Schwarzman Scholars worked together to create an academic journal, reflecting their ability to think critically about the Middle Kingdom and the implications of its rise. These collections of thoughts come together to form "Xinmin Pinglun," our Journal dedicated to the publication of the informative and analytical essays of our scholars. As the application deadline for the class of 2019 is approaching and the arrival of the incoming class is on its way, we are sharing pieces from Ximin Pinglun to give insight into the critical thinking and scholarship taking place at Schwarzman College. Here, Emma Campbell-Mohn (Class of 2017) shares her thoughts on the Committee on Foreign Investments in the United States (CFIUS) and the Security Review Commission (SRC), and how they impact US-China relations.
“Capital flow must be carefully managed,” stated Chinese economist David Li during a lecture at Schwarzman College. While Li was referring to the need to manage capital flow for the economic benefit of a state, this same principle applies to protectionist policies designed to protect a state’s national security. In an era of globalization in which foreign firms regularly purchase controlling shares of domestic companies, governments find it necessary to protect certain industries, thereby making distinctions between companies which can be purchased by foreign firms and those which cannot.
The Committee on Foreign Investments in the United States (CFIUS) was established in 1975 to review transactions with potential national security concerns in which a foreign person takes control of a U.S. company. Transactions are reviewed by the CFIUS Board, which includes heads of some US Departments, such as the Department of Defense, Department of Commerce, and Department of Energy. It is chaired by the Department of the Treasury.
In the Northwestern Journal of International Law & Business, Souvik Saha notes that in response to the CFIUS blocking the merger of Huawei and 3Leaf in 2010, China passed legislation establishing its own version of CFIUS: the Security Review Committee (SRC). SRC is housed within China’s Ministry of Commerce. The history of China’s regulation of foreign investments is complex. Given its Communist heritage, China historically put stringent limits on foreign investment; however, China’s legal framework underwent rapid liberalization during the Deng Xiaoping era. Now, it appears to be once again changing in response to limits created by CFIUS. In general, legislation regarding the foreign acquisition of Chinese companies is evolving, in part due to the changing nature of the Chinese regulatory state.
According to Li, “politics and the economy are never separate” and the regulation of foreign investments for national security is the nexus of both fields. The increased use of CFIUS and the SRC may be indicators of faltering relations as differences between both countries’ conceptions of international security emerge. Both the US and Chinese regulatory mechanisms remain shrouded in mystery because what constitutes a national security concern is subject to change and interpretation by various branches and departments of their respective governments. If CFIUS and SRC are increasingly utilized to protect sensitive industries in both countries, this can have direct implications for American buyers in China and Chinese buyers in America, possibly exacerbating relations if a trade deal is viewed as unfair or unfavorable.
The power and threat of CFIUS
While the total number of transactions reviewed by CFIUS has fluctuated between 65 and 155 annually from 2008 to 2014, transactions involving Chinese companies have accounted for an increasingly higher percentages of total transactions. Transactions involving China accounted for roughly 2% of CFIUS’ total reviewed transactions in 2007 but increased to roughly 16% by 2014.
It is unclear whether this trend is due to China increasingly investing in sensitive sectors of the US economy, which would require CFIUS review, or if China is increasingly a target of CFIUS scrutiny. Given that the United Kingdom was previously the most reviewed country party to CFIUS, the former appears more applicable as Chinese buyers increasingly invest in areas deemed necessary for national security. Another possibility is that the US government — Congress in particular — is expanding what constitutes a national security interest and is increasingly wary of Chinese foreign investments.
CFIUS exerts influence on foreign transactions not only through its abilities to review and cancel transactions but also in merely threatening to review. According to the 2016 Report to Congress of the US-China Economic and Security Review Commission, 14% of transactions were halted when review was threatened.
"It is possible the SRC will be used primarily as a retaliatory tool."
This could be due to an unwillingness of American and Chinese companies to go through the review processes, the unlikelihood of a positive result, or unrelated to CFIUS. Regardless, it indicates that the power of CFIUS extends beyond its de jure authority.
Congress retains the ability to make changes to the regulatory framework of CFIUS as it demonstrated with its 2007 Amendments. Members of Congress have suggested expanding the types of transactions covered by CFIUS and thus further enhancing the power of the threat of CFIUS to hamper a transaction.
SRC: more unknown than known
Given the countries’ political and economic differences, it is no surprise that SRC is inherently different than CFIUS. Unlike the United States, foreign companies were historically prohibited from buying Chinese companies. The current framework arises from an evolution of Chinese regulatory policy. As Saha states, at first, there was a ban on foreign companies buying Chinese companies. Subsequent liberalization under Deng Xiaoping allowed foreign companies to buy Chinese companies, although final approval was still subject to the Communist Party. China later enacted a formalized regulatory framework after CFIUS blocked some Chinese companies from buying controlling shares in American companies.
Like CFIUS, the SRC particulary focuses on key industries, including “agricultural products, basic infrastructure, defense, energy and resources, equipment manufacturing, technology and transportation services,” according to the China Business Review. Unlike CFIUS, its purview is “national economic security,” which extends beyond CFIUS’ focus on national security objectives. Its method of determining whether to approve or disapprove a transaction is still largely unknown. It is possible the SRC will be used primarily as a retaliatory tool.
Last summer, according to Reuters, Tsinghua Holding Corporation withdrew a bid for Micron Corporation, in part due to potential CFIUS review. Micron was the last domestic producer of dynamic memory chips and therefore a critical part of the US technology sector and US national defense. It is logical that this type of transaction would be rejected by CFIUS in order to protect national security, in the same way that China protects certain sensitive industries.
Where do these dueling regulatory frameworks leave US-China relations? If current trends continue, a “tit-for-tat” retaliatory reltaionship could develop. Some U.S. companies may even avoid foreign buyers entirely for fear of being subjected to CFIUS. Given the utility of using SRC and CFIUS to protect specific industries and current trends, it is likely that each body will be employed with increasing frequency under the Trump and Xi Administrations.
Emma Campbell-Mohn ('17) is from the United States of America and graduated from Duke.