Asian Investment in the US – Navigating the Convergence of Increased Regulatory and Commercial Risk with Investment Opportunities
2017 was an unusual year in U.S.-Asia trade and investment. Asian companies seeking to invest in the U.S. market face a rare level of uncertainty while continuing to favor the United States as a prime investment location.
Since the transition to a new presidential administration in the United States, the so-called “pivot” to Asia appears to have been reversed as showcased by the withdrawal of the United States from the Trans-Pacific Partnership (“TPP”) in 2017. The U.S. withdrawal from TPP has challenged trade relations with much of Asia, including with Japan, who made significant market access accommodations to the United States in TPP negotiations and now faces talk of U.S. action to reduce the negative trade balance between the two countries. The trade relationship with South Korea is also challenged by recent indications that the trade agreement between South Korea and the United States (“Korus”) may be in jeopardy because the negative trade balance with South Korea continues under Korus. Added to this uncertainty is the suggestion of import restrictions and increased tariffs which may reduce the value of investments in the United States by Asian multinational companies who manage their costs by leveraging global supply chains.
Turbulence on the U.S. trade policy front comes at the same time that uncertainty is growing on the regulatory front. This includes a push for more aggressive use of national security tools, such as the Committee on Foreign Investment in the United States (“CFIUS”), a federal, inter-agency committee charged with the national security review of transactions in which a foreign entity acquires control of a U.S. entity. Combined, all these factors are creating regulatory and commercial risks for Asian companies seeking to make investments in the United States. CFIUS risks have increased due to, among other things, proposed legislation expanding CFIUS’ jurisdiction. A potential expansion of CFIUS jurisdiction may be particularly worrisome for Asian investors when considered in the context of the most recent CFIUS Annual Report to Congress . Even under CFIUS’ current and more limited jurisdiction, acquisitions by investors from China and Japan were in the top four of all covered transactions reviewed by CFIUS during the period discussed by the report.
Moreover, with respect to Chinese investors in particular, investment risks are compounded by the release in August 2017 of overseas investment guidelines by the Chinese government prohibiting certain overseas investments. The Chinese government has also issued a series of new measures to control capital outflow, which makes engaging in M&A activities in the United States and beyond increasingly challenging for cash-rich Chinese enterprises.
Notwithstanding these challenges, significant opportunities are available to Asian investors in the United States, particularly when such investment has the potential to sustain or increase U.S. jobs. How should investors navigate the convergence of regulatory and commercial risk with the significant investment opportunities in the United States?
Companies from Asia and around the world may consider taking the following steps.
Seek professional insights on whether your transaction may raise national security concerns. If your transaction will result in control of a U.S. business, assess whether it may raise national security concerns before seeking CFIUS approval. While CFIUS approval is likely to be challenging in information technology and defense-related industries, national security concerns may also exist in the context of other, less apparent, industries. Therefore, seeking professional guidance before filing your CFIUS notice is prudent. Potential national security concerns should not be ignored, but rather proactively addressed working with professionals to develop mitigation strategies while minimizing commercial impacts.
Align your investment with U.S. goals of maintaining and creating jobs. Notwithstanding the concerns of the U.S. government about the negative balance of trade with Asian nations including China, Japan, and South Korea, if your investment in the United States will result in existing jobs being maintained and/or new jobs being created, political and commercial risks are more likely to be minimized. As part of your diligence, develop a compelling economic narrative and align your investment with U.S. employment goals.
Investigate regional sensitivities associated with foreign investment. Sensitivities associated with foreign investment in the United States exist not just at the federal level, but at the state, local, and civil society levels as well. Work with professionals to understand the state and local impact of the industry in which you seek to invest, shape your investment to enhance that impact, and identify allies among civic and community leaders to help promote its merits.
In structuring your investment, learn from the experiences of others. As part of your due diligence, investigate the experiences of other foreign investors in your industry and in the region of the United States in which you plan to invest. The case studies of similarly situated companies can help prevent costly mistakes and aid in the successful launch of your investment.
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