Committee on Foreign Investment (CFIUS)
National Security Creep in Cross-Border Investments
Editor’s Note: This post also appears on Just Security.
In the past year, the U.S. Committee on Foreign Investment in the United States (CFIUS) reviewed a record number of transactions for national security concerns. In July, the U.K. government blocked its first transaction under a new investment screening law—the National Security and Investment Act (NSIA)—that took effect in January. Also in July, the Biden administration endorsed the development of a mechanism to screen outbound investment from the United States to countries of concern, particularly China. Although Congress ultimately omitted a broad outbound investment screening mechanism from the CHIPS and Science Act passed in August, bipartisan support for such a mechanism suggests it may move forward in another form.
All of these developments are examples of what we call “national security creep”: the recent expansion of national security-related review and regulation of cross-border investments to allow government intervention in more transactions than ever before. As we explain in a forthcoming Columbia Law Review essay, national security creep raises both theoretical and practical questions for regulators, judges, deal parties, and scholars—all of which suggest that countries ramping up their national security review of investments should take care to do so thoughtfully and as transparently as possible.
The Expanding Reach of National Security-Related Investment Reviews
National security creep is part and parcel of a bipartisan shift to frame economic issues—among many others—in security terms. Both the Trump and Biden administrations have emphasized that “economic security is national security.” Scholars have termed this a move to a “new geoeconomic world order, characterized by great power rivalry between the United States and China and the clear use of economic tools to achieve strategic goals.” Competition between the United States and China has come to focus in large part on technology—both developing it and protecting it from cybersecurity threats.
Against this backdrop, three recent major developments relating to cross-border investment screening exemplify national security creep.
- CFIUS’s Increasing Scope: CFIUS has reviewed inbound investments for security concerns for decades, but the scope and frequency of its reviews are increasing. Two recent high-profile CFIUS actions have involved apps: CFIUS required a Chinese company to unwind its acquisition of the dating app Grindr in 2019, and former President Trump ordered TikTok’s Chinese parent company, ByteDance, to divest itself of Musical.ly in 2020. Clearly, CFIUS’s interest has expanded well beyond traditional security-related companies, like defense contractors. And in the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), Congress legislatively expanded CFIUS’s jurisdiction to include certain real estate transactions and some non-controlling investments in businesses involved with critical technologies, critical infrastructure, or sensitive personal data of U.S. citizens.
- Global Diffusion of CFIUS-Like Processes: National security screening of investments is not unique to the United States. Indeed, the U.S. government has actively encouraged allies to establish such screening processes. Numerous countries have established new or strengthened existing security-focused screening processes in the past few years. For example, the U.K. NSIA came into effect in January 2022, Australia overhauled its investment screening system effective in 2021, and the European Union’s adoption of a regulation on screening foreign direct investment in 2019 prompted numerous E.U. member states to impose screening mechanisms.
- Increased U.S. Restrictions on Outbound Investment: National security-based restrictions are also not limited to investment into the United States. The U.S. government has expressed increasing concern about investments flowing from the United States to China in particular. National Security Adviser Jake Sullivan has warned about “the impact of outbound U.S. investment flows that could circumvent the spirit of export controls or otherwise enhance the technological capacity of our competitors in ways that harm our national security.” The Trump administration imposed and the Biden administration continued (in somewhat amended form) a prohibition on investments by U.S. persons in entities linked to China’s military. Broader outbound investment screening has garnered bipartisan support and may be adopted in some form by the executive branch or Congress.
Taken together, these actions and the broad understandings of national security that underpin them render more deals than ever before subject to screening and even prohibition on national security grounds.
The Potential Role of the Courts
As the executive’s claims about national security push further into the economic realm, companies caught up in regulatory actions may turn to the courts. Indeed, some already have. Two Chinese companies won preliminary injunctions against their inclusion on the Trump administration’s investment ban list. Judges tend to defer to the executive branch on national security-related factual and legal claims, leading scholars to identify a phenomenon of “foreign affairs exceptionalism.” But will this deference survive as executive claims with respect to national security shift focus from issues like terrorism to long-term tech competition?
