American Retirees Are a National Security Threat

CFIUS, long an acronym recognizable only to a handful of government officials and D.C. lawyers, has recently managed to steal a few headlines. The Committee on Foreign Investment in the United States, the interagency body that reviews foreign purchases of U.S. companies for national security concerns, features heavily in the new conference report for the fiscal 2019 National Defense Authorization Act. The report proposes overdue reforms, strengthening the U.S. government’s ability to scrutinize aggressive efforts by foreign actors to obtain access to sensitive technologies by purchasing U.S. companies, in whole or in part.

But the proposed reforms that will soon make their way to the president’s desk miss a crucial, slow-emerging but potentially high-impact question: What happens when foreign investors buy shares in U.S. companies from aging Americans who are increasingly selling their ownership in those companies to fund their retirements? This more gradual transfer of control can create national security risks for the United States that today’s emerging discussion of CFIUS has missed entirely.

Leading economists, such as the Wharton School’s Jeremy Siegel, predict that, just as American baby boomers are increasingly selling stock in U.S. companies to fund their retirement, foreign investors from emerging markets such as China and India are increasingly buying those stocks. That’s because, almost exactly as many Americans are cashing out, these foreigners are buying in, a trend reflected in their countries’ significantly higher domestic growth rates and per capita savings rates. Siegel and others predict that, as a result, by the middle of this century many U.S. companies will be majority-owned by non-American investors. These economists thus predict that majority ownership of key U.S. businesses—as well as leading European and Japanese businesses—will be in the hands of foreigners from emerging markets.

This is a very different kind of shift to foreign ownership from what the CFIUS review process has focused on for decades or would be prepared to tackle even under the proposed reforms. Thousands—even millions—of different foreign individuals, corporate entities, and investment funds will own small stakes in U.S. companies, with each individual investor’s holdings staying below the threshold that typically triggers U.S. government scrutiny through the CFIUS process (or otherwise). In turn, these many slow, small asset transfers do not raise the same types of national security concerns implicated in multimillion- or multibillion-dollar investments in (or purchases of) U.S. businesses by foreign entities of the type that made headlines recently when President Donald Trump blocked a proposed foreign purchase of the U.S. tech company Qualcomm. Those concerns generally include threats to the integrity of critical infrastructure, of corporate intellectual property, of military capabilities and readiness, and, ultimately, of U.S. technological advantages.

But diffuse foreign ownership of U.S. businesses creates its own type of national security risks. If (more likely, when) a majority of shareholders of Apple, Google, and IBM are non-U.S. people or entities, the composition, vision, and strategic direction of those companies could well change. Such companies, for example, might be more willing to enter into partnerships or joint ventures with dubious foreign businesses; pursue additional sales or expansion into foreign markets, raising national security concerns; or enter into strategic relationships with hostile foreign governments. Those companies also might be more aggressive in challenging lawful U.S. processes such as criminal or foreign intelligence-related subpoenas served on them by the U.S. government, and they might be more willing to make security or other concessions to foreign governments, including even greater openness to the intrusive requirements of Beijing and others. And shareholder voting—from the election of board members to proposed corporate changes, including the fundamental alteration of corporate structure and mission—could yield results at odds with U.S. strategic interests. That could even happen not because of deliberate foreign influence over such decisions but simply because of the different perspectives and priorities of foreign, as opposed to U.S., shareholders. Indeed, one of us has written previously about the national security implications of leading U.S. tech companies’ increasingly (and now overwhelmingly) non-U.S. user base. Non-U.S. shareholders pose yet another complex challenge.

This isn’t a shock to the system—it’s a slow-boiling frog. Addressing the challenge it poses is complex, given the implications of either failing to react or overreacting. Tackling this problem will require Congress and the president to balance difficult economic, national security, and foreign-policy tradeoffs. For example, the most direct way to prevent the gradual accumulation of ownership by foreign shareholders might be to restrict the extent to which non-American people or entities can purchase U.S. stock—but this is clearly a nonstarter from an economic perspective, as it would depress U.S. share prices by slashing the available investor base. Such a drastic approach could also destabilize global markets by incentivizing other countries to follow this lead and restrict U.S. investors’ access to stock ownership of their companies—obviously bad for American investors and the global economy as a whole.

At the same time, the tools currently available to CFIUS to mitigate national security risks—such as predicating approval of purchases on “walled-off” divisions of the company being bought or limiting the buyer’s ability to control certain aspects of U.S. operations—are unworkable where the accumulation of foreign ownership occurs gradually through individual stock purchases.

But to acknowledge that a simple solution isn’t apparent speaks to the difficulty of the problem, not to whether it’s one worth addressing. Perhaps the best first step is to ensure a thorough study of this trend and its national security implications. Existing Securities and Exchange Commission rules require public disclosure of investments in U.S. stock that exceed 5 percent of the voting class shares of the company. This rule, and perhaps other SEC rules focused on transparency, could be updated to enable greater public awareness of cumulative foreign ownership of U.S. companies, so that the gradual trend can be carefully tracked and studied over time. In parallel with that, national security officials from across the government could study the potential national security risks associated with diffuse foreign ownership, including those mentioned above. Armed with greater understanding of the economic trend and of its implications, U.S. officials would be far better placed to consider options for tackling this challenge.

As potential CFIUS reforms now receive unprecedented but justified attention, we must look ahead to the risks posed by the slow accumulation of foreign ownership of U.S. companies. Unlike the frog blissfully unaware of the dangers it faces in the gradually warming water, we can’t let this threat catch us unawares—until it’s too late.