Uncertainty With Chinese Foreign Direct Investment Under the Trump Administration; Expanding Role of CFIUS

The People’s Republic of China has grown into the world’s second largest economy, the largest manufacturing nation, and a major political/diplomatic presence at a rapid pace. For the first few decades post-1950, China relied on an inflow of foreign direct investment (“FDI”) while the country’s ability to offer cheap labor to companies and lopsided trade surplus all to helped spur economic growth.1 Recently, however, with a growing trend of favoring domestic manufacturing and the increasing cost of labor in China, Chinese corporations have sought to enhance investment efforts in other countries, especially through its “Go Global” policy which was established in 2000.2 China’s outflow of FDI has consistently increased, and, in 2015 alone, Chinese firms invested $121 billion overseas, making the country one of the top five exporters of investment in the world.3

The United States has represented an increasing target of Chinese investment. Following the 2007 financial crisis, Chinese investment in the United States has grown significantly each year, equaling $46.2 billion in 2016, up from $15.3 billion in 2015, and a radical increase from the $356 million figure in 2007.4 In 2016, 178 deals occurred, up 108 from the corresponding amount in 2007.5 This staggering growth highlights an important trend within the global economy. Enhanced Chinese investment in the United States has been viewed by economists as a significant beneficial contributor to the growth of the American economy.

However, concerns regarding increased Chinese investment in the United States stems from the fact that China, in many respects, retains the statist model it operated under prior to significant market reforms.6 Many of China’s largest and most powerful corporations are categorized as state-owned enterprises (“SOE”), which entails heavy state involvement in the corporation’s operations, and promotes the general idea that complying with the government’s wishes is paramount, trumping any goals for high profits.7 Furthermore, state-operated enterprises have accounted for at least 80% of China’s FDI.8

The strong ties Chinese companies maintain with the state have raised concerns regarding Chinese investment in foreign countries; particularly in the United States. Although continued foreign investment in the United States is beneficial to the American economy, the degree to which the Chinese government acquires assets in and ownership of American companies, and particularly American technology, has enhanced the importance of a previously irrelevant executive body, the Committee on Foreign Investment in the United States (“CFIUS”).

CFIUS is an executive (inter-agency) body that has authorization to review (and veto) transactions that could result in a foreign entity controlling an American business.9 The Committee is composed of the heads of sixteen departments and agencies within the executive branch.10 Following a formal review process, CFIUS produces a formal review to the President, and the President has the ability to either permit the deal to continue or formally freeze the deal.11 The basis of the Committee’s review and decisions stem from a perspective of national security. If the Committee determines that the deal involves technology or an industry that should not be accessible to a foreign entity, then CFIUS will most likely recommend the President to block the deal. CFIUS was created via an Executive Order by President Ford in 1975, and in the early years, the Committee failed to play a significant role and operated without a clear purpose.12

Against this backdrop, CFIUS has grown into a line of defense against FDI that threatens the national security–an intentionally broad term–of the United States. The rise and growth of CFIUS has corresponded to the increase in China’s FDI in recent decades.13 In fact, only four transactions have ever been formally blocked by presidents, following an official CFIUS review and recommendation, and all four transactions involved Chinese Corporations as well as sensitive technologies.14  Furthermore, of the total number of transactions reviewed by CFIUS between 2013 and 2015, seventy-four involved Chinese corporations, which was twenty-five transactions more than the second-most reviewed country, Canada.15

Since the inauguration of President Trump, recent events have enhanced the focus on Chinese-specific FDI and CFIUS. While many expect Trump’s policies to enhance investment and open global markets in an effort to grow the domestic economy, early actions by the administration hint at a protectionist policy against Chinese investment in the United States. In addition to formally blocking a Chinese private equity firm from acquiring a Portland semiconductor corporation, marking the fourth time a president ever blocked a foreign deal through CFIUS, others expect that the blockage serves as a symbol of enhanced scrutiny over Chinese investment.16 The legal profession is also cognizant of this enhanced scrutiny, as the demand for attorneys with CFIUS expertise has increased since President Trump’s inauguration.17 With the increasing amount of FDI from Chinese companies in the United States, many of which stem from state-owned enterprises, and the enhanced scrutiny of CFIUS in reviewing acquisitions involving Chinese companies, such concerns have never been more important.

  1. Ilan Alon et al., Chinese State-Owned Enterprises go Global, 35 J. of Bus. Strategy 3, 4 (2014). 

  2. Ming Du, When China’s National Champions Go Global: Nothing to Fear but Fear Itself?, 6 J. World Trade 1127, 1127 (2014). 

  3. Patrick Griffin, CFIUS in the Age of Chinese Investment, 85 Fordham L. Rev. 1757, 1775 (2017). 

  4. China Investment Monitor, Rhodium Group, http://rhg.com/interactive/china-investment-monitor (last visited Nov. 5, 2017). 

  5. Id

  6. See Griffin, supra note 3, at 1759. 

  7. See id. at 1774. 

  8. Du, supra note 2, at 1128. 

  9. See James K. Jackson, Cong. Research Serv., RL 33388, Comm. on Foreign Inv. in the U.S. (CFIUS) 2 (2016). 

  10. Griffin, supra note 3, at 1760. 

  11. See id. at 1761. 

  12. See Jackson, supra note 9 at 1. 

  13. See Thilo Hanenmann and Daniel Rosen, Don’t Misread Old Tealeaves: Chinese Investment and CFIUS, Rhodium Group (Feb. 24, 2016), http://rhg.com/notes/dont-misreadold-tealeaves-chinese-investment-and-cfius

  14. Anna Zhang, Lawyers to Benefit from Trump Administration’s Increased Scrutiny of Chinese Investment in the US, Nat’l L. Journal (Sept. 25, 2017), https://www.law.com/nationallawjournal/sites/nationallawjournal/2017/09/25/lawyers-to-benefit-from-trump-administrations-increased-scrutiny-of-chinese-investment-in-the-us/

  15. Jackson, supra note 9 at 23. 

  16. Zhang, supra note 14. 

  17. Id