Washington Strikes Back Against Chinese Investment
A new bill moving forward on Capitol Hill would expand regulators' ability to block Chinese acquisitions — and U.S. ventures abroad.
In the race to manufacture self-driving vehicles, there is no more important technology than lidar, which uses laser pulses much like radar to map the nearby area in minute detail. It is what lets a car tell the difference between a human leg and a branch. That’s the main reason Chinese internet giant Baidu made a big investment in American lidar specialist Velodyne in 2016.
But the technology isn’t just for civilian cars — it also makes U.S. military applications more lethal.
That Velodyne investment represents exactly the kind of increasingly aggressive Chinese investment to snap up cutting-edge technology that could give Beijing both an economic and a military advantage. And U.S. lawmakers, policymakers, and the Pentagon are all taking notice, desperate to find a way to make sure that China doesn’t vacuum up the technological edge that drives the American economy and gives the United States a military edge — for now. Similar alarm bells are ringing in Europe, with several countries scrambling to find ways to screen Chinese investment in high technology and critical infrastructure.
Bipartisan legislation gaining momentum on Capitol Hill and backed by the Trump administration would take aim at the avalanche of Chinese investment with an eye to protecting U.S. national security. By updating an obscure government committee that scrutinizes foreign investment, the legislation seeks to give Washington a chance to examine — and potentially block — joint ventures like the Velodyne investment that up to now have mostly flown under the radar.
Rep. Robert Pittenger, a North Carolina Republican, is one of the architects of the Foreign Investment Risk Review Modernization Act, which would overhaul the Committee on Foreign Investment in the United States (CFIUS). The measure represents a necessary response to China’s “well-coordinated, government-driven effort to exploit our laws to acquire military-applicable technologies used to modernize their army and intelligence agencies,” he argues.
“CFIUS is one of the few agencies we have to address national security ramifications in foreign investment, and it must be modernized to keep pace with current Chinese practices,” he told Foreign Policy.
Chinese foreign investment in the United States has skyrocketed in recent years, tripling in 2016 to $46 billion, according to the research firm Rhodium Group. Once focused on fossil fuels and old-school industries, Chinese money is increasingly flowing into advanced manufacturing, real estate and hospitality, and information and communications technology.
Despite a downturn last year, the scale of Chinese investment alarms some lawmakers, prompting new legislation which could come to the floor for a vote later this year.
But the bill lawmakers are proposing in both the House and the Senate doesn’t just update U.S. government oversight of incoming investments. It also takes aim at outbound investments and ventures by U.S. firms, especially investments that require the transfer of intellectual property, potentially expanding the scope of government oversight to cover a slew of high-tech transactions.
That expanded focus has horrified many tech firms and former government officials, who fear that it will choke off investment and hobble American firms trying to do business in cutting-edge sectors.
American tech giant IBM, for example, has vocally opposed the measure’s provisions regulating outbound investments from the United States into China, describing the bill as “the most economically harmful imposition of unilateral trade restrictions by the United States in many decades.”
Former government officials say the measure could close the door on America’s historically open investment relationship with the rest of the world. Christopher Smart, a former economic advisor to President Barack Obama and now at the Carnegie Endowment for International Peace, says the “swing toward taking a much tougher line on China” risks “overshooting.” The dilemma, he says, is “crafting tools that don’t cause more harm than good.”
“You can stop shoplifting at any store if you just don’t let shoppers in. You have to design security measures that strike the right balance,” Smart says.
Rod Hunter, who oversaw international economic issues on George W. Bush’s National Security Council and is now a trade lawyer at law firm Baker McKenzie, says updating investment oversight is needed, but he worries the effort to regulate U.S. technology going overseas through CFIUS is a step too far.
Hunter adds that in recent days the bill’s sponsors tweaked it to try to address those concerns, but it’s not clear the revised version will be any less onerous.
