Last month, the US House of Representatives passed the Foreign Investment Risk Review Modernization Act with an overwhelming 400-2 majority, revealing strong bipartisan support among lawmakers determined to take concrete actions to defend against creeping encroachment of foreign capital on US democracy.
With strong support from the administration of US President Donald Trump, the act is expected to be reconciled with the US Senate version and passed by the US Congress next month.
The act not only symbolizes a critical milestone in US foreign-investment policy, but also implies Washington’s determination to substantially update and improve its defense mechanism to firmly protect its national security from the silent aggression of foreign governments under the guise of foreign investment.
Essentially, the significance of the act lies in its vigorous commitment to expand the authority bestowed on the Committee on Foreign Investment in the US — a Cabinet-level interagency entity responsible for reviewing foreign investments in the US in terms of national security — and to substantially reinforce the nation’s ability to safeguard its security from potential hazards caused by sophisticated and clandestine operations of malignant foreign investments.
From the perspective of US foreign-investment policy, it is not difficult to comprehend the rationale behind this new legislative initiative. Historically, significant refinements or reform of US foreign-investment policy have been largely driven by two elements: a massive shift in the US strategic-security environment and high-profile foreign-investment controversies.
This time is not an exception. The political momentum to improve the US’ ability to supervise merger and acquisitions of US companies by foreign entities (company or state) has been gradually accumulated for years, mostly due to the rapid surge of Chinese investment over the past decade.
In particular, Chinese outward investments with primary interest in purchasing high-tech US firms, as well as their enigmatic relationships with the Chinese Communist Party, have prompted US security concerns and drawn enormous political attention.
Moreover, intensified strategic tensions between the US and China in the South China Sea, as well as deteriorating trade negotiations between Washington and Beijing, have further aggravated the bilateral relationship, which has led to foreign investment becoming another arena of strategic confrontation between the two nations.
Last year, Trump blocked a Chinese company’s attempt to purchase an Oregon-based semiconductor company, Lattice Semiconductor. In May, he obstructed a Singaporean company, Broadcom, from acquiring a California-based telecommunications equipment company, Qualcomm.
The decisions were recommended by the foreign investment committee on grounds that they might impair national security, which showed that Washington has become more wary of foreign purchases of sensitive technologies.
Among all political factors triggering national security concerns, primary risks of foreign investment are mainly derived from two sources. The first is political relations between nations looking to make foreign direct investments and the host state. The second is whether the targets of foreign investment trigger any security concerns, such as in the case of defense-related industries, high-tech firms, critical infrastructure or national assets.
If the investor state is perceived as a potential rival, the host state has reasons to worry about political motivations, such as fifth-column effects, or political infiltration. Also, if a proposed foreign investment has a narrow focus on sensitive industries, it will certainly invoke concerns in the host state over the risk of leaks in the high-tech sector.
Apparently, Chinese investments in the US seem to fit these criteria, prompting relatively heavy scrutiny. It is not only because China is perceived as a strategic rival, but also because Chinese investments in the US are disproportionately concentrated in high-tech industries.
Last year, the first US National Security Strategy Report of the Trump administration unequivocally said that China is a primary strategic competitor of the US.
Furthermore, to achieve its ambitious “Made in China 2025” vision, Beijing has encouraged investments in US high-tech firms to swiftly obtain access to sensitive technologies.
Coupled with Washington’s antagonistic perception of Beijing, Chinese investments seen as sensitive are regarded by the US as politically motivated, rather than driven by economics. As a result, it is no surprise that anxiety over Chinese investments is the principal impetus behind the act.
To enhance and maintain the US’ strengths and advantages in the strategic competition with China, the act has substantially expanded the authority and functions of the committee in four ways:
First, it increases the committee’s authority by extending its coverage with “covered transactions.” These transactions include any real-property acquisitions with proximity concerns for national security reasons, as well as non-controlling minority investments in US firms.
Second, corresponding to the preceding point, the House version indicates that “sensitive transactions involving countries of special concern” will be subject to “covered transactions.” Specifically, “countries of special concern” refers to any nation facing export restrictions, or accused of being a state sponsor of terrorism. These concerns can reinforce surveillance on foreign investments by potential rivals.
Third, the House version dramatically revamps the committee’s practice of “voluntary filings” into “mandatory filings.” As a result, any investment of a “substantial interest” in a US business by a foreign person with direct or indirect connections with a foreign government is required to file a review.
Fourth, regarding technology transfer, the act instructs the US Department of Commerce to develop an authorization process for transfers of emerging or foundational technologies. These technologies identified in the inter-agency process will be reviewed by the committee as critical technologies. Hence, security of high-tech transfer will be tightened.
From the preceding illustration, it is apparent that US lawmakers have made enormous efforts to eliminate loopholes and prevent potential adversaries from undermining the US’ technological edge.
In contrast with the US’ determination to fortify its defense mechanism against China’s creeping investment assaults, Taiwan, as the primary target of Beijing’s multifaceted attacks, seemingly lacks adequate awareness of the overwhelming danger and is not constructing formidable protection against the possible hazards of Chinese investments.
The situation is dire for Taiwan.
Reports from the Wall Street Journal that indicate Taiwan’s technology secrets are under assault from China only reveal the tip of the iceberg regarding its politically motivated business operations here.
Taiwan has been on the front line in terms of suffering amid China’s numerous economic assaults. Nevertheless, due to the internal partisan divide over issues regarding cross-strait relations, it is rare to see the government take any concrete measures to bolster its self-defense mechanism against economic encroachment, even though Taiwan faces more Chinese economic assaults than the US.
However, given intensifying geostrategic tensions and the looming effects of a trade war between the US and China, there is no room for Taiwan to pleasantly maintain the “status quo” of its loose and outdated foreign-investment regulation regime.
Taiwan is likely to encounter a double threat from the two world powers.
To maintain quasi-ally status with the US, Taipei needs to demonstrate that it can curb high-tech leaks to China, so it can convince Washington to keep Taiwan on its list of nations to which it makes high-tech transfers.
However, thwarted by a more restricted US investment policy, China will turn to Taiwan by providing more favorable incentives to attract high-tech talent.
If not handled prudently, Taiwan faces losing high-tech transfers from the US, while Chinese incentives produce a cross-strait brain drain.
If these two threats materialize, Taiwan will be caught in the middle and whole industries will be in jeopardy.
To prevent this, the government needs to be resolute in taking necessary and proactive measures to revamp its foreign-investment regulation regime for both outward and inward investments. It needs to boost its oversight capability and restrain prevalent technology theft by and leaks to potential enemies.
The spirit of the US legislation is a vivid reminder and a wake-up call for Taiwan, while it also shows that democracy is not merely a way to improve human dignity, but is also worth defending against covert capital encroachment by foreign governments.
Eric Chiou is an associate professor of international political economy at National Chiao Tung University.
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