in recent years into one of the tools at the forefront of US foreign policy. Although this trend became even more pronounced during the Trump administration, there appears to be broad bipartisan appetite to continue to use CFIUS to aggressively target investment by Chinese companies and individuals. CFIUS background CFIUS was originally organised by President Ford via executive order in 1975, but initially served a largely advisory function. In 1988, CFIUS was authorised to review and potentially prohibit transactions by non-US investors when Congress passed the Exon-Florio amendment to the Defense Production Act. Between 1988 and 2018, the jurisdiction of CFIUS was limited to transactions where a non-US investor would acquire control of a US business. During this time, all filings with CFIUS were voluntary, although the Committee could itself initiate a review of a transaction where no voluntary notice was filed, and potentially require post- closing action to mitigate any national security concerns, up to and including recommending that the President order divestment. However, this power was rarely invoked, with only three transactions blocked by a president through the Obama administration (although a number of other transactions were quietly abandoned by the parties because of CFIUS’s opposition). However, during the 2010s, Chinese investment in the United States increased dramatically. According to the Office of the US Trade Representative, between 2010 and 2018, transactions involving Chinese venture capital firms increased more than eight times. At the same time, in 2015, the ‘Made in China 2025’ plan was released, which details the Chinese government’s intention to transition the Chinese economy from low-value goods to technology-focused high-value manufacturing and services. Additionally, the Chinese government continued to strengthen its policy of ‘civil-military fusion’ to reduce barriers between the private sector and military industrial base. As a result, US policymakers increasingly grew concerned that Chinese investment in US companies could be a potential vector for transfers of technology. ere were also concerns that Chinese investors set out to structure transactions to avoid CFIUS jurisdiction, for example, through significant minority investments, formation of joint ventures, and the purchase of real estate assets. In response to these concerns, in August 2018 Congress passed the Foreign The growing and continued focus on Chinese investment in CFIuS reviews INSIgHT