Congress has acted to increase national security controls over merger and acquisition transactions involving China particularly with respect to technology firms. The Trump administration is also threatening China with even more tariffs.
The Committee on Foreign Investment in the US (CFIUS)
The Cfius has the job of protecting US economic interests by preventing any takeover by foreign companies in cases where the takeover could have negative security consequences on the US. Over the past decades the CFIUS and its antecedents have slowly gained more power, especially since the Korean war. However, this week it gained a whole lot more.The CFIUS gains much more powerThe Foreign Investment Risk Review Modernization Act of 2018 was rolled into the National Defense Authorization Act which had to be passed and was by Congress this week. The new act gives CFIUS new powers, more resources and staff, more oversite and also a mandate to massively increase its influence on any M&A process that involves foreign companies.The bill passed the Senate 87-10 on Wednesday as part of the $717 billion dollar Defense Authorization Act it will now go the President Trump for his signature. It will give the CFIUS more power to investigate and possibly block foreign deals.John Cornyn the Texas Republican who sponsored the bill said: “We cannot continue to let bad actors, like China, erode our national security advantage by circumventing our laws. This bill will modernize the process and help put an end to the backdoor transfer of dual-use technology that has gone unchecked for too long."How the powers of CFIUS are expandedA top priority of the legislation was to make it more difficult for Chinese venture capital firms to invest in US startups, and then pilfer intellectual property or acquire confidential user data.According to an article in Techcrunch, Congress achieved this is two ways: "First, the definition of a “covered transaction” has been massively expanded, with a focus on “critical technology” industries. In the past, there was an expectation that a foreign entity had to essentially buy out a company in order to trigger a CFIUS review. That jurisdiction has now been expanded to include such actions as adding a member to a company’s board of directors, even in cases where an investment is essentially passive. " This means that the typical venture capital round could now result in a Washington review, enough perhaps to keep Chinese venture capital out of the US system. By some measures, Chinese venture capital had outpaced that of the US during the first half of this year. This could have huge ramifications for US startups.The second new provision is that CFIUS must receive all partnership agreements that a US company signed with a foreign investor. This requirement of full further disclosure will give CFIUS a better picture of any risks a deal might create for national security.Provisions may take some time to come into effectIt could take many months for the provisions to come fully into force and some effects of the bill may not be felt until the end of next year. However, the message is clear.US and China continue trade warAs a result of US restrictions Chinese investment is skyrocketing in the EU while dwindling in the US. The US is also now considering increasing tariffs from 10 percent to 25 percent on $200 billion of Chinese goods. The Chinese commerce ministry immediately responded that it would place tariffs on $60 billion of US goods if the US followed through with its threat.While so far the tech industry has not suffered too much from the dispute, Apple said in a recent quarterly filing:“Tariffs could also make the Company’s products more expensive for customers, which could make the Company’s products less competitive and reduce consumer demand.”The Wall Street Journal also noted: "The U.S. turned up the heat Wednesday on China, with the Trump administration threatening to more than double proposed tariffs on imports while Congress passed a defense bill designed to restrict Beijing’s economic and military activity.The moves come as Beijing and Washington have failed to ease an escalating trade dispute, prompting the administration to seek additional leverage. "