Harris Sliwoski attorney Jonathan Bench and Darkhorse Global Founder John Lash, recently hosted a conversation on globalization: a new national security challenge during which they discussed the future of conflict, collaboration, and competition in US-China relations.
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Economic Security as National Security
Both the US and China are leading the way, but neither is particularly unique in their views that economic security is analogous and sometimes synonymous with national security. China has for many years embedded a provision in all its laws and regulations regarding anything that might “endanger national security or public security” (危害国家安全、公共安全). And in recent years the US has discussed more openly that it will counteract China’s global influence campaign as a matter of national security.
This attitude of retrenchment has impacted and will continue to impact free trade, competition, innovation, and global security. The future will more closely resemble a multipolar, venn diagram of competing interests and alliances, with China and the US hyperfocused on their internal market strength, stability, and resilience. This may leave allies in a dilemma where they must choose between economic strength and their own national security.
The Committee on Foreign Investment in the US (CFIUS) and “Reverse CFIUS”
CFIUS is a US interagency committee authorized to review certain transactions involving foreign investment in the US in order to determine the effect of such transactions on the national security of the US. It was reinvigorated under the Trump Administration, and the Biden Administration has continued to facilitate its work.
Due to the current geopolitical environment, CFIUS will likely spawn a reverse CFIUS process that looks at outbound investment from the US to determine the effect of such transactions on the national security of the US. We expect preliminary guidance this year regarding its scope and potential requirements.
Impact on Cross-Border Investment
Most cross-border investment and M&A activity that could impact US national security arise from the following risk scenarios:
- Technology transfer
- Data protection and cybersecurity
- Product integrity
- Supply assurance
- Co-location
General partners, limited partners, and strategic partners should all be aware of and expect the following and add them to their due diligence checklists:
- Evaluation of any national security impacts earlier in the (pre) due diligence phase
- Restrictions on sensitive, confidential information, other than financial data
- Limitations on actions foreign LPs can take over the GP
- A general increase in disclosures and transparency
- Inquiries by LPs regarding the existence and identification of foreign LPs and their origin countries
China’s Perception of the US
China’s leadership continues to use the term “encirclement” (围) to describe the US’ actions, including analogous terms such as containment and repression. Encirclement has deep roots in Chinese history and its collective consciousness, and we will continue to hear these terms when government officials are trying to sway other governments to align with China and its worldview of sovereignty above all.
Simultaneously, every Chinese company that is establishing operations in the US is aware of CFIUS and its potential implications on their business model. They incorrectly assume that the US government is lying in wait to dismantle any Chinese business in the same way that the Chinese government has and continues to act regarding both Chinese and foreign companies that do not toe the Party line.
Realignment of the World Order
The Biden Administration to a large extent has resurrected US foreign policy. China is also seeking to win friends and influence people in its own way (“diplomacy with Chinese characteristics”). Nowhere is this more apparent than in seeing how key nations like Brazil, India, Indonesia, Malaysia, Mexico, Pakistan, Philippines, Qatar, Saudi Arabia, and the United Arab Emirates publicly align with China or try to remain neutral because of their significant economic ties to China.
Those nations that seek to maintain or deepen their economic ties to China while remaining within the US’ economic and security relationship will find themselves stretched. Some will be forced to choose sides. Those with more economic clout or a strategic national security asset may be able to continue indefinitely in that position.