The United States welcomes foreign investment. When companies from overseas buy into American firms, they provide a source of money that creates jobs and boosts innovation. But if the investor is Chinese, there is a wrinkle—increasingly, the wary eyes of regulators and intelligence officials want to pry into the question of whether the investment threatens U.S. national security.
The Trump administration and members of Congress say they want the government to have better tools to scrutinize Chinese investment in the United States. They worry that the billions of dollars that Chinese firms are annually pouring into U.S. companies aren’t just the normal give-and-take of international commerce. They fear that some of these investments could result in the Chinese government’s acquiring key U.S. technology, especially in fields with military applications, and access to sensitive U.S. infrastructure or strategic real estate.
Politicians from both parties are sounding the alarm bell. In a Senate Intelligence Committee hearing on global threats in February, Mark Warner (D-Va.) said he worried about Chinese companies that could “totally invade our market, particularly because so many of them are tied back to the Chinese government.” Marco Rubio (R-Fla.) concurred: “I’m not sure, in the 240-some-odd-year history of this nation, we’ve ever faced a competitor and potential adversary of this scale, scope, and capacity. . . . They are carrying out a well-orchestrated, well-executed, very patient long-term strategy to replace the United States as the most powerful and influential nation on Earth.”
Director of National Intelligence Dan Coats replied to Rubio that the intelligence community has “full awareness of what the Chinese are attempting to do on a global basis. There’s no question that what you have just articulated is what’s happening with China.”
Chinese companies are on a dramatic buying spree. In the last decade, U.S. investment by Chinese companies increased nearly 100-fold to $29 billion in 2017, according to the Rhodium Group, a consulting company that studies international investment. That surge is part of a global strategy, though it also reflects China’s growth as an economic power and the need felt by Chinese business leaders to diversify. Indeed, these investments fall all across the business spectrum: In recent years, Chinese companies bought Smithfield Foods, for instance, and acquired minority stakes in Cirque du Soleil and Snapchat.
Hardly anybody worries about Chinese control of the U.S. bacon supply or how the Red Army might wield a stable of half-naked acrobats or teenage selfies. More nettlesome is the issue of what happens when Chinese investors want to buy U.S. technology companies or unusual real estate.
The problem reflects our government’s complicated relationship with the Chinese regime. On the one hand, we look to China as a key trading partner and a friend that might help us rein in North Korea. American businesses themselves are investing in China, partnering with Chinese companies, and eyeing the country as a major source of growth. On the other hand, China is a strategic competitor that is challenging U.S. interests across Asia. It is pushing to dominate fields such as artificial intelligence, semiconductors, and robotics—all of which have obvious military applications—using just about any means necessary, including cyberattacks and economic espionage. And because of the fusion of the Chinese political, economic, and military spheres, the government can be expected to appropriate any technology it wants from its companies.
“The problem in China is that if you’re a Chinese company and the government shows up and says, ‘Help us out,’ you can’t say no,” notes James Lewis, a military technology specialist with the Center for Strategic and International Studies. The tricky part, he says, is trying to discern “when is it a legitimate investment and when is it a risk to national security.” Move too far one way, and you stifle commerce and subject whole industries to routine government review. Go too far the other direction, and you risk boosting the military capability of a potential adversary.
The government body tasked with this policing is the Committee on Foreign Investment in the United States (CFIUS). It is a federal panel composed of representatives from the major executive branch departments including Justice, Treasury, State, Homeland Security, Energy, and Defense. The committee, which is led by the treasury secretary, has the power to recommend that the president reject any deal that results in foreign individuals or companies taking control of U.S. companies if the deal could harm national security. If the panel recommends a deal be rejected—a rare move—the president must publicly announce his decision.
The number of cases CFIUS reviews annually has nearly tripled since 2009, to 172, according to the panel’s latest annual report to Congress, and a fifth of the deals reviewed involved a Chinese acquisition.
But even deals that don’t directly involve China can be rejected because of the country’s growing strength. Just this month, CFIUS said it is examining the proposed hostile takeover of U.S. semiconductor maker Qualcomm by Broadcom, a Singapore-based maker of computer components. The fear is that the deal would deprive the United States of a valuable domestic defense contractor, and Chinese firms would spring up to fill the void in the competition to build the next generation of wireless capability, known as 5G.
