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Reciprocity in CFIUS Reviews Might Hit Chinese Deals Hardest

There appears to be growing momentum behind the notion that the Committee on Foreign Investment in the United States should incorporate investment reciprocity into its national security reviews of inbound transactions, a policy shift that would weigh the heaviest on Chinese buyers if enacted.

Investment reciprocity — the idea that the U.S. should block a foreign entity’s investment in a particular industry when a U.S. buyer would be similarly blocked in that entity’s country — has been on politicians’ radar since before Donald Trump took office.

Lawmakers from both parties have floated the idea in various pieces of legislation in recent years, and they’ve tasked the Government Accountability Office with evaluating reciprocity, among other principles, in the office’s ongoing review of the CFIUS process.

But now that the U.S. is led by an avowedly protectionist administration, especially when it comes to China, the push for reciprocity is likely to gain steam. Trump made no secret of his leanings on the campaign trail, criticizing in particular a Chinese investment group’s acquisition of the 130-year-old Chicago Stock Exchange, a deal that has since been cleared by CFIUS.

“[Trump] singled out the sale of the Chicago Exchange as one that was problematic, and he was highly critical of China in particular, which is in his view taking advantage of the free trade rules.” said Gregory Husisian, chair of Foley & Lardner LLP’s export controls and national security practice group. “He was also critical about how the U.S. is allowing companies to freely invest in the U.S. when those countries at home are restrictive about the investments they allow.

“It wasn’t like he came out and said, ‘Within the first 100 days I plan to amend CFIUS,’” Husisian added. “But he is clearly skeptical of trade and investment from China, and China really is the largest source of CFIUS filings, and that’s a trend that’s not going to go away.”

If the U.S. does decide to go this route, there are at least a couple ways the government could go about it. The president could direct CFIUS to focus more heavily on particular industries or use a broader definition of national security, as long as those directives don't stray too far from the regulations dictated by the Foreign Investment and National Security Act of 2007, or FINSA. Congress can also amend FINSA to expand either the range of industries susceptible to national security review, or even expand the review itself from one focused solely on national security to a review that more broadly considers foreign investments in the U.S.

But regardless of how it’s done, bringing investment reciprocity into the picture would affect Chinese buyers the most, especially in the current environment, when public suspicion toward the Asian powerhouse runs strong and inbound investments from China are at record levels. According to an analysis conducted by the Rhodium Group, Chinese buyers inked $44 billion worth of acquisitions in 2016, lifting the total amount of direct Chinese investment in the U.S. since 2000 to $109 billion.

“The devil is always in the details. If we do have it, it will not be targeted at a specific country, at least explicitly,” said Mario Mancuso, head of Kirkland & Ellis LLP’s international trade and national security practice. “As a practical matter, it’s impact will be greatest on China. China is a relatively — at least compared to the U.S. — closed domestic market.”

And investment reciprocity may be just one potential shift in CFIUS policy that would bode ill for Chinese buyers, and  even for European buyers with a strong presence in China.

The September letter from Congress calling for a review of CFIUS also urged the GAO to evaluate other possible changes, including the incorporation of a net economic benefit test, a requirement that Chinese investment in tech incubators be subject to review, and an expansion of the interagency committee to include the director of the FBI, the chairman of the Federal Communications Commission, the secretary of agriculture and the commissioner of the Food and Drug Administration.

All told, the request, which predates Trump’s election, reflects ongoing concerns about foreign direct investment from China and Russia, as well as foreign direct investment in the technology, communications and food sectors.

For now, while the GAO continues its review and the administration continues to staff the relevant agencies, foreign investors should brace for close scrutiny of their proposed transactions.

“In the near term, the White House is going to be the center of gravity [on higher profile deals] as the member agencies have yet to be fully staffed with senior political appointees. Practically speaking, that means that CFIUS reviews for higher profile deals will both move more slowly and be susceptible to greater White House scrutiny,” Mancuso said.