On January 25, 2022, the House of Representatives unveiled the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength Act of 2022 (H.R. 4521) (“America COMPETES”), which is companion legislation to the United States Innovation and Competition Act (S. 1260) (“USICA”) passed by the Senate last summer. At over 2,900 pages, the legislation is an omnibus package of incentives and proposed funding for technology areas (principally semiconductors), supply chain proposals, investments in science, technology, engineering, and mathematics (“STEM”), and other pieces of legislation—all directed squarely at enhancing the United States’ competitive position against China.
Nestled within America COMPETES is a 25-page legislative proposal to create an inter-agency process—National Critical Capabilities Reviews—to review and regulate outbound investment (the “Outbound Review Process”). If enacted, the United States would become the first major Western advanced economy to adopt a broad-gauged outbound investment screening process, raising the prospect of a new era in national security-based reviews and restrictions of international investment flows.
To be sure, the concept of an outbound review process in the United States is not new—it first arose in early drafts of what ultimately became the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which updated the statutory authorities governing the Committee on Foreign Investment in the United States (“CFIUS”). More recently, both Senators and House Members have pushed legislation nearly identical to the proposal in America COMPETES, including an attempt last summer by Senators Bob Casey (D-PA) and John Cornyn (R-TX) to add an outbound investment review process as an amendment to USICA. The Casey-Cornyn proposal ultimately was not included in USICA, partly because of pushback by the U.S. business community based on its breadth, but the Biden Administration, notably in a speech last summer by National Security Advisor Jake Sullivan, has signaled potential support for an outbound review process. Thus, while it is by no means certain that the Outbound Review Process will be enacted, the prospect is more real than ever given potential bipartisan support within Congress and alignment between Congress and the Executive Branch.
Outbound Review Process
The stated rationale for an outbound screening process is to safeguard against the U.S. becoming dependent on China for critical parts of the supply chain and production capabilities. The concerns that motivated earlier attempts to regulate outbound investment, however, were centered on technology transfers to China, especially through joint ventures. Among some policymakers, there is a broader view that investments by U.S. companies in China that can help China advance its own capabilities, even if only through financing, should be curbed.
Against that backdrop, the Outbound Review Process, as proposed, is both sweeping in scope and lacking in specifics. As proposed, the legislation would establish a new committee—the “Committee on National Critical Capabilities” (the “Committee”)—that would be chaired by the U.S. Trade Representative (“USTR”) and composed of a number of Executive Branch Agencies. Modeled to an extent on CFIUS, the Committee would have the authority to review certain transactions that may impact “national critical capabilities.” Specifically, the Committee could review any transaction by a United States business that “shifts or relocates to a country of concern, or transfers to an entity of concern, the design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving one or more national critical capabilities,” or “could result in an unacceptable risk to a national critical capability” (a “Covered Transaction”).
As a definitional matter:
- Much like in the CFIUS regime, the term “United States business” means a “person engaged in interstate commerce in the United States.” The full scope of this is not clear and is a source of ambiguity and tension in CFIUS. This ambiguity would be more acute in legislation that, unlike CFIUS, does not have a 30-plus year history of practice, and that screens outbound capital flows. For example, as drafted, the legislation could arguably capture investments by U.S.-headquartered companies or financial sponsors that are made out of their foreign-based subsidiaries or funds.
- “Country of concern” means any foreign government or foreign nongovernment person engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons, or any non-market economy that is later identified by the Committee.
- “Entity of concern” means any entity “the ultimate parent entity of which is domiciled in a country of concern; or that is directly or indirectly controlled by, owned by, or subject to the influence of a foreign person that has a substantial nexus with a country of concern.” Thus, for example, the definition could capture companies from allied countries that have substantial minority shareholdings from, or operations in, China or Russia (or other foreign adversaries). (The term “substantial nexus” is not defined.)
- While the legislation would defer the full definition of “national critical capabilities” to implementing regulations, it suggests that at a minimum the term would mean “systems and assets… so vital to the United States that the inability to develop such systems and assets or the incapacity or destruction of such systems or assets would have a debilitating impact on national security or crisis preparedness” and could include articles in the following general categories, along with any others identified through implementing regulations:
- medical supplies, medicines, and personal protective equipment;
- articles essential to the operation, manufacture, supply, service, or maintenance of critical infrastructure;
- articles critical to infrastructure construction after a natural or manmade disaster;
- components of systems critical to the operation of weapons systems, intelligence collection systems, or items critical to the conduct of military or intelligence operations; and
- services critical to each of the foregoing.
