Mapping the National Security Landscape for Investors

Episode Summary

In the inaugural episode of “Foreign Correspondent — where we’ll discuss foreign direct investment reviews and the foreign policy, national security and political issues that drive them — host Jason Hewitt welcomes listeners to a discussion on the intersection of national security policy and dealmaking. For insights, Jason turns to guests Mike Leiter, the Washington, D.C.-based head of Skadden‘s CFIUS and National Security Groups, and Sir Simon Gass, senior advisor at consulting firm SC Strategy and former chair of the U.K.’s Joint Intelligence Committee. Together, they examine the overlap between national security and economic security, the changing relationship between the U.S. and Europe and geopolitical contests with China.

Voiceover (00:01):
From Skadden, you’re listening to Foreign Correspondent: An FDI Podcast, where we discuss foreign direct investment reviews and the foreign policy, national security and political issues that drive them. The cross-border investment screening insights you need start now.

Jason Hewitt (00:23):
Hi there and welcome to Foreign Correspondent, Skadden’s FDI podcast. So we’re going to be exploring the complex world of foreign direct investment reviews and the national security policy behind them. This is our inaugural episode, so welcome. Our aim is to have monthly conversations with leading national security policy experts, regulators, and Skadden’s foreign investment team on the intersection of national security policy and deals.

(00:48):
For this episode, we’re joined by our first national security policy expert, sir Simon Gass. From 2019 to 2023, Simon served as chair of the Joint Intelligence Committee here in the UK and advisor on intelligence to successive British prime ministers. His diplomatic career included roles as ambassador to Greece and Iran and NATO’s senior civilian representative to Afghanistan. Simon is now a senior advisor at SC Strategy, which is a London-based international strategy and geopolitical advisory consultancy. Their team of former intelligence, defense and security leaders, senior diplomats and corporate heads advise leaders across the public and private sectors providing actionable geopolitical insights. The team includes former advisors to the UK investment security unit who are experts at interpreting western government national security concerns across a range of sectors. Welcome Simon.

Sir Simon Gass (01:44):
Hi Jason. It’s great to be with you today.

Jason Hewitt (01:46):
So joining us also is Mike Leiter, who is the head of Skadden’s CFIUS and National Security Practices. He’s been recognized by a Foreign Investment Watch as a top global CFIUS expert and has significant experience before CFIUS as well as on non-US foreign investment screening processes. He’s currently also chairman of RAND Corporation and before joining Skadden was president of Leidos Defense. Before his time at Leidos, Mike served as director of the National Counterterrorism Centre from 2007 until 2011 for both presidents Bush and Obama. Hi again, Mike,

Michael Leiter (02:20):
Jason, great to be here. And Simon, a pleasure to be on with you as well.

Jason Hewitt (02:24):
Excellent. Well thank you so much both. I’m Jason Hewitt. I advise on global foreign investment screening and coordinate our non-US FDI screening practice here in London. Today’s episode we’re aiming to unpack what governments are focused on when using their foreign investment toolkits. So this is all about mapping the national security landscape as it’s relevant to investors, helping investors understand what they should think about and the geopolitical developments that are driving the focus of governments at the moment.

(02:53):
There are three broad themes that I’ll try and take us through, the overlap between national security and economic security, the changing relationship between the US and Europe and geopolitical contest with China. So I’ll dive straight into it. We’re halfway through the first year of the UK’s new Labour government here in London. They’re elected after much talk of secure-onomics, a bit of a portmanteau of security and economics that seems to capture the theme of the last few months, Simon. Has Labour’s first six months seen them take a broader view of national security?

Sir Simon Gass (03:27):
Well, Jason, I think in the UK, as in many countries, we’ve been taking a very broad view of national security for a long time now. I remember when I was dealing with some of these subjects maybe six or seven years ago, I think we were still in the UK and a little bit, I have to say behind the United States and Australia and a few other countries. We were still dealing with national security in I would say quite a narrow and traditional way. And what we learnt sometimes the hard way was that actually these days because of the linkage between economics, technology, national security, you have to take a very much wider view if you want to protect your country’s interests. And I lived through, for example, the Huawei 5G episodes in which I have to say the British government of the day was thoroughly beaten up by the first Trump administration.

