At the beginning of 2020, the Committee on Foreign Investment in the United States (CFIUS) released final regulations that expanded its oversight abilities. Shortly after, in February, the rules came into effect. One month after that the coronavirus began its deadly march across the US, throwing the country into lockdown and paralysing the economy. The government responded with a $2200bn stimulus package, with more expected to follow.
Perhaps unsurprisingly, the new CFIUS regulations – the pinnacle of the Trump administration’s ‘America First’ approach to FDI in the US – have become an afterthought for regulators intent on bolstering the US economy.
But if and when the Covid-19 outbreak is brought to heel, few expect the Trump administration to ease up. Indeed, even before the new regulations went into effect, the White House had been using the CFIUS’s powers far more than the Obama administration ever did. In Mr Trump’s first two years, the CFIUS opened 331 investigations, compared with the 145 in the final two years of Barack Obama’s second term, according to the US Treasury.
A chilling effect
Over the past couple of years, the US has seen a two- to three-fold increase in the number of abandoned deals that have undergone review by the CFIUS, according to Clinton Yu, a partner with law firm Barnes & Thornburg. “In other words, we have seen a chilling effect on foreign investment at least partially due to increased scrutiny by the CFIUS,” he says.
The new rules promise even more activity in a second Trump term, should he win the presidential election. Minority investments by foreigners in critical technology or critical infrastructure now fall under the CFIUS’s purview. Its reach also includes businesses that collect personal data, real estate, and joint ventures in which technology companies contribute intellectual property.
“This is the first legislation relating to CFIUS in more than 10 years,” says Jennifer Morgan, a real estate partner at law firm King & Spalding.
Now that these rules are in place, the natural question to ask is: what is coming next?
Ms Morgan, for one, does not anticipate new rules from a second Trump term, or a Democratic presidency, for that matter. For the next few years, she says, the government and the market will be in the processing stage of real world implementation. “This did receive bi-partisan support and both parties have serious concerns about other countries interfering with US business, especially infrastructure,” she says. “Unless we see a dramatic fall off in foreign investment in the US, I don’t think watering down CFIUS rules will be a priority for either camp.”
Observers hoping for significant change, not just regarding incoming investment but also US policies towards trade and immigration, might want to brace themselves for disappointment. Under a second Trump term, such policies are unlikely to be reversed and, in some cases, will probably be accelerated. Certainly there is expected to be some type of shift if a Democratic candidate wins the election, but to what extent is unclear, even though Joe Biden looks set to clinch the party's nomination.
Ultimately, however, it probably will not matter to investors who wins. When Mr Trump was first elected, there was talk about a significant slowdown in inbound investment, but that evaporated within a few weeks, according to Timo Rehbock, chair of Barnes & Thornburg’s European group. Indeed, despite some of Mr Trump’s more controversial policy stances, regarding trade for example, direct investment in the US actually doubled. “With the uncertainties inherent in those policies, people simply said: ‘We will increase our investments in order to be part of the market, one way or another,’” says Mr Rehbock.
Diversified supply chains
Companies have also been proactive in overhauling global supply chains in response to the trade policy upheaval. “As a result of the Section 301 tariffs on goods from China, we have noticed a shift in investment in Chinese production to production in other countries such as those located in south-east Asia,” says Mr Yu. “Even as the US and China continue to negotiate a trade deal, US investors have been under pressure to diversify their supply chain beyond China, and not just as a short-term solution.”
Companies are working around additional US policies that at first hampered their investment activities, according to Mr Rehbock. For example, the review process for immigration has become more stringent, making it difficult for companies to bring their own talent to the US. The answer? These investors are turning to the US market for their human resources, he says.
Other policies the Trump administration has put in place have been largely welcomed by foreign investors, and these too will be likely to be continued in a second term, according to Andrew Blasi, director at consulting firm Crowell & Moring International.
“Additional deregulatory and taxation measures at the federal level could support this approach, particularly if the Republican party were to maintain a majority in the US Senate and regain a majority in the US House of Representatives,” he says. “The same is also true at the state level if Republican governors and legislators fare well in this year’s election.”
Mr Trump is likely to continue his approach in pursuing bilateral trade agreements that are relevant to investment flows, adds Mr Blasi. The continued implementation of the US-Mexico-Canada Agreement under a second term for Mr Trump is also likely to support further FDI across North America.
Of course, concludes Mr Blasi, the overall state of the US and global economy will have the largest overall influence on US FDI, both inbound and outbound. “And that is dependent on a variety of macroeconomic and social variables that are influenced, but not completely controlled, by the president of the US,” he says.
This article first appeared in the April-June edition of fDi Magazine. The full digital version of the magazine is available here.