James F.f. Carroll, Back to the Future: Redefining the Foreign Investment and National Security Act's Conception of National Security

• Jurisdiction: United States,Federal
• Publication year: 2009
• Citation: Vol. 23 No. 1

COMMENTS

BACK TO THE FUTURE: REDEFINING THE FOREIGN INVESTMENT AND NATIONAL SECURITY ACT'S CONCEPTION OF NATIONAL SECURITY

Where we're going, we don't need [excessive restrictions on foreign investment].¹

INTRODUCTION

In an age of ever-widening globalization, national governments face an increasingly difficult balance between encouraging economically beneficial foreign investment and protecting industries seen as key to national security from foreign takeover. Governments often include economic factors in their definitions of national security, as the line between military and civilian industry is blurred by the globalization of dual-use technology. The perceived threat of terrorism after 9/11 as a result of acquisitions by Middle Eastern companies has only heightened American fear of foreign acquisitions. Yet as foreign direct investment in the United States accounted for over $1.5 trillion cumulatively in 2004,²the stakes in the dispute over which foreign transactions should be allowed are higher than ever.

Since the 1988 passage of the Exon-Florio Amendment³to section 721 of the Defense Production Act,⁴the executive branch of the U.S. government has screened foreign investment, including mergers and acquisitions, that could

"threaten to impair the national security."⁵President Reagan delegated the review of such transactions to the Committee on Foreign Investment in the United States (CFIUS), which was composed of the heads of several different federal departments, including Treasury, Defense and Commerce.⁶The amendment was passed in response to fears of Japanese takeovers of high-tech companies considered critical to the defense industrial base, most notably in the production of computer chips.⁷However, Exon-Florio did not define the term "national security." Instead of a definition, the amendment suggested a few broad-based factors for the CFIUS to consider so that the amendment could apply to a wide variety of international transactions.⁸These factors included "the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the U.S. to meet the requirements of national security."⁹

Following 9/11, the CFIUS scrutinized transactions at twice the rate it had during the pre-9/11 decade.¹⁰This trend culminated in the Dubai Ports controversy, in which there was a huge political outcry over the attempt by Dubai Ports World (Dubai Ports), a United Arab Emirates (U.A.E.) company, to purchase control of the major operations of six American ports.¹¹Despite Dubai Ports passing all of the relevant CFIUS tests with flying colors, Congress responded with a vitriolic outburst against the sale, which ultimately

Id. resulted in the passage of the Foreign Investment and National Security Act

(FINSA).¹²

FINSA broadened the Exon-Florio factors that determine whether a transaction threatens national security by adding foreign control of "critical infrastructure," including "energy assets," to a list of national security interests that the CFIUS must insure are not impaired by any transaction.¹³This legislation further muddied the already unclear waters regarding which foreign investments are permissible and what constitutes a national security interest.

The broad, open-ended definition of national security creates four concerns. First, the interpretation of national security is driven by xenophobic political concerns, and it can be expanded to encompass whatever foreign threat moves the most votes at the time.¹⁴Second, the broad interpretation of national security creates investor uncertainty, deterring what could be economically beneficial transactions, due to the fear of public backlash, as was the case with the Dubai Ports deal.¹⁵Third, a vague interpretation of national security could lead to retaliatory foreign restrictions of American investment abroad.¹⁶

Fourth, a politicized reading of national security targeted against regions such as the Middle East, or rising powers such as China, could inhibit cooperation with the war on terror and other efforts, further contributing to the international isolation of the United States.¹⁷

This Comment will argue that the solution to these concerns is to amend

FINSA to limit the factors that determine national security in order to exclude

Id. protectionist or xenophobic influences and add certainty and predictability to the CFIUS process. Part I of this Comment will consider the general pre-9/11 history of the regulation of foreign investment and the application of Exon- Florio, with special attention given to the various congressional and executive interpretations of national security and the motivations behind those interpretations. Part II will analyze the change in the application of Exon- Florio after 9/11, in particular the Unocal and Dubai Ports controversies and the passage of FINSA as a legislative response. Part III sets out the problems inherent in a broad set of factors determining national security and proposes a narrower set of national security factors for the President to consider.

