Foreign investment monitor #9

Donald Trump’s return to the White House could bring some relief but also introduce significant new challenges for businesses navigating US foreign investment controls. With CFIUS at the center of an increasingly complex and politicized regulatory landscape, investors must be prepared for heightened scrutiny, evolving priorities and potentially unpredictable outcomes. Drawing on the patterns of his first term, Trump’s leadership is likely to reinforce CFIUS’s role as a gatekeeper for national security, with significant implications for deal-making in key sectors.

CFIUS during the first Trump administration (Trump I) had three key features: diverging views on whether CFIUS should prohibit all Chinese investments; a shift within the Committee whereby trade agencies often acted more like security agencies; and process improvements allowing for reduced withdraw/refile rates and mitigation, notwithstanding historically high case numbers. Trump’s second term (Trump II) could build on these trends—or take them in new directions.

Much will depend on the political appointees leading the Treasury Department. CFIUS will likely remain a primarily career-staff-led, bottom-up process, resulting in general continuity. However, the priorities and approaches of senior officials across CFIUS’s member agencies have come to exert greater influence in the process over the past two administrations.

The appointment of a more traditional Treasury Secretary with financial sector experience (like Trump I Secretary Steven Mnuchin), could signal a return to a process governed by a narrower conception of national security, potentially reducing skepticism toward investments from US allies and partners. It could also refocus the process on efficient review of transactions, after a period in the Biden Administration notable for extended timelines and frequent requests that parties withdraw and refile their notices. On 22 November 2024, President-Elect Trump nominated Wall Street investor Scott Bessent to be Treasury Secretary. If he is confirmed, he would likely represent a return of some stability and predictability to the process. On the other hand, if a more protectionist Treasury Secretary is ultimately confirmed, he or she could broaden the scope of CFIUS reviews, creating greater uncertainty and unpredictability for transactions involving sectors with trade sensitivities.

One notable shift could be an even more aggressive posture with respect to Chinese investment, with CFIUS treating such investment as presumptively incompatible with US national security interests and defaulting to prohibition of such transactions. Transactions involving Chinese acquisitions of non-US companies with a US presence will also need to carefully consider whether the US operations are non-critical and can be carved out to prevent CFIUS action from derailing the broader deal.

Strategic investors, even from allies, may face increased risk, particularly if Trump II moves further in a protectionist direction. During Trump I, outside the CFIUS process, national security considerations were extended to trade issues, with the administration, for example, imposing tariffs on steel and aluminum imports and actively considering imposition of tariffs on European and Japanese automakers, in each case using national security authorities. If trade considerations become embedded in CFIUS reviews, strategic investors from allied countries may find themselves facing unexpected challenges. While financial investors may get some relief, all strategic investors will need to stay attuned to evolving and sensitive policy and political dynamics in Washington.

CFIUS’s growing prominence has occasionally led to politicization of transactions—and this trend could continue under Trump II. While the actual CFIUS process was generally disciplined under Trump I, certain high-profile cases were subject to public commentary and—in certain circumstances—leaks, which appeared intended to generate external pressure on the Committee. The extent of politicization will likely—and significantly—depend on the personalities in key positions, but companies engaging in high-profile or potentially controversial transactions should anticipate the need for government relations and communications strategies.

The impact of national security-based trade and investment regulations more generally is likely to intensify. Trump I saw the passage of the Foreign Investment Risk Review Modernization Act, significantly expanding CFIUS’s powers, along with a series of executive orders and rules targeting Chinese strategic and economic threats. The Biden Administration built on these efforts, introducing new CFIUS rules and non-CFIUS national security-based rules with far-reaching compliance implications. Trump II is likely to continue this trend, particularly with bipartisan Congressional support for measures aimed at decoupling sensitive US supply chains from China. Businesses will need to closely monitor regulatory developments to stay ahead of potential risks.

As Trump’s second term takes shape, continuity in CFIUS’s core processes is likely, but shifts in leadership priorities, politicization, and integration with broader trade policy could create a more complex and unpredictable landscape. For investors, early assessment and strategic decision making will be critical to navigating this evolving environment.

