The US Senate and Congress are jointly moving to toughen regulation on incoming foreign direct investment (FDI) amid the ongoing US-China trade war. This development contrasts with the recent agreement reached between the Trump administration and ZTE, a Chinese communications firm, allowing ZTE to re-establish a crucial supply chain that had been embargoed earlier in the US-China trade war.
U.S. legislators have now finalized this year’s National Defense Authorization Act (NDAA), a broadband piece of legislation in which the Foreign Investment Risk Review Modernization Act (FIRRMA) is included. Presently, CFIUS, the government committee tasked with evaluating the national security implications of foreign investments in the US, only has the authority to review and recommend termination for majority stake acquisitions of US companies from abroad. However, FIRRMA will expand CFIUS’ jurisdiction beyond acquisitions to include mergers, joint ventures, minority position investments, and real estate deals near national security facilities, thereby reducing the openness of US markets to some foreign investment.
Despite the significance of this policy shift, many US politicians have criticised FIRRMA for not going further. In the Senate’s earlier drafting of FIRRMA the act would have also blocked Trump from lifting the trade ban on ZTE; however, that clause was abandoned due to pressure from the White House. Nevertheless, the legislation still contains targeted provisions to limit the relationship between Chinese telecom firms like ZTE and the US government. Such provisions reflect the U.S. government’s concern regarding Chinese efforts to obtain intellectual property, source code, and know-how from U.S. firms.
Since Trump’s inauguration, CFIUS has already lead to the termination of nearly $125B USD in incoming FDI. Of the terminated deals, the largest was the forgone acquisition of Qualcomm by Broadcom, worth $117B (Bloomberg). Now, with their enhanced regulatory powers, more deals will come under CFIUS’ scrutiny which is likely to result in fewer approvals for foreign investments in the US. Investors and investment-oriented institutions are monitoring these developments closely; notable among them is the National Venture Capital Association, who has recently warned their members that “FIRRMA may change investment patterns and deal structures [in the US] moving forward.” (NVAC).