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  • Writer's pictureJohn Lash

The Next Generation Foreign Policy Paradigm: Economic Security as National Security

The Biden administration will contend with many pressing issues during its first 100 days, with none more nuanced than the intense geopolitical and economic competition between the United States and China. This inflection point – where economic security meets national security – must be appropriately addressed in a targeted manner within the gray zone between diplomacy and conventional warfare. The nations do not meet on traditional battlefields, but rather in boardrooms and in cyberspace in next generation competition for global economic superiority and soft power influence. These circumstances are more than economic competition as they culminate on geopolitical and national security spectrums with a key U.S. interagency body – the Committee on Foreign Investment in the United States (CFIUS) – at the forefront of this effort.

One of the most significant policy decisions facing the administration will be how to wield the immense powers of the Committee as a catalyst for pillars of American exceptionalism while balancing national security considerations with an open investment policy. And conversely, by what measure will the consequences of action, or inaction, be judged over time.

Establishing the meaningful connections necessary to meet this challenge will require a multidisciplinary approach that will combine first-principles thinking with an analysis of second and third-order consequences of action or inaction by governments. First principles thinking requires that for a given issue one must attempt to deconstruct down to the core pieces or foundational truths, then reconstruct in a more effective manner; ultimately, ensuring the solution is to the root cause of the issue and not a symptom of the problem. Consideration must also be given to the second and third-order consequences of a given decision, those outcomes which are directly related to an initial decision, but which don’t adequately address subsequent impact that occurs in a different context or time horizon.

The approach will require the design comprehensive models which address foundational truths of globalization, including both the potential benefits and negative consequences of free and open trade on national security. This includes evaluating the risks and the benefits of activity in the capital markets, such as access and control over key infrastructure assets that are funded or acquired through the Belt and Road Initiative (BRI) or through the acquisition of intellectual property for next generation technologies indigenous only to the U.S.

CFIUS: Sword or Shield

The increasingly resourced and specialized group that is tasked with examining these issues at this convergence of economics, trade policy, and national security is the Committee on Foreign Investment in the United States (CFIUS). With the passage of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018, Congress made clear the bipartisan support for protecting US national security threats arising from foreign investment. FIRRMA not only expanded the jurisdiction of CFIUS, but also provided greater authority to conduct reviews; with the Committee requesting a significant increase in funding for supporting CFIUS operations.

CFIUS is an interagency body, chaired by the Department of Treasury, that has the authority to review foreign direct investment in the United States to evaluate the impact such investments could have on U.S. national security. The Committee was established in 1975 by Executive Order, and in 1988 Congress formalized CFIUS legislatively through the Exon-Florio Amendment to the Defense Production Act of 1950. Since that time, the authority of CFIUS has been expanded twice; once in 2007 by the Foreign Investment and National Security Act of 2007 (FINSA) and in 2018 by the Foreign Investment Risk Review Modernization Act (FIRRMA) which was signed into law by President Donald Trump on August 13, 2018 as part of the National Defense Authorization Act of 2019.

As sharp contrasts are drawn between the policy positions of the administrations, the focus on regulatory scrutiny of foreign direct investment in US critical infrastructure is an area of policy continuity which will continue to lead the great power competition. During the Trump administration there was a significant shift in public awareness of CFIUS – a historically secretive and often mysterious interagency body – as a means to protect next-generation technologies, ensure resilience and security of vital supply chains, and to safeguard sensitive personal data of US citizens. Through highly publicized cases a light has been shined on CFIUS as it emerges as perhaps the most critical line of defense for the US in the battlefield of global competition. CFIUS authorities can be deployed in expansive offensive and defensive situations, from investments in dual-use technologies to mobile applications to renewable energy, with an ability to review and take potential action not only pending deals, but also deals which have closed which are under its broad jurisdiction.

