By Clay Chandler and Eamon Barrett
August 18, 2018

President Trump this week signed into law a $717 billion defense spending bill. Media coverage focused on its largesse and the fact that, at the signing ceremony, Trump refused to acknowledge its namesake, Sen. John McCain. But a crucial feature of the legislation—a section codifying a profound shift in America’s openness to foreign investment—was mostly ignored.

The key investment changes were spelled out in the Foreign Investment Risk Review Modernization Act, (a.k.a. FIRRMA). That’s not a moniker that lends itself to catchy headlines. But make no mistake: FIRRMA is a big deal—for foreign firms seeking to invest in the U.S., and also for American companies with global operations, U.S. venture capital and private equity firms with foreign investors, and potentially anyone who sells or licenses technology developed in America to non-U.S. customers.

Financial Times columnist Rana Foroohar was among the few journalists to spot FIRRMA’s significance. The act, she noted, renders national security the dominant consideration in evaluating foreign investment in America and “strengthens the role of Department of Defense and the intelligence community in deciding who should and should not be allowed to invest in the U.S.”

FIRRMA doesn’t mention China by name. But it’s clear China is the main target. The Economist observes that, “while Mr Trump and China continue to spar over trade tariffs, FIRRMA reflects a fight over Chinese investment in American technology startups that is less visible but which nonetheless may have serious consequences for Silicon Valley.” According a report by the Rhodium Group, Chinese investment in the U.S. came to less than $2 billion in the first half of 2018, down from $29 billion last year and a record $46 billion in 2016. FIRRMA limits chances of a recovery.

The U.S. Treasury summarizes FIRRMA’s key provisions here. White & Case offers an analysis here. For global businesses, the two main things to know about FIRRMA are: 1) that it dramatically expands the authority and resources of the Committee on Foreign Investment in the United States (CFIUS), the interagency group that advises the president on when to block foreign takeovers of U.S. businesses on national-security grounds; 2) that it broadens CFIUS jurisdiction to include a far wider range of investments.

The big picture is that FIRRMA, which passed with bi-partisan support, reflects a fundamental change in America’s thinking about the free movement of capital. Until recently, the mantra among U.S. political and business leaders was that the benefits of foreign investment outweighed the risks; in a free market, American innovation would prevail. That confidence is gone. Matt Sheehan, writing on the Macro Polo blog, notes that FIRRMA takes an expansive view of what constitutes a threat to national security, instructing CFIUS to consider “whether the transaction is likely to reduce the technological and industrial advantage of the United States relative to any country of special concern.’’

In the new climate of fear, American as well as Chinese investors risk running afoul of FIRRMA. Foroohar wonders about SenseTime, “an AI company in Beijing with facial recognition software used with CCTV footage and digital payment systems [that] has received funding from Qualcomm, Silver Lake, Tiger Global Management and Fidelity.” The Economist points out that “Uber and Lyft, the messaging app Snap, virtual-reality firm Unity Technologies, cancer-testing firm Grail, financial-tech firm Sofi, augmented-reality firm Magic Leap and others, have taken Chinese money.” Says Bobby Franklin, president of the National Venture Capital Association: “FIRRMA will leave a broad mark.”

More China news below.

Clay Chandler


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