National security and economic ambitions: Labour’s strategic approach to investment

While the US election has set the stage for a more assertive approach to foreign investment screening, the UK’s political landscape under the new Labour government presents a contrasting focus. Here, national security considerations remain central, but they are increasingly integrated with a broader industrial strategy aimed at fostering economic resilience and growth. As the UK’s NSI regime matures, its approach reflects a delicate balance between maintaining scrutiny and encouraging investment in strategic sectors.

The UK's National Security and Investment (NSI) regime underpins the Labour government’s approach to attracting international investors and facilitating safe investment to drive economic growth. With a modern industrial strategy in play and a Strategic Defence Review underway, investors face a landscape where protecting critical sectors and promoting investment are increasingly intertwined.

The third NSI annual report highlights the regime’s growing maturity. Between April 2023 and March 2024, the Investment Security Unit (ISU) screened a record 906 transactions, while the number of rejected notifications fell sharply, reflecting better investor understanding of the rules. Final orders also decreased significantly, from 15 to five, indicating a regime that is both efficient and targeted but with no softening of approach. Chinese investors remain a focus, with 41 percent of deals called-in for in-depth review and eight of the ten deals withdrawn post call-in associated with China.  Notably, the Labour government’s approach remains nationality-agnostic in deals where the sensitivity of the target alone merits intervention. Investors from the UK and US accounted for the largest number of final orders in 2023-24.

Labour’s October 2024 green paper on industrial strategy emphasizes the government’s commitment to advancing strategic sectors like clean energy, advanced manufacturing, and life sciences while safeguarding national security. Investors should anticipate further alignment between the NSI regime and broader policy objectives, with possible updates to mandatory notification sectors in early 2025.

While the NSI regime remains predictable in many respects, the Labour government’s focus on economic resilience and geopolitical challenges suggests an environment of heightened scrutiny for high-impact deals. For investors, understanding the shifting regulatory priorities will be crucial for navigating the UK’s evolving investment landscape.

Balancing scrutiny with stability in France

Following elections in the US and UK, attention turns to France, where political instability is shaping the outlook for foreign investment. Despite the challenges of a fractured government and growing economic pressures, France’s ability to balance regulatory scrutiny with investment stability continues to make it a magnet for foreign direct investment.

Following the recent elections, Prime Minister Michel Barnier is steering a coalition government without a parliamentary majority, a precarious position that has heightened political instability and raised questions about the country’s economic direction. Debates over tax policy, driven by concerns around excessive public debt, have cast doubt on the fiscal predictability that has been a hallmark of French policy since 2017.

Despite these pressures, France remains Europe’s top destination for FDI, a position it has held for five consecutive years, according to a May 2024 Ernst & Young study. This status reflects not only the country’s economic fundamentals but also the French Treasury’s steadfast commitment to a foreign investment screening regime that balances control with market attractiveness. Investors can expect the Treasury to maintain its pragmatic approach, ensuring that regulatory oversight does not undermine the country’s appeal as an investment destination.

However, the protection of national interests is central to France’s foreign investment policy. While significant changes to the FDI regime are unlikely, enforcement of the existing framework is expected to be applied consistently, particularly in transactions involving critical sectors or perceived risks to national security or more broadly national interest. Amendments introduced in January 2024, including a permanent threshold for acquiring control, expanded coverage of sensitive sectors and enhanced exemption for intra-group transactions, signal, despite the unprecedented political and economic situation, a mature and predictable regime for most investors.

The more immediate risks for foreign investors lie not in the FDI review process itself, which remains relatively stable, but in the broader context of political and tax or economic instability. The risk of increased politicization of certain high-profile deals, fueled in part by the government’s emphasis on “re-industrialization,” could add complexity to transactions that are seen as strategically significant. Deals with heightened visibility may face additional scrutiny or become entangled in political narratives, potentially complicating the review and approval process.

For investors, understanding these dynamics will be critical. While the regulatory landscape offers predictability, the interplay of political pressures and economic priorities requires careful navigation. By staying attuned to France’s evolving political and economic environment, investors can better position themselves to seize opportunities while managing potential risks.