While much of the Senate Judiciary Committee’s meeting next Thursday, February 3, will focus on the pending Supreme Court nomination, the Committee is still scheduled to mark up and vote on the Open App Markets Act (S. 2710)—which purports to address unfair competition in the app market. This vote follows a particularly contentious markup of
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
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The Senate voted 68 to 32 to pass one of the most expansive bills on U.S. economic competitiveness in decades. The United States Innovation and Competition Act (“USICA”) is the culmination of three months of bipartisan negotiations after Majority Leader Chuck Schumer (D-NY) invited six Senate committees to propose bills to bolster U.S. leadership in research and development (“R&D”), technological advancement, and economic growth. Before the vote, Leader Schumer remarked that “the ambitions of this legislation are large, but the premise is simple. If we want American workers and American companies to keep leading the world, the federal government must invest in science, basic research, and innovation just as we did decades after the Second World War.” He applauded the bill for “paving the way for the largest investment in science and technology in generations.”
The convincing bipartisan vote to authorize over $200 billion in federal funding reflects broad support for investing in U.S. innovation and competition. The heart of the bill is the Endless Frontier Act authorizing $81 billion to the National Science Foundation (“NSF”) and $17 billion to the Department of Energy (“DOE”) to support R&D across ten key technologies, including artificial intelligence, advanced communications technology, biotechnology, and semiconductors. The bill also includes institutional support, including establishing a new technology and innovation arm at the NSF and hundreds of provisions recognizing the Federal Government’s role in innovation and competition, including support for science, technology, engineering, and mathematics (“STEM”) education; protecting research security and intellectual property rights; and competing globally, including against China. Against the backdrop of a global chips shortage, the bill appropriates $52 billion in emergency funding to support semiconductor manufacturing and R&D and $1.5 billion to support open and interoperable interface radio access networks (“open-RAN”) enabling more secure deployment of 5G.
The bill’s provisions are organized across six divisions:
Division A funds two programs that were enacted as part of the National Defense Authorization Act last year. First, the division appropriates $52 billion to fund programs authorized by the Creating Helpful Incentives to Produce Semiconductors for America Act (“CHIPS Act”), including financial assistance for companies to invest in facilities and equipment for semiconductor manufacturing and R&D, a Department of Defense public-private partnership to ensure a robust semiconductor supply chain, and a Department of Commerce (“DOC”) study on the capabilities of the U.S. industrial base to support semiconductor needs. Second, the division appropriates $1.5 billion to a Public Wireless Supply Chain Innovation Fund, authorized by the Utilizing Strategic Allied Telecommunications Act (“USA Telecommunications Act”), to award grants for companies to research, develop, and deploy 5G and next-generation technology that uses open-RAN.
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