Sometimes, companies scuttle deals themselves when it appears from the review process that CFIUS will reject them. That’s what happened last month with the proposed purchase of Xcerra, a Massachusetts company that makes equipment for testing computer chips, by a Chinese-backed investment fund. In January, MoneyGram called off a merger with a subsidiary of Chinese e-tailing giant Alibaba.
In the last five years, the only presidential rejections on security grounds involved U.S. semiconductor companies targeted for acquisition by Chinese interests. In December 2016, President Obama denied a Chinese investment fund’s attempt to buy the U.S. operations of Aixtron, a German semiconductor company. In September, Trump rejected a proposed acquisition of Lattice Semiconductor by a Chinese-backed private equity firm. In response, a Chinese commerce ministry spokesman groused, with no apparent sense of irony, that government security reviews “should not become a tool for advancing protectionism.”
For an administration that has no qualms about slapping tariffs on allies and withdrawing from international agreements, applying more national-security scrutiny to sales of U.S. companies to potentially hostile countries would seem a natural move. A report last month by the Rhodium Group noted that under Trump, CFIUS “seems to have broadened its approach for reviewing Chinese deals, taking into consideration a broader array of criteria when assessing security risks.” But there are difficulties even in identifying the investments that might pose the greatest risk down the road.
Mergers and acquisitions involving big and established companies are easy to track. But sophisticated technology is being pioneered by tiny startups—many of which are desperate for money. “If the Chinese government finds some startup in Silicon Valley and a guy drops by and says, ‘I’ll give you $10 million,’ that’s a little below the radar,” says the American Enterprise Institute’s Derek Scissors, an expert on Chinese investment. “They can’t track everybody doing everything.”
The tech news site Recode reported last fall that a Chinese sovereign wealth fund and a major Chinese investment bank were both increasing their presence in Silicon Valley. The investment bank has opened a San Francisco office and “has a mandate to do more direct investing in startups,” Recode wrote.
In the Senate hearing on global threats, FBI director Christopher Wray said: “One of the bigger challenges we face is that because America is the land of innovation, there’s a lot of very exciting stuff that’s happening in terms of smaller start-up companies. A lot of them are less sophisticated about some of this stuff.”
Concerns about foreign companies buying U.S. real estate will remind many of similar worries about Japan in the 1980s. But with China today, the concern is that it is buying land near U.S. military bases. In a 2012 case, Obama rejected a Chinese acquisition of a wind farm near the Naval Weapons Systems Training Facility Boardman in Oregon, where the military tests unmanned drones and other aircraft. A similar case in 2009 involving a Nevada mining company near a Navy installation was withdrawn when it became clear it would not be approved.
Government enforcement has its limits. Under current law, CFIUS can reject transactions only if a foreign company acquires “control” of a U.S. company. It might be possible, then, for an overseas firm to buy a minority stake in a company and still receive access to sensitive information.
Peter Singer, who specializes in security issues at the think tank New America, says concerns about Chinese technological prowess should prompt a wholesale rethinking of how the government protects this sector of the economy. He says we need a “space race” mentality that does more than just try to stop China. He suggests spending more on science education and encouraging the best foreign scientists to come to the United States. “It’s not just what is China doing, it’s what are we not doing,” he says. “In a number of these areas, we don’t have an overall national strategy.”
Congress is trying to give the executive branch more power to reject foreign investments. A bill introduced by Senator John Cornyn (R-Texas), and cosponsored by five Republicans and five Democrats, has strong support from the administration. The House version, introduced by Rep. Robert Pittenger (R-N.C.), has 34 cosponsors, including 6 Democrats. The bill would revamp the CFIUS process and bring many more transactions under its microscope. Yet even if it passes, the bill won’t solve the problem of aggressive Chinese investment. It would merely empower the Trump administration to take a more active role in safeguarding U.S. security interests. The hard decisions would still lie ahead.
Tony Mecia is a senior writer at THE WEEKLY STANDARD.
