Written by Vivienne Monger

 

Introduction

The ongoing TikTok debate has sparked heated discussions about U.S.-China trade relations and national security. It may seem like a fight over a social media app, but it’s more than that. The ban is a symbol of the growing tension between the two countries as they battle for dominance in trade, investment, and technology. While the U.S. frames its aggressive position to stop Chinese investments as a protective measure, it may violate international legal standards. This blog explores how the Committee on Foreign Investments in the United States (CFIUS) was formed and has evolved in response to growing Chinese dominance. Finally, this blog analyzes executive actions like the ByteDance order, which raise concerns under the Fair and Equitable Treatment (FET) standard, potentially exposing the U.S. to international liability.

CFIUS Background

The United States of America has long understood both the benefits and risks that foreign investment has on the U.S. economy and well-being as a nation. Generally, foreign direct investment has a positive impact on the economy, but there are some instances where national security considerations outweigh this benefit.¹Adam Hays, Foreign Direct Investment (FDI): What It Is, Types, and Examples, Investopedia, (June 6, 2024), https://www.investopedia.com/terms/f/fdi.asp CFIUS was created to balance these considerations. It was established by an executive order in 1975 and exists within the Treasury Department.²James K. Jackson, Foreign Direct Investment in the United States: An Economic Analysis, Cong. Res. Serv., RL33388 (Feb. 26, 2020). Since its inception, presidents have both broadened their authority and increased transparency in the decisions coming from the committee. In general, CFIUS creates a legal standard for the executive branch to limit or stop any transactions where there is credible evidence that a national security threat outweighs the benefit of foreign investment.

During President Trump’s first term, he successfully reformed CFIUS with the goal of stopping Chinese investment. The Foreign Investment Risk Review Modernization Act (FIRRMA) was enacted over concerns about China’s growing investment in U.S. technology.³U.S. Dep’t of the Treasury, The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) (2018). The act allows CFIUS to discriminate among foreign investors by country of origin by labeling some countries as “a country of special concern”, or one that has demonstrated or outright declared a goal of harming U.S. leadership and national security.

There are several ways a transaction can come onto CFIUS’s radar. First, a foreign person, usually a company, can voluntarily report a transaction they hope to make in the U.S. The agency can also initiate its own investigation into any transaction within its jurisdiction, primarily focusing on those countries of special concern and China specifically.⁴Cathleen D. Cimino-Isaacs, & Karen M. Sutter, The Committee on Foreign Investment in the United States (CFIUS), Cong. Res. Serv., IF10177 (Dec. 9, 2024). After investigation, they can clear the transaction, limit the transaction with a mitigation agreement, or block it completely. If the agency permits the transaction, the company is given “safe harbor” to proceed.⁵Cimino-Isaacs & Sutter, supra note 4 Transaction limitation methods include divestment from flagged entities or other conditions to help mitigate any national security concerns.

CFIUS is a vehicle for the executive to first raise these concerns. In fact, the ByteDance case was originally under CFIUS authority based on the initial 2017 ByteDance deal to buy a separate social media app called Musical.ly.⁶Fatima Hussein & Sally Ho, How a little-known agency holds power over TikTok’s future, AP News (Mar. 31, 2023), https://apnews.com/article/tiktok-ban-china-cfius-national-security-a7f59032a6a68c67470a0746d560e411 The matter was taken over by Congress with the Protecting Americans from Foreign Adversary Controlled Applications Act.⁷TikTok Inc. v. Garland, No. 24-1113, slip op. (D.C. Cir. Dec. 6, 2024). This Act is what the Supreme Court ultimately declined to strike down and led to the app shutting down temporarily.

Blocked transactions are a lot less common. After a series of review periods, the Committee has the option to escalate the issue further up the chain until it reaches the president. After a presidential review period, they make a final decision. Presidents have blocked transactions in the past or implemented other mitigation tactics. Ultimately, the president has only ever blocked eight transactions, seven of which have been Chinese-based companies.⁸Cimino-Isaacs & Sutter, supra note 4.

U.S.-China Trade and Investment Agreements

The United States’ investment and trade relationship with China wasn’t formalized until President Clinton signed the U.S.-China Relations Act of 2000 and paved the way for the country to join the World Trade Organization the following year.⁹Council on Foreign Relations, The Contentious U.S.-China Trade Relationship, www.CFR.org (May 14, 2024), https://www.cfr.org/backgrounder/contentious-us-china-trade-relationship. The United States has bilateral trade and investment treaties with China and a Fair and Equitable Treatment (FET) standard exists in the language of both.¹⁰Dr. Bonni van Blarcom & Gulnar Nagashybayeva, U.S. Trade with China: Selected Resources, Library of Congress, (May 22, 2024), https://guides.loc.gov/us-trade-with-china#:~:text=In%201979%2C%20the%20U.S.%20and,over%20%24750%20billion%20in%202022. The purpose is to create a stable and transparent legal environment for foreign investors. If a country is denied justice under the law and receives arbitrary or outright discriminatory treatment, the FET standard aims to protect them. The standard is a way to protect the essence of the agreement and help ensure that all reasonable legal expectations are met by all signatories.