Moreover, the legislation requires a study of the following additional industries to identify other critical capabilities:
- Communications, including electronic and communications components
- Aerospace, including space launch
- Artificial intelligence
- Water, including water purification
With respect to the review process itself, transaction parties would be required to file any Covered Transaction. How transaction parties would be expected to know whether their transaction is subject to a filing requirement—i.e., meets the definition of “Covered Transaction” —is unclear. It is also unclear whether filing would be required prior to a transaction, or if it could be submitted post-closing. At the same time, if parties fail to identify and file a transaction, the Committee would have the right to initiate a unilateral review of the transaction. The legislation also would require the Committee to review any transaction at the request of Congress.
Once parties file a transaction, the Committee would undertake a review to determine whether the transaction presents an unacceptable risk to one or more critical capabilities. If the answer is yes, the Committee can refer the transaction to the President for action, which could include suspending or prohibiting the transaction or imposing measures to mitigate the risk.
Questions and Issues Regarding the Proposed Legislation
The Legislation, as proposed, presents a number of significant issues that could pose barriers to implementation and compliance, including:
- Breadth – As noted, it would be extremely difficult for companies to identify transactions in scope and comply with the regulations. On one hand, it sweeps in transactions of any type and focuses on a huge swath of industries. According to an economic study by the Rhodium Group, the language, as drafted, could capture 45% of all U.S. transactions in China between 2000 and 2019. At the same time, it also creates an expectation that companies would independently be capable of undertaking an analysis and identifying transactions that “could result in unacceptable risk to a national critical capability.” Finally, as written, significant process details are omitted, which makes it difficult to understand the extent to which this regime would be applied in practice and how companies would need to adapt and respond in the new regulatory environment.
- Implementation – The legislation lacks significant detail on how it would be implemented and under what timeframe. Where details are included, they beg further questions as to how those details inform the overall process and objectives. For example, USTR is designated as the chair of the process, but there is no indication of how USTR would have the resources and capability to be the primary regulator. Indeed, investment-related matters are typically addressed through finance ministries, and the Department of the Treasury has expertise in this area already because of the CFIUS process.
- Potential Impact on Investment in the United States and Competitiveness of U.S. Businesses – A key reason that most countries do not regulate outbound investment, other than through targeted sanctions, is that investments abroad can return revenue that is used to re-invest at home. Indeed, many U.S. businesses are able to derive revenue from China, which they then redeploy to advance research and development in the United States. As the Rhodium Group report points out, the U.S. government’s own economic data underscores this point: “According to the [Department of Commerce’s Bureau of Economic Analysis], the operations of [U.S. businesses in China] produced $573 billion in revenue and $38 billion in profits for US multinationals in 2019.” Thus, regulation that would limit U.S. companies’ ability to drive revenue from China could ultimately have a harmful economic effect. There are related potential knock-on effects if businesses in other countries, including allies, do not face the same restrictions, including whether U.S. businesses may become less competitive globally.
To be sure, it is far from certain that the proposed Outbound Review Process in America COMPETES will be adopted. The issues identified above are glaring and certainly recognized and understood in policy circles. It also is almost certain that the business and investment community will push back against the breadth and uncertainty in the proposal. America COMPETES/USICA are massive pieces of legislation, and it may well be that this issue is pushed to the side or significantly narrowed in the interest of moving forward with the other less controversial aspects of the legislative package. However, even if the legislation does not pass this year, there is broad alignment in Washington on the issues that the legislation seeks to address, and an outbound investment process could be a rare area of agreement between a Biden Administration and a Republican-controlled Congress (as many expect will happen) in 2023 or 2024.
 Including the White House Office of Science and Technology Policy as well as the Departments of Commerce, the Treasury, Homeland Security, Defense, State, Justice, Energy, Health and Human Services, Agriculture, and Labor.
 Thilo Hanemann, Mark Witzke, Charlie Vest, Lauren Dudley, and Ryan Featherston, An Outbound Investment Screening Regime for the United States?, The U.S.-China Investment Project, January 2022, P. 14.
 Id. at 16.