A controversial proposal that would have subjected certain foreign investments by U.S. companies to review by an interagency committee failed to make it into the CHIPS and Science Act of 2022, which President Biden signed into law last week. I wrote about the details of the outbound investment screening mechanism earlier this summer and warned that it was unclear whether the benefits of these rules would outweigh the costs for American businesses.

Senators Bob Casey (D-PA) and John Cornyn (R-TX) pushed the outbound investment screening proposal, which would have given an interagency committee (the Committee on National Critical Capabilities) the power to screen investments made overseas by US companies that involve “domestic critical capabilities” in “countries of concern”. Although their proposal did not make it into the final text, the CHIPS legislation includes language limiting how companies receiving semiconductor manufacturing subsidies can invest. It is said:

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“The Covered Entity may not engage in any Material Transaction, as defined in the Agreement, involving the material expansion of semiconductor manufacturing capacity in the People’s Republic of China or any other foreign country of concern. “

The law defines “relevant foreign country” as the covered nations as defined in section 4872(d) of title 10 of the United States Code, which includes China, Iran, North Korea and Russia. . The act also empowers the Secretary of Commerce — in consultation with the Secretaries of Defense and State and the Director of National Intelligence — to identify other countries that may pose a threat to the national security of the United States for the purpose of to administer state aid for investments in the manufacture of semiconductors. . The main concern, of course, is competition with China, which is why it gets a special mention.

There are a few exceptions to this rule, for example, existing and future investments in legacy semiconductors. These chips are widely used and their recent shortage has led to a slowdown in production in the automotive industry, among others. Another exception is for investments that primarily serve the foreign market in which they are made. As Martin Chorzempa of the Peterson Institute for International Economics has pointed out, such exceptions could weaken the legal safeguards against outsourcing.

Chorzempa also notes that the government could learn a lot about U.S. investments in China through the notification requirements under the law. US companies receiving subsidies will be required to notify the Secretary of Commerce of any transactions in China or other affected countries. The secretary will then determine, in consultation with other firm officials, whether this investment is against the rules. If the company is found to be in violation, it must cease its investment or otherwise return its federal financial assistance. Thus, companies that receive subsidies will have a strong incentive to comply with these investment restrictions, although the details of the enforcement of the law remain to be seen. For example, it is not yet clear what may constitute a “significant transaction” that is subject to review in the first place; these regulatory details have yet to be worked out. Only then will the scope of the notification requirements and the investments they cover be known.

While these provisions do not establish the type of outbound investment screening mechanism that I described in my previous article, they prohibit certain investments in China and allow the Department of Commerce to expand the list of countries to which restrictions. It’s not immediately clear what procedures would be needed to determine whether an additional country is a national security concern, or whether the department will need to provide justification for why a specific country poses a national security threat. What is clear is that our business partners are aware of this. Major Korean chipmakers Samsung and SK Hynix have hinted that the CHIPS bill is forcing them to rethink their investments in China. As with many aspects of trade regulation, one action by one country tends to have repercussions for the entire global economy.

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With growing fears of high-tech competition with China, it’s likely we’ll see similar rules in future bills that distribute taxpayers’ money to subsidize certain industries. If Congress is unable to act on outbound investment screening, the president can pursue other policy options, such as restrictions on the export of chipmaking equipment to China, which have been considered.

The Biden administration has already signaled its support for screening certain investments in China, suggesting that it is likely that Senators Casey and Cornyn will work to revive screening of outbound investments in the future, even if it does. there was opposition to its inclusion in the broader CHIPS package. Any new language that emerges will no doubt be informed by the discussions that took place when Congress crafted the CHIPS bill to address the many concerns raised about the provisions, including those from the business community. That said, it’s unclear whether such legislation would get enough votes when it finally emerges. In the meantime, the proposal will be waiting in the wings, but it won’t be long before it takes center stage.