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Tiptoeing the Line Between National Security and Protectionism: A Comparative Approach to Foreign Direct Investment Screening in the United States and European Union

  • Jason Jacobs

Abstract

Weaponization of state-backed, foreign investments by China is an emerging national security threat in the United States and the European Union. The U.S. and E.U. have espoused similar policy goals—to address the threat without closing their markets to foreign direct investment—while fostering increased cooperation between allied partners in screening transactions.

On the surface, the recent, China-specific measures taken by the U.S. and the investment screening framework adopted by the E.U. appear reflective of an alignment of those policy goals. Indeed, many commentators have suggested that is exactly what is happening. However, closer examination reveals a stark divergence. The U.S. has a robust screening mechanism that has evolved into a weapon of economic warfare. The E.U. meanwhile, remains a patchwork of conflicting—or nonexistent—national regulations overlaid by a comparatively toothless investment screening framework.

There is a tendency to attribute this divergence to structural differences between the United States and European Union. This in-depth comparison of U.S. and E.U. investment screening mechanisms exposes a split that goes beyond application and into actual policy. This revelation should temper expectations that the E.U. is equipping itself to block transactions that are of concern to the U.S.

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Copyright

Footnotes

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© Jason Jacobs 2019.

Footnotes

References

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2 John Crabb, The Qualcomm Defense: A Possible Hostile Takeover Tactic, Int'l Fin. L. Rev. (May 2, 2018, http://www.iflr.com/Article/3804380/The-Qualcomm-defence-a-possible-new-hostile-takeover-tactic.html); Accessed 3 Dec. 2018.

3 James K. Jackson, Cong. Research Serv., RL33388, The Committee on Foreign Investment in the U.S. (CFIUS) 7 (2018).

4 Michael Leiter et al., Broadcom's Blocked Acquisition of Qualcomm, Harvard Law School Forum on Corporate Governance and Financial Regulation (Apr. 3, 2018), https://corpgov.law.harvard.edu/2018/04/03/broadcoms-blocked-acquisition-of-qualcomm/.

5 Jackson, supra note 2, at 115; Cong. Research Serv., RL33534, China's Economic Rise: History, Trends, Challenges, and Implications for the United States 13 (2018).

6 Defense Production Act of 1950, § 721, 50 U.S.C. app. 2170.

7 See Crabb, supra note 1; (Qualcomm referred the transaction to CFIUS to resist Broadcom's acquisition efforts. This article does not address Qualcomm's strategy to avoid a hostile takeover or what is now being referred to as the “Qualcomm defense.”).

8 Leiter, supra note 3.

9 Briefing by Representatives from the Departments and Agencies Represented on the Committee on Foreign Investment in the United States (CFIUS) to discuss the National Security Implications of the Acquisition of Peninsular and Oriental Steamship Navigation Company by Dubai Ports World, a Government-Owned and -Controlled Firm ff the United Arab Emirates (UAE) Before the S. Comm. On Armed Services, 109th Cong. 2 (2006).

10 Eli Greenbaum, 5G, Standard Setting, and National Security, Harv. L. Sch. Nat'l Security J. (Jul. 3, 2018, http://harvardnsj.org/2018/07/5g-standard-setting-and-national-security/).

11 Letter from Aiman N. Mir, Deputy Assistant Sec'y, Investment Sec., Dept. of the Treasury, to Mark Plotkin & Theodore Kassinger, attorneys for Broadcom (Mar. 5, 2018) https://assets.documentcloud.org/documents/4407490/Letter-From-Treasury-Department-to-Broadcom-and.pdf.

12 See, e.g., Josh Horwitz, Trump Just Blocked What Would Have Been the Largest Tech Acquisition Ever—Because China, Quartz (Mar. 12, 2018) https://qz.com/1227509/trump-just-blocked-broadcoms-attempt-to-buy-qualcomm-because-china/.

13 Financial Risk Review Modernization Act of 2018, 50 U.S.C.A. § 4565 (2018) [hereinafter FIRRMA].

14 Farhad Jalinous et al., White & Case, CFIUS Reform Becomes Law: What FIRRMA Means for Industry, 1 (2018).

15 American Bar Ass'n, Homeland Security: Legal and Policy Issues 235 (Joe D. Whitley and Lynne K. Zusman, eds., 2009).

16 White House Off. of Trade and Manufacturing Pol., How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World, 12 (June 2018 https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf) [hereinafter Chinese Economic Aggression] (This Article will only focus on state-backed, technology-seeking investment and not the other methods identified in this source).