How judges approach the executive’s factual and legal claims in cases brought by companies will determine how much of an independent check courts are on executive uses of broad delegated powers from Congress. Three main possibilities emerge. First, judges might simply accept the executive’s claims about the new scope of national security issues and defer accordingly, with the result that the scope of deference to the executive quietly expands further into the economic realm. A second possibility is that the executive’s ever broader claims about what falls within the ambit of national security cause judges to become more skeptical of and less deferential to executive national security claims across the board, resulting in a constriction of deference. A final possibility is that judges begin to bifurcate their treatment of national security claims and cases, treating more traditional national security issues with their customary deferential approach, while treating economically focused national security claims more skeptically or less deferentially.
Judges’ approaches may well vary based on their judicial philosophies, but companies deciding to challenge (or not) security-related restrictions imposed on them will determine whether judges have an opportunity to weigh in at all. As security reviews begin to catch companies well beyond those that consider themselves key national security players, governments should be prepared for legal challenges and the possibility of a more skeptical, searching review by the judiciary.
Implications for Contract Theory
From a theoretical perspective, national security creep also adds new uncertainty to deals, upending well-understood notions about how regulation affects deal costs.
In the contract theory literature, many scholars have argued that the cost of a contract includes both its ex ante design costs and its ex post litigation costs. When regulators intervene, they almost always intervene ex ante. With very rare exceptions, for instance, antitrust authorities are involved in divestiture and other mitigation decisions before deals close. Moreover, the rationales and outcomes of regulatory intervention are often relatively transparent.
National security review, however, is different. CFIUS can review and unwind deals even after the deal closes, meaning that regulatory costs are not cabined to the ex ante design part of the deal timeline. Moreover, because CFIUS review is shrouded in secrecy, parties have a harder time planning for the uncertainty of national security review.
Longer Term Consequences of National Security Creep
Because the expansion of national security reviews of investment is recent and ongoing, the longer term consequences are difficult to predict, but policymakers should be mindful of some possibilities.
First, there is a risk of blowback from investment screening processes. For example, it is not clear whether or how the U.S. government, in urging other countries to establish CFIUS-like processes, has considered the risks and costs of such processes being used against U.S. investors or that U.S. companies have considered the risks to their investments from such global diffusion of screening processes. Another blowback risk comes from China. As more countries stand up investment screening processes with the more-or-less explicit goal of mitigating risk from Chinese investments, might China respond by forcing countries effectively to choose between Chinese investment and investment by the United States and its allies?
Second, because CFIUS review is so unpredictable—it can happen after a deal closes, there is relatively little public information about why or how CFIUS intervened in previous deals, and mitigations can rise to the level of ordering divestiture—deal parties might be motivated to hide CFIUS-triggering information from regulators. A related concern is that well-heeled deal parties can seek repeat-player counsel that can guide them through the CFIUS process, while less well-heeled parties cannot—leading to a market where access to national security clearance for deals is held in the hands of a few private lawyers.
Finally, what effect will national security creep have on overall deal volume? Intuitively, increased regulatory costs of national security reviews may chill deals involving countries imposing such review. That’s not necessarily a bad thing if the chill deters deals that would raise legitimate national security concerns, but the chill may not be so perfectly tailored. On the other hand, proliferation of security review processes could potentially decrease regulatory friction if clearance of an investor or a deal in one country were effectively transferable to allied countries.
Recent legal changes in the United States and abroad ensure that national security creep in investment review remains in significant flux. This post and our essay aim to begin a conversation about these developments by highlighting their potential domino effects and unintended consequences. In the near term, we offer some words of advice and caution.
We urge executive branch decision-makers to wield their tremendous authority judiciously. They should act to protect national security as necessary but also be aware of the possible ripple effects of their actions for a broad range of issues, including investor disclosures and treatment of U.S. investors abroad. Executive officials should also be more transparent and speak publicly about the nature of the national security concerns they are attempting to address with national security screening of investments. Doing so would help to bolster the legitimacy of regulatory actions. As the nature of national security concerns evolves, Congress, the judiciary, the public, and scholars all need to be part of the conversation.