Academic journal article Washington International Law Journal

Balancing Security and Growth: Defining National Security Review of Foreign Investment in China

Academic journal article Washington International Law Journal

Balancing Security and Growth: Defining National Security Review of Foreign Investment in China

Article excerpt

I. INTRODUCTION

A steep decline in foreign investment in developing economies was one of the major consequences of the 2008-2009 financial crisis.1 Projections indicate that global investment in emerging markets will decline 31 percent in 2009.2 China has not been exempted from this decline in foreign investment. The decline in foreign investment in China combined with the other effects of the global economic slowdown caused the closing of tens of thousands of factories in China.3 As a result, labor protests broke out, leading to a number of clashes between workers and riot police.4 Plant closings and labor unrest have been most prevalent in the coastal regions of China.5 Previously, these areas had seen the bulk of foreign investment in China due to tax and regulatory advantages.6

Since 1978, Chinese foreign direct investment policies have been gradually liberalized.7 However, investors fear that developing economies, including China, are "becom[ing] increasingly protectionist under the guise of a national security review."8 Article 12 of China's 2006 Provisions on Acquisition of Domestic Enterprises by Foreign Investors ("2006 M&A Provisions")9 allows such review. Under Article 12, China's Ministry of Commerce has the authority to subject foreign investment to a national security screening that, because of its vague and as-yet-undefined process and lack of investor protections, may drive foreign investment away from China.

The United States also screens foreign investment for national security concerns. In the United States, the interagency Committee on Foreign Investment in the United States ("CFIUS") performs national security reviews of foreign investments.10 The Chinese and American systems share the common goal of protecting national security without acting as an unnecessary barrier to foreign investment. China's 2006 M&A Provisions were enacted in part because of a belief that China needed a national security review process similar to the United States.11 However, the systems are in different stages of procedural development. CIFUS has existed since 197512 and its review is governed by clear statutory and regulatory rules including timelines, express review criteria, and "safe harbor" protections for investors.13 China's 2006 M&A Provisions lack any such provisions. Because China has the same dual goals of encouraging foreign investment and protecting national security, the provisions guiding CFIUS should serve as a blueprint for China in making changes to its review procedures.

In addition to the United States CFIUS rules, China should also look to other articles in the 2006 M&A Provisions for guidance in reforming Article 12. The 2006 M&A Provisions provide rules for normal "nonnational- security" review, including rules governing which transactions must be submitted for review to Chinese officials14 and explicit timelines for review.15 Because the rules for "non-national-security" review provide increased investor confidence and protection, they should also be integrated into China's national security review regime.

This Comment examines the history and structure of national security review in the United States and China and suggests changes to China's national security review process to clarify its scope, procedures, and effects. Part II reviews the history and structure of foreign direct investment in China and the history of national security review of foreign direct investment in the United States. Part III examines some of the shortfalls of national security review under Article 12. Part IV recommends changes and additions to China's national security review of foreign direct investment.

II. ECONOMIC DEVELOPMENT AND EVOLVING NATIONAL SECURITY CONCERNS IN CHINA AND THE UNITED STATES HAVE PROMPTED THE NEED FOR REGULATION OF FOREIGN DIRECT INVESTMENT

The respective approaches to national security review of foreign investment in the United States and China have been greatly shaped by their historical attitudes towards and experience with such investment. …

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