House subcommittee holds hearing to discuss foreign investment challenges

The House Monetary Policy and Trade Subcommittee met this week to evaluate the Committee on Foreign Investment in the United States (CFIUS) and the security challenges of changing global economy.

Subcommittee Chairman Rep. Andy Barr (R-KY) said the challenge is to modernize the CFIUS review process to better addresses security threats without hurting the ability of U.S. business to compete at home and abroad. The statute under which CFIUS operates has not been updated in a decade, he said.

Several witnesses talked about the need for Congressional action to address these issues.

“As flexible and well-conceived as the export control regime is, there is a need for Congressional attention,” Rod Hunter, a partner at Baker & McKenzie LLP, said. “In any event, CFIUS would be an ineffective substitute technology control vehicle. … Imposing such a regime on U.S. technology businesses … could undermine U.S. innovation. Uncertainty around CFIUS determinations could encourage investment in research and development to move offshore, beyond the scope of the bureaucratic review process. This, in turn, could undermine the U.S. innovation and technological development so essential for our defense industrial base and economy more broadly.”

Theodore Kassinger, partner at O’Melveny & Myers LLP and former deputy secretary at the U.S. Department of Commerce from 2004-2005, said any changes to CFIUS must be careful to maintain its basic principles.

“First, foreign investments should be welcomed and subject to regulation only to protect vital national interests. Second, in the competition for global capital, the United States is well served by regulatory processes that are transparent, predictable, and efficient. These two fundamental guideposts lead to a third over-arching proposition: Any statutory or regulatory amendments to Section 721 should replicate the rigorous path set by the legislative and rule-making processes followed in 2007 and 2008. Those were models of deliberative consideration and produced an usually well-crafted set of regulations,” Kassinger said.

Derek Scissors, resident scholar, American Enterprise Institute, said CFIUS must be careful to correctly trace the origins of Any acquisitions.

“The biggest People’s Republic of China (PRC) acquisition in the U.S. last year was routed through Ireland. It’s still Chinese. Perhaps the most controversial deal saw Lattice Semiconductor briefly try to pretend it was being bought by a U.S. company. Also, Chinese. The best way for CFIUS and American policy-makers to determine control of a firm is to trace the money being used. Layers of subsidiaries and shell companies mean any other method of determining control can be gamed. Ultimately Chinese money guarantees influence, no matter the company’s name or location of its headquarters,” Scissors said.

Admiral Dennis Blair, co-chair of the Commission on the Theft of American Intellectual Property, and former director, national intelligence at the National Security Council, said the theft of American intellectual property is real and demands robust policy responses.

“Reforming the CFIUS process to include an IP protections evaluation—both before and after acquisition of American firms—and then staffing the CFIUS interagency team with sufficient resources to conduct this more thorough review are important next steps,” Blair said.