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China Faces Restrictions On Investing In U.S. Tech Companies: Will U.S. National Defense Be Strengthened?

ArmchairTechInvestor, March 11, 2018, by Brad Peery

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In November, 2017 a new bill was introduced in the U.S. Congress entitled the Foreign Investment Review Modernization Act. The Committee on Foreign Investment In the United States (CFIUS) has the responsibility to review foreign investment in the U.S. There are continued attempts by China to invest in U.S. technology. The most recent controversy surrounds Broadcom’s hostile bid to take over Qualcomm, a worldwide leader in semiconductors used in cellphones and wireless communications networks. One issue is whether Broadcom might do something to Qualcomm that would make the U.S. dependent on a Chinese company, Huawei, a very large Qualcomm rival, for its communications networks, particularly the next generation 5G networks in the U.S. These networks will bring significant new capabilities for applications, such as artificial intelligence (AI).

The new bill comes amid increasing scrutiny of defense threats under the Trump administration, as the U.S. government has blocked several investments from China, including the high-profile proposed acquisition of Lattice Semiconductor Corp by Chinese state-backed Canyon Bridge Capital Partners. Trump has also introduced a 25% tariff on steel imports, and a 10% tariff on aluminum, on the basis that U.S. manufacturing of these products in vital for U.S. national defense.

The new bill also updates the CFIUS definition of “critical technologies” to include emerging technologies that could be essential for maintaining the U.S. technological advantage over countries that pose threats. China is likely to be the most important country affected by the changes.

The bill defines “critical technology” as “technology, components, or technology items that are essential or could be essential to national security,” and including “emerging technologies that could be essential for maintaining or increasing the technological advantage of the United States over countries of special concern with respect to national security, or gaining such an advantage over such countries in areas where such an advantage may not currently exist.” “Presumably this category includes artificial intelligence, robotics, aerospace, etc., and could be far reaching,” wrote Rob Hunter, partner at Baker & McKenzie LLP in a note, “To be sure, CFIUS can already reach investments in this category where the foreign acquirer takes “control.” However, some investments that might not amount to ‘control’ would also be captured where the buyer would have access to non-public information held by a critical technology company.”

ArmchairTechInvestor Opinion
China has ambitions to become the worldwide leader in defense, and defense technologies. The U.S. is beginning to fully realize the dimensions of this threat to the U.S. The first year of the Trump presidency has begun to plan for and confront these threats. A defense technology war, particularly with China and Russia, has begun.

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