CFIUS Updates Needed to Secure Defense Supply Chain, Bipartisan House Task Force Says

The U.S. should expand certain foreign investment reporting requirements and establish a list of trusted partner countries that are exempt from investment screening disclosures, the House Armed Services Committee said last week. The committee presented the comments in a July 22 report from its bipartisan Defense Critical Supply Chain Task Force, which said the Committee on Foreign Investment in the U.S. can be used more efficiently to help make critical defense supply chains more secure.

The report specifically recommended establishing a reporting requirement for U.S. companies to disclose any “foreign capital” they receive from U.S. adversaries, including China. The task force also recommended creating an “inclusionary process for trusted partners that U.S. companies can work with, exempting them from CFIUS requirements.”

The task force made those recommendations after conducting a roundtable with experts from industry associations, think tanks and current and former Defense Department officials, some of whom said the “structure” of CFIUS should be reworked. While CFIUS “is an effective tool that brings together government agencies to focus on issues, the structure of CFIUS forces it to focus solely on the problem in front of it rather than a broader national security view,” one roundtable member said. “While CFIUS is a useful tool to have in the federal government’s toolbox, there are issues with considering it the sole mechanism for addressing broader risk.”

Another roundtable member said that “because of CFIUS’s nature as an exclusionary process, the United States should offer an inclusionary process for trusted partners.” CFIUS currently recognizes Australia, Canada and the United Kingdom as excepted states, a concept introduced under the Foreign Investment Risk Review Modernization Act, which allows investors from certain countries to benefit from certain CFIUS exemptions (see 2002270049 and 2105060056).

While CFIUS allows the U.S. to screen incoming investments, Rep. Mike Gallagher, R-Wis., co-chair of the task force, said the U.S. should also better scrutinize outbound investments. He specifically said more scrutiny should be placed on outbound U.S. capital to Chinese technology and data companies. “That outflow has increased even amidst the pandemic, and we have American money being invested in companies that are on the” U.S. list of Chinese military companies (see 2106280023), Gallagher said during a July 22 event hosted by the Center for a New American Security.

“I actually think there's going to be a framework that emerges that basically says all of these companies are off limits,” Gallagher said. “We don't want American pension funds, we don't want university endowments being used to build things that are designed to kill Americans in a future war or enslave Uyghur Muslims in modern day concentration camps.”

The task force also heard from industry experts who said the U.S. needs to coordinate a technology competitiveness strategy with its allies and create an emerging technology coalition with the Five Eyes (U.S., U.K., New Zealand, Australia and Canada) and other partners. Gallagher agreed, saying the U.S. needs to do a better job of working with allies to develop alternatives to state-run Chinese companies instead of just imposing trade restrictions.

“If we are going to contemplate some form of selective economic and financial decoupling from China, which I think is now inevitable,” he said, “the only way that works is if we simultaneously draw closer with our partners and our allies and collaborate on critical technologies.”