Chipping Away at Trade: New Tool Could Bring Big Changes

Bass, Berry & Sims PLC

Bass, Berry & Sims PLC

On August 9, President Biden plans to sign the CHIPS and Science Act into law in the White House Rose Garden. The bill provides $52.7 billion in subsidies and incentives to domestic semiconductor manufacturers to strengthen existing supply chains and better compete with China. While details of the bill have been debated as the legislation has gone through multiple rounds of revisions and edits, elected officials have remained focused on the goal of enacting a bill that ensures funding to promote domestic rather than non-U.S. business. To realize those ambitions, the legislative authors took a page from the Committee on Foreign Investment in the United States’ (CIFUS) playbook, producing a quasi-outbound investment screening mechanism that could bring big changes.

While many believe Tuesday’s Rose Garden ceremony embodies a major step toward regaining ground in the technology race, the bill’s legacy will likely be more pointedly derived from “the guardrail provision” and what it means for the future of trade, industrial and national security policy, as well as globalization more broadly. Specifically, the bill requires a “covered entity” seeking CHIPS funding to enter into a “guardrails provision” agreement with the Department of Commerce (DOC) – prohibiting the entity from engaging in any “significant transaction” promoting the “material expansion of semiconductor manufacturing” in China or any “other foreign country of concern.” A “foreign country of concern” is defined to include China, North Korea, Russia, and Iran.

Covered entities will be required to notify the DOC of all planned significant investments in any “foreign country of concern.” DOC then has 90 days to decide whether the transaction violates the covered entity’s agreement and notify the entity of the decision. If DOC determines that there is a violation, the covered entity is given the opportunity to remedy the issue by providing tangible proof within 45 days that “the planned significant transaction has ceased or been abandoned.” Violations can trigger the DOC to recover the full amount of financial assistance provided.

The “guardrails provision” could be precedent setting as it has the potential to be implemented across other critical sectors of the economy. The provision sets up a quasi-outbound investment screening instrument that can be repeatedly leveraged to achieve national security imperatives.

The provision is just the latest step away from recent collective notions of prioritizing the free flow of trade and investments to support economic growth, lower prices for consumers, and greater competitiveness. During debate on the bill, Senators Bob Casey (D-PA) and John Cornyn (R-TX) pushed to include language that would have created a Committee on National Critical Capabilities to screen outbound investments. This failed to make it into the final CHIPS legislation.

While support for such a mechanism did not have support in Congress, the White House is publicly behind the idea. In addition, a bipartisan group of lawmakers has already cobbled together a bill – the National Critical Capabilities Defense Act – that would make such a mechanism a reality. Under the proposed bill, U.S. companies who plan to invest in advanced technology sectors in China (or other countries of concern) would be required to provide notice of such plans. The bill would also allow the president to prohibit transactions believed to pose a risk to national security.

Even without the passage of new legislation aimed at creating such a mechanism, the wheels are in motion and Congress now has a tool with the guardrails provision to limit U.S. investments in select sectors of foreign economies. We believe this could have significant implications for the future of outbound corporate investment. Any company considering investing outside the United States should recognize that momentum is building for increased investment scrutiny and plan business activities and corporate strategies accordingly.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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