17 Cong. Research Serv., RL33534, China's Economic Rise: History, Trends, Challenges, and Implications for the United States 13 (2018).

18 Jalinous et al., supra note 13, at 5.

19 Commission Proposal for a Regulation of the European Parliament and of the Council Establishing a Framework for Screening of Foreign Direct Investments into the European Union, at 3, COM (2017) 487 final (Sept. 13, 2017).

20 See, e.g., Julien Blanquart & Reid Whitten, CFIUS for Europe? The New Screening of Foreign Investments in Europe, Global Trade Law Blog: Timely Updates and Analysis on Key International Trade Law Issues (Dec. 12, 2017), https://www.globaltradelawblog.com/2017/12/12/new-screening-fdi/; See also e.g., Jalinous et al., supra note 13, at 5.

21 See Michael Brown & Pavneet Singh, China's Technology Transfer Strategy: How Chinese Investment in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels of U.S. Innovation, Defense Innovation Unit Experimental (Feb. 2017). Although the report is unpublished, it is available as part of the Congressional Record as part of the Hearing Before the Committee on Banking, Housing, and Urban Affairs United States Senate, 115th Congress, First Session on Examining the Role of the Committee on Foreign Investment in the Intellectual Property & Technology Law Journal Volume 30 • Number 10 • Oct. 2018 United States, Sep. 14, 2017: https://fas.org/irp/congress/2017_hr/cfius.pdf; See also Zack Hadzismajlovic, FIRRMA Becomes Law, Reforming CFIUS, Export Controls, and Forever Changing Diligence in Foreign Direct Investment and Structuring of Public and Private Equity Deals, 30 No. 10 Intell. Prop. & Tech. L.J. 7, 1 (2018).

22 China's Economic Aggression, supra note 15, at 2.

23 Id.

24 Office of the U.S. Trade Representative, Findings on the Investigation Into China's Acts, Policies, and Practices Related to Tech. Transfer, Intell. Prop., and Innovation Under Sec. 301 of the Trade Act of 1974 115, 65 (2018).

25 China's Economic Aggression, supra note 15, at 17.

26 Derek Scissors, China's SOE Sector is Bigger than Some Would Have Us Think, American Enterprise Institute (May 17, 2016), http://www.aei.org/publication/chinas-soe-sector-is-bigger-than-some-would-have-us-think/.

27 China's Economic Aggression, supra note 15, at 17.

28 Foreign Sovereign Immunities Act of 1976, 94 Pub. L. No. 583, 90 Stat. 2891.

29 See Sindhu Sundar, Chinese Co. Ducks MDL Claims Over Defective Drywall, Law360 (Mar. 15, 2016), https://www.law360.com/articles/771877/chinese-co-ducks-mdl-claims-over-defective-drywall; (This paper will not address Chinese SOEs invocation of sovereign immunity to evade civil litigation).

30 U.S.-China Econ. and Security Commission, 2016 Annual Report, 102 (Nov. 2016, https://www.uscc.gov/sites/default/files/annual_reports/2016%20Annual%20Report%20to%20Congress.pdf).

31 China's Economic Aggression, supra note 15, at 11.

32 Id. at 18.

33 See Sovereign Investor Institute's Sovereign Wealth Center, http://www.soverignwealthcenter.com/fund/6/china-investment-coorporation.html#Wq1yNujwb-g.

34 China's Economic Aggression, supra note 15, at 18.

35 FIRRMA, supra note 12.

36 Hadzismajlovic, supra note 20, at 1.

37 Brown, Michael & Pavneet Singh, China's Technology Transfer Strategy: How Chinese Investment in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels of U.S. Innovation, Defense Innovation Unit Experimental (Feb. 2017). (Although the report is unpublished, it is available as part of the Congressional Record as part of the Hearing Before the Committee on Banking, Housing, and Urban Affairs United States Senate, 115th Congress, First Session on Examining the Role of the Committee on Foreign Investment in the United States, Sep. 14, 2017: https://fas.org/irp/congress/2017_hr/cfius.pdf).

