Economics and Trade Bulletin September 5, 2018U.S.-China Economic and Security Review Commission2Bilateral TradeU.S. Monthly Goods Trade Deficit with China Reaches $36.8 Billion in July 2018In July 2018, the U.S. trade deficit in goods with China totaled $36.8 billion, its highest monthly level on recordand an increase of 9.6 percent compared to July 2017.1 U.S. exports to China declined from $11.1 billion in June2018 to $10.3 billion in July, while U.S. imports from China surged to $47.1 billion, the highest level sinceNovember 2017.2 Through the first seven months of the year, the U.S. goods trade deficit with China increased 8.7percent year-on-year to $222.6 billion, and is poised to exceed the annual record of $375.6 billion set in 2017.3Year-to-date, the United States has exported $74.3 billion worth of goods to China, an 8 percent increase year-on- year, and imported $296.8 billion, up 8.5 percent year-on-year (see Figure 1).4Figure 1: U.S. Goods Trade Balance with China, 2010–July 2018Note: 2018 data are for the first seven months of the year.Source: U.S. Census Bureau, Trade in Goods with China, September 5, 2018. census.gov/foreign-trade/balance/c5700.html.Bilateral Policy IssuesCommittee on Foreign Investment in the United States Reform Becomes LawOn August 13, 2018, President Trump signed into law the Foreign Investment Risk Review Modernization Act(FIRRMA) as part of the John S. McCain National Defense Authorization Act for fiscal year (FY) 2019.5 FIRRMAreforms the Committee on Foreign Investment in the United States (CFIUS) for the first time since 2007.* Though * For Commission’s assessment of Chinese investment in the United States and recommendations for reforming the CFIUS process, seeU.S.-China Economic and Security Review Commission, “Chinese Investment in the United States,” in 2017 Annual Report toCongress, November 2017, 71–111. -400 -300 -200 -100 0 100 200 300 400 500 201020112012201320142015201620172018 US $ b illi on s ExportsImportsTrade Deficit Economics and Trade Bulletin September 5, 2018U.S.-China Economic and Security Review Commission3many of FIRRMA’s provisions merely codify existing CFIUS practice (e.g., with regards to real estate acquisitions),FIRRMA also changes, broadens, or limits the committee’s authority in a number of important ways. In particular,FIRRMA expands the definition of “covered transactions” (i.e., transactions subject to a CFIUS review) to includeaccess to critical technology, critical infrastructure, and sensitive information, and certain types of investment fundtransactions. Congress identified several factors it wants CFIUS to consider when considering national security risks:1. Whether a transaction involves a country of “special concern” that has the “strategic goal of acquiring atype of critical technology or critical infrastructure that would affect” U.S. leadership in those areas;2. Impact of cumulative control by foreign persons of a particular critical technology or asset, and patterns ofrecent transactions for any given critical technology or asset;3. Whether the foreign person involved in a transaction has “a history of complying with United States lawsand regulations”;4. How the control by a foreign person of U.S. industries or activities “affects the capability and capacity ofthe United States to meet the requirements of national security”;5. The extent to which a transaction may expose sensitive information on U.S. citizens to exploitation by aforeign person or government;6. Whether a transaction may exacerbate or create new cybersecurity vulnerabilities in the United States.6Arguably, FIRRMA’s most substantial change to the CFIUS process concerns the scope of covered transactions,including: Critical technology: FIRRMA broadens the definition of “critical technology” beyond traditional exportcontrolled articles (i.e., defense articles covered in the U.S. Munitions List or Commerce Control List) toinclude “emerging and foundational technologies” as defined in the Export Control Reform Act of 2018(ECRA).* 7 FIRRMA also requires the president to “establish and, in coordination with the Secretary, theSecretary of Defense, the Secretary of Energy, the Secretary of State, and the heads of other Federalagencies as appropriate, lead, a regular, ongoing interagency process to identify emerging and foundationaltechnologies.”8Noncontrolling investment: FIRRMA provides that any noncontrolling investment, direct or indirect, by aforeign person shall be subject to CFIUS scrutiny if such an investment grants a foreign person control overany unaffiliated U.S. business that (1) owns, operates, manufactures, supplies, or services criticalinfrastructure; (2) produces, designs, tests, manufactures, fabricates, or develops one or more criticaltechnologies; or (3) maintains or collects sensitive personal data of United States citizens that may beexploited in a manner that threatens national security.9 o Investment fund investment: FIRRMA provides an exception for any noncontrolling investment bya foreign person through an investment fund in a U.S. business with access to critical technology,critical infrastructure, or sensitive personal information if (1) “the fund is managed exclusively bya general partner, a managing member, or an equivalent” who is not a foreign person; (2) the fundis structured in a way that precludes the foreign person from guiding the fund’s decision making;and (3) the foreign person does not gain access to nonpublic technical information as a result of theinvestment.10 This provision could have significant implications for the ability of investment funds * For ECRA’s definition of emerging and foundational technologies, see John S. McCain National Defense Authorization Act for FiscalYear 2019, Public Law No. 115-232, 2018, Sec. 1758. Economics and Trade Bulletin September 5, 2018U.S.-China Economic and Security Review Commission4(such as venture capital funds) with foreign capital to invest in U.S. assets without being subjectedto the CFIUS review process (provided the investments remain completely passive).Real estate: The purchase or lease by a foreign person of real estate located in “close proximity” to a U.S.airport, port, military installation, or another sensitive facility is a CFIUS covered transaction.11 ThisFIRRMA provision codifies existing CFIUS practice. In 2012, CFIUS ordered Ralls, a U.S.-domiciledsubsidiary of Chinese corporate giant Sany, to divest of its wind farm property acquisition because of itsproximity to a sensitive U.S. Navy training site.12FIRRMA also makes changes to CFIUS’s institutional structure and procedure, including: Review period: Lengthening the initial review period from 30 days to 45 days, with up to an additional 15days in “extraordinary circumstances,” to be defined in later regulations;13 Funding: Establishing a “Committee on Foreign Investment in the United States Fund” with $20 million inappropriations for each of FYs 2019 through 2023, and authorizing CFIUS to collect filing fees of up to 1percent of the transaction value, or $300,000, whichever is less;14 Expanding the reporting requirements: FIRRMA introduces several new reporting requirements; inparticular, it directs the secretary of commerce to produce a biannual report through 2026 on the value,ownership, sectoral breakdown, and investment type of Chinese investment, with analysis of whetherpatterns of Chinese investment align with the objectives outlined by the Chinese government in the Madein China 2025 plan.15 Declarations and mandatory declarations: FIRRMA allows parties to a covered transaction to submit ashort voluntary declaration (no more than five pages) to CFIUS. After considering the declaration, CFIUSmay request the parties to file a written notice (i.e., apply for a formal review), initiate a unilateral reviewof the transaction, or notify that all action with respect to the transaction is completed. Certain types oftransactions a