The America COMPETES Act’s Outbound Investment Review Framework Threatens U.S. Global Economic Competitiveness

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Earlier this week, the House of Representatives introduced a bill, the America COMPETES” Act (H.R. 4521; the backronym is for ‘‘America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength’’) that is intended to bolster America’s competitive position vis-à-vis China. The bill includes a proposal called the National Critical Capabilities Review that would create a new legal framework to regulate outbound investment from the United States. Its overly broad scope risks reducing both outbound and inbound foreign investment in the United States.

In recent years, both Democratic and Republican lawmakers have become increasingly concerned about the Chinese government’s ability to develop dual-use military technologies and control global supply chains. Such worries have strengthened calls for increased scrutiny of U.S. investment in Chinese companies. To address this concern, the COMPETES Act proposes to create an interagency “Committee on National Critical Capabilities,” with the power to review and block certain outbound U.S. foreign investments if they harm “national critical capabilities.”

The proposed framework applies to any potential transaction by a U.S. entity if the transaction a) “shifts or relocates” any essential element “involving one or more national critical capability” to a “country” or “entity of concern” or bi) “could result in an unacceptable risk to a national critical capability.” Although the investment review framework does not explicitly mention China, it defines “country of concern” as a “foreign adversary” under the Secure and Trusted Communications Network Act—which includes China and Russia, according to the Department of Commerce’s definition, along with Iran, North Korea, Cuba, and Venezuela.

The legislation also provides the interagency committee the discretion to classify and review transactions in “nonmarket economies.” The Department of Commerce’s category of “nonmarket economies” currently includes Armenia, Azerbaijan, Belarus, China, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan, and Vietnam.

Despite the potentially sweeping nature of the proposed law, its statutory language provides remarkably few details about the business entities and transactions it seeks to cover. Although the legislation provides some examples of “national critical capabilities,” such as critical infrastructure or weapons systems, it gives the agency broad discretion to define those capabilities. To that end, the bill instructs the committee to make further recommendations after reviewing 11 industries—ranging from artificial intelligence to semiconductors to “aerospace, including space launch.”

This lack of specificity means that too many businesses could be subject to unnecessary national security scrutiny. According to the research consultancy the Rhodium Group, 45 percent of all U.S. foreign direct investment transactions in China between 2000 and 2019 would have potentially been subject to the committee’s investment review process. Even if the committee were to define these sectors more precisely, it creates the possibility that covered transactions will be defined too broadly—as the European Commission did while drafting the European Union’s Artificial Intelligence Act.

According to the Rhodium Group’s estimate, if the proposed law were to result in too many businesses submitting notifications for inconsequential deals, it would pose at least two challenges. First, identifying risky transactions from such a high volume of reported deals will be difficult and require significant regulatory agency resources, especially since it would require the interagency committee to decide within 60 days of receiving written notification whether it wants to review a specific deal.

Second, it would create unnecessary regulatory uncertainty for businesses conducting transactions with little or no national security implications. Like the Committee on Foreign Investment in the United States (CFIUS), the interagency committee will likely not publish details of the reasons behind a particular decision due to national security considerations. Moreover, prior decisions will not be legally binding on the committee. The lack of clear precedents will further contribute to the uncertainties that businesses will face under the new framework.   

Furthermore, as in the CFIUS framework, the legislation defines a U.S. person as a “person engaged in interstate commerce in the United States.” This broad and unclear definition is a thorny issue for CFIUS determinations, but the legal uncertainties will be even more pronounced for assessing the security risks of outbound investments. For example, if a German or Japanese company invests in U.S. robotics or AI startups, does the law then apply to the company’s investment portfolio outside the U.S.?

America’s outsized role in the global economy means that most foreign companies will continue to do business in the United States, even if some businesses are subject to cumbersome review processes. However, in the long run, if the U.S. foreign investment regime is perceived as overly restrictive and arbitrary, many firms will develop ways to avoid regulatory risks. One would be to avoid investing in American businesses with a “national critical capability” nexus, such as computer vision, robotics, and quantum computing startups. That risks reducing financing options for companies that need more investment to compete with their Chinese counterparts.