Analysis

Trump was elected to 'Make America Great Again'. This agenda stretches from cracking down on illegal immigration to modernising the US military and includes reducing the US global trade deficit and cracking down on 'unfair' trade practices (see UNITED STATES: Military modernisation not guaranteed - March 19, 2018).

The administration eyes various causes of this trade deficit, including 'unbalanced' free trade agreements (FTA) which disadvantage the United States, and foreign firms dumping products on the US market.

Yet the issue is not only one of trade: the administration wants to crack down on the national security risks associated with foreign trade and investment. Intellectual property (IP) theft is one such area, and China is in the administration's crosshairs.

Concerned about China

Trump ordered government investigations into suspected Chinese theft of US firms' IP; after investigators reported, Trump ordered on March 22 that tariffs worth over 50 billion dollars be introduced to target Chinese technology firms. These tariffs could be brought in by June, if US-China talks on reducing the trade deficit and cracking down on 'unfair' trade practices get nowhere (see INTERNATIONAL: US trade will target self-sufficiency - March 27, 2018).

Part of the difficulty is different regulatory systems and expectations: China's investment rules have compelled US firms to establish joint ventures as a condition of trading in China, but Trump's administration characterises this as forced technology transfer.

Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer are both pushing for China to increase its purchases of US-made semiconductors and stop forced technology transfers, among other calls.

The administration's trade policy has sparked fears of a global trade war; China says it does not want this, but would defend itself, as the EU has also said.

Broadcom and Qualcomm

The proposed 117-billion-dollar Broadcom-Qualcomm deal would have been the largest tech sector takeover to date. Qualcomm is a high research and development (R&D) firm. Broadcom is a marketing and asset maximisation corporation, with less invested in semiconductor technology.

Critics argue that Broadcom gives less attention to R&D than to growing through acquisitions and maximising returns from assets. The Trump administration's willingness to block the proposed takeover reflects the importance of the semiconductor chips developed by Qualcomm for 5G wireless technology, which Broadcom, a firm with some Chinese equity interests, would have rapidly developed (see INTERNATIONAL: China and the United States race for 5G - February 28, 2018).

A merger, the administration feared, would have reduced US competitiveness in 5G technology globally, and could have aided China -- the administration fears that Chinese firms work together with China's government, even when not state-owned.

Enter the CFIUS

Trump's decision to block the Broadcom-Qualcomm takeover was informed by the CFIUS and enabled by the 2007 Foreign Investment and National Security Act (FINSA) which, among other legislation, enables the president to block deals if national security could be threatened.

Established in 1975 under executive order, the CFIUS gained increased traction after the September 11, 2001 New York terrorist attacks and is now governed under FINSA. The CFIUS is an inter-agency, Treasury-led committee with nine Cabinet members, two ex officio members and members appointed by the president.

The CFIUS examines any takeover bid by a foreign company if it is deemed to pose a national security threat. The committee works to a legal standard of 'credible evidence'. However, since 1975 there have been severe limits on making public the body's deliberations or disclosing the confidential materials submitted to it for consideration.

While only the president has the authority to block takeovers, the CFIUS itself can intervene to change parts of proposed deals, for instance excluding part of a US firm from an agreement. It can also negotiate with the parties to a proposed deal.

Yet the CFIUS's involvement can alone be sufficient to stop deals: private sector firms have minimal leeway where reputational risk is concerned. Apart from the Qualcomm-Broadcom deal, nine earlier deals (one with a German firm and eight with Chinese firms) have fallen through since February 2017, Bloomberg reported.

What is known in the recent case is that the CFIUS concluded that a Broadcom-Qualcomm merger would mean a reduction in long-term R&D investment by Qualcomm, and the potential transfer of valuable US tech skills and results in a foreign company.

Despite meeting Broadcom officials who tried to provide reassurances about national security issues, the CFIUS recommended Trump block the merger.

Greater intervention likely

Given the Trump administration's Make America Great Again priorities, conditions seem ripe for increased use of presidential veto powers over foreign investments, and for the CFIUS to play a growing role of its own.

However, increasing protectionism through new tariffs and tougher security of investment, while easy to initiate, is difficult to control or unravel. The issue will be whether the current round of sizeable tariffs will modify China's policies domestically and internationally, and that of other countries such as EU states, or simply induce a deterioration of bilateral relations.

CFIUS update bill

Both congressional houses are currently considering a bipartisan bill -- the Foreign Investment Risk Review Modernization Act -- which would update and expand the CFIUS and its remit, for national security reasons. This includes giving the CFIUS oversight of outbound investments by US firms, including overseas joint operations, that would see US IP being transferred overseas.

Tech firms have lobbied successfully for the bill to be watered down -- they feared that it would hinder their operations and profits if passed in its current form (see UNITED STATES: Tech firms will sharpen review of M&A - March 16, 2018). Yet the measure has bipartisan and Trump administration support and is likely to become law.