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It's been long overdue. President Trump's campaign slogans of putting 'America first' might impact the interests of working class citizens more than benefit the country by reducing technology transfer. Just recently, the announcement of metal tariffs resulted in widespread criticism of the administration from all quarters.

While these are claimed to cut down on Chinese predatory tactics, in reality, metal tariffs end up damaging US' trade relationships with its other partners. These include the European Union and Canada, although perceived "friendly" countries are able to apply for exemptions. This being a topic of another post, today we will look at how these and other moves by the Trump administration counter both Chinese Foreign Direct Investment in the United States and standard operating conditions for US firms.

Trump Administration's Aluminum Tariff's Are Just The Beginning Of A Long Brewing US-China Trade War; Subsequent Legislation Will Impact Silicon Valley Tech Giants And Chinese FDI In US Military Technology Companies

The Chinese government's acquisition of Anbang last month sent jitters down Capitol Hill. The investment group owns several properties, including a $2 Billion Waldorf-Astoria Manhattan purchase, in the United States.The Chinese government's control of the insurance group brings into question the future of Anbang's vast portfolio of investments, both in the US and abroad.

The Anbang takeover is just the tip of the iceberg, made of a series of accumulating Chinese investments, American concerns and research reports which surround growing skepticism in Washington around Chinese intentions. Some, including the President, allege that China is playing unfairly.

At one end the country's national laws make it mandatory for foreign firms to share their technological secrets for investment in the mainland. At the other, a growing amount of strategically placed investments by China in the US threaten the latter's technological edge in military, cyberspace and other arenas.

Broadcom; The End For Deals Or Beginning Of Increased CFIUS Power?

Moving over to the technology industry and starting off with consumer tech, recently Singaporean based Broadcom (NASDAQ:AVGO) made a $117 Billion bid for Qualcomm (NASDAQ:QCOM). While Broadcom is not Chinese, the President blocked this transaction, citing national security and global competitiveness as his primary reasons.

He was advised by the Council on Foreign Investment in the United States (CFIUS). CFIUS is a secretive government body, headed by the Treasury department. The committee is responsible for scrutinizing deals which involve a merger or sell off of US companies to foreign entities. Now, under the Trump administration, CFIUS will play a larger role in regulating Chinese investments in particular.

Chinese investment tripled over the year to $46 Billion in 2016, and the recent frostiness has already begun to demonstrate its impact. Prior to his blocking of the Broadcom-Qualcomm deal, Mr. Trump also used his powers to block Chinese backed Canyon Bridge Capital Partners' bid for Lattice semiconductor; after a CFIUS recommendation. This decision was based on 50 U.S.C. §2170, known as the Exon-Florio Amendment.

Other tech deals struck down by CFIUS include Chinese conglomerate HNA's bid for US in-flight services firm Global Eagle Entertainment and Ant Financial's proposed acquisition for MoneyGram. Sound a bit too worrying if you're all up for boundary free international business? Well, CFIUS will now get more teeth for its bite.

Enter FIRRMA - The Foreign Investment Risk Review Modernization Act:

Given the increase in Chinese investment in US technology firms, both civilian and military, Congress is now looking to amend several provisions in the current CFIUS implementing statue. The concerns which motivate FIRRMA (H.R 4311) predate President Trump. Senator Dianne Feinstein (D-Calif) claimed in January that current loopholes in CFIUS' mandate “have allowed foreign adversaries to weaponize their investments in U.S. companies and transfer sensitive dual-use U.S. technologies, many of which have potential military applications."

FIRRMA focuses primarily towards amendments to the Defense Production Act of 1950 (Pub. L. 81-774). These and others will:

Expand CFIUS' authority to cover a) joint ventures, b) minority investments under an expanded definition of critical technology and c) real estate investments near government/military bases.Add cyber-security, sensitive data transfer and previous compliance history evaluations to the definition of national security factors require for assessment of investments originating from certain territories which include China and the Middle East.Require foreign government backed investors whose proposed share of acquisition exceeds 25% to file a declaration filing, increase CFIUS review timeline to 120 days and allow the committee to collect a filing fees for any transaction deemed relevant.

Navigating this increase in authority due to FIRRMA is tricky ground for the US government. At one end, losses estimated from the combined impact of Chinese hostile actions is greater than $225 Billion. At the other, the United States depends heavily on China for imports; these include everyone's favorite, the iPhone and a vast array of cheap products available at mega retailers such as Walmart (NASDAQ:WMT).

According to an updated report by The Commission on the Theft of American Intellectual Property, it is alleged that 87% of all counterfeit goods entering the United States originate from China and Hong Kong. The lion's share of the low end $225 Billion loss is from trade secret theft from US firms, estimated at a low-end cost of $180 Billion. The target of such thefts are industries deemed important in China's 12th Five-Year plan, which include semiconductor and military communications.

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The Methodology, Scale And Scope Of Chinese FDI In US Technology:

Right now, there are several ways China is able to gain access to critical US technologies. The current landscape involves blurring the boundary between civilian and military uses of important tech. For example, while you can use Face ID to unlock your iPhone, the military uses it to analyze terrorists.

According to a DIUE report, it's this blurring of boundaries combined with Venture Capital investment tools which allows the Chinese government access to pivotal technologies necessary for military and innovational superiority over the next 50 years.

The primary concern in Washington for technology transfer to China condenses around what the Department of Defense terms as 'Third Offset'. This term covers financial technology, gene editing, robotics, artificial intelligence, autonomous vehicles and AR+VR. All are currently under development, by early stage companies and are foundational in nature; meaning that their potential to generate further innovation for other segments as well is massive.

Chinese Investment in the United States; China Investment Monitor (Rhodium Group, LLC)

A brief look at the volume and value of Chinese Venture Capital investments in the US for 2016 will help understand the reasons behind an increase in the clamor for tariffs. Data gathered by the Rhodium Group puts a $8.5 Billion figure for total Chinese investments in Third Offset technologies. The year back in 2015, early technology deals by Chinese investors totaled $12 Billion; making for one-tenth of all the deals for the year.

For the combined time period 2010-2016, Seed and Series A deals were responsible for 58% or 490 of all venture capital deals involving Chinese investors. While all this might suggest a deliberate effort to 'buy' upcoming technologies, there are other reasons behind it as well. Chinese investors are eager to diversify their holdings, and earn more returns in a dilute market.

A participant in a 2017 workshop sponsored by the Council on Foreign Relations summarized the problem effectively. According to him, “We know who is investing in whom. [But] we don’t know who owns them. And we don’t know why.”