(04:23):
And the background to that was that in the United Kingdom we felt that we’ve got a perfectly adequate technical solution by which we could have allowed Huawei some distance into our telecommunications networks. But I think the point that we had missed, and I think this is one of the big changes in recent years is we’d missed the strategic significance. This wasn’t simply an issue of is there a direct and very specific national security risk, for example, in terms of IP that you want to protect. By allowing either an acquisition or an entry into your market, you’re ceding a strategic space to a competitor that you would really rather not do on wider national security ground. I would say that what we’re seeing in the first six months of the Labour government is pretty much continuity in terms of the breadth of national security. As you know, under our National Security and Investment Act, there are 17 specified areas of particular sensitivity where notifications of acquisition of control are mandatory.

(05:35):
Those were drafted after consultation with business and industry. I don’t see them changing at the moment. I certainly don’t see Labour wanting to relax them. And by the way, it was interesting, I thought that when Rachel Reeves, the British Chancellor of the Exchequer, went on a visit to China less a week ago for economic and financial dialogues, one of the very first things that was put out loudly in terms of all British government communication, and Rachel Reeves herself made it clear, is that national security is the government’s first duty. And I think that is a very important and very correct statement. So for me at the moment it looks as though Labour wants to continue as in the past.

Jason Hewitt (06:27):
You mentioned earlier that the UK in certainly adopting this mandatory approval framework was a little bit behind Australia, which has had a really long-standing FDI regime except it’s one that expressly regulates national interest, ie, FIRB asks itself the question, is this transaction contrary to national interest? And national interest in an Australian context is character of the investor, it’s economic social taxation considerations as well as national security. I think this increasing conflation between, legitimate or otherwise, this conflation between national security and economic security really shows that direction of travel for FDI authorities.

Sir Simon Gass (07:10):
Well, I agree with that and one could add, I guess this will be Michael’s territory rather than mine, but if one reads the sorts of things which Robert Lighthizer for example was writing about a year or so ago, that is clearly the case in the United States as well. As far as the UK is concerned, I think that’s one of the developments which we will need to watch carefully. As you know, we’re waiting for the government to emerge with an industrial growth strategy, which we expect to become clearer. Some of the bones of it are clear already, but the detail will be clear later in the spring.

(07:49):
We might get on later to a discussion which has been quite active in Brussels and other European capitals around national champions, for example, about whether Europeans and for this purpose I include the UK, are happy for large companies from elsewhere in the world, including the United States of course, to hoover up early start-ups in Europe, particularly in the technology sphere. And that I think is certainly an issue. I think at the moment what I would say about the United Kingdom is that what the government will say is that the answer to that is to make the environment in the United Kingdom more favorable for those businesses so that doesn’t have to happen.

Jason Hewitt (08:33):
I think it’s a really interesting note for investors that whilst we’re talking about FDI in the sense of a shield to national security risk, part of the other side of things is the sword side or the carrot side, however you want to think about it. The ability to create a domestic environment that’s focused on the kind of innovation, investment and resilience that drives economic security seems a key feature of the landscape for investors.

Sir Simon Gass (09:01):
I agree with that. And even if one thinks in the narrow terms of the British National Security and Investment Act, it’s quite interesting that the Act applies to not only external organizations that might be seeking to take control, but even to the United Kingdom areas of control, which is kind of interesting. And if we look at the last year’s worth of published statistics around the National Security and Investment Act, of the number of potential deals which were called in for review, which is a relatively small number, about 40% of those were related to China, but 22% were related to the United States, for example.

Jason Hewitt (09:43):
And I think, Simon, on one of our upcoming themes, we’ll be talking a little bit more about that changing relationship between the US and Europe. But before we turn to that, Mike, all the talk at the moment is on the US deal and Nippon’s deal decision. Was that politics, was that economic security? Is there a fair national security argument or is it a little bit all of the above?

