Ralls and National Security Review of Foreign Investments

Abstract

With its enormous open market, the United States has long been a magnet for foreign direct investments (FDI). Historically, most of the FDI originated from U.S. allies such as the U.K. and Canada and posed minimal threat to U.S. national security. In the past decade, however, surging FDI from non-allies elevated the tensions between safeguarding U.S. national security and preserving a free and open investment market. In response, Congress reformed the review process by Committee on Foreign Investment in the United States (CFIUS) to enhance the scrutiny of FDI and congressional oversight. The agency enjoys broad discretion and its review is shrouded in secrecy. Yet given the national security nature of the regime, no foreign investor had ever challenged the agency until 2013, when a Chinese-invested company filed a federal lawsuit against CFIUS alleging, among others, violations of its constitutional right to due process. Few thought the plaintiff had more than a minimal chance of winning, and the trial court indeed ruled in favor of the government. Yet to the surprise of most experts, the DC Circuit reversed the lower court’s decision and held the CFIUS’s action unconstitutional. As the first and only lawsuit against CFIUS in the agency’s entire history, the case (Ralls v. CFIUS) has caught a great deal of attention and generated heated debates. But to date the debates have mostly centered on the legal merits of the case. Few have analyzed the key assumptions underlying the trial court ruling and the critiques of the appellate ruling, let alone the practical impacts of the case. This article narrows the gaps by empirically exploring the following three questions. One, is the assumption valid that foreign investors with complete information assume the risk of presidential veto by skipping the notification to CFIUS prior to their acquisition of U.S. assets? The trial judge and most CFIUS experts have adopted, consciously or not, that assumption, so has the agency itself. However, as will be demonstrated below, the assumption lacks empirical support. Two, has the DC Circuit ruling any significant practical effects on how foreign investors cope with the CFIUS regime, as some critiques have predicted? According to the empirical analysis, Ralls has at most a temporary effect on foreign investors’ perception of CFIUS review. Third, how do foreign investors view and respond to the regime in general? The article presents preliminary evidence that the investors’ actions reflect salient legal issues of the CFIUS law. The findings have important policy and theoretical implications.