Deal breakers? Regulating foreign direct investment for national security in Australia and the United States

26 Jul 2018

Executive summary

  • A change in the sources of foreign direct investment (FDI) in Australia and the United States has raised concerns about national security risks that may arise from such investments.
  • Both Australia and the United States have mechanisms to screen FDI and retain statutory powers to block, or order the divestment of, foreign acquisitions. These processes are currently being revised to better protect national security.
  • The issue for policymakers is how to maximise the benefits of foreign investment, while addressing legitimate national security concerns.
  • Whereas Australia’s regime is built around an open-ended ‘national interest’ test, the US process is explicitly directed at investment that ‘threatens to impair the national security of the United States’.
  • The Committee on Foreign Investment in the United States (CFIUS) provides a useful model for how Australia could reform its foreign investment screening process to better focus on national security issues, while leaving other non-security policy issues to domestic regulatory frameworks behind the border.
  • Australia’s process has been more focused on protectionism and has struggled to integrate national security considerations in a systemic way, resulting in confused policymaking and uncertainty for foreign investors.

Policy recommendations

  • The government’s discretion to reject foreign investment applications should be exercised only in relation to national security issues or cases where domestic regulatory frameworks are unable to address policy issues raised.
  • Australia’s Foreign Investment Review Board (FIRB) should be overhauled to better integrate consideration of national security and critical infrastructure issues. FIRB should report to the National Security Committee (NSC) of federal cabinet rather than the treasurer on national security issues. The NSC should be the decision-making authority rather than the treasurer.
  • The Australian government should develop broad principles for assessing national security risks and make these principles publicly available. The principles should be suitable for multilateral adoption in free trade agreements and investment treaties. The process for applying these principles should be articulated in a publicly-available government guidance document.
  • Critical infrastructure and other assets deemed too sensitive to allow foreign ownership should be identified either through statutory restrictions on foreign ownership or a negative list to increase certainty for foreign investors.
  • FIRB should improve its reporting to parliament, including through confidential hearings to parliamentary committees to protect classified and commercially sensitive information.
  • There is a lack of coordination between Australia and the United States in evaluating and addressing national security risks that may arise from foreign investment. A memorandum of understanding should be signed between the Australian and US governments for the exchange of information and setting out procedures for consultation and the joint consideration of cross-border acquisitions that raise common national security issues. This would complement existing ‘Five Eyes’ processes in relation to intelligence sharing.
Publication Details
License Type: 
All Rights Reserved
Published year only: