TOKYO -- Japan has failed to get on a new whitelist that exempts foreign companies from toughened scrutiny of investments in the U.S. The decision requires Japanese companies to be reviewed by the Committee on Foreign Investment in the U.S. when they plan to invest in key American technologies.
Only three countries -- Australia, Canada and the U.K. -- have made the list, according to the U.S. Treasury Department.
The list will take effect under new rules of the Foreign Investment Risk Review Modernization Act of 2018. The new rules will come into force on Feb. 13.
Screening powers of the CFIUS have been reinforced in stages amid increased tension between the U.S. and China. A pilot program, which started in November 2018, requires foreign companies to file for the committee's review of their plans to invest in semiconductor and 26 other American industries considered important to the national security of the U.S.
The new rules will add sensitive personal data and properties near certain military installations and other U.S. government facilities to the CFIUS's investment review. They also have expanded the definition of national security due to an increase in military-applicable technologies.
Japan has been trying to keep up with U.S. moves to prevent the drain of key technologies to China. In November last year, Japan tightened foreign investment rules to require overseas investors to report in advance when they plan to acquire more than 1% of shares in companies important to the nation's security, compared with the previous limit of more than 10%.
The revision of the Foreign Exchange and Foreign Trade Control Law is aimed at preventing Japan from becoming a conduit for technology leaks. Tokyo is also considering restrictions on foreign investors' purchases of land.
Japanese government officials had expected the legal revision to help Japan get on the new whitelist.
Now that the expectation has failed to materialize, Japanese investors will need to examine whether their investment plans are subject to the CFIUS's review and, if so, apply to the committee. As screening criteria will become tougher under the new rules, "investment schedules will be affected," said Ayumu Shinozaki, a lawyer familiar with international trade.
Companies in countries chosen for the whitelist "are basically exempted from reporting and filing requirements," said Kaori Yamada, a lawyer well versed in trade laws. But the CFIUS may investigate their investment plans as occasion demands.
Ryo Okubo, a New York-based lawyer often involved in merger and acquisition deals, noted that Australia, Canada and the U.K. were selected for the whitelist because they are members of the Five Eyes, an anglophone intelligence alliance comprising the three countries along with New Zealand and the U.S. "New Zealand was omitted probably because its investment in the U.S. is small," Okubo said.
Many experts pointed out that selection standards for the whitelist have yet to be fixed. Some said the Trump administration may use the list to have other countries put their foreign investment rules in line with U.S. versions by suggesting their inclusion on it.
Japan's stance may be tested by the U.S. on various occasions. "The U.S. is possibly taking a wait-and-see stance to check how Japan will implement its foreign investment rules. In particular, it wants to carefully figure out developments in Japan-China relations," said Yoshihide Ito, a Washington-based lawyer and expert on trade policy.
The whitelist is applicable for two years and may be changed when necessary.
Announcing the new whitelist on Jan. 13, the Treasury Department said it will release on its website selection criteria for exception from the CFIUS's tightened review, which are based on other countries' foreign investment rules and mutually cooperative relations with the U.S. But the implementation of the new rules remains uncertain.
Noting that many offices and departments in the U.S. government oppose the selection of countries for the whitelist, Okubo said, "Chances of Japan and other countries joining the list are low at present."
Amid the prolongation of U.S.-China friction, "self-defense" measures to avoid being put on the U.S. violation list are indispensable for Japanese companies. Analyzing effects of their China-related operations on investments in the U.S., they need to manage risks so as to prevent the U.S. from rejecting their investments.
"I expect that CFIUS will ultimately develop a waiver procedure for individual investors. Such a procedure might be for investors that have already received CFIUS approvals and are hence known to CFIUS," American lawyer Rod Hunter, a former senior official of the National Security Council, said. "A waiver procedure may prove to be a more useful vehicle for frequent investors than the categorical exclusions by countries for excepts investors."
Companies with many operations involving both the U.S. and China will have to keep a nervous eye on regulatory moves in the U.S.