September 14, 2017

Senate Banking Committee “Examining the Committee on Foreign Investment in the U.S.”

Key Topics & Takeaways

  • China Equity Caps: Tim Scott (R-S.C.) highlighted the lack of reciprocity in U.S. and Chinese economic relations, in particular the hurdles faced by financial services firms invested in China.  Rock Creek Global Advisors’ Clay Lowery explained that financial services firms have been subject to problematic equity caps in China “for a while.” He noted that progress is made “usually through dialogue” to address this issue, and he encouraged the Trump Administration to engage officials from China on this issue.
  • Economic Benefits Test: In response to a question from Sen. Joe Donnelly (D-Ind.), Lowery clarified that he does not think the Committee on Foreign Investment in the U.S. (CFIUS) should expand its mandate to include an economic benefits case. Kevin Wolf of Akin Gump agreed, stating that CFIUS should continue to narrowly focus on national security implications of investments, not economic or commercial considerations.  He cautioned that expanding the mandate of CFIUS runs the risk of politicization and harming the U.S.’s coveted place as the top destination for foreign direct investment.  He instead pointed to “an entire body of law” dedicated to trade remedies that is best equipped to address trade policy concerns.
  • Reciprocity: James Lewis of the Center for Strategic and International Studies noted that Chinese companies do not face the same obstacles in the U.S. as American firms do in China.  He suggested that looking for reciprocity in investment treatment would be “good for CFIUS,” and he urged policymakers to use a “comprehensive” set of tools to address issues with China. In contrast, Sen. Chris Van Hollen (D-Md.) stated that “CFIUS is not the tool that we [should use to] respond to reciprocity issues,” but stated that China must be pressed to improve its investment climate. Lowery agreed, and suggested instead using existing trade remedy laws that are more equipped to address such concerns.

Witnesses

  • Clay Lowery, Managing Director, Rock Creek Global Advisors
  • Kevin Wolf, Partner, Akin Gump Strauss Hauer & Feld LLP
  • James Lewis, Senior Vice President, Center for Strategic and International Studies

Opening Remarks

Sen. Mike Crapo (R-Idaho), Chairman, Senate Banking Committee

In his opening statement, Crapo explained that the role of the Committee on Foreign Investment in the U.S. (CFIUS) is to protect U.S. homeland security by blocking certain inbound foreign direct investment transactions that could compromise national security.  He expressed support for President Trump’s decision to block the acquisition of Lattice Semiconductor by a Chinese firm with “strong ties” to the Chinese government, which he said was a “textbook” case for positive intervention by CFIUS. Crapo stated that Chinese companies are increasingly seeking to acquire sensitive technologies in the U.S. and expressed interest in learning whether CFIUS was well-equipped to handle these changing dynamics. He also touted the important role that inbound foreign direct investment (FDI) has on U.S. economic growth and innovation.  Yet Crapo noted that CFIUS must maintain national security and while supporting an open investment policy. He closed by highlighting the need for the Senate to confirm Heath Tarbert for Assistant Secretary of International Markets and Development at Treasury to oversee national security policy at CFIUS while maintaining a healthy investment environment for the U.S.

Sen. Sherrod Brown (D-Ohio), Ranking Member, Senate Banking Committee

Brown reiterated his support for Heath Tarbert’s nomination and expressed his hope that he will be confirmed promptly by the full Senate.  He noted the increase in inbound investments that trigger CFIUS reviews in recent years, particularly from China, and questioned whether CFIUS has sufficient resources to fulfill its mandate, given the increased workload.  Brown also acknowledged that reforming CFIUS would not be enough to address all U.S. national security threats, and expressed interest in learning whether other agencies are better equipped to address rising security concerns.

Testimony

Clay Lowery, Managing Director, Rock Creek Global Advisors

In his testimony, Lowery explained that CFIUS investigates cross-border mergers and acquisitions that could pose a national security threat to the U.S.  He explained that it undertakes a three-part analysis in such reviews to determine: 1) whether acquisition of the asset makes national security more vulnerable; 2) the consequences of those vulnerabilities; and 3) whether it poses specific risk to U.S. national security. Yet he noted that only four transactions have ever been blocked by CFIUS, including the announcement made yesterday. Lowery noted that CFIUS also has powers to mitigate potential risks, which is used to balance its obligation to welcome foreign investment while ensuring national security.

