The Foreign Investment Risk Review Modernization Act: How CFIUS Became a Tech Office

Abstract

International trade, and its deep links to investment, has a long history in American policymaking. The first major law passed by the United States Congress was the Tariff Act of 1789. As a result of that Act and its progeny, tariffs generated the majority of federal tax revenue until the U.S. Constitution was amended in 1915 to allow income taxes. On top of driving revenue, controlling imports formed the basis for Alexander Hamilton’s theory of development, where “infant industries” were protected from foreign competition thus stimulating domestic investment. Economists called this theory “import substitution” when it was revived in the 1950s and 1960s.

The historical profile of international trade and investment is also political and strategic. The Tariff Act was justified not only by calling for the paying off of national debts but also “the encouragement and protection of manufactures.” Hamilton’s Report on Manufactures, which made the original case for American industrial policy, was “largely military and strategic in nature,” reminiscing on the material wants of the Revolutionary War. At the turn of the century, the Trading with the Enemy Act of 1917 was used to nationalize assets during World War I and to block all foreign investment during World War II. International commerce still sits at the nexus of politics and economics today, as recently leaked Chinese documents indicated that China was retaliating against American tariffs by targeting specific political constituencies with their own retaliatory tariffs.

The Committee for Foreign Investment in the United States (“CFIUS”) has lurked quietly in the background. CFIUS is an interagency committee that can block mergers, acquisitions, and takeovers by foreign entities that could create a national security risk. Despite that significant power, it is the subject of few law review articles and has only been party to a single lawsuit. Furthermore, most of the data it uses for its decisions is classified, so the public’s only window into its operations is its public testimony, Congressional research reports, and mandated reports since 2007. Thus, though it has played a key role in some important transactions, it remains little known. In the wake of the Foreign Investment Risk Review Modernization Act (“FIRRMA”), the newly-passed, largest-ever expansion of CFIUS, the scramble to understand CFIUS is more furious than ever. This paper addresses just that in three parts.

Part I reviews the history and review process of CFIUS. It was created haphazardly and became an important part of the national security apparatus not by design but by circumstance. This Part shows that CFIUS historically evolved through a consistent pattern. Its profile tended to increase in response to high-profile tentpole transactions involving the potential takeover of a U.S. firm by a foreign acquirer from a politically sensitive country. During those times, a consistent set of long-simmering disputes came to a boil and were resolved by new legislation. All such legislation tended towards increasing CFIUS’s power, expanding the scope of national security it is charged with considering, and increasing its disclosure to Congress.

Part II explains the context and content of FIRRMA itself. FIRRMA was born out of the nexus of increased fear regarding China’s growing strategic and economic clout and the potential loss of American technology supremacy, with urgency injected by the attempted Broadcom-Qualcomm merger. The resulting legislation attracted significant industry attention, especially from venture capital. FIRRMA expands CFIUS in three principal ways. First, it expands CFIUS’s mandate by requiring it to prevent the transfer of critical technologies and consider new factors in approving a transaction. Second, it expands CFIUS’s scope by covering new types of transactions, including passive investments. Third, it expands CFIUS’s authority by establishing it as a full-fledged and fully-funded agency with vast new powers.

Part III argues that though CFIUS’s expansion is motivated by protecting American technology, FIRRMA does not properly equip CFIUS to succeed in its new, technology-oriented role. First, its scope cannot fulfill its mandate, as technology transfer usually occurs outside of CFIUS’s purview. Second, its authority does not meet its mandate, as CFIUS does not have the technical resources or incentives to operate competently. Lastly, CFIUS’s new mandate itself is difficult to define due to the tricky nature of protecting national technological supremacy, risking inconsistency and mission creep.

This paper concludes by framing FIRRMA in the larger context of an overall American technology strategy. FIRRMA is just the first step of a broader realignment towards more restrictive trade policies, especially surrounding technology, pitting the Western world increasingly against China. It can also be seen as part of a more restrictive domestic economic framework. Furthermore, the nature of important emerging technologies in the coming years will cause CFIUS’s scope to potentially touch most high-tech businesses.

Keywords: CFIUS, FIRRMA, technology regulation, foreign policy, foreign investment, merger, acquisition, takeover, investment, startup

JEL Classification: f23, f36, f52, f55, f68, h11, k22, k33, k29, f10, f5, p16