arm wrestling businessmen in front of US and China flags

How Could We Stop Chinese Investors from Buying US Companies?

Legislation is needed to protect U.S. economic and security interests threatened by Chinese firms buying American companies.

After my article, “Should We Allow the Chinese to Buy Any U.S. Company They Want?” was published, I was made aware that AXIOS published an article by Steve LeVine on January 10 that provided data from MacroPolo showing that the amount of Chinese investment in the U.S is far greater and more dangerous that I thought. 

He wrote, “Chinese investors and firms own a majority of almost 2,400 American companies employing 114,000 people, about the same number as the combined U.S. staffs of Google, Facebook and Tesla…”

On their website, MacroPolo is described as “an initiative of the in-house think tank of the Paulson Institute at the University of Chicago,” which “has a dedicated team of experienced observers and seasoned analysts” whose “aim is to decode China’s economic arrival …across multiple dimensions.” 

The article featured MacroPolo's interactive map, which shows the economic impact of Chinese investment in each state by economic contribution, number of firms owned, and total employment of these firms. The map “appears to be the first open-source, county-by-county study of every majority-owned Chinese company in the U.S. — $56 billion worth.”

In 2017, the top three states were:

  • California: $12.3 billion economic contribution, 19,300 employed, 598 firms
  • Michigan: $7.6 billion economic contribution, 15,200 employed, 111 firms
  • New York:  $3.1 billion economic contribution, 6,300 employed, 198 firms

Kentucky was the top state in 2016 with the $5.4 billion buyout of GE Appliances in Louisville by Haier. I was horrified when this happened because I had used GE’s reshoring of a water heater as the headline case study in my reshoring presentations, and I had visited the GE new product design center in Louisville in the fall of 2015. I had been delighted to see one appliance after another being reshored.

The most immediate way that we could reduce Chinese investment in the U. S. would be to pass the legislation I mentioned in my previous article:  The Foreign Investment Risk Review Modernization Act (FIRRMA), introduced on Nov. 8, 2017 by Rep. Robert Pittenger (H.R.4311) and Sen. John Cornyn (S. 2098).  The key features of these bills are:

  • “Expands CFIUS jurisdiction to include joint ventures, minority position investments, and real estate transactions near military bases and other sensitive national security facilities.
  • Updates CFIUS definition of “critical technologies” to include emerging technologies that could be essential for maintaining the U.S. technological advantage over countries that pose threats.
  • Adds new national security factors to the review process.
  • Strengthens the government’s ability to protect American “critical infrastructure” from foreign government disruption.”

Reps. Devin Nunes, CA-22, Chris Smith, NJ-04, Denny Heck, WA-10, Dave Loebsack, IA-02, Sam Johnson, TX-03, and John Culberson, TX-07, are co-sponsors of H.R. 4311.

In his press release, Cornyn said, “By exploiting gaps in the existing CFIUS review process, potential adversaries, such as China, have been effectively degrading our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies…This undermines our national security and highlights the imperative of modernizing the CFIUS review process to address 21st century threats. This bill takes a measured approach by providing long overdue reforms to better protect our country, while also working to ensure that beneficial foreign investment is not chilled.”

Sens. Richard Burr, R-Va., Diane Feinstein, D-Calif., Marco Rubio, R-Fla., Amy Klobuchar, D-Minn., John Barrasso, R-Wyo., Gary Peters, D-Mich., James Lankford, R-Okla., Joe Manchin, D-W. Va., and Tim Scott, R-S.C., are also co-sponsors of S. 2098.

The introduction of FIRRMA may be the outcome of the recommendations of the draft annual report of the U.S.-China Economic and Security Review Commission “calling for a ban of the commission's annual Chinese state-owned enterprises' purchases of U.S. companies…The Commission recommends Congress amend the statute authorizing the Committee on Foreign Investment in the United States to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies…" as reported by Ali Meyer on Oct. 27, 2016 in the Washington Free Beacon.

The first independent review of these 79-page bills was published Dec. 21, 2017 in the Latham & Watkins Client Alert whitepaper titled, “CFIUS Reconstructed: The Foreign Investment Risk Review Modernization Act of 2017.” The White Paper states, in part:

“The proposed Foreign Investment Risk Review Modernization Act would bring substantial changes to CFIUS review. Key Points are:

  • FIRRMA could speed review of certain transactions
  • It would provide for increased scrutiny of transactions from countries of concern.
  • It would expand the scope of activities subject to CFIUS review

FIRRMA would also lengthen the CFIUS review process, extending the initial review period from 30 to 45 days, and allowing CFIUS to extend a national security investigation for 30 days beyond the existing 45-day period where “extraordinary circumstances” require. Thus, the post-notice CFIUS clock would expand from 75 days currently to either 90 or 120 days from the time of filing to the end of the national security investigation.

…But FIRRMA would also increase the resources CFIUS would have to undertake its expanded responsibilities.… In a number of important ways FIRRMA would clarify, alter, or expand current CFIUS practices. And yet, the 79-page bill leaves open certain questions, and raises still others.”

