US Finalising FDI Screening Rules Outbound

The White House’s ‘reverse-CFIUS’ plan emboldens broader screening law

As the countdown to US President Joe Biden’s announcement of the world’s first outbound investment screening regime continues, a bipartisan group in Congress has spent the first weeks of May renewing attempts to enshrine a more extensive tool into law.

The White House is working on an executive order to “restrict certain US outbound investments in specific sensitive technologies with significant national security implications”, Treasury secretary Janet Yallen confirmed in a speech on April 20. It is rumoured to target advanced semiconductors, quantum computing and artificial intelligence, which could advance dual-use technologies in countries such as China.

Washington DC insiders tell fDi that the government has repeatedly promised that the executive order will be announced “soon”. In the meantime, its plans have emboldened bipartisan efforts to establish a broader screening mechanism into more robust legislation.

On May 3, senate majority leader Chuck Schumer outlined plans to introduce “China competitiveness legislation” which includes new government powers to screen and where appropriate halt the flow of capital to China’s high-tech industries.

Less than a week later, on May 9, a group of democratic and republican lawmakers reintroduced into the house of representatives the National Critical Capabilities Defense Bill. The bill proposes the establishment of a government agency to screen US investments into “foreign adversaries like China and Russia”. In addition to the industries expected to be covered by the White House’s executive order, the bill also includes large capacity batteries, critical minerals, active pharmaceutical ingredients and automobile manufacturing.

“When we invest American dollars in foreign competitors without any safeguards, we risk undermining our own economic might and national security,” senator Bob Casey, the democratic lead sponsor of the original bill, told fDi. “I’m working on bipartisan legislation to monitor these investments so we protect American manufacturing, stop giving our technology away and strengthen our national security.”

Gathering steam

A mechanism contained in legislation is more robust than than an executive order, which can be overturned by successive presidents. Efforts to get outbound screening into law since 2018, most recently as part of last year’s Chips and Science Act, have failed. But the forthcoming executive order could breathe new life into a legislative tool. “The Biden administration’s interest in moving this forward has further raised the profile of [outbound screening]”, a senate aide told fDi. “They’ve signalled that it is a priority for national security.”

According to Emily Benson, director at the Centre for Strategic and International Studies, there is “broad understanding” that an executive order “would be accompanied by a companion legislative act from US Congress”.

Early cracks

The prospective outbound mechanism has been dubbed ‘reverse-CFIUS’, after the Committee on Foreign Investment in the United States which scrutinises inbound investments. Although such rules are not new per se, the US would be the first major example of a country systematically screening outbound capital flows for national security risks.

Korea restricts foreign investments by companies that develop critical technology developed with its government subsidies, akin to the US’s Chips and Science Act. Meanwhile Japan reviews outbound investments in specific sectors such as weapons. But Berkeley Research Group managing director Harry Broadman said these regimes “are nothing like what the US is considering in terms of broad requirements, concerning the country’s view on security risks stemming from investing in certain other countries.”

Even before any formal announcements, cracks are emerging in the potential US regime. There are fears outbound screening could put US investors at a disadvantage to its foreign peers who are not subject to the same restrictions.

In addition, the original version of the bill, tabled in 2021, faced pushback from business groups who described it as “extremely broad” and “[creating] unworkable compliance concerns for businesses of all sizes”. This year’s version of the bill has stoked similar concerns. Nancy McLernon, president and CEO of the Global Business Alliance, said it “seems to drift beyond national security into economic protectionism”.