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PERSPECTIVE: FIRRMA to Decrease Chinese Investment in U.S. Amidst Trade War

Unfortunately for companies that actually experience technology transfer with Chinese partners, none of the actions taken by the Trump administration have helped their issue.

Sara Hsu
    Aug 09, 2018 11:05 AM  PT
PERSPECTIVE: FIRRMA to Decrease Chinese Investment in U.S. Amidst Trade War

The Foreign Investment Risk Review Modernization Act (FIRRMA) was passed by Congress this week in a move to prevent unwanted investment in the U.S. The act was bundled into the National Defense Authorization Act of 2019 and was meant to target Chinese investment in the U.S. technology.

The Trump administration previously said it would restrict new Chinese investment in the U.S. tech sector, but then backtracked on the action, saying it would rely on the FIRRMA law, or legislation to enhance the powers of the Committee on Foreign Investment in the United States (CFIUS).

The House and Senate passed versions of the bill, which would increase the authority of CFIUS in reviewing a wider range of investments. The bill was favored by both Democrats and Republicans, indicating growing bipartisan concern about Chinese participation in the U.S. tech sector. This concern was fueled by the report of the Office of the U.S. Trade Representative, which found that China has been attempting to obtain access to American technology through investment. Legislators are worried that China's increasing technological prowess may overshadow that of the U.S.

FIRRMA expands the ability of CFIUS to review real estate transactions in close proximity to national security facilities, non-controlling investments involving critical infrastructure or technologies or personal data, changes in the rights of foreign investors in U.S. businesses, and any transactions intended to evade scrutiny. 

The latter may include any type of investment that allows a foreign entity access to key technical information, seats on a board of directors of a business with sensitive technical information, or participation in significant decision-making of a firm with sensitive technology. CFIUS would have the power to require investors to file particular documents and charge filing fees, and the Commerce Secretary will be required to oversee the setup of export control restrictions on new technologies. FIRRMA also requires that the Treasury Secretary create new regulations to implement some aspects of this law.

While FIRRMA would look at investments from any country, it comes during a mounting trade war between the U.S. and China. President Trump recently raised the stakes on promised tariffs on $200 billion of Chinese. goods, stating that he would look into imposing a 25-percent fee rather than a 10-percent tariff. Together with the previously promised $50 billion tariffs, about half of goods exported from China to the U.S. would be adversely affected. 

In response, China said it would fight back with up to 25 percent tariffs on $60 billion of U.S. imports. China's next round of tariffs would include wood products, liquefied natural gas, and mineral ores. About half of U.S. exports to China will be impacted. The trade war was initiated to punish China for alleged technology transfer from U.S. to Chinese firms, and to reduce the deficit between the two countries.

It seems highly likely that Chinese investment in the U.S. tech industry will be discouraged as a result of the new FIRRMA law, which is expected to be signed by the president this month. Indeed, the new act requires that every two years, the Secretary of Commerce send a report on Chinese foreign direct investments made in the U.S. to CFIUS and to Congress.

From China's perspective, all of these actions are unwarranted. China denies any forced technology transfer, and has stressed that using threats is the wrong way to negotiate. At present, it appears that no talks between the U.S. and China are under way to resolve the issue. Trump's trade war has also damaged the profits of American high tech multinationals using components manufactured in China. China has noted that it is prepared to engage in an economic war, as the U.S. continues to carry out its aggressions.

Unfortunately for companies that actually experience forced technology transfers with Chinese partners, none of the actions taken by the Trump administration have addressed their issue. While curbs on Chinese firms investing in the U.S. may prevent some technology transfer to China, the original problem has ended without a solution. While curbs on Chinese investment in the U.S. tech sector may make sense in some circumstances, but they will also have the impact of reducing available funds for American startups.

To some extent, FIRRMA can be viewed as an additional action taken by the Trump administration against China, and comes as no surprise, given the U.S. President's hostile approach to dealing with the country. FIRRMA, in light of the U.S.-China trade war, appears to be yet another move by a hysterically anti-Chinese administration. 

There has to be a better way of dealing with another major world power than treating it as a threat. At this moment, it seems likely that the trade war will continue to escalate. Additional action taken against China would play to Trump's base, but will almost certainly fail to stand up to historical scrutiny.