President Obama’s Second Order on CFIUS
President Obama signed an order banning the sale of a US company to a Chinese firm. Here’s what it means.
December 5, 2016
On Friday afternoon, President Obama signed an order banning the sale of a U.S. company to a Chinese firm. It is only the third time since 1990 that a U.S. president has taken such an action. The action was taken pursuant to a recommendation by the Committee on Foreign Investment in the United States, an often-discussed but little-understood entity of the U.S. federal government.
Q1: What is CFIUS?
A1: The Committee on Foreign Investment in the United States (CFIUS) is an interagency body, chaired by the secretary of the treasury, that also includes the heads of numerous executive branch departments and agencies.
CFIUS was established by President Gerald Ford under executive order. In the 1980s, at a time when concern was growing about the impact of acquisitions of U.S. firms by Japan, Congress established CFIUS in legislation with a mandate of reviewing foreign investment in or acquisition of U.S. firms for national security risks. The resulting legislation, passed in 1988, was the Exon-Florio Amendment to the Defense Production Act of 1950.
More recently, Congress passed the Foreign Investment National Security Act of 2007 (FINSA), which expanded the remit of CFIUS to include critical infrastructure and added additional cabinet-level officials to the committee.
CFIUS is required by law to review foreign investments in the United States for potential risks to U.S. national security.
Q2: How does CFIUS work?
A2: CFIUS follows a rigid, legislatively prescribed timeline. Specifically, CFIUS has a 30-day review period to conduct initial examinations for all cases. If additional review and due diligence is needed, the case may enter a 45-day investigation period. At the end of those two phases, CFIUS must either certify that there are no unresolved national security concerns and approve a transaction, or it must send a transaction to the president for decision — likely with a recommendation to deny the investment. The president must make a determination within 15 days.
Q3: What did the president do on Friday?
A3: President Obama signed an order prohibiting the sale or transfer of a U.S.-based semiconductor company, AIXTRON, Inc. (whose parent company is German), to Grand Chip Investment GMBH (a German company whose parent company is Chinese).
Q4: What is the basis for the U.S. president to block a transaction between a Chinese firm and a German firm?
A4: Under U.S. law, the president of the United States has the authority to prohibit or cancel acquisitions of U.S. firms by foreign parties when the president deems the transaction may harm U.S. national security.
Q5: Has this happened before?
A5: This is only the third case ever blocked by a president under CFIUS. President George H.W. Bush issued the first presidential action under CFIUS in 1990. Bush ordered the divestiture of U.S. aerospace manufacturer MAMCO by China National Aero-Technology Import and Export Corporation (CATIC), a state-run corporation in China that produces aircraft for defense and export markets.
The second was an action taken by President Obama in 2012, where he ordered the divestiture of several wind farm companies from a firm, Ralls, owned by two Chinese nationals. The wind power companies acquired were close to a U.S. Navy base.
Of the 782 cases CFIUS has reviewed between 2008 and 2014, 52 required some kind of mitigation activity by the parties, 39 transactions were abandoned by the parties, and 1 reached the president and was blocked.
Q6: Only three cases have been denied, and all involve firms from China. Does this mean firms from China have a more difficult review process?
A6: No. CFIUS reviews do not focus on country of origin. The process focuses on whether a foreign government could have ownership or control of a firm in a way that could negatively impact U.S. national security.
John Schaus is a fellow with the International Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
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Originally published at www.csis.org.