Competition as National Security Strategy

While CFIUS plays a critical role in the effort to safeguard national security interests, the November 2020 Homeland Security Advisory Council (HSAC) Subcommittee on Economic Security notes that its jurisdiction is limited, and CFIUS by itself cannot address all potential threats to US economic security. The report takes the position that, the Committee “exists to shine an intense spotlight on a single transaction by a single foreign buyer at a single point in time, and its only recourse is to prohibit or limit that particular acquisition,” and consequently, “in many cases, a broader view of the industry and global competition is necessary to appreciate the risk and to fashion a remedy more effective than just saying “no” to the deal at hand.”

The next generation initiatives for economic security within a larger foreign policy framework will expand on these exigent national security reviews, assessing not only the threat, vulnerability, and consequence of foreign direct investment (i.e. the risk), but also explore the net-benefit impact on both national security and the domestic economic ecosystem. The competition between the US and China requires dispassionate and objective evaluation, as whether and how the US government limits the ability of US companies to compete directly impacts national security, technology, and economic policy.

The connection between economics and national security is rooted in the fundamental principle of competition, which creates resilience, security, and innovation across the global markets. These global relationships have created dependencies between nations for research and development, along critical supply chains, and in mutually beneficial trading arrangements. The consequence of this interdependence is that certain countries, including the US and China, have moved towards the fourth industrial revolution, to a technology and knowledge economy. The future is represented by a digitalization that has created a global economy where traditional boundaries and international order have evolved to an interdependent international system.

In establishing an effective shift of the national security narrative from conflict to competition, the Biden Administration will seek to reengineer a vision of strength, stability, and resilience in the American economy. The strategic efforts will likely include collective pressure on a global scale for the US and allies to hold other nations accountable for norms and standards of behavior on economic, societal, and political spectrums. This effort has been evident as various allied nations, such as the United Kingdom, have announced far-reaching reforms to their foreign investment review processes which align broadly with the CFIUS regulations in the US.

Balancing Security with Open Economy

The US strategic approach to national security investment reviews under CFIUS jurisdiction will be integral to both economic policy and national security policy formulation. These policies will be impacted by how, when, and in what context the US government, along with other trade policy tools, are deployed and enforced. While the review of foreign direct investment under CFIUS is focused exclusively on the national security risk posed by the transaction, the potential positive or negative externalities that arise from these measures are intrinsically linked to creating, inhibiting, or protecting American businesses. These businesses are drivers in the development of innovative technologies which underpin domestic economic competitiveness; however, these technologies, often with civil-military fusion capabilities, are also key for military superiority.

The standards that govern competition in free and open economies conflate issues of national security and trade policy, creating circumstances with impossible security tradeoffs or an environment where economics and innovation must be considered in a national security risk-benefit analysis. The risk-benefit analysis would include assessing the potential benefits of economic security as a component part of the national security evaluation. Additionally, a comprehensive risk-benefit analysis should not need to conclude there is no national security risk, but rather that permitting a transaction provides the best available option given the circumstances, balancing the scales in a complex geoeconomic ecosystem.

It is within this system which the Biden administration will need to focus to reestablish and sustain American economic prominence. The role of CFIUS will remain forefront in these efforts as a gatekeeper to evaluate the incremental national security risks of foreign investment into key US businesses, particularly those in edge technologies, those technologies with civil-military fusion (dual-use), and with companies which are rich with US personal data. Importantly, this will require a cognizant effort to acknowledge that access to capital presents its own risks to US businesses, companies in early or late stages may require investments to maintain viability. This capital risk is acutely relevant for US businesses attempting to raise funds at the front-end of the business lifecycle, before commercial viability; or alternatively, for mature companies to continue to operate through commercial end-of-life.

As the global economic power dynamics continue to shift, China and the United States both have a vested interest in a stable world order; however, each country does maintain their own national interest in preserving and expanding their power-role both economically and politically. In addressing the evolution from conflict to competition between the US and China one of the critical inflection points will be whether the administration will concede that developing consistent, open, and rules-based standards in interactions can create positive sum outcomes for both countries and the global economy.

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