38 Hadzismajlovic, supra note 20, at 1.

39 See 50 U.S.C. § 4565.

40 Jalinous et al., supra note 13, at 5.

41 Jackson, supra note 2, at 115.

43 50 U.S.C. app. § 2170.

44 American Bar Ass'n, supra note 14, at 238.

45 Jackson, supra note 2, at 115.

46 Executive Order 11858 (b), May 7, 1975, 40 F.R. 20263.

47 Id.

48 Pub. L. No. 94-472, Oct. 11, 1976; 22 U.S.C. § 3101(b).

49 U.S. Congress. House Committee on Governmental Operations. The Adequacy of the Federal Response to Foreign Investment in the United States. Report by the Committee on Governmental Operations. H.Rept. 96-1216, 96th Cong., 2d. sess., Washington: GPO, 1980. 166–184.

50 U.S. Congress. House. Committee on Energy and Commerce. Subcommittee on Commerce, Consumer Protection, and Competitiveness. Foreign Takeovers and National Security. Hearings on Section 905 of H.R. 3. 100th Cong., 1st sess., Oct. 20, 1987. Testimony of David C. Mulford. Washington: GPO, 1988. Pp. 21–22.

51 Pub. L. No. 100-418, Title V, Section 5021, Aug. 23, 1988; 50 U.S.C. Appendix § 2170.

52 Id.

53 50 U.S.C. app § 2170(e).

54 Jackson, supra note 2, at 115; Pub. L. No. 110-49, 121 Stat. 246 (2007).

55 Id.

56 American Bar Ass'n, supra note 14, at 237.

57 50 U.S.C. app § 2170(b)(1)(D)(iii).

58 Jackson, supra note 2, at 115.

59 Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. 31 C.F.R. Part 800.

60 National Defense Authorization Act for Fiscal Year 1993, § 837(a), P.L. 102-484, Oct. 23, 1992.

61 Dubai Ports World was created in November 2005 by integrating Dubai Ports International and Dubai Ports Authority. It is one of the largest commercial port operators in the world, with operations in the Middle East, India, Asia, Europe, North America, Latin America, and the Caribbean.

62 Briefing on the Dubai Ports World Deal before the Senate Armed Services Committee, Feb. 23, 2006.

63 Jackson, supra note 2, at 115.

64 Jonathan Weisman & Bradley Graham, Dubai Firm to Sell U.S. Port Operations, Wash. Post (Mar. 10, 2006) at A1.

65 Id.

66 Stephanie Kirchgaessner, U.S. Threat to Reopen Terms of Lucent and Alcatel Deal Mergers, Fin. Times (Dec. 1, 2006) at 19.

67 Jeremy Pelofsky, Businesses Object to U.S. Move on Foreign Investment, Reuters News (Dec. 5, 2006).

68 Pub. L. No. 110-49, 121 Stat. 246 (2007), and Exec. Order 13,456.

69 Pub. L. No. 110-49.

70 50 U.S.C. app. § 2170(b)(4)(D).

71 50 U.S.C. app. § 2170(b)(2)(B)(i)(I).

72 50 U.S.C. app. §§ 2170(b)(2)(B)(i)(II) and 2170(b)(2)(B)(i)(III).

73 50 U.S.C. app. § 2170(a)(6): “‘[C]ritical infrastructure’ means, subject to rules under this section, systems, assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.”

74 American Bar Ass'n, supra note 14, at 241.

75 50 U.S.C. app. § 2170(g).

76 American Bar Ass'n, supra note 14, at 245.

77 31 C.F.R. § 800.208 (2008).

78 31 C.F.R. §§ 800.216(a), 800.212 (2008).

79 Jackson, supra note 2, at 17.

80 American Bar Ass'n, supra note 14, at 245.

81 73 Fed. Reg. 70, 702 (Nov. 21, 2008).

82 31 C.F.R. §§ 302(b), 800.223 (2008).

83 Pub. L. No. 110-49.

84 Jackson, supra note 2, at 13.

85 Id.

86 Id.

87 Id.

88 50 U.S.C. app § 2170(e).

89 Jackson, supra note 2, at 18.

90 Pub. L. No. 110-49.

91 50 U.S.C. app § 2170(e).

92 Jackson, supra note 2, at 14; Ralls Corp. v. Comm. on Foreign Inv., 411 U.S. App. D.C. 105 (2014) (court had jurisdiction to review constitutional claims of corporation owned by Chinese nationals since statutory bar to review of President's determinations under Defense Production Act that the corporation's acquisition of companies now under foreign control threatened national security did not preclude review of constitutionality of process).

