James Jackson has prepared a six page primer on U.S. national security vetting of foreign investments (Foreign Investment, CFIUS, and Homeland Security: An Overview, Congressional Research Service, April 17, 2008).
Jackson develops an argument that last year's Congressional action to revise the process, the Foreign Investment and National Security Act (FINSA), is meant to address threats to something called "national economic security." He does so by ignoring the language of FINSA, and introducing language from a separate statute.
June 14: Since I wrote this, I've found that, while FINSA doesn't include a definition of "national security," or "national economic security" it does include a "clarification" among its definitions stating "The term `national security' shall be construed so as to include those issues relating to `homeland security', including its application to critical infrastructure." I'm not sure what this means, but I'm not as certain as I once was that the language of FINSA precludes something its proponents call "national economic security." See the text added to the end of this post.
"Economic security" is a problematic concept. Summarizing a discussion in Graham and Marchick (US National Security and Foreign Direct Investment), a national economic security test might create a general foreign investment review process that would inhibit foreign investments in the U.S.and provide other countries with an excuse to subject U.S.investments to similar review. It would be hard to enforce because it's extremely hard to define what “economic security” means. It would provide endless opportunities for companies to suppress competition by making spurious claims that a foreign investment in a competitor violates some "economic security" test. It would encourage politicization of the review process.
A quick word search of the final text of the bill (FINSA) shows that it does not use the term "'economic security." FINSA does include references to "critical infrastructure," and Jackson suggests that a concern with economic security can be introduced into this bill by using the definition of critical infrastructure from another piece of legislation (to anticipate the argument at the end of the post - FINSA uses a different definition of critical infrastruture than the legislation Jackson cites):
...After the September 11 terrorist attacks Congress passed and President Bush signed the USA PATRIOT Act of 2001 (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism).12 In this act, Congress provided for special support for “critical infrastructure,” which it defined as: systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.
This broad definition is enhanced to some degree by other provisions of the act, which specifically identify sectors of the economy that Congress considered as elements in the critical infrastructure of the nation....
The broad sweep of industrial sectors in the economy that fall within the terms “critical infrastructure,” “homeland security,” and “key resources” reflects a fundamental change in the way some in Congress view national economic security. From this viewpoint, economic activities are a separately identifiable component of national security and, therefore, should be protected from foreign investment that transfers control to foreigners or shifts technological leadership abroad. This viewpoint, however, has not been shared by some policymakers within the administration, who argue that including critical infrastructure and homeland security in P.L. 110-49 did not alter the overriding focus of the Exon-Florio provision on investments that directly affect U.S. national defense security. As a result, Congress and the Administration have sparred at times over transactions that CFIUS has approved over the objections of various Members of Congress. This clash of views essentially revolves around three long-standing issues: a) what constitutes foreign control of a U.S. firm?; b) how should national security be defined?; and c) which types of economic activities should be targeted for a CFIUS review?
Some Members also perceive greater risks to the economy arising from foreign investments by firms that are owned or controlled by foreign governments as a result of the terrorist attacks. The Dubai Ports World case, in particular, demonstrated that there was a difference between the post-September 11, 2001 expectations held by many in Congress about the role of foreign investment in the economy and of economic infrastructure issues as a component of national security. For some Members of Congress, CFIUS seemed to be out of touch with the post-September 11, 2001 view of national security, because it remained founded in the late 1980s orientation of the Exon- Florio provision, which views national security primarily in terms of national defense and downplays or even excludes a broader notion of economic national security.
These and other concerns about foreign investment underscore the significant differences that remain between Congress and the Administration over the operations of CFIUS and over the economic and security objectives the Committee should be pursuing. The proposed acquisition of P&O by Dubai Ports World sparked a broader set of concerns and a wide-ranging discussion between Congress and the Administration over a working set of parameters that establishes a functional definition of the national economic security implications of foreign direct investment. In part, this issue reflects differing assessments of the economic impact of foreign investment on the U.S. economy and differing political and philosophical convictions among Members and between the Congress and the Administration.
Congress defined "critical infrastructure" in FINSA, and it defined it differently than it did in the Patriot Act: "CRITICAL INFRASTRUCTURE- The term `critical infrastructure' means, subject to rules issued under this section, systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security." This does not mention economic security. There is no definition of or reference to economic security in FINSA. I don't think this was an accident.
Beyond that, there is something odd about the way this discussion develops. Jackson is clear that this is a concern by "some" congressmen. But how many? And why does he describe the views of this group? The use of "some" implies that there are "some" others who think something different; why doesn't he develop these views? Why do the views of some congressmen, not apparently incorporated into the language of this piece of legislation, create "significant differences... between Congress and the Administration..."?
Post revised on May 9, 2008. Post revised June 13, 14, 16.
Addendum, Jun 14: From a short note on the new regulations by Richard Willoughby and Tim Martin of Tory LLP (United States: The Expanding CFIUS Mandate For Review Of Foreign Investment In The United States, June 6):
The proposed regulations do little to clarify FINSA's potentially sweeping definition of "critical infrastructure." This term is defined in the proposed regulations as "systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular systems or assets of the entity over which control is acquired ... would have a debilitating impact on national security." Because FINSA defines national security to include issues relating to homeland security, critical infrastructure risks being construed as encompassing a broad swath of the U.S. economy, far beyond the usual notions of businesses related to national defense and intelligence. The guidance that is still to come is expected to assist in the interpretation of this concept.
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