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New Regime for Outbound U.S. Investment Would Be First of Its Kind

Feb. 24, 2022, 9:00 AM

The House recently passed the America COMPETES Act, which is designed to boost U.S. global competitiveness. However, the bill contains a little noticed but significant provision to create a new U.S. government screening process for outbound investment.

If enacted in its current form after being reconciled in the Senate, the bill will have profound consequences for cross-border mergers, outbound U.S. investments, technology licensing, and possibly even technology exports.

Since 2017, a bipartisan coalition has focused on addressing national security risks associated with China’s pursuit of civil-military innovation by modernizing the regulatory regime for reviewing foreign investment into the U.S.

This effort led to the landmark 2018 Foreign Investment Risk Review Modernization Act, which expanded the jurisdiction of the Committee on Foreign Investment in the U.S. (CFIUS) for review of inbound foreign investments and created mandatory CFIUS notification requirements for certain investments involving critical technologies and significant personal data.

‘Reverse-CFIUS’ Process

Congress has now increasingly focused efforts on the creation of a new U.S. government review regime for outbound U.S. investment—a type of “reverse-CFIUS” process.

The House-passed COMPETES Act—the companion to the U.S. Innovation and Competition Act that cleared the Senate in 2021—will create a new interagency body called the Committee on National Critical Capabilities. This new CFIUS-like committee would be chaired by the Office of the U.S. Trade Representative to review the transfer of critical assets overseas.

Under the draft legislation, the committee’s mandate would be vast, covering “any transaction” that “shifts or relocates to a country of concern, or transfers to an entity of concern, the design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving one or more national critical capabilities.”

The definition of “country of concern” would sweep in not only covered investments in U.S. adversaries like China and Russia, but also potentially “nonmarket economy” countries like Vietnam and others in Europe and Central Asia.

Triggers for Review

The scope of “national critical capabilities” triggering review is similarly broad. Although specific products and technology that could trigger a review would be enumerated in subsequent regulations, the draft legislation identifies national critical capabilities as including:

  • medical supplies and medicine,
  • personal protective equipment,
  • articles essential to critical infrastructure,
  • articles critical to infrastructure construction following a natural or human-made disaster, and
  • articles critical to the operation of weapons and intelligence collection systems.

It also identifies industries that would be a particular focus: energy, medical, communications, defense, transportation, aerospace, robotics, artificial intelligence, and semiconductors, among others.

Similar to the current CFIUS process, parties to a covered transaction would be required to submit the transaction to the new committee for approval or potential blocking by the president.

The prospect for enactment of these provisions remains unclear. Over the coming weeks, the COMPETES Act must be reconciled with the Senate companion, which did not include an outbound investment review provision, and previous versions have been stripped from past legislation since at least 2018.

But support is growing across political parties and branches of government. The bipartisan U.S.-China Economic and Security Review Commission recommended legislation “to screen the offshoring of critical supply chains and production capabilities” to China in its 2021 report to Congress.

Also, National Security Adviser Jake Sullivan noted in a July 2021 speech that the Biden administration is “looking at the impact of outbound U.S. investment flows that could circumvent the spirit of export controls or otherwise enhance the technological capacity of our competitors in ways that harm our national security.”

Profound Implications

If something like the COMPETES Act outbound foreign investment regime is enacted into law, the implications for U.S. companies will be profound and may create substantial uncertainty around cross-border capital flow.

First, the bill’s coverage of “any transaction” that “shifts or relocates…or transfers” certain capabilities to countries of concern could cover not only new overseas mergers but also technology licensing, follow-on transactions for sustainment of non-U.S. facilities, and even exports of U.S.-origin goods.

Second, although transactions in allied countries are excluded, the implications for the U.S.-China economic relationship would be significant: the U.S.-China Investment Project estimates that 43% of U.S. investment transactions in China—or $110 billion in value—from 2000 to 2019 would have been covered by the new bill. The implications could be particularly severe for investment in the information technology, automotive, biotechnology, venture capital, and private equity sectors.

Third, it is unclear whether investments by foreign-registered funds of U.S.-based investment firms would be covered by the bill.

Fourth, it is unclear whether the legislation would trigger reciprocal responses in China, similar to its recent passage of antidote measures to block compliance with U.S. sanctions by Chinese firms.

Fifth, it could provide competitive advantages to investors from third countries who face no such restraint on outbound investment.

Given these significant ambiguities, one could imagine a pilot program being required before the legislation could take full effect.

Whatever the particulars of such a law, a new outbound investment review process would surely be an accelerant to the broader forces of economic decoupling between key sectors of the U.S.-Chinese relationship.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Jason Chipman and Marik String practice national security law at Wilmer Cutler Pickering Hale and Dorr LLP in Washington, D.C. They previously served, respectively, as senior counsel to the deputy attorney general at the Department of Justice and acting legal adviser of the Department of State.