The purpose of the legislation is to come to grips with the shifting patterns of foreign investment — and beef up government oversight. CFIUS, the Reagan-era mechanism built to keep an eye on foreign takeovers of U.S. firms, has a limited scope, small staff, and relies on voluntary filings from firms doing deals. It hasn’t been updated in more than a decade, even as countries like China have become massive investors in sectors ranging from telecommunications to finance.
As currently set up, CFIUS reviews look narrowly at the national security implications of foreign takeovers, from the Dubai ports deal in 2006 to the attempted purchase of Lattice Semiconductor last year by a Chinese-backed investor. The committee is chaired by the Treasury Department but includes representatives from a dozen agencies as well as the intelligence community in considering whether foreign acquisitions present a threat to American security interests; deals are rarely blocked in practice.
The push to reform CFIUS comes as the often-obscure committee has leapt into the spotlight by threatening to scupper history’s biggest tech takeover, Broadcom’s $117 billion bid for U.S.-based Qualcomm, a chip maker. Singapore-based Broadcom has tried to dodge CFIUS scrutiny by moving its headquarters to the United States, but U.S. officials are still worried the deal could undermine American ability to compete in fifth-generation mobile technology.
But takeovers are far from the only big investment coming in, especially into critical technology sectors. Minority stakes, investments in early-stage firms, and startups typically don’t require CFIUS review. A February 2017 study by the Defense Innovation Unit Experimental — the Pentagon’s Silicon Valley outpost — found that China participates in 7 to 10 percent of investments in venture-backed startups.
“The U.S. government does not have a holistic view of how fast this technology transfer is occurring, the level of Chinese investment in U.S. technology or what technologies we should be protecting,” the report concluded.
And joint ventures that U.S. firms do overseas, like a landmark 2011 venture between General Electric and a Chinese aircraft maker, have also been exempt from scrutiny — until perhaps now. With the Pentagon worried that China is rapidly gaining access to advanced technologies that could improve fighter jets, boost cyber capabilities, or revolutionize artificial intelligence, those kinds of ventures are raising more eyebrows in Washington.
But investment and innovation in critical sectors is crucial for the U.S. economy, which makes over-regulating investment a risky proposition, former government officials say.
“The economics are clear: We should open the doors as wide as possible to foreign investment,” says Smart. “The politics are far murkier when dealing with an actor as large and ambitious as China, and when dealing with Chinese investors who may have a political agenda.”
Companies involved in complex joint ventures with Chinese firms argue that they have robust controls in place to prevent the transfer of sensitive technologies to China. In the case of the GE aviation deal, a company official familiar with the deal said those checks included elaborate computer safeguards, separate leadership and staff structures, and rules on where employees can go to work after the joint venture.
And for multinationals competing in a global economy, avoiding the Chinese market is seldom an option. When announcing the deal in 2011, GE executives argued they couldn’t just sit on the sidelines and watch as their competitors snapped up business in China.
Critics of the proposed legislation say it overshoots in trying to control the export of U.S. technology by potentially regulating a wide variety of transactions, joint ventures, and other deals — when sensitive technologies are already subject to review. Both the Commerce Department and the State Department have their own export controls, for dual-use goods and for military technology.
“Putting a technology control regime within CFIUS would be superfluous and counterproductive,” Hunter says. “At the very least, it would subject U.S. tech companies to long delays when trying to do international deals, a big competitive disadvantage.”
China’s race to acquire advanced technology is only going to accelerate. It aims to dominate 10 big sectors such as information technology, robotic manufacturing, and aerospace technology as part of its Made in China 2025 plan.
But there are more ways to gobble up advanced technology and intellectual property than pricey acquisitions; since China started its drive to boost its own innovation a decade ago, it’s also used cyberespionage and aggressively recruited foreign talent to devastating effect.
“If you are the Chinese government and trying to steal secrets,” say Smart, Obama’s former economics advisor, “there are easier and cheaper ways to do it than buying a company.”
Elias Groll is a staff writer at Foreign Policy. @EliasGroll