Should the Federal Government Scrutinize Foreign Investments in the U.S. More Closely? (H.R. 5841)

What is H.R. 5841?

(Updated November 15, 2018)

This bill — known as FIRRMA — would change how the Committee on Foreign Investment in the United States (CFIUS) operates to strengthen the government’s ability to protect national security and enhance confidence in the United States’ longstanding open investment policy. It would do this by expanding the scope of transactions reviewable by CFIUS to more effectively address national security concerns that fall outside the current scope of CFIUS review.

The bill would allow CFIUS — which was last updated 10 years ago and last substantially updated during the Ford Administration — to adjust its procedures to ensure that the process is tailored, efficient, effective, and administrable.  Additionally, it would require an assessment of the resources necessary for CFIUS to sustain its critical work, and would both establish a CFIUS Fund and permit filing fees to help achieve that end.

CFIUS would be required to look at entire industries or sectors, rather than individual proposed acquisitions or takeovers on a case-by-case basis. Additionally, the bill would expand CFIUS jurisdiction to minority position investments, real estate transactions near military bases, and other sensitive national security facilities. It would also update CFIUS’ definition of “critical technologies” to include emerging technologies; add new national security factors to the review process; and strengthen “critical infrastructure” protections.

Finally, this bill would create a “safe list” of certain allied countries. Investments from companies and investors from “safe list” countries would be exempt from CFIUS review.

The bill's full title is the Foreign Investment Risk Review Modernization Act of 2018.

Argument in favor

Foreign investment in U.S. companies can have significant national security implications if the companies make technologies with defense applications — and it serves the U.S. national interest to ensure that such technologies do not fall into the hands of hostile states.

Argument opposed

Over-regulating foreign investments in the U.S. may make it more difficult for U.S. companies that need capital to raise it from overseas. Additionally, this bill’s explicit anti-China stance may escalate tensions in the Trump administration’s current trade war with China.

Impact

U.S. companies seeking foreign investment; foreign investors; and the Committee on Foreign Investment in the United States.

Cost of H.R. 5841

A CBO cost estimate for this bill is unavailable.

Additional Info

In-Depth: Rep. Rob Pittenger (R-NC) introduced this bill as part of a bipartisan, bicameral legislative effort to modernize the national security review of potential foreign investments in the United States. Upon introducing this bill in November 2017, Rep. Pittenger said:

“China is buying American companies at a breathtaking pace.  While some are legitimate business investments, many others are part of a backdoor effort to compromise U.S. national security. For example, China recently attempted to purchase a U.S. missile defense supplier using a shell company to evade detection.  The global economy presents new security risks, and so our bipartisan legislation provides Washington the necessary tools to better track and evaluate Chinese investment.”

In January 2018, Rep. Pittenger added:

“The United States has always maintained technological superiority over our enemies. This decisive advantage is now threatened by adversarial states, including China, seeking to utilize cloaked financial investment as a vehicle for stealing our technology and infiltrating our critical infrastructure. We cannot continue to stand still even after adversarial nations have already acquired vital military technology from our own companies. This common sense, bipartisan legislation streamlines and bolsters the CFIUS review process to protect our military, our economy, and hardworking American families.”

The Trump administration endorses this bill and its Senate counterpart as legislation that achieves the twin aims of protecting national security and preserving the United States’ longstanding investment policy. Key administration officials, including Treasury Secretary Mnuchin, Attorney General Sessions, and Defense Secretary Mattis, have also expressed their support for this bill.

The U.S. Chamber of Commerce, United States Council for International Business, National Foreign Trade Council (NFTC), Business Roundtable, and Computing Technology Industry Association (CompTIA) are among the organizations that support the current version of this bill. 

In a letter to the House Financial Services Committee and Senate Banking Committee these organizations expressed their support for “the broad consensus that the Committee on Foreign Investment in the United States (CFIUS) should focus exclusively on assessing the national security risks of inbound investments, while export controls should address national security risks associated with outbound technology transfers to countries of concern.”

Opponents of the bill argue that this bill would produce overly broad changes, making the government too involved in private economic decisions in a way that fails to truly protect national security while putting private industry at risk. The Brookings Institution’s Theodore H. Moran argues:

“These ‘reforms’ of CFIUS constitute a fundamental departure from the committee’s traditional practice of narrowly identifying national security threats arising from foreign acquisitions, without excluding foreign acquisitions across entire industries, sectors, or areas of the U.S. domestic economy that might reduce the U.S. technological and industrial advantage vis-à-vis another country… U.S. national interests would be best served by maintaining CFIUS’s narrow focus on specific threats that might arise from particular acquisitions within industries. Excluding entire industries, sectors, or areas of the U.S. economy from foreign acquisitions — with zero-sum attention to whether such acquisitions might erode U.S. technological or industrial advantage vis-à-vis the home country of the acquiring firm — could weaken U.S. competitiveness.”

There is one cosponsor of this bill, who is also a Republican. There is a companion bill in the Senate, S.2098, sponsored by Sen. John Cornyn (R-TX). A similar version of this bill introduced in the House last year by Rep. Pittenger, H.R. 4311, attracted 50 bipartisan cosponsors (42 Republicans and eight Democrats).

Of Note: CFIUS was first established in 1975 by Executive Order 11858 to respond to then-growing concerns that the Organization of the Petroleum Exporting Countries (OPEC) investments in U.S. assets were politically motivated. Operating from an understanding that foreign investments in U.S. assets could have major negative national security implications, the Committee was accordingly charged with analyzing trends of foreign investment and considering proposals for changes in the law(s) governing foreign investments in U.S. assets.

Throughout the 1970s and 1980s, concerns over foreign investment in the U.S. focused on hard assets such as ports and energy infrastructure (and semiconductors, to a lesser extent), and such sales’ and investments’ impacts on the U.S. economy.

In 1988, Congress passed the “Exon-Florio” provision of the Defense Production Act of 1950 (DPA), enacted as Section 721 of the DPA, reflecting increased concerns with foreign investments in certain kinds of U.S. firms (at that time, the concern was around Japanese investors). This provision authorized the President to block foreign acquisitions that threatened national security, provided that existing U.S. law did not adequately protect national security already, and that there was credible evidence that a transaction would indeed impair national security. Subsequently, the President’s authority to administer the provision was delegated to CFIUS through Executive Order 12661.

Following Section 721’s enactment, the Treasury Department issued regulations which largely remain in place today. These regulations allowed parties in CFIUS-regulated transactions to provide a “notice” to seek clearance for the transaction, and as an alternative to the Committee seeking to stop the transaction.

A few years later, the 1992 “Byrd Amendment” to Exon-Florio required CFIUS to investigate proposed mergers, acquisitions, or takeovers where the foreign acquirers was controlled by, or acting on behalf of, a foreign government.

At present, CFIUS’ mandate is to consider whether a transaction subject to the Committee’s jurisdiction — a “covered transaction” — may threaten the national security of the United States. For transactions posing such a threat, CFIUS must either to identify acceptable measures the transacting parties can take to mitigate that threat, or recommend that the President block the threatening transaction.

Media:

• Sponsoring Rep. Robert Pittenger (R-NC) Press Statement