I. PRE-9/11 HISTORY OF REGULATION OF FOREIGN INVESTMENT

Before the 1980s, regulation of foreign direct investment was sporadic and largely driven by the First and Second World Wars.¹⁸However, in the 1980s, fears that Japan was purchasing large portions of the American economy led Congress to pass Exon-Florio, the first major systematic regulation of foreign direct investment in the United States.¹⁹President Reagan threatened to veto the original version of Exon-Florio, which would have restricted foreign investment on economic grounds.²⁰As a result, Congress limited the criteria for determining what constituted a threat to national security in the final version of Exon-Florio to a set of national defense-related factors that was still quite broad.²¹Despite the broad scope of Exon-Florio, investigations were relatively rare during the 1990s.²²

A. Legislative History of Restrictions on Foreign Direct Investment

Antipathy toward foreign investment has a long history in the United States. During World War I, Congress passed the Trading with the Enemy Act (TWEA),²³which allowed President Wilson to nationalize the assets of many German firms, especially those within the chemical industry, as well as their

American subsidiaries.²⁴At the same time, the United States also seized control of all foreign-owned or controlled radio stations because of fears that Germans were using the radio to communicate the positions of U.S. ships.²⁵

After World War I had come to an end, foreign radio stations were legally outlawed in 1927, and German firms and patents were auctioned off to American companies.²⁶German assets were seized again during World War II, but as a result of the previous seizures, there were relatively few German assets left within the United States.²⁷

After World War II, concerns about foreign investment in the United States were relatively minimal, since nearly every other major economic power had been devastated by the war and lacked capital to invest abroad.²⁸During the

1970s, foreign investment in the United States increased considerably, although a congressional investigation discovered that the investments were coming largely from Western allies, not from Middle Eastern countries as had been feared.²⁹Against the backdrop of perceived abuses of presidential power by the Nixon administration, Congress decided to limit the peacetime presidential authority given in the TWEA to restrict foreign investment by passing the International Emergency Economic Powers Act (IEEPA).³⁰This law allowed the president to seize foreign assets only when a state of national emergency was declared and required that those assets had to be returned to the foreign companies after the state of emergency ended.³¹

During the mid-1980s, the dollar was relatively weak, and many Japanese companies were flush with cash and looking to purchase U.S. companies.³²

Many American commentators feared that the United States was becoming owned by Japan, as Japanese competition purchased or drove out of business many prominent American corporations.³³Foreign direct investment skyrocketed from 1980 to 1990; its percentage of the net national wealth more than doubled from 1.2% to 2.7%.³⁴

The rapid increase in foreign investment produced a strong regulatory response from Congress.³⁵During the 1980s, congressional restriction of foreign investment was driven largely by populist, anti-foreign sentiment, rather than by special interest groups such as labor or domestic corporations.³⁶

Congressional backlash against foreign direct investment was especially potent in the districts that received the bulk of the new foreign investment.³⁷

Id.

Department Report, BUS. AM., Aug. 23, 1993, at 11.

In contrast, the executive branch supported foreign direct investment during this period.³⁸The executive branch had access to economic data indicating that foreign direct investment was not nearly as dangerous as popular opinion believed.³⁹Presidents were also understandably reluctant to cede power over foreign investment to Congress, as the executive branch felt that foreign direct investment benefited the U.S. economy and U.S. foreign policy goals.⁴⁰The struggle between the two branches set the stage for political debates over regulation of foreign direct investment for the next two decades.

In the 1980s, Congress was particularly concerned with Japanese acquisition of high-tech companies, specifically an attempt by Fujitsu, a Japanese company, to acquire an 80% interest in Fairchild, a U.S. semiconductor manufacturer.⁴¹The Reagan administration, under congressional pressure, reviewed the Fairchild merger pursuant to the IEEPA and likely would have approved it.⁴²But Fujitsu withdrew its offer due to the political pressure and negative publicity,⁴³foreshadowing the future ramifications of Exon-Florio.⁴⁴Blocking the sale under the IEEPA would have required a declaration of a state of...