Uday Khanapurkar, Research Intern, Institute of Chinese Studies

Trade tensions notwithstanding, with the strengthening of the Committee on Foreign Investment in the United States (CFIUS)¹, little doubt remains that contemporary Sino-American relations are characterised by an “admixture of the methods of commerce with the logic of conflict” (Luttwak, 1990, p.19). ‘CFIUS 2.0’ is slated to exhibit an unprecedented quantum of oversight and finesse in conducting American economic statecraft with its sights fixed largely on China.

With the American foreign policy focus, having pivoted from counter-terrorism to strategic competition with a rising China, the recent iteration of CFIUS reforms² takes due stock of the USA’s changing priorities. Interestingly, nine out of the 11 takeover bids killed or abandoned at CFIUS’ suggestion under the Trump administration originated in China.

The renewed CFIUS process is now geared toward preventing Chinese appropriation, through equity investments, of American technologies that underpin American competitiveness or which the DoD considers sensitive to military superiority. With respect to critical technologies and infrastructure ³, CFIUS is now enabled to review investments by foreign persons irrespective of whether the stake obtained is controlling (upward of 50 per cent) or not. In doing so, FIRRMA aims to safeguard even against the theft of information made possible by exchanges of employees with China such as took place in the cases of Apple and IBM.

The bill also stipulates that parties to transactions involving the acquisition of a ‘substantial interest’ in critical technologies or infrastructure issue ‘mandatory declarations’ to CFIUS inviting a review. Notably, FIRRMA, in a bid to grant CFIUS with considerable discretionary authority in reviewing foreign investments, is peppered with terminological ambiguities with regards to what constitutes substantial interests, critical technologies, national security as well as US businesses.

Similarly, joint ventures with foreign persons have been brought under the purview of the CFIUS process, closing what was considered a major loophole exploited by Chinese investors to the US. The inclusion of joint ventures under ‘covered transactions’ fit for CFIUS review was vociferously opposed by lobbying groups representing beneficiaries of Chinese investments, particularly in the tech industry. Therefore, the ultimate inclusion of this element in the bill is testimony to the alarm that China’s “unslakeable thirst” for technological advancement inspires in the US policy-making circles.

Nevertheless, in strengthening the CFIUS process, the USA is invariably targeting the Chinese jugular. Acquiring advanced technologies is indispensable to Xi Jinping’s ambitious goal to sustain growth rates upward of 6.5 per cent until 2020 by evading the middle income trap and moving up the manufacturing value chain. An empowered CFIUS could possibly upset this plan, considerably weakening China’s, and in particular Xi Jinping’s, stature. Furthermore, FIRRMA is clear in calling for collaboration with US allies in the development of a regime intolerant to the theft of competitive technologies which would effectively isolate China. Combined with expected disruptions on the trade front, FIRRMA could prove to be the proverbial straw that broke the camel’s back.

Even so, CFIUS reforms are far from a strategic masterstroke by Washington on account of attendant risks that it presents to the American economy. According to Dov Zakheim, Senior Analyst, CSIS, insofar as the free flow of investment is salutary to the development of emerging technologies, investment barriers may starve Silicon Valley of much-needed funding. Overreach by CFIUS and the DoD (since it is the only agency capable of defining critical technologies and infrastructure) may culminate in the very outcome it sought to prevent – the erosion of American competitiveness in advanced technologies. The risk looms, even though consistently high stock valuations of tech companies are expected to render capital forthcoming. Secondly, the extent to which US allies will be willing to forego inward investments given the uncertainty engendered by recent trade tensions is suspect. Thirdly, it is suspected that restricting investments from China may cause it to resort to cyber espionage to secure commercial gain, negating the efforts of a deal struck between Presidents Obama and Xi in 2015 prohibiting the same.

With FIRRMA achieving bipartisan support in the US Congress and being incorporated within a must-pass bill such as the NDAA, that the American dispensation is approximating toward a concerted strategy to confront China in the economic domain is undeniable. This is part of a broader shift in American strategic thought which for the past few decades has principally eschewed the intermingling of commerce and politics in favour of free market values⁴. A stronger, more intolerant CFIUS combined with trade tensions means that the world’s two largest economies are embroiled in a two-front geo-economic tussle which promises to herald the continuation of “war by other means.”

Endnotes

1. CFIUS is an inter-agency body that screens foreign investments for national security risks.
2. Enshrined in the Foreign Investment Risk Review Management Act (FIRRMA) signed by the President of the United States on August 13, 2018.
3. Umbrella terms for enterprises and information that DoD deems essential to the preservation of national security as well as technological superiority.
4. Blackwill, Robert D. and Harris, Jennifer M. War by Other Means. Cambridge, MA: Harvard University Press, 2016.