Michael Leiter (10:05):
Yes, that’s the easy answer. Yes, it’s national security, if whoever is sitting in the chair says it’s national security. And Jason, as you probably recall when we were talking both internally but also when we were speaking externally to the House of Commons regarding the reform of the British review process, it was one of the main points we made, which is you can tell me all you want that this is a narrowly tailored definition of national security. And I sort of laughed and said, “No, it’s not. It’s anything that the current government believes is national security.” No, of course there are some guardrails, but for every country, national security is an eminently malleable term and phrase that allows for political influence, allows for economic desires and as Simon said, to some extent, quite fairly. So I think we have to recognize the massive pendulum swing that we’ve experienced over the past 20 years on this point.

(11:12):
Now, national security reviews of foreign investment are as I guess as old as time, or at least as old as nation states. But in our democracies, whether republics or parliamentary system, whatever they are, it’s really since they’ve come alive in statutory form in about the 1970s for a variety of reasons. And that’s when CFIUS kicked off. But when it was begun in the ‘70s, there was a protection. In the US it was protection of the semiconductor industry from Japanese invasion. But you go past the ‘70s into the ‘80s, ‘90s, naught, and what you really end up with is almost every country in the world embracing global trade, movement of supply chains to the cheapest provider and a belief that that globally integrated economy will provide the best economic benefit. And in that regard, most governments thought that that brought them security. So we went from complete openness to where we are today, which is Simon I think accurately described, query whether it’s good and whether it’s sustainable, but accurately described everything is now national security.

(12:26):
By the way, this has been great for me. I now have, as you’re one of them, Jason, we have 40, 50 lawyers who do nothing but national security at a private law firm focused on litigation and deals. That’s remarkable. And it turns out I think that pendulum will probably swing back a little bit, but for now, everyone making investments has to consider the country in which they’re investing and what that current government, that current perspective views as national security. Now, some of those things I think will remain relatively stable. Access to cutting edge AI enabling chip technology that everyone gets, that’s national security. The details of how that is protected might not be at all consistent, which is what we’re seeing now in the middle of January in the United States, huge fights over new rules about how you’re going to control that. Now, it’s not foreign investment through which this is directly through regulated, but it is export controls and access to technology which is very, very closely linked to foreign investment.

(13:31):
So Nippon Steel I think is both telling and as the Supreme Court once said, this ticket is good for one train only. It is telling in that anywhere any investor invests in the world, you have to understand both national and broader national security interests. And that’s very important. If you want to go buy the most prestigious French winery, the French might well find a national security interest there. That’s what the French might care about. And this replicates across the globe and some countries care more than others. And in that sense it’s a very, very important lesson. The less important lesson is that in a period of US electoral politics where both Kamala Harris and Donald Trump are trying to win the, I don’t know, 30 odd electoral votes from the state of Pennsylvania, you better have the unions on your side before you go try to buy a steel company.

(14:30):
Now that seems sort of intuitive, but what isn’t as intuitive is how quickly one can phrase that as a national security concern. And once it is phrased as a national security concern, although it varies country by country, it becomes more immune from review and questioning than virtually any other regulatory scheme. It provides the government with a very, very big stick and it’s hard to throw that stick back at them. So I think the pawn is telling, I don’t think it actually reflects a radical change in the US government’s perspective on foreign investment.

(15:07):
In my view, foreign investment is remarkably different and much more welcome and will be more welcome by the Trump administration than truthfully it was in the Biden administration. Now, there’s still going to be guardrails about that because we’re still in the world of national security, which is in the eye of the beholder, but I do think that Nippon Steel should not be over-read nor should it be combined with the threat of tariffs that foreign investment into the United States is going to be difficult. In fact, I think it’s going to be just the opposite and much more open. My very last point is all of this sounds good if you’re sitting in London, if you’re sitting in Washington, it all sounds relatively clean until those investors don’t have quite the same views about what national security is.

Jason Hewitt (15:53):
Moving a bit from that discussion on the US into the changing relationship between the US and Europe. Simon, how is Trump’s second term being viewed here in the UK and Europe more broadly?

Sir Simon Gass (16:04):
Nervously, I would say if I had to give you a one word answer. Mike’s already set the scene in some ways. Of course Europe is well aware that President Trump will be committed to significant tariff imposition. He’s talked at various stages about 10 or 20% blanket tariffs. I doubt whether that’s exactly what it will be because I think that there will be quite a lot of obstacles, but there’s no doubt that it’s coming on no doubt on things like steel and other commodities, but it could go an awful lot wider than that. But I think that’s one angle of what I would put into a wider box which extends through the economy through national security and elsewhere, which is that this is likely to be a US administration which is much more prepared to dip into the coercive toolbox than the cooperative toolbox instinctively. It will do both of course, and I’m not implying that it’ll be merely coercion, but it could be quite difficult.

(17:13):
We’re seeing, for example, at the moment, stories about US big tech companies already lobbying President Trump to try to prevent the European Union from imposing fines on big tech companies and you could see that that could come with quite a big stick in some circumstances. Will we also see the United States applying more coercive measures if for example, US attempts to buy into British or European companies are turned down on national security grounds? There were a whole range of areas where Europe will be watching very closely to see how the new Trump administration develops. There’s an awful lot that we don’t know. And one of the dichotomies which I used to think about during the first Trump term, admittedly more in the geopolitics space, but I think that it could apply here as well is is this about America first or is this about America only? Because in the end we believe that the United States benefits from having a network of allies who are able to push globally in the same direction as the United States on a pretty wide range of issues.

(18:38):
That wasn’t always quite so apparent that that was the view from Washington in the first Trump administration. And my sense is that it might be even less so in a second Trump administration. So quite a lot for Europeans to be concerned about. And at the same time as they’re concerned about how the United States might behave, they also have to think very reflectively about how they might seek to respond to that. Going toe-to-toe with the United States in an all-out tariff war, for example, does not strike me as something which certainly the United Kingdom would relish doing for rather obvious reasons. There will be an awful lot to think about and I think that Europe is going to have to be uncharacteristically nimble if it’s going to make the best of what will be a challenging situation.

Jason Hewitt (19:30):
Simon, when you talk about Europe being nimble, and I think about that in the context of FDI regimes. There’s this perennial debate around whether FDI and the EU should be a union-wide activity undertaken by the EC. There’s clearly a lot of interest from member states and I think from a policy perspective in it remaining national, national security, it’s in the name after all. But does that national approach from member states affect their ability to be nimble and be mercantile with the US in the way that the EU might have an interest in?

Sir Simon Gass (20:04):
Well, it certainly fragments some of the power which the European Union might bring to the negotiating table because there are some areas which are clearly national jurisdictions. National security, for example, is not a European Union jurisdiction issue that belongs with national government. And as you know, Jason, even the national security scrutiny mechanisms are national mechanisms in the European Union. They’re encouraged strongly by the European Commission, but there is no Europe-wide mechanism for investment scrutiny. So what this means is that, or what it reveals in a sense is only a concern for EU member states to maintain control of their own competencies, but it also frankly reveals what is sometimes an entirely understandable competitive streak amongst European nations.

(21:03):
All of our countries want to attract investment. And as Mike was saying, that applies to the United States as well. For the United Kingdom at the moment we have a labor government which has been very clear that growth is its primary target, its main requirement. For that it needs investment and therefore it is going to fight tooth and nail as the trade minister said recently to ensure that where investments can be made, they come to the United Kingdom rather than to France or to Spain. That’s entirely natural.

(21:36):
But inside the European Union that imposes limitations on the extent to which the European Union can act as one. And even by the way, in terms of agreeing, negotiating mandates with the United States, there are always tensions between the interests of some countries that are determined to protect, I don’t know, olive production and others that are determined to protect high technology goods. So this is something which the European Union has to deal with. I have say, they’re pretty practiced at it, so it’s probably not quite as dramatic as I’m making it sound, but it certainly makes it sometimes harder to respond with that nimbleness, which we were speaking about.

