The Committee on Foreign Investment in the United States (“CFIUS”) has aggressively pursued its national security mandate under the Biden administration, firmly establishing itself as a key consideration in cross-border transactions. While it remains to be seen whether CFIUS will ultimately clear Nippon Steel’s acquisition of U.S. Steel, the perceived politicization of the review, the increased timeline for CFIUS reviews generally, and the aggressive posture that CFIUS has taken in some non-Chinese cases have prompted a sense of unpredictability among investors. But what will a second Trump administration (“Trump II”) mean for the CFIUS process?
CFIUS during the first Trump term (“Trump I”) had three key features: (1) diverging views across the administration on whether CFIUS should prohibit all Chinese investments, in part because Chinese economic competition was seen by some agencies as no less threatening than its strategic competition; (2) a shift in the dynamic within the Committee where trade agencies (like Commerce, USTR, and State), which historically had functioned as a check on security agencies (like DOD, DOJ, and DHS), often acted much more like security agencies, and (3) a record by the end of the term, notwithstanding the foregoing factors, of processing historically high case numbers, driving down withdraw/refile rates, and reducing the rate of mitigation.
The Biden Administration remained tough on Chinese investment, has continued to build a robust infrastructure to manage the CFIUS process, cleared some internal factors that were negatively affecting outcomes, and developed some clarity around when the declarations process is a feasible option. However, it has also applied CFIUS authorities towards other policy objectives (e.g., imposing data security requirements on companies) that have disproportionately affected non-Chinese investors. Treasury, as Chair, shifted its focus to enforcement, and with the trade agencies largely having given up their historical role of being a check on over-exercise of CFIUS authorities, the rate of mitigation and withdraw/refiles has climbed significantly.
With this backdrop what might we expect from Trump II?
- Personnel is policy, and the selection of political officials at Treasury will matter most. CFIUS has historically been, and likely will remain, a primarily staff-led, bottom-up process, and continuity among career staff likely will result in general continuity. Before Trump I, this continuity was not significantly affected by changes in administration or senior officials. Since Trump I, however, the priorities and approaches of senior officials across CFIUS’s member agencies have come to be much greater determinants of how the process works.
- Appointment of a more traditional Treasury Secretary with financial sector experience (like Trump’s first term Secretary, Steven Mnuchin), would portend a return to a more predictable and efficient process. The focus may remain on a narrower conception of national security, reprioritizing adherence to statutory timeframes, and with less CFIUS skepticism of investment from partners and allies, particularly financial investors.
- Appointment of an individual with a more protectionist agenda to be Treasury Secretary (like former U.S. Trade Representative Robert Lighthizer) could portend a process that is more expansive in its impact than ever before. If the Treasury Secretary is an individual who views open investment with skepticism and is a trade hawk, CFIUS may become more unpredictable for parties engaging in transactions implicating sectors with trade sensitivities, as discussed below.
- CFIUS may adopt a presumption of prohibition for all Chinese transactions. The next CFIUS leadership—whether ideologues that favor decoupling from China or process-oriented officials looking to find efficiencies—may seek to block all Chinese transactions notified to the Committee with an effective presumption that all Chinese acquisitions pose a risk unless proven otherwise. Given the significant decline in direct Chinese acquisitions of U.S. companies and the low tolerance for any China-related risk, CFIUS already blocks most Chinese transactions that come before it. However, an effective presumption of a block may still have an impact on Chinese acquisitions of non-U.S. companies that have a U.S. presence. Parties to such non-U.S. transactions will need to consider whether the U.S. operations are non-critical and can be carved out to limit risk that CFIUS action could cause the whole transaction to fail.
- Non-Chinese strategic investment may face increased risk if the Administration moves in a protectionist direction. Trump I pressed the bounds of national security authorities, including considering tariffs on European and Japanese automakers on national security grounds through Section 232 authorities of the Trade Expansion Act of 1962. If trade considerations become a factor in CFIUS’s review, it could have broader implications on strategic investors from countries that are U.S. partners and allies seeking to acquire U.S. businesses in industries with less apparent ties to national security. The loss of historical balance between trade and security agencies on the Committee would likely deepen the effects of this shift, were it to occur. Financial investors will probably get some relief, but strategic investors, even from partners and allies, may need to be more sensitive to the policy and political dynamics in Washington.
- CFIUS’s high profile may continue to prompt politicization of transactions. While the actual CFIUS process was fairly disciplined in Trump I, there was greater willingness to speak publicly about transactions and, in certain instances, there were uncharacteristic leaks by internal stakeholders to generate external political pressure. The Biden Administration has also reacted to political pressure in different ways, with the drive to block the Nippon Steel transaction being the most obvious, but delays in the process and increases in mitigation being the most consequential. The individual personalities in Trump II may significantly impact the extent to which the process is politicized, but it is becoming increasingly important for parties to think about government relations and public communications strategies for any potentially high profile transactions.
- The web of national security-based trade and investment regulations is likely to grow. In Trump I, the government not only secured the passage of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) significantly expanding CFIUS authorities, but it also promulgated a significant number of executive orders and rules targeting strategic and economic threats from China.[1]The Biden Administration built on each of these, further expanding the web of trade and investment regulation.[2] Though ostensibly targeting China risk, these rules have broad second-order effects, restricting transactions and, at a minimum, creating significant new compliance burdens. Trump II is likely to continue this trend, and with a potentially Republican-dominated Congress and general Democratic-Republican alignment on China issues, new legislation reinforcing a trend towards decoupling is likely. Because China is so deeply embedded in supply chains, it is important for companies to track these regulations in their early stages to anticipate and manage the potential impact of these rules.
[1] President Trump issued the executive order authorizing the Department of Commerce to restrict the importation and sale of information and communications technology and services tied to China, another focused on the bulk-power system, rules implementing legislation affecting government contractor use of certain Chinese information technology, and restrictions on U.S investment in certain publicly traded companies with ties to the Chinese military, among others.
[2] President Biden’s Administration proposed or issued rules, among others, related to transactions involving sensitive personal data and connected vehicles, in addition to promulgating sweeping new export control rules and, most recently, rules that restrict investment in China related to semiconductors/microelectronics, quantum, and AI. It is highly probable that Trump II will continue to identify areas of perceived gaps in protecting against Chinese strategic and economic threats.
