*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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Sustainability Characteristics", “The Importance of Negotiating Good
Contracts", "A New Challenge for Emerging Markets: the Need to Develop an
Outward FDI Policy”, "China Moves the G20 toward an International
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Governance: The Need for Global Micro-regulatory Frameworks", and "The
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 231  July 30, 2018
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])
*CFIUS reforms must be reformed*
* <#m_-6592116282805325755__edn1>
Theodore H. Moran** <#m_-6592116282805325755__edn2>

The Committee on Foreign Investment in the United States (CFIUS) screens
proposed takeovers of US companies by foreign companies to assess whether
such acquisitions might threaten US national security.

Principal CFIUS concerns are: 1) leakage of sensitive military or
intelligence or dual-use technology to foreign companies or their home
country governments; 2) provision of information technology (IT) access so
that foreigners might conduct surveillance or sabotage via back-doors in IT
systems; and 3) offering foreign companies or their home country
governments quasi-monopoly control over goods and services that they may
deny to US users.

Foreign investment in the US—including foreign investment via
acquisitions—is generally very beneficial to the US. Foreign companies
bring good jobs, cutting edge technology and high quality-control
procedures to the US economy. The US-based employees of foreign-owned MNEs
earned an average income of US$79,979 in 2013.[1]
<#m_-6592116282805325755__edn3> 12% of all US productivity increases over
the past two decades have come from spillovers from foreign companies
investing in the US domestic economy.[2] <#m_-6592116282805325755__edn4>

The CFIUS process is chaired by the US Treasury, which is disposed to
welcome inward FDI in all forms unless plausible threats to US national
security can be clearly identified. CFIUS rejections of foreign
acquisitions are quite rare—only four in the past twenty years—although
companies sometimes withdraw their acquisition proposals when they are
unable to mitigate CFIUS concerns.

Congress and the White House are now proposing a fundamental “reform” of
CFIUS regulations, via the Foreign Investment Risk Review Modernization Act
(FIRRMA). These new “reform” recommendations would change CFIUS in three
problematic areas.

First, FIRRMA would replace CFIUS’s traditional narrow approach to
identifying potential national security threats from specific acquisitions
within industries to identifying entire sectors of the US economy where
foreign acquisitions from countries such as China and Russia should be
prohibited. For example, CFIUS has previously rejected Chinese acquisitions
of semiconductor companies that possessed technology crucial to improving
anti-missile radar systems (gallium nitride technology). Under FIRRMA, the
entire semiconductor industry could be placed out of bounds for Chinese or
Russian acquisitions.

Second, FIRRMA directs CFIUS to investigate “the potential effects of the
covered transaction on United States international technological and
industrial leadership in areas affecting United States national security,
including whether the transaction *is likely to reduce the technological
and industrial advantage* of the United States relative to any country of
special concern” (italics added).[3] <#m_-6592116282805325755__edn5>

Excluding whole sectors, industries and areas of the US economy from
foreign acquisitions, even if limited to foreign investment from a handful
of specific countries (China, Russia, possibly others), so as to prevent
erosion of US industrial and technological superiority, would unavoidably
put the US government in the business of designing a national industrial
policy.  This approach would require the US government to select some
sectors to be protected, while designating other sectors to be open to
foreign acquisitions.   Such a move opens the door to a political process
for which there is no logical end in sight.

Not only would the prevention of foreign acquisitions within whole
industries exclude valuable technological and managerial inputs from
external investors from entering broad segments of the US economy, but the
change in the US approach would justify copycat sector-wide or area-wide
exclusions on the part of other countries. Government authorities in Europe
and Asia might well adopt mirror-image policies to avoid loss of industrial
or technological leadership.  Once the rationale to prevent the erosion of
industrial or technological leadership becomes accepted as legitimate,
could the effort be limited to foreign acquisitions involving only a few

Third, FIRRMA proposes an extremely dangerous expansion of CFIUS
authority to review commercial sales, joint venture arrangements and normal
business licensing of intellectual property by US companies to foreigners.
FIRRMA permits CFIUS to screen commercial practices even if the sales and
licenses involved are not covered for national security reasons by the US
export control regime.

It is important that Congressional revisions of CFIUS authority be
refocused on specific national security threats that might plausibly arise
from individual acquisitions rather than excluding entire industries and
sectors of the US economy from foreign acquisitions, even if initially
limited to China and Russia.  At the same time, the objective of protecting
US industrial supremacy across the entire frontier of technologies in a
zero-sum manner should be rejected as the basis for US FDI policy.

Finally, CFIUS should be removed from interfering in normal sales and
licensing of US intellectual property, and joint venture business
relationships, when there is no national security rationale for prohibiting

In the end, a reformed-CFIUS should mirror the old-CFIUS, perhaps embedded
in a bit of non-substantive nationalistic rhetoric.

The result would be an appropriately calibrated balance between keeping the
US economy open to the benefits from foreign investment without
jeopardizing US national security in the process.

* <#m_-6592116282805325755__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-6592116282805325755__ednref2> Theodore H. Moran (
[log in to unmask]) is Nonresident Senior Fellow, Peterson Institute for
International Economics. The author is grateful to Mark Kantor, Daniel
Rosen and David van Boven for their helpful peer reviews.
[1] <#m_-6592116282805325755__ednref3> Theodore H. Moran and Lindsay
Oldenski, “How offshoring and global supply chains enhance the US economy,”
Peterson Institute for International Economics, *Policy Brief*, 16-5, April
2016, p. 2
[2] <#m_-6592116282805325755__ednref4> *Ibid**. *p. 5.
[3] <#m_-6592116282805325755__ednref5> FIRRMA, section 15.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Theodore H. Moran, ‘CFIUS reforms must be
reformed,’ Columbia FDI Perspectives, No. 231, July 30, 2018. Reprinted
with permission from the Columbia Center on Sustainable Investment (*
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Marion A. Creach, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 230, Carlos A. Primo Braga, “Foreign direct investment and ‘peak
   globalization’,” July 16, 2018
   - No. 229, John Gaffney, “Could BITs and BATs be combined to ensure
   access to human rights remedies?” July 2, 2018
   - No. 228, Felipe Hees and Pedro Barreto da Rocha Paranhos, “Investment
   facilitation: moving beyond investment promotion,” June 18, 2018

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *On September 27-28, 2018*, CCSI will hold its Annual Columbia
   International Investment Conference (CIIC) on “Multinationals in the Age of
   Sustainable Development: New Thinking on the Role of International
   Investment Agreements.” The Conference, taking place alongside the 73rd
   Session of the UN General Assembly in New York, will build on a multi-year
   effort to identify guiding principles and practical approaches for aligning
   international investment treaties with the Sustainable Development Goals
   (SDGs).* Registration is free but required...for more information, and
   to register, please visit our website here
   - *On September 26, 2018*, CCSI and the UN Sustainable Development
   Solutions Network (SDSN), under the guidance of Prof. Jeffrey Sachs,
   Special Advisor to the UN Secretary-General on the SDGs, and
   Laurent Fabius, President of the Constitutional Council of the French
   Republic, will host a conference to discuss the Global Pact for the
   The Global Pact for the Environment aims to unify international
   environmental governance and codify a human right to the environment in
   international law. *For more information, and to register, please see
   our website here
   - *On September 26, 2018*, CCSI and the Sabin Center for Climate Change
   Law will host a conference on "Climate Change, the Courts, and the Paris
   Agreement." In recent years citizens, sub-national governments and NGOs
   have turned to litigation to hold governments and corporations accountable
   for their contributions to climate change. *For more information about
   this event, including registration, please see our website here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2018 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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