Michael Leiter (22:16):
Yeah, I agree exactly what Simon just noted. And Jason, you and I have worked on deals where you’ve got intra-EU deals where countries simply decide no, we’ll hold off, let’s understand better if you’re going to close this factory or not. It is not a complete dissolution by any stretch of the European common market, but it is a powerful tool for a domestic government to use. It is obviously in an area where the EU does not otherwise govern and does not have authority. And the question will be as the US, as it likely will, gets more aggressive with tariffs as there are more and more schisms across the US and Chinese spheres, whether or not it’s social media or technology that enables different activities, as more and more of those emerge, whether or not it either drives or gives cover to more of these nationalistic tendencies, governments are using this to leverage deal makers in a way that really hasn’t been the case before.

(23:22):
I think it’s going to accelerate over the next couple of years if for no other reason the Trump administration’s actions will give some free rein and give some cover and may also provide European governments with some incentives to use that against the US as a sword against our tariffs.

Sir Simon Gass (23:39):
I certainly agree with that, Mike. And of course the European Union is facing a real challenge and it’s not just the European Union, I’ll include the UK, let’s talk widely about Europe. In terms of global competitiveness, it’s got a real problem as the Draghi report showed in relation to the European Union. And under those circumstances we are going to see those tensions. Like Mike, I don’t think that it will fragment the single market, but it will impose tensions and indeed we’ve seen them. If we look at the area of electric vehicles for example, this has been a real battleground about how the Europeans should behave towards China in relation to EVs where we’ve seen German car makers for example, that have made huge investments in China being very reluctant to go down the road of increased tariffs. We’ve seen other countries, including France, really wanting to screw down on cheap EV imports into Europe. Of course China is also investing in Europe in these areas, big EV investments including in countries like Hungary who are very much outliers in terms of European Union decision making.

Michael Leiter (24:47):
And can I follow something? Simon’s example of electric vehicles and the batteries associated with them is a fantastic one because the UK, Europe and the US basically didn’t give a damn for 10 years. You suddenly look down and you fundamentally have almost no ability to support the electric vehicle market. Now, going from one to the other and then trying to get to a place where you can have a non-Chinese reliant vehicle, that’s a painful process. And by the way, in both the US and the UK, especially the UK, sorry Simon and Jason, but good luck finding all of the capital you need from UK sources to develop that, let alone semiconductors and fabs. And fill in with our global infrastructure and the weaknesses, whether or not you’re on the M4 trying to get in from Heathrow or the Deegan coming in from JFK, we know what our respective countries infrastructure needs are.

(25:57):
So where is that capital going to come from? We sort of know it’s no longer going to come from China. One of those key sources is the Middle East. They have the capital, they’re interested in the investment and they also though at the same time geopolitically sits somewhere between the West and China, this is where the rubber starts to meet the road on the electric vehicle, pun intended.

Jason Hewitt (26:23):
Mike, you’re setting us up really well for our third theme, which is the geopolitical contest with China. I think what you’ve touched on there is really this question of China adjacency, and the risks for investors in Chinese participation, in co-investments, in parallel investments and even in the supply chain. What’s your take? Is the US more sophisticated here? Is there a real concern around China adjacency for investors?

Michael Leiter (26:48):
Well, there is a real concern. There should be a concern around China adjacencies and that’s about as malleable a term as national security is, adjacencies. It’s kind of a nice little filler. But I think we could characterize that from a bunch of different things. You could think of adjacencies as companies or investors who rely on sales to China in a way that they might be reliant on Chinese approval and might do things we don’t want them to do otherwise. They might be companies that rely significantly on R&D or personnel that come from China. By the way, almost every technology company in the world is, whether we like it or not. Those adjacencies might be a geopolitical partnership with China in various areas. I think both the US and the UK and other Western allies have a pretty nuanced understanding now of these issues. I think their bureaucracies are absolutely terrible at actually determining risk and shaping mitigation to address these things.

