The quiet committee keeping China investment at bay

The quiet committee keeping China investment at bay

A Chinese private equity firm, Primavera Capital Group, in May acquired the well-known test preparation company Princeton Review and an online learning platform, Tutor.com.

The move, like other Chinese investments in tech and those that deal with personal information, is increasingly drawing the attention of politicians, the US government and national security experts – especially as tensions rise between the US and China.

What remains unclear, however, is if this seemingly routine business acquisition was reviewed by the Committee on Foreign Investment in the the US, which has authority to examine transactions involving foreign investment.

The committee is largely prohibited from publicly disclosing any information filed with it, including whether it is reviewing a transaction or whether one was referred for review.

While the committee is hardly a household name, its mission and its expanding oversight have important implications for the US economy and national security.

Government oversight

The dark grey dome of the U.S. Capitol Building against a light grey sky.
Congress strengthened the Committee on Foreign Investment’s powers, allowing it to scrutinize foreign investments in areas including cybersecurity, microelectronics and artificial intelligence. Photo: Joshua Sukoff for Unsplash.com, CC BY via The Conversation

The Committee on Foreign Investment, a US government interagency committee established in 1975 by President Gerald Ford, is tasked with studying and coordinating the implementation of policy on foreign investment in America.

Investment by foreign countries greatly benefits the US, supporting 10.1% of the total labor force in 2019. Yet, beginning in the 1980s, the federal government grew increasingly concerned about potentially harmful effects of foreign investment in the US. For example, if a foreign firm gets control of sensitive technologies, it could hurt national competitive advantages or even threaten national security.

The primary objective of the committee is to review selected foreign investments and some real estate transactions by foreigners in the US for their national security implications. Real estate transactions are generally scrutinized only when a transaction involves land that is either close to a military base or near an airport or seaport.

Vetting foreign investments

In the 1980s, political concern grew about Japanese investment and, specifically, the proposed purchase by Japanese computer giant Fujitsu of chipmaker Fairchild Semiconductor. Semiconductors were considered a sensitive industry, with potential defense applications, so the purchase prompted Congress in 1988 to pass the Exon-Florio amendment to the Defense Production Act of 1950.

This amendment empowered the committee not just to review foreign investment deals but also to recommend rejecting them. Acting on its recommendation, a US president could block a foreign transaction on “national security” grounds.

For instance, in 1990, President George H W Bush voided the sale of MAMCO Manufacturing, which made metal parts for airplanes, to a Chinese agency, ordering the China National Aero-Technology Import & Export Corporation to divest itself of the Seattle-based company.

In the context of a committee review, the term national security typically refers to foreign transactions that could cause significant outsourcing of jobs, a loss of control over agricultural supply chains, the sharing of sensitive technologies, control of a firm that satisfies defense needs, or the impairment of critical infrastructure.

Strengthening the committee

In 2006, Dubai Ports World, owned by the United Arab Emirates government, was about to gain managerial control of six US ports in a major deal. Because of terrorism-related concerns, Senator Chuck Schumer led a campaign against this proposal and the transaction was eventually called off, even though it had initially been approved by both the committee and President George W Bush.

White sand beach in the foreground with Abu Dhabi skyscrapers in the background.
Political concern scuttled a United Arab Emirates deal to manage US ports and triggered greater power for the Committee on Foreign Investment. Photo: Damian Kamp for Unsplash.com, CC BY via The Conversation

In the aftermath of this controversy, lawmakers passed the Foreign Investment and National Security Act in 2007, giving Congress greater oversight of the committee to ensure that potential acquisitions were adequately reviewed. In addition, it required the committee to scrutinize any foreign investment deal in which the pertinent overseas entity is either owned or controlled by a foreign power.

National security concerns

Over time, the Committee on Foreign Investment has been given more power to reflect and act on the political and economic concerns of the US.

China, for example, appears to have global ambitions to replace the US-led world order. As it gains geopolitical power, China has come under increased scrutiny by the US, with public support for getting tough with China on economic issues. In response to these concerns, concrete steps have been taken by US lawmakers to increase the scope of what the committee is able to do.

In 2018, then-president Donald Trump signed the Foreign Investment Risk Review Modernization Act, giving the committee new powers over certain types of foreign investment that affect many Chinese investors. In the two-year period after the passage of the act, transaction registrations from Chinese investors fell by 43%.

In 2022, President Joe Biden signed an executive order directing the committee to sharpen its investigation of foreign investment deals that could negatively affect cybersecurity, quantum computing, biotechnology and sensitive data.

A teal-green schematic on a black background computer screen.
Foreign investments scrutinized by the US can range from agricultural supply chains to biotechnology and quantum computing. Photo: Adi Goldstein for Unsplash.com via The Conversation

The Committee on Foreign Investment is now more powerful than it has ever been, and it is a gatekeeper on major foreign investment deals.

The US is not alone in examining foreign investment deals for national security implications. In recent times, the United Kingdom, the European Union and Australia have either created or strengthened existing regulations to police with greater care foreign investment deals, particularly those originating in China.

It remains to be seen what the long-term implications of these expanding powers of the Committee on Foreign Investments in the US will be.

Amitrajeet A. Batabyal is a distinguished professor, the Arthur J Gosnell professor of economics and interim head of the Department of Sustainability at the Rochester Institute of Technology.

This article is republished from The Conversation under a Creative Commons license. Read the original article.