Policy Backgrounders

The President released an “America First Investment Policy” which praises much foreign investment and seeks to strengthen the US’ public and private capital markets while also promising new restrictions on investment from China and other defined “foreign adversaries” as well as restrictions on US outbound investment to China, including from financial services companies and pension funds. It also includes proposed revisions to the reviews of foreign investment by the Committee on Foreign Investment in the US (CFIUS) and calls for a review of the US-China bilateral tax treaty, leading to broader questions on the US-China relationship.

Key Insights

The Memorandum highlights the benefits of a generally open investment policy and proposes “fast track” review for some investments from allied and partner countries.
However, it contains very strong language on China and uses a broad definition of “critical infrastructure” in which Chinese companies will not be able to invest.
The Memorandum orders a review of the 1984 US-China bilateral tax treaty, blaming that and the grant of Most Favored Nation status to China for “the deindustrialization of the United States and the technological modernization of the PRC military.”
Additionally, the Memorandum promises new restrictions on US outbound investment to China, including by financial services firms, with a possible risk of US sanctions.

The Memorandum and Foreign Investment Policy

The Presidential Memorandum on “America First Investment Policy” includes positive language, highlighting the benefits of a generally open investment policy and notes that US partners and allies (“some of whom have tremendous sovereign wealth funds”) are valuable sources of investment funds for US economic growth.

To promote foreign direct investment, the US will establish a “fast-track” investment review for “specified allied and partner sources . . . involved with [US] advanced technology and other important areas.” This new review has not been further defined; however, it will include “requirements that the specified foreign investors avoid partnering with United States foreign adversaries.” For example, if Nippon Steel’s proposed acquisition of US Steel had been approved, the deal would likely have been conditioned to require Nippon Steel not to partner with certain Chinese companies.

For some investors, the new “fast-track” program will be a welcome alternative to the often long process of the Committee on Foreign Investment in the US (CFIUS); for others, it may force difficult choices about whether to drop partnerships in the People’s Republic of China (PRC) as a condition of investment in the US, thus furthering the accelerating division of the global economy into geoeconomics blocs.

The US will also expedite environmental reviews for any new investment over $1 billion and continue to welcome passive, non-voting investments from all sources that “do not confer any managerial influence, substantive decision making, or non-public access to technologies or technical information, products or services.”

Focus on China

The main focus of the Memorandum, however, is on investment from and in designated “foreign adversaries” (China, Iran, North Korea, Russia, and Venezuela), with a particular focus on China. The Memorandum declares that China and other foreign adversaries “systematically direct and facilitate investment in [US] companies and assets to obtain cutting-edge technologies, intellectual property, and leverage in strategic industries.” It further argues, without providing details, that Chinese access to US capital markets “exploits United States investors to finance and advance the development and modernization of its military.”

As a result, because China does not permit US investors to acquire Chinese critical infrastructure, China will not be permitted to acquire US critical infrastructure, encompassing a broad definition including “food supplies, farmland, minerals, natural resources, ports, and shipping terminals” as well as other critical infrastructure sectors. In addition, the US will also “establish new rules to stop United States companies and investors from investing in industries that advance the PRC’s national Military-Civil Fusion Strategy” as well as “allowing only those investments that serve American interests” (hyperlink added).

More specifically, the Memorandum states that the CFIUS process will “restrict PRC-affiliated persons from investing in United States technology, critical infrastructure, healthcare, agriculture, energy, raw materials, or other strategic sectors,” including “farmland and real

estate near sensitive facilities.” The US will also end “mitigation” agreements as part of the CFIUS process that require ongoing compliance review in favor of “concrete actions that companies can complete within a specific time.” It is unclear, however, whether this new requirement will lead to increased disapproval of specific transactions that might normally require ongoing compliance review. Finally, the Administration will also work with Congress to restrict access to US “talent and operations in sensitive technologies (especially artificial intelligence) and to expand the remit of ‘emerging and foundational’ technologies” subject to CFIUS review.

Threats to the Broader Relationship?

The Memorandum also incorporates some of the restrictions that were reportedly being considered in the last Congress by the House Select Committee on the Chinese Communist Party, which is now considering a bill to revoke China’s Most Favored Nation (MFN) determination, which would put the US at odds with its obligations under the World Trade Organization (WTO) and has criticized investments in China by some US financial firms.

An important provision of the Memorandum states the US will review the 1984 US-China bilateral tax treaty to “further reduce incentives for United States persons to invest in our foreign adversaries.” The Administration states that this treaty “along with the PRC’s admission to the World Trade Organization and the related undertaking . . . to accord unconditional Most Favored Nation treatment to goods and services of the PRC, led to the deindustrialization of the United States and the technological modernization of the PRC military. We will seek to reverse both of those trends. United States investors will invest in the future of America, not the future of the PRC.”

Finally, in additional steps to restrict certain Chinese listings on US securities exchanges, the Memorandum states the Administration will determine if their financial auditing standards meet the Holding Foreign Companies Accountable Act; review allegations of fraudulent behavior as well as the “variable interest entity and subsidiary structures used by foreign-adversary companies to trade” on US exchanges, “which limit the ownership rights and protections” for US investors; and provide that “foreign adversary companies are ineligible for pension plan contributions” under the Employee Retirement Security Act of 1974.

Restrictions on US Outbound Investment

The Memorandum states the US “will also use all necessary legal investments to further deter United States persons from investing in the PRC’s military-industrial sector,” including the threat of sanctions for making certain securities investments. It also raises the possibility of new restrictions on US outbound investment in the PRC in “semiconductors, artificial intelligence, quantum [computing], biotechnology, hypersonics, aerospace, advanced manufacturing, directed energy, and other areas implicated by the PRC’s national Military-Civil Fusion strategy.” The Administration will consider restrictions on private equity and venture capital investments and investments from pension funds and endowments.

Conclusion

The attempt to provide clarity and expedite an often-confusing CFIUS process will be welcome to many investors from allied and partner nations, and the Administration seeks to justify new restrictions on Chinese investment on national security grounds, continuing a trend begun under the Biden Administration. To some degree, the Memorandum also restores policies of the first Trump Administration, as several other Memoranda and Executive Orders have also done. While the policies on outbound investment also continue a trend begun under the Biden Administration, particularly for sensitive technologies, certain policies in the Memorandum have a harder edge.

Besides directly threatening sanctions on US financial firms, the Memorandum continues a series of statements the Administration has made on the need to review bilateral tax treaties, which are important to promote investment by avoiding double taxation. Granting Most Favored Nation status was a condition of China’s entry into the WTO; withdrawal of that status would arguably put the US in violation of its WTO obligations and would not be received well by China.

It is unclear whether these are simply negotiating threats or whether the US might actually consider revoking MFN status, but the bill in Congress and the pressure on US investors not to invest in certain strategic sectors in China make this seem potentially more than merely threats. While it is certainly possible to impose binding restrictions on US outbound investment, the statement that “United States investors will invest in the future of America, not the future of the PRC” is very strong language seeking to direct investment in the US rather than letting US investors seek the highest and best use of their capital, inside or outside the US. The details of this new policy, when announced, will be important to determine not only the course of future investment to and from China but the contours of the broader relationship in both trade and national security and patterns of both inbound and outbound foreign investment.