The white paper also stated that “an alternative bill was introduced into the Senate, the “United States Foreign Investment Review Act of 2017 (S.1983),” also with bipartisan sponsorship (Sens. Sherrod Brown, D-Ohio, and Charles Grassley, R-Iowa. That said, FIRRMA’s bicameral introduction and bipartisan support, which includes Sen. Diane Feinstein, D-Calif., as well as reports that some of FIRRMA’s sponsors worked with the administration on the bill before it was introduced, all provide some reason to expect a version of FIRRMA to move during upcoming months.”

On Dec. 11, 2017, Alexandra Kilroy wrote a guest blog for Adam Segal on the Council on Foreign Relations website. Alexandra is an intern in the Digital and Cyberspace Policy program at the Council on Foreign Relations. She wrote, “As Chinese firms pour funds into promising Silicon Valley start-ups, many national security experts are concerned that China may soon surpass the United States as a technological power, in part though investing in U.S. firms and acquiring cutting-edge technology.”

She commented that “the Foreign Investment Risk Review Modernization Act (FIRMMA), … appears to be motivated in part by an unreleased Pentagon report of the military applications of Chinese investments in the United States. Under the new legislation, CFIUS oversight would be expanded to include foreign investments near military facilities, minor-share investments in critical technology and infrastructure sectors, and transfers of dual-use technology to foreign entities. Acquisitions of critical technologies by “countries of special concern” would also be subject to CFIUS oversight.”

She commented that “Chinese state-led capitalism makes it difficult to distinguish between private and state-owned businesses, and many private firms have strong ties to the Chinese government. In addition, China has been historically disinclined to allow private foreign investment in many critical parts of the economy…it has traditionally maintained strict limits on foreign investment in its energy, transportation, and technology industries. Chinese firms, many with connections to the state, can invest billions in U.S. technology, but U.S. companies are often barred from doing the same.”

As a director on the board of the San Diego Inventors Forum, it greatly concerns me that Chinese investors are buying startup companies whose new technologies may be critical to the future of American technological advances.  Under the current law, Chinese investors could be buying small emerging companies that have advanced technologies that are down at the Tier 3 and 4 levels in the supply chain and never get brought up for a CIFIUS review of the acquisition.

In this regard, there are two possible scenarios that frighten me: (1) Chinese investors buying an advanced technology company and shutting it down to keep the U. S. from benefitting from the technology, and (2) having Chinese engineers insert “backdoor” technology into the product to make it not work properly or quit working when triggered remotely. The latter is already a problem with counterfeit Chinese parts in the defense and military supply chain.

On Jan. 22, 2018, Daniel DiMicco, chairman, and Michael Stumo, CEO, of the Coalition for a Prosperous America sent letters to Rep. Pittenger and Sen. Cornyn, which said, in part:

“The Coalition for a Prosperous America (CPA) board of directors has voted to support the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) which you introduced on Nov. 8, 2017 with bipartisan support.

We appreciate your recognition that foreign investment should be more tightly monitored to address new security threats posed by an evolving global landscape. Your bill appropriately expands CFIUS’s authority to review certain transactions that pose national security concerns, expands the list of factors to be considered by CFIUS and mandates disclosures by state-owned enterprises.

We agree with your reasons, and those of your cosponsors, for advancing this bill. We would additionally point out that trade is part of China’s multidisciplinary strategy to surpass the U.S. on the global stage. China engineers persistent trade surpluses. Our corresponding deficits require us to be a net importer of capital. We sell our assets to balance the books as they sell more goods than they buy. Thus, the greater the U.S. trade deficit, the more we sell our assets and the more we must monitor and restrict which assets are sold.

CPA believes your bill could be improved by adding economic security as a basis for rejecting investment. As an example, Canadian laws restricting investment go beyond national to economic security, i.e. net gain to the domestic economy, when buyers are state-influenced companies.”

The expansion of CIFIUS by FIRRMA may not be enough to stop the dangerous level of Chinese investment in the U.S. Another solution would be to require reciprocity between China and the U.S. with regard to investment. Currently, U. S. companies are not allowed to buy 100% of any Chinese company. 

On Jan. 17, 2018, CPA’s Trade Blog included an excerpt from Jenny Leonard’s article on Inside US Trade, which stated, “The White House is considering the creation of a reciprocal investment regime with China following a Section 301 [Trade act of 1974] investigation into Chinese technology and intellectual property policies…The sources said the administration, if it went that route, would apply the 1977 International Emergency Economic Powers Act, which gives the president broad authority to regulate commerce “to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared for purposes of this chapter and may not be exercised for any other purpose.”

The article describes how it could be done: “Trump, they said, would sign an executive order declaring a national emergency and, as required under the statute, “immediately” transmit a report to Congress specifying the rationale behind the emergency and actions, and naming “any foreign countries with respect to which such actions are to be taken and why such actions are to be taken with respect to those countries.”

The result “would be to restrict Chinese foreign investment in the U.S. to the extent that Beijing restricts U.S. foreign investment in its market, which could effectively lead to sectoral investment bans. Chinese investors under the new regime would have to demonstrate that China allows U.S. investment in a specific sector. For example, one source said, if Chinese investors wanted to buy a U.S. bank, they would be able to acquire no more than a 49% stake -- in line with Chinese rules on foreign ownership of banks in China.”

Personally, I like this latter solution the best as there is still too much possibility that a Chinese acquisition may escape the expanded CIFIUS “radar screen” for a review. It’s not just our national security that is being threatened; it’s our economic security as well.

TAGS: Trade
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