Lowery cautioned that the investment landscape has changed dramatically, with the rise of China as well as increased development of sensitive technologies. He suggested careful examination of whether CFIUS reform is warranted, as well as undertaking a cost-benefit analysis of unintended and unintended consequences by Congress and the Government Accountability Office (GAO).  Lowery highlighted the increased strain on resources at CFIUS, considering the increased case-load in recent years, and encouraged the Senate to confirm Heath Tarbert and “let him get to work” to lead the committee’s important work.

In closing, Lowery made three recommendations for the Senate to consider in its efforts to safeguard national security and remain open to international investment: 1) minimize the opportunity to politicize inbound investments; 2) keep CFIUS focused narrowly on national security interests; and 3) increase the scrutiny applied to state-backed investments.

Kevin Wolf, Partner, Akin Gump Strauss Hauer & Feld LLP

In his testimony, Wolf explained that the U.S. export control system and CFIUS complement each other, and noted that the export control regime regulates the transfer of sensitive technologies generally (as opposed to on a transaction-by-transaction basis).  He noted that the most effective export controls are imposed multilaterally alongside U.S. allies. Wolf encouraged the Senators to consider whether CFIUS could be improved regulatorily (instead of by statute), or whether another area of trade remedies law or export controls could better achieve the desired policy objectives.

James Lewis, Senior Vice President, Center for Strategic and International Studies

In his testimony, Lewis noted the growing volume and increased complexity of cases being reviewed by CFIUS, noting in particular the “challenge” posed by Chinese industrial policies.  He added that the authorities for CFIUS were last reformed ten years ago and called for modernizing them, particularly to address ways in which China aims to “circumvent” CFIUS reviews and protections. He specifically suggested expanding the scope of covered transactions to include greenfield investments, affording CFIUS greater authority and resources to undertake difficult cases, and cooperating with foreign partners such as Japan, the EU and Germany.

Question and Answer

Expanded Scope

Lewis maintained that the most important issue is to ensure CFIUS reviews cannot be circumvented by allowing greenfield investments to fall outside of the scope of the committee’s mandate. He noted that the Department of Defense published a classified report highlighting the concerns with such investments to secure sensitive technologies, and questioned what policymakers are doing to address such alternate methods to circumvent CFIUS.

In contrast, Wolf suggested that many policy concerns can be addressed by “creative” and “clever” use of existing authorities in the export control regulations, rather than by expanding the scope of CFIUS. He cautioned against “inadvertently impos[ing] controls that are broader than necessary” to avoid harming the U.S.’s openness to foreign investment.

Sen. Elizabeth Warren (D-Mass.) expressed concern about increased Chinese investments in early-stage technology companies that do not automatically trigger CFIUS reviews. Wolf agreed, and suggested making sure sensitive technologies acquired through investment in early-stage tech companies be addressed proactively through the export control system.

Lowery explained that the bulk of cross-border mergers and acquisitions “have nothing to do” with national security, so the U.S. government should not waste resources by reviewing them. He suggested making inbound investments by state-owned enterprises automatically subject to CFIUS reviews.

In response to a question from Sen. Joe Donnelly (D-Ind.), Lowery clarified that he does not think CFIUS should expand its mandate to include an economic benefits case. Wolf agreed, stating that CFIUS should continue to narrowly focus on national security implications of investments, not economic or commercial considerations.  He cautioned that expanding the mandate of CFIUS in this way runs the risk of politicization and harming the U.S.’s coveted place as the top destination for FDI.  He added that there is “an entire body of law” dedicated to trade remedies that is best equipped to address trade policy concerns.

Sen. Thom Tillis (R-N.C.) expressed concern about CFIUS “scope creep” and conveyed interest in striking a balance between national security protections and economic openness.

Reciprocity & Market Access

Lewis noted that Chinese companies do not face the same obstacles in the U.S. as American firms do in China.  He suggested that looking reciprocity in investment treatment would be “good for CFIUS.” He urged policymakers to use a “comprehensive” set of tools to address issues with China.

In contrast, Sen. Chris Van Hollen (D-Md.) stated that “CFIUS is not the tool that we [should use to] respond to reciprocity issues,” but stated that China must be pressed to improve its investment climate. Lowery agreed that CFIUS should not be used as a reciprocity tool, and suggested instead using existing trade remedy laws that are more equipped to address such concerns.

Equity Caps

Sen. Tim Scott (R-S.C.) highlighted the lack of reciprocity in U.S. and Chinese economic relations, in particular the hurdles faced by financial services firms invested in China.  Lowery explained that financial services firms have been subject to problematic equity caps in China “for a while.” He noted that progress is made “usually through dialogue” to address this issue, and he encouraged the Trump Administration to engage officials from China on this issue.

Additional information from this hearing can be accessed here.