The National Critical Capabilities Defense Act is a US draft bill that warrants the attention of the global FDI community. The act aims at establishing a committee named the ‘Committee on National Critical Capabilities’ (CNCC) to review several aspects of the way US companies trade and invest across borders, which would also result in the screening of US outbound investments.
The US National Critical Capabilities Defense Act, on the one hand, tries to evade economic tensions between the US and “foreign adversaries” (essentially China and Russia) by reducing investments that are considered to be against national security. On the other hand, such a law can be criticised because of the purpose it serves – screening US outbound investments, especially in China – which has been served by other tools of the government.
The tool which already exists and has played a very important role in US international economic policy is the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018 which strengthened the powers given to the Committee on Foreign Investments in the US (CFIUS) to screen cross-border investment. The CFIUS reviews and takes measures addressing the national security concerns arising from inward foreign investments and trade-related transactions involving foreign persons which could be further modernised to also include the screening of outward FDI.
The draft bill has two main objectives – one is to scrutinise the companies in the US that have supply chains with China and second, to monitor the financial institutions in the US that lend funds or carry the business with Chinese companies. Many argue that the competitiveness of companies in the US might get undermined if, in the name of national security, there is a blanket screening of companies having mere trade-related supply chains with China. It is clear that the present draft by the US Congress has received criticisms from various stakeholders, including investors and business entities.
The introduction of such an outbound investment review mechanism has global and systemic relevance for global FDI because it would mean that any supply chain which has vulnerabilities in them (i.e. linkages with either Russia or China) shall be heavily monitored and prevented from being a threat to US national security.
The introduction of such an outbound investment review mechanism has global and systemic relevance for global FDI
The act defines the term ‘National Critical Capabilities’ in a broad way to include systems, services and even the assets that form a major role in US national security. Moreover, the act has the potential to have far-reaching consequences because it also mentions that such an outbound review system will cover the review of the investments in countries like China and Russia.
The National Critical Capabilities Defense Act could have a massive impact on US investors but would also serve as a benchmark for many other jurisdictions. In the aftermath of the rise of national security mechanisms to control inward FDI, the screening of outward FDI might well become a key feature of tomorrow’s global FDI regulation.
Julien Chaisse is professor of Law, City University of Hong Kong and President, Asia Pacific FDI Network. Twitter: @JChaisse
This article first appeared in the October/November 2022 print edition of fDi Intelligence. View a digital edition of the magazine here.
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