Senior Members of Congress appear to be laying the groundwork for a much-needed regulatory update of a process used by the U.S. government to review of foreign investments in the United States in strategically important sectors such as defense as well as homeland security, especially in the case of U.S. ports. In a letter to the U.S. Comptroller General, sixteen (16) Members of Congress from both sides of the aisle asked that the Government Accountability Office (GAO) advise on the current effectiveness of the Committee on Foreign Investments in the United States (CFIUS) review process as well as provide guidance on proposed updates under consideration by the Congress. The letter is appended at the end of this post.
By way of brief background, the CFIUS review process was created via Executive Order in 1975 by President Gerald Ford. The rules governing the interagency process have also been amended by the Congress various times as well as other Presidential executive orders. While not a tool of (pure) free-market thinking, the CFIUS review process is a necessary tool that can be used to protect strategically vital U.S. markets from unfair competition, espionage, among other things. The process involves nine federal agencies and is one of many safeguards used by Uncle Sam to protect U.S. national security and, in the late 2000s, homeland security.
There is no doubt that the United States is one of the most welcoming and most sought out countries for foreign investors; however, certain foreign investments could impair the national security of the United States. Pursuant to the regulations, the president has broad authority to “mitigate any threat to the national security of the United States that arises” from a foreign acquisition of a U.S. company or “covered transaction.”
Potential foreign acquisition of U.S. companies that are subject to CFIUS review include, but are not limited to, investments involving critical infrastructure and critical technologies. Pursuant to the regulations, critical infrastructure includes a “system or asset, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular system or asset … would have a debilitating impact on national security.” While critical technologies include a wide array of defense articles or services controlled for export by the State Department, Commerce Department, of the Department of Energy, among others.
Frankly, many moons ago, as in graduate school years, I was not a huge fan of this process because, at first look, it seems like an unwarranted interference with the free markets. However, decades later and, I hope, slightly wiser, the CFIUS review process remains one of many much-needed safeguards along with export controls that are utilized by the U.S. government to protect and strengthen U.S. national security. Our allies and adversaries are constantly on the hunt for anything that could give them an edge. If they have to steal it, they will. In a heartbeat. Also after the 2001 terrorist attacks on the United States, the CFIUS process should become an even more important safeguard.
According to a series of questions presented to the Comptroller General, Congress seems to be a laying a foundation for expanding the jurisdiction of the CFIUS review process. Stressing that the “evolving nature of national security threats” as well as the aggressive efforts by state-owned foreign companies in China and Russia to invest in the U.S. may require a “structural update” of the CFIUS process. They also request a closer look at “soft power” sectors such as the media and other entities that could be acquired by foreign powers or interests and, potentially, used for propaganda. If you think the latter does not happen, think again. In fact, there are reports that certain Fox News personalities have lost their jobs because certain foreign investors on their board did not appreciate certain news coverage about events in the Middle East.
Opponents of the CFIUS process argue that the process is too secretive, onerous and unpredictable. In the long run, it also chills foreign investment. Compared to other federal regulatory processes, the CFIUS process is not be as transparent; however, consider the subject. It can’t be. Despite this, subjecting a potential transaction to a CFIUS review is usually well worth the cost and aggravation. The U.S. taxpayer has tasked the federal government to safeguard national security and the homeland. The benefits of the process to Americans are substantially outweighed by the potential inconveniences that it imposes on potential foreign investors. Remember that access to the U.S. market is a privilege, not a right.