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A bill to screen foreign investments (especially from China) into the US and control hi-tech exports, the Foreign Investment Risk Review Modernisation Act, will close gaps in vetting – but could result in an over-regulated tech sector, says Rod Hunter.

In response to recent investments from China, the US Congress is considering a bill proposed by Republican senator John Cornyn of Texas and Republican representative Robert Pittenger of North Carolina, the Foreign Investment Risk Review Modernisation Act (FIRRMA), to tighten screening of foreign investments in the US and impose new controls on technology exports. Some version of the bill will likely pass this year, now that President Donald Trump’s administration has declared its support.

FIRRMA would usefully close gaps and increase resources for an overburdened national security vetting process, but it would also shackle US technology companies with superfluous and ultimately detrimental regulation. The US and other advanced countries benefit greatly from their open economies, and they should not allow themselves to be stampeded into counterproductive policies by fears over China.

Tightening the spigot

Chinese investments in the US totalled $29bn in 2017, down more than a third from 2016 levels of $46bn as Chinese regulators tightened the spigot and some deals bumped into US regulatory obstacles. Nevertheless, many observers have raised concerns about Chinese investments in sensitive and politically sensitive sectors ranging from semiconductors to robotics to food and agriculture.

There are certainly many legitimate reasons for Chinese foreign investments: diversification, proximity to customers, and so on. Moreover, China’s outbound investment stock is low at 12% of China’s GDP, compared with the US outbound investment stock of about 34% of US GDP. However, the deep involvement of the Chinese Communist Party and Chinese state in their economy, as well as China’s ‘military-civil fusion’, raise concerns in an era of growing great power competition.

US presidents have broad authority to block or unwind any foreign investments they deem a threat to national security. Over the past 18 months, presidents Barack Obama and Donald Trump, assisted by the inter-agency Committee on Foreign Investment in the United States (CFIUS), have blocked Chinese investments in semiconductors, a sector prioritised by the Beijing government. Meanwhile, CFIUS has quietly waylaid other transactions.

Welcome improvement

Some of FIRRMA’s proposals would represent necessary improvements. The bill would create a reporting obligation for investments in technology companies, so that CFIUS could monitor deals with start-ups and other small firms that otherwise go unnoticed. Legislators rightly focus on emerging technologies with as-yet unknown national security implications. The bill would also increase CFIUS’s resources through filing fees. Investors will cheer if fees mean rapid and regular disposition of cases.

More problematically, the bill would turn CFIUS into an über-regulator for tech companies. CFIUS would vet sharing by US “critical technology” companies of “intellectual property and associated support” with foreign persons through “any type of arrangement”, whether at home or abroad. This new requirement would encumber a multitude of daily commercial activities: not just joint ventures, but also joint product development, licensing, service agreements and even hiring.

This proposal would turn the technology sector into a regulated industry, overseen by a committee of risk-adverse government regulators. CFIUS is reactive, labour-intensive and time-consuming, with some cases taking over a year. It has difficulty processing 240 cases annually, and this expansion of its purview could swell its docket to tens of thousands.

Weight of regulation

Regulatory burdens, uncertainty and delay could encourage research and development offshore, beyond the reach of the bureaucratic process. The result would be the asphyxiation of the innovation so essential for the US defence industrial base and economy.

This burdensome new procedure would also be redundant. The US, like other advanced countries, already has an export control regime designed specifically for technology transfers. Those procedures can be targeted to particular technologies and can restrict transfers to specific countries and users. If the administration is concerned about, say, a class of artificial intelligence, it can immediately prohibit international sharing of the technology without a licence.

To be sure, this established export control regime merits reform. First, Congress should enact a new export control law; successive administrations have had to resort to emergency powers to sustain the regulatory framework since the underlying export control law lapsed in the 1990s. Second, the White House’s National Security Council should ensure security agencies identify for regulation emerging technologies with dual use applications: critics are right to complain regulators are not keeping pace with technology.

Mr Cornyn and Mr Pittenger have identified the right issues: gaps in authority, inadequate resources and ossified tech transfer controls. Much of their bill would be useful. But wedging technology controls into the committee-run investment regime would risk stifling the US technological leadership that the bill’s authors aspire to protect.

Rod Hunter is a Washington, DC-based partner of Baker McKenzie, and previously served as a senior director for international economics at the White House’s National Security Council.

This article is sourced from fDi Magazine
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