93 FIRRMA, supra note 12.

94 FIRRMA, supra note 12, § 1703, 50 U.S.C. § 4565(a).

95 Id. § 1706, 50 U.S.C. § 4565(b)(1)(C).

96 Jalinous et al., supra note 13, at 3.

97 FIRRMA, supra note 12, § 1709, 50 U.S.C. § 4565(b).

98 Hadzismajlovic, supra note 20, at 4.

99 FIRRMA, supra note 12, § 1723(1) & (2), 50 U.S.C. § 4565(p).

100 Id. § 1723(3)(B), 50 U.S.C. § 4565(p).

101 Jalinous et al., supra note 13, at 4.

102 FIRRMA, supra note 12, § 1718(1).

103 Id.

104 Jalinous et al., supra note 13, at 5.

105 FIRRMA, supra note 12, § 1713(3), 50 U.S.C. § 4565(c).

106 U.N. Conf. on Trade and Dev., World Investment Report 2016, Investor Nationality: Policy Challenges, at 95, UNCTAD/WIR/2016 (2016).

107 This article does not address the national-level foreign investment screening mechanisms of individual Member States.

108 The 12 countries are Australia, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Portugal, Italy, Poland, Spain, and the United Kingdom (this article does not address how Brexit will affect the proposed EU framework or how the new regulations will apply to UK-based investments post-Brexit).

109 Reflection Paper on Harnessing Globalisation, COM (2017) 240 (May 10, 2017).

110 Explanatory Memorandum on the Proposal Establishing a Framework for Screening of Foreign Direct Investments into the European Union, at 2, COM (2017) 487 final (Sept. 13, 2017) [hereinafter EC Explanatory Memo].

111 Commission Proposal for a Regulation of the European Parliament and of the Council Establishing a Framework for Screening of Foreign Direct Investments into the European Union, COM (2017) 487 final (Sept. 13, 2017).

112 European Commission Press Release IP/18/6467, Commission Welcomes Agreement on Foreign Investment screening framework (Nov. 20, 2018).

113 Jackson, supra note 2, at 28.

114 Regulation (EU) No. …/…, (COM(2017)0487 – C8-0309/2017 – 2017/0224(COD)) [hereinafter EC Framework].

115 EC Explanatory Memo, supra note 103, at 2.

116 EC Framework, supra note 107, art. 4.

117 Id. art. 6.

118 Id. art. 7.

119 Id. art. 8.

120 See, e.g., Blanquart & Whitten, supra note 17.

121 It is important to note that both FIRRMA and the EU proposal lay out very broad provisions and direct agencies and Member States to clarify and implement those provisions through regulations.

122 EC Framework, supra note 107, at 23.

123 EC Framework, supra note 107, at 21.

124 50 U.S.C. app § 2170(e).

125 Ralls Corp. v. Comm. on Foreign Inv., 411 U.S. App. D.C. 105 (2014).

126 Council Regulation 139/2004 of Jan. 29, 2004, On the Control of Concentrations Between Undertakings (EC Merger Regulation), art. 3(2), 2004 O.J. (L 24/1).

127 Commission Proposal for a Regulation of the European Parliament and of the Council Establishing a Framework for Screening of Foreign Direct Investments into the European Union, at 19, COM (2017) 487 final (Sept. 13, 2017).

128 Jackson, supra note 2, at 13.

129 FIRRMA, supra note 12, § 1718, 50 U.S.C. § 4565(1).

130 European Parliament, Report on the Proposal for a Regulation of the European Parliament and of the Council Establishing a Framework for Screening of Foreign Direct Investments into the European Union, at 5, (COM(2017)0487 – C8-0309/2017 – 2017/0224(COD))

131 Regulation (EU) No. …/…, p. 5.

132 This paper does not address how that caselaw affects the application of the EC Merger Regulation to portfolio investments.

133 Leiter, supra note 3.

134 EC Framework, supra note 107, at 20.

135 FIRRMA, supra note 12, § 1703, 50 U.S.C. § 4565(a).

1 © Jason Jacobs 2019.

Tiptoeing the Line Between National Security and Protectionism: A Comparative Approach to Foreign Direct Investment Screening in the United States and European Union

  • Jason Jacobs

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