(27:50):
I think there are lots of people in the US government who understand the national security risk posed by China, by the way, not much more so in canned standard ways as they’re a threat to Taiwan than much more nuanced ways about what the CCP really does long-term and things like that. But expertise is good enough. Do I think that the US government or the UK government understands how that really starts to intersect when you’re looking at how am I going to support a trillion dollars worth of investment for AI and who should I worry about and how should I worry about it? No, I think that that understanding is remarkably thin in all capitals. Not to say that there aren’t excellent people in each, but there aren’t remotely enough to actually spread that knowledge and allow larger bureaucracies to operate in anything but rather cookie cutter ways. And that’s why you get frustration.

Jason Hewitt (28:42):
Simon, you mentioned Rachel Reeves’ visit to China earlier this month. That also follows a couple of weeks after the expulsion of an alleged Chinese spy. So clearly there’s nuance that’s pretty emblematic of a complex approach to China. How are the UK and Europe thinking about Chinese investors?

Sir Simon Gass (29:01):
Well, firstly, let me just go back to what Mike said because I very much agree with that and have agreed with it for a long time. And it’s not only China adjacency, it’s also sometimes obfuscation of ownership and coupling of tracks of different types. And for all of those things you need a big range of very sharp skills, whether it’s forensic accountants or technology experts or really sharp legal brains. This is going to astonish you, but British civil servants are not generally paid at the same sort of level as top forensic accountants or even, dare it be said, top lawyers. And as a result it’s very difficult to acquire within government those sorts of skills because the first thing they do once somebody has acquired those skills is go and work for excellent firms like Skadden if it’s a legal skill that they have.

(29:55):
So it really is a very difficult challenge I think as these things become more complex. And what that means of course, and all of our governments are trying to do this, is getting the right ecosystem so that you have ways of outreach to advisors beyond government who can help you find your way through some of these complex deals. But that is usually not a very cheap way of doing business either at a time when government budgets are under stress. So I think this is a real challenge for the future, which I think many governments have struggled with.

(30:26):
Most European countries have caught up and have recognized some of the challenges of some types of Chinese investment. And I say sometimes a Chinese investment because it’s an obvious point, one you’re well aware of, which is that the United Kingdom still wants to attract investment from China in the right places and in the right circumstances. And very often that is the case. And the fact that an investment comes from China of course does not mean that it is necessarily in some way damaging to national security or let it be said to you referred earlier to the Labour government’s view of secure economics, to economic resilience because those are linked concepts, they’re not exactly the same, but Chinese investment doesn’t have to cross any of those red lines.

(31:15):

One of the ways in which the debate is warming up in the United Kingdom, and of course there’s a good dose of politics in this, is how comfortable we should be with Chinese investment in some aspects of our national infrastructure. Wind farms has become an area where the government here has recently been criticized. It’s a bit rich coming from the government’s opposition since they were the ones who encouraged Chinese investment in that area in the first place of course. But that’s politics for you.

(31:45):
And that is a little bit what I meant earlier and I think Mike in what he said has illustrated brilliantly, about the way in which this is a dynamic picture. And investors, whether it’s in Europe or the United States, they can’t stand still. They need to be constantly scanning the horizon for areas in which, as Mike said, governments put a national security label on activity which might not so far have been regarded as being troublesome. But I think it’s having the foresight to see how that will go over the course of the next five years or so, which is particularly intriguing and of course very difficult.

Michael Leiter (32:29):

And I just say, I love Simon’s examples because there’s so much to them. And I mean that in the best of ways. Wind farms are really interesting in the US because one of the now pretty well established stories of Chinese theft with technology involves wind turbines, which for some period was a US-based developed technology. And a Chinese actor pretty clearly stole that technology through a variety of means, which in turn has made Chinese turbines subject to much greater scrutiny in the United States. Also, really one of the only two federal cases regarding CFIUS’s jurisdiction involved wind turbines. Why? Because those turbines happen to be located a few miles from a US Navy bombing site, aerial bombing site. And what else can you put in turbines? All sorts of stuff. And especially if they’re Chinese, there’s all sorts of concerns about that. So in the US, boy, there are no Chinese buying wind turbines.

