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Foreign investment monitor

Where next for US-China relations?

He may have spent the early months of his presidency reversing much of his predecessor’s legacy, but Joe Biden is unlikely to stray too far from Donald Trump when it comes to China.

Not only have senior officials in his administration labeled China as America’s “greatest long-term security threat”, but the President himself has ordered an urgent review of critical supply chains to cut US dependence on its geopolitical rivals. At the same time, the Department of Commerce has allowed a sweeping Trump-era supply chain regulation that designates China as a “foreign adversary” to come into effect. Recent talks between the two countries in Alaska were as fiery as anything seen during the previous administration.

Concern over Beijing’s use of industrial policy and foreign investment to advance its strategic ambitions grew during the latter years of the Obama administration, with several Chinese deals formally or effectively blocked based on risks identified by the Committee on Foreign Investment in the United States (CFIUS). With President Trump equating economic and national security from the outset of his presidency – and bi-partisan concerns in Congress leading to an expansion of CFIUS’s remit – Chinese deal value dropped to around 15 percent of its 2016 peak by the end of Trump’s term (although Beijing was also putting the brakes on speculative acquisitions and transactions that didn’t align with its goals).

The Biden administration, thus far, has emphasized the need to ensure US technological leadership, although it remains to be seen whether this will lead to greater intervention in technology deals even where there is no clear nexus to the PRC. But when it comes to CFIUS’s substantive risk analysis of Chinese deals, the next four years are likely to look very much like the last. That said, Colin Costello, who until recently led the intelligence community’s analytic support to CFIUS before joining Freshfields’ Washington, DC office, believes there will be changes at the margins that businesses need to understand.

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Administration officials are expected to let CFIUS reviews run their course

“The Trump administration had almost no appetite for mitigation to address risk in relation to Chinese investment,” he says. “That’s unlikely to be the case under Biden, where CFIUS may be more willing to entertain discussions of mitigation in borderline cases unless the target involves advanced technology, critical infrastructure or sensitive personal data. Even there, senior administration officials will very likely let CFIUS reviews run their course rather than prematurely interjecting themselves into the committee’s deliberative process. Looking at the transactions prohibited by President Trump, some would almost certainly still be blocked today, but others might be cleared subject to significant mitigation. We’re also likely to see a return to CFIUS as a ‘black box’ organization. The committee has always been tight-lipped on ongoing reviews but towards the end of Trump’s term there was a lot of committee business discussed in the press.”

Partner Aimen Mir, who joined Freshfields in 2018 after 10 years in leadership positions at CFIUS, including four as its most senior career official, also highlights dramatic increases in the committee’s budget. “With more resources we may see more predictable timelines as CFIUS’s bandwidth expands,” he says. “But we’re also likely to see deeper review of all transactions filed with the committee. Mitigation may be pursued as an option in deals where previously the risk wouldn’t have warranted it, and more manpower may be devoted to scrutinizing non-notified deals – meaning more transactions could be called in for review post-closing.”

The desire to safeguard US technology, infrastructure and sensitive personal data has implications for all international acquirers, not just those with direct ties to Beijing. Colin stresses that companies considering such investments – particularly if they carry a mandatory filing requirement – must be mindful of how CFIUS analyzes deals. While the committee’s political appointees change with each administration, there is much less turnover among the career staff who perform most of the substantive risk analysis and formulate recommendations. This community has come to accept that commercial ties can represent a significant vector of risk, especially in transactions involving advanced technology that may have military applications. “A company might view a supplier relationship or joint venture with a Chinese company as a purely commercial matter, but CFIUS might view it as a potential route for technology transfer,” he says.