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October, 2017

US Congress introduce bill tightening scrutiny of foreign investment

Original article: The Wall Street Journal

Two heavyweight Republican lawmakers plan to soon unveil legislation that would tighten scrutiny of foreign investment in the United States, notably Chinese investment in U.S. technology firms. The legislation - two identical bills, proposed by Senate Majority Whip John Cornyn and Rep. Robert Pittenger - would increase the authority of the Committee on Foreign Investment in the United States (CFIUS). 


U.S. officials are warily eyeing the recent surge in Chinese investment in the United States, which trebled to US$46 billion last year, according to research firm Rhodium Group. 


The Wall Street Journal points out that an important provision in the bill would expand the range of transactions vetted by CFIUS to "include joint ventures and other arrangements that require U.S. technology companies to provide intellectual property and support to a foreign person." 


Further, the bill would allow CFIUS to vet deals involving newer technologies developed by startups, not just established defense technology.  

Analysis:

China probably moved too hastily to strengthen its domestic semiconductor sector. In 2014, Beijing outlined a grandiose vision to become self-sufficient in semiconductor production, deploying Chinese companies on a mission to buy up the best integrated-circuit assets the world had to offer. Three years later, China doesn't have a lot to show for it - except a string of failed bids from Taipei to Idaho. 


Moves like Tsinghua Unigroup's - the state-backed private equity arm of Tsinghua University - abortive attempt to buy Micron in 2015 raised eyebrows in U.S. policymaking circles. Micron is the only U.S. company among the world's top ten chipmakers. Lawmakers began calling for closer scrutiny of Chinese investment in the United States. But instead of falling back, Beijing redoubled its efforts. In September, US President Donald Trump blocked the sale of Lattice Semiconductor to a group of Chinese investors. 


National security is a major concern for the U.S. Washington doesn't want Beijing gaining access to IC technology with military applications. Lattice Semiconductor, for instance, has previously sold chips to the U.S. military. The company says it no longer does. 


China's spotty record of IP protection is another area of concern for the U.S. American companies allege that they have been forced to share valuable trade secrets with joint-venture partners in exchange for access to the massive Chinese marketplace. Erecting stiffer barriers to Chinese investment in the United States is one way to respond to that problem. 


The American business community has mixed feelings about the bill. Unsurprisingly, firms with heavy China exposure worry it could elicit a harsh response from Beijing. Companies that do less business with China are more supportive, according to The Wall Street Journal. 


In previous newsletters, TIPG has highlighted the importance of reciprocity in the U.S.-China trade relationship. 16 years after China's accession to the WTO, its economy remains closed to many areas of foreign investment - certainly more so than the U.S.'s - while American companies in the PRC lament unfair treatment. Without a significant effort by Beijing to address these problems, it's hard to see how the U.S. will continue to welcome Chinese investment with open arms. 

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