The intense scrutiny faced by Chinese investors in recent years is tipped to continue under Joe Biden's incoming administration. However, Mr Biden’s multilateral approach has buoyed hopes that investors from US allies are less likely to be caught in the crosshairs.
The Committee on Foreign Investment in the United States (CFIUS), which screens inbound acquisitions for national security threats, rose to prominence under president Donald Trump, thanks to its intervention in high-profile Chinese deals involving the apps TikTok, Grindr and StayNTouch, and various semiconductor companies.
It is widely-accepted that Mr Trump has used CFIUS as a tool in his ‘America First’ policy and China trade war, but statistics show the US started to toughen its stance on Chinese investment long before he entered the White House.
“This extra scrutiny is not a Trump phenomenon,” says Anne Salladin, a partner at Hogan Lovells who worked for CFIUS for almost two decades. “It has been going on since around 2012, when the US started to see an extraordinary increase in Chinese investment.” That was the year then-president Obama ordered Chinese-controlled Ralls to unwind its acquisition of wind farms near a US military base.
Further evidence that scrutiny will continue is the overwhelming bipartisan support for the Foreign Investment Risk Review Modernisation Act (Firrma) which recently expanded CFIUS’s powers in areas fervently pursued by China — namely, personal data, new or advanced technologies, and critical infrastructure.
It is an ominous sign for Chinese investment which, according to the Rhodium Group, totalled just $5bn last year — down 90% on 2016 and the lowest level since 2009. A spokesperson for the US–China Business Council tells fDi that “the hostile environment created by the trade war and increased scrutiny of planned Chinese investment are direct causes of the nosedive”.
Leeway for trade partners
Since starting his presidential campaign, Mr Biden has made no specific comments on national security review. But his desire to work with governments whose interests align with the US means the list of countries excluded from Firrma’s broad remit — which captures even minority stakes and board positions — is tipped to grow.
“I’d expect less of a push for reviews on companies from allied countries, and I suspect the ‘white list’ of countries — which are exempted from some of the more restrictive requirements — will probably be expanded,” says Martin Chorzempa, a research fellow at the Peterson Institute for International Economics who studies CFIUS. Today, that list includes Canada, the UK and Australia; but the committee, comprised of the heads of the federal government’s economic and security agencies, has discretion to add other countries with sufficiently robust FDI screening mechanisms.
The top candidates are Japan, France, Germany, Switzerland and the Netherlands — some of which have tightened their review procedures of late. In 2019, Swiss investment firm Partners Group, Japan’s Denso and Swedish private equity firm EQT pushed for their respective countries to be included on the list.
FDI frame of mind
The country’s first federal agency tasked with attracting investment, SelectUSA, was established during Mr Biden’s vice-presidency and some are optimistic that this recognition of FDI as an economic priority will be reflected in his cabinet picks.
Ex-CFIUS officials confirm that the career civil servants who review transactions take cues from politically-appointed superiors. “My hope is that any administration that prioritises FDI will ensure that CFIUS reviews take into account the importance that FDI brings to the economy,” says Nancy McLernon, CEO of Global Business Alliance which represents foreign companies’ US operations.
“Our members have been concerned by the increased tensions between the US and some of our major trading partners, particularly those in Europe,” she says. “But we’ve seen some positive signs from the president elect about wanting to rebuild relationships with our allies.”
Some predict a shift away from outright denials and towards allowing deals to go ahead under strict constraints. “When the current administration identifies risks, they are less likely to rely on mitigation to resolve their national security concerns. It’s possible the new administration will have a slightly higher risk tolerance for investors from certain countries,” says Dorsey & Whitney partner and former CFIUS official Justin Huff.
Keep it discreet
While close scrutiny of Chinese investments will continue, the Biden team is expected to take a more measured approach. For example, Nova Daly, a public policy advisor at Wiley Rein, a law firm, expects more leniency for deals by non-Chinese entities with connections to the country.
But they will be kept in check by their obligations to brief the Senate, which is likely to remain Republican-controlled. “I suspect there will be more Senate oversight of CFIUS decisions, given that CFIUS cases have national security implications and a number of senators will remain hawkish on China,” says Mr Davy, who ran CFIUS from 2006 to 2009. “So I think the Biden administration will have to take a relatively conservative approach.”
One change that is almost certain is a return to its historically low profile. The secretive agency has been thrust into the spotlight this year by Mr Trump’s comments on social media and in the press, but, by law, CFIUS officials are not supposed to acknowledge the existence of any filings or reviews. “It’s very unusual what we have been seeing for the last few months. Typically, CFIUS does not discuss cases that are before it in public and I don’t expect to see this going forward under a Biden administration,” says Ms Salladin.
In the previous iteration of this series about the upcoming presidency of Joe Biden, we looked into the future of investment into Iran.