President Trump has blocked the acquisitions of two American semi-conductor companies in large part due to security concerns. These actions were recommended by the Committee on Foreign Investment in the United States (CFIUS).
While CFIUS has said it may review foreign acquisitions of semi-conductor companies such as Qualcomm and Lattice, CFIUS should specify what other technologies and countries it considers to be relevant to national security. This would allow for more certainty about which technologies should be exempted from free trade. It would also foster an environment where companies can act with greater confidence with respect to mergers and acquisitions.
CFIUS includes the secretaries of federal agencies, including Treasury, State, Commerce, and Defense. It has been given the power to audit and review any foreign merger with, or acquisition of, an American company to ensure national security. M&As can be nullified by the President after a CFIUS review even after two companies have completed an agreement, so companies are encouraged to preemptively file papers with CFIUS.
The existence of CFIUS may raise alarms, as it is a group of top political appointees with the ability to unilaterally obtain private information and block free-market interactions, potentially leaving room for partisan bias or special-interests to influence policy under the guise of national security. However, CFIUS’s existence is necessary for national security reasons, in order to prevent valuable technology from being used against the United States. CFIUS has been judicious in its actions since its founding in 1975.
CFIUS has blocked few mergers and acquisitions. For example, between 2009 and 2015 only one out of 310 potential M&As investigated by CFIUS required a presidential decision. However, the growing tension between China and America since the election of President Trump is making American companies unsure about whether they will be considered important to national security.
The debate surrounding CFIUS is complex, leaving analysts divided. CFIUS seeks to strike a balance between private property concerns and national security. On the one hand, the ability to merge with and sell to whomever one wants is an essential aspect of private property rights. On the other hand, protection from foreign harm is a core duty of the federal government. What constitutes a national security risk can be vague, though, and would benefit from discussion.
The president decided to end Singapore-based Broadcom’s takeover of Qualcomm because of alleged national security concerns. The Treasury, which chairs CFIUS, stated in its March 5 press release that Broadcom could be used by Chinese actors to intentionally give Huawei, Qualcomm’s top competitor, a competitive edge in important technological advances. The New York Times and Wall Street Journal editorial boards were united in calling the decision a necessary evil, but other analysts were skeptical.
Jibran Khan at National Review asserted Broadcom wanted to continue Qualcomm’s research and development capacities, and Salvatore Babones made the case in Forbes that fears of Broadcom’s loyalties were too speculative, and that America could have benefited from some “Singaporean know-how.” It is likely that there was credible, and necessarily secret, proof to support the president’s decision. Barring such information, many are left uncomfortable by the invocation of national security.
For better or worse, semi-conductors are now considered a matter of national security. Going forward, CFIUS should give some clear direction to the business community about what other technologies it may deem reviewable. If China wishes to gain ground in advanced robotics, will CFIUS take a similarly tough stance?
A significant amount of social and monetary capital is at stake, even beyond the rejected Broadcom-Qualcomm merger, which would have been the largest in tech history. The President may feel emboldened to prevent more foreign M&As after Broadcom announced April 4 it would be moving to America despite its rejected bid to acquire Qualcomm. Attracting more foreign capital was among the aims of the Tax Cut and Jobs Act, but some foreign investment may have to come on President Trump’s terms, or not at all.
Gary Hufbauer, Senior Fellow at the Peterson Institute for International Economics, recommended in his January testimony to Congress that CFIUS should focus on narrowing its stated purview. The Foreign Investment Risk Review Modernization Act (FIRRMA), introduced late last year by Sen. Cornyn, would instead expand CFIUS’s bureaucracy and cast a wider net over American businesses. The bill has not been voted out of committee. Hufbauer said that CFIUS should identify the “critical technologies” and “countries of special concern” to national security. These details would save time and money. If the lists are too long or short, they could be adjusted.
A single CFIUS review can cost $1 million in filing fees and legal counsel necessary to navigate an opaque, complicated process. Attorneys sometimes resorts to reading the body language of government officials in interviews to gauge whether their client will be wasting money in pursuit of a merger or acquisition. A public deal rejected by CFIUS can harm a company’s brand, and critical time can be wasted resolving a legally-binding request CFIUS requests from companies to approve the deal.
Specifying what constitutes a critical technology and country of special concern to national security would save time and money. It would also make the national discussion about CFIUS more substantial, and less theoretical.
Joshua Hardman is a contributor to Economics 21
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