In August 2023, President Joe Biden unveiled plans to implement the first-ever screening of outbound U.S. investments in sensitive technologies, citing national security concerns related to China’s military-industrial complex. Businesses with Chinese ties are now bracing for the final rule, expected before the end of the year.
The executive order focuses on limiting U.S. investments in China in sectors like semiconductors, quantum computing and artificial intelligence. The U.S. Treasury’s draft rule, which was open for public comment until August 2024, clarifies the scope of these restrictions, which will apply to greenfield investments, joint ventures and U.S.-controlled foreign subsidiaries.
The restrictions come at a time when industry groups have expressed worries about growing protectionism and the impact on U.S. competitiveness.
The 2024 Inbound Investment Survey, released in June, polled members of the Global Business Alliance, an advocacy group for international companies doing business in the U.S. Thirty-six percent of respondents believe the U.S. business climate is worsening, with only 5% seeing improvement. This dip in confidence is attributed to several factors, including regulatory changes and protectionism.
Among the top concerns highlighted in the survey was the perceived politicization of cross-border investment reviews. Companies fear these changes could adversely affect their operations and future investment decisions.
U.S. policy for screening inbound foreign investment has moved toward tighter oversight in recent years, especially with regards to Chinese investment, and this trend will likely continue regardless of the winner in November. Screenings are handled by the Committee on Foreign Investment in the United States, a federal interagency committee which is tasked with evaluating the national security implications of inbound foreign investments.
Legal experts have warned of uncertainties in how the criteria around outbound investment could be applied and of unintentionally negative effects on U.S. businesses or investors that could fall afoul of the restrictions.
“The final rules still have to come out, but the draft rules have a lot of questions that are open and unanswered,” says Jonathan Gafni, senior counsel and head of the U.S. foreign investment practice at law firm Linklaters in Washington, pointing to uncertainties about how the definition of what constitutes a Chinese company is interpreted.
“At a high level, this is about U.S. investment in Chinese activities relating to the sensitive technology sectors that have been identified. But in practice, when you’re describing a business as being one that has a Chinese affiliate from which it derives 50% of its revenue, profits, operating expenses or capital expenditures, you have a lot of non-Chinese companies that could meet those criteria,” he says.
As an example Gafni posits the hypothetical case of a company in Texas that is designing a semiconductor technology that that could be deemed a sensitive technology. The design and engineering might be taking place in Texas but if, for example, the company has a joint venture in China that is fabricating or packaging the semiconductors, that aspect could be accounting for a greater chunk of the operating budget and therefore bring the company under the purview of the 50% rule.
“So you could have a US investor investing in this Texas company that happens to have a manufacturing role in China, and that could still be within scope. This raises the concern of possibly restricting investment in cutting-edge U.S. technology businesses,” Gafni says.
The Treasury Department has acknowledged the issue, and one of the questions posed in the notice of proposed rulemaking that came out in June 2024 is whether a US company could be effectively viewed as a Chinese affiliate under the draft rule.Among the questions is one that Gafni considers “a very existential one”, which is whether the order as written is too broad or too narrow. It also has created a “reverse CFIUS” situation whereby the body established to screen inbound investments for their national security implications will be reviewing outbound investment as well in situations in which parties ask for national interest-based exemptions.
As and when the final rules are released and whatever their final shape, technology-focused companies that do business in or with China will need to pay careful attention.
“Companies assessing the impact of the executive order on their business and operations should consider the potential impact of the outbound investment program on their businesses and investments,” warned law firm Hogan Lovells in a guidance note about the rules. “They also should take into account the possibility that U.S. allies and partners may adopt similar outbound investment restrictions.”