National Security Creep in Cross-Border Investments

The term “national security creep” is defined as “the recent expansion of national security-related review and regulation of cross-border investments to allow government intervention in more transactions than ever before”. Recently, the US Committee on Foreign Investment in the United States (CFIUS) and U.K. have been increasingly reviewing and blocking transactions for national security concerns. Much of these concerns regard cybersecurity threats as some high profile reviews, for example the Chinese software company Bytedance has come under fire from the Trump administration for possible spying issues. This is part of a recent trend of administrations framing economic issues in security terms as with these developments (1) CFIUS has been reviewing more frequently, transactions with a greater scope and profile (2) Behavior and organizations like the CFIUS have spread to other countries (3) Outbound investment has also increasingly become restricted. National security creep also moves into unprecedented territory in contract theory as the CFIUS can cancel deals even after they are made. Much of this is driven by recent transactions regarding critical technologies, infrastructure and especially the personal data of Americans. Officials worry that unchecked outbound technology flows could “enhance the technological capacity of our competitors in ways that harm our national security”. Some possible consequences emerge, as (1) it is unknown how or if the U.S. government has thought of the long term effects of transaction reviews and (2) As many of these reviews are done as part of a geopolitical power struggle between the United States and China, China may respond in kind by forcing other foreign investment to choose between the two powers. The article argues that CFIUS review processes are much too secretive and as review can happen after a deal closes, investors may be motivated to hide details from the CFIUS to prevent review. Additionally it argues that the executive should be careful in how it uses its power and should balance protecting national security but also in its effects and being transparent.