Jason Hewitt (33:33):
So asking you to look into that impossible crystal ball a little bit, for Western investors, where are the opportunities to fill in investment gaps based on being a more benign investor? And of those opportunities, which are the ones that will surprise people with the level of scrutiny, ie, what is an emerging national security focus that people perhaps will be surprised by not thinking about today?

Michael Leiter (34:00):
So first of all, obviously the past 10 years have seen enormous growth of private equity investment in every sector of the economy. What people don’t fully appreciate though is that much of that private equity investment is done, even if it’s UK private equity investment in the UK or US private equity in the US or US private equity into the rest of Europe. Much of that investment is done hand in glove, other non-US, non-UK investors because the size of the tickets that they have to write almost always require those US private equity leads to go out and find other capital. Now, that other capital is sometimes passive, sometimes it is not. If the ticket sizes are large enough, no investor will just say, ah, here’s a few billion, go off and do it. They want some say.

(34:52):
So I think that will continue to be the case given all of the basic infrastructure demands we have. Not to mention the unshoring of a bunch of different capabilities that we’ve covered in this podcast, Jason. So I think we should continue to see very significant investment desired by sovereign wealth funds from Asia and the Middle East. And when I say Asia, I largely mean ex-China. So whether or not you’re China or US, UK, you know what those areas of growth are going to be. It’s going to be around technology, semiconductors, artificial intelligence, biotech, actually reinvigorating basic infrastructure, airports, telecommunications, energy that supports some of these other. So those trends I think absolutely continue and they actually accelerate. For the very reason that we’re trying to pull back from China and separate these fears, it requires exactly that investment to enable our ability to onshore these capabilities. So I think those investments and the drive for that will be real so that the opportunity is right there economically.

(35:58):
Then the opportunity becomes how if you are one of those non-US, non-UK investors, how can you navigate both the geopolitical tension that you may find yourself between the US and China and simultaneously provide sufficient assurances to the US, the UK and elsewhere that you can live in those two spheres, but your investment in these areas of hyper-growth are still can be, you can have sufficient assurances around these not somehow undermining security. And we have those conversations all the time, Jason, and they’re different levels of government from the very highest to the working level, but it is walking people through why this investment is beneficial and that economic benefit is providing national security but simultaneously providing assurances. And then making some hard choices about for those investors who want to do this, what you simply won’t do in China because it is not cost free, it’s not just words.

Jason Hewitt (36:59):
And I think it’s fair to say, Mike, that when we talk about mitigation in the FDI world, it’s not necessarily the same as say the antitrust world. A lot of the mitigation here is about governance, information security. Where it starts to hit valuations is more around supply assurances, R&D commitments and maintenance. But for a lot of deals, especially in this new and emerging technology space, you want to be supplying, you’re buying the business because you want to be in the market developing the technology, selling to the customers. You’re not going to be taking a valuation impact because the government wants to know you’re going to continue to develop in that market.

Michael Leiter (37:37):
Yeah, Jason, I think you got it exactly right. And as we’ve discussed earlier, countries will start to make choices. You want their investment, they have to see some benefit from that. Now, often that is just economic benefit but not always. And in some of these high-tech sectors, they also want to be able to maintain or develop some capacity domestically. And to say no to that is also saying no to their willingness to make certain investments whether, again, it’s the UK, US or elsewhere.

Sir Simon Gass (38:08):
Well, I agree with that. I think it is all going to get more complex. I think technology is going to lie at the heart of a great deal of investment. But of course we shouldn’t forget some of the more traditional industries and areas of activity as well. The range of countries which will be seen as attractive destinations for investment has of course already shifted as manufacturing has to some extent moved out of China as companies try to spread bet tariff avoidance, particularly with exports to