In practice, tribunals balance these fairness interests with state sovereignty and each country’s right to enact regulation in their own public policy interests. While one action alone may violate the standard, tribunals have generally found that flagrant disregard for the standard and recurrent situations are more likely to be a violation.¹¹Knoll-Tudor Ioana, Fair and Equitable Treatment, Jus Mundi, (Sept. 16, 2024), https://jusmundi.com/en/document/publication/en-fair-and-equitable-treatment. For example, in Waste Management II v. Mexico, the tribunal said that actions that are “arbitrary”, “grossly unfair, unjust or idiosyncratic” or discriminatory, breach the standard.¹² Waste Mgmt., Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award (Apr. 30, 2004). They also focused on legal proceedings lacking due process with an outcome that ultimately offends the judicial process. ¹³Aceris Law LLC, Fair and Equitable Treatment in Investment Arbitration, www.acerislaw.com, (Jan. 23, 2022), https://www.acerislaw.com/fair-and-equitable-treatment-in-investment-arbitration/#:~:text=Taken%20together%2C%20the%20S.D.,candour%20in%20an%20administrative%20process.

The Ralls Corp case highlights due process concerns with CFIUS actions.¹⁴ Ralls Corp. v. Comm. on Foreign Inv. in the United States, 758 F.3d 296 (D.C. Cir. 2014) When Ralls Corporation, a Chinese-owned company, acquired wind farms near a U.S. Navy base, CFIUS deemed the transaction a national security threat, and the President ordered divestment. Ralls challenged this, citing Fifth Amendment violations, as they were denied access to evidence or the chance to rebut. The D.C. Circuit Court found procedural protections inadequate, prompting reforms requiring CFIUS to share declassified reasoning with the affected entities. However, classified information remains withheld. This case underscores the tension between national security and fair treatment in U.S.-China trade relations.

During his first administration, President Trump set the tone for tough China policies in the last decade, one which former President Biden continued. During his administration, Biden has not shied away from using CFIUS powers to mitigate or block Chinese transactions with American companies. For example, in May of 2024, Biden ordered a company with Chinese ties to shut down operations of a crypto mine built one mile from an Air Force Base due to a genuine national security threat based on the base’s intercontinental nuclear missile capabilities. ¹⁵ Exec. Order No. 2024-10966, 89 Fed. Reg. 43301 (May 16, 2024).

The Future

While each investigation by CFIUS and subsequent action looked at in a vacuum may not violate the FET in standard U.S. trade agreements with China, when taken as a whole, and with the anticipated ramping up of actions against the country, fairness disintegrates. Due process may be avoided by sending “Ralls letters” which are required to provide the company or government entity with all declassified information to illustrate why they made their decision. However, with a majority of presidential blocks targeting the country and a host of other restrictions and mitigations placed on Chinese entities, a pattern of unfair treatment emerges.

President Trump has started to increase tariffs on China and will likely continue to use CFIUS review powers to limit and block transactions with the country. In fact, Committee leadership under his guidance could adopt an outright ban on all Chinese transactions notified to them.¹⁶Amen Mir et. al., Instant Reaction – CFIUS under Trump II: Back to the Future, Freshfields, (Nov. 7, 2024), https://blog.freshfields.us/post/102jnpo/instant-reaction-cfius-under-trump-ii-back-to-the-future. CFIUS already blocks almost all reported transactions due to a low tolerance for any China-related risk and the negative public view, but an outright policy of blocking will create significant liability under the Fair and Equitable treatment standard. A policy like this, blocking transactions, regardless of a legitimate security issue, would certainly be “arbitrary” and would create an unfair environment for Chinese investors. With this aggression, the U.S. risks breaking international contracting standards and further straining the U.S. China relations. 

Conclusion

The critical questions about fairness, due process, and international legal obligations continue to circle as the Tik Tok ban remains in limbo. While national security concerns are often justified, a pattern of unfair treatment targeting China could expose the U.S. to claims of discrimination under the FET standard. The current U.S. administration, although slightly unpredictable, seems to have a policy goal of doubling down on the discriminatory treatment of China so this liability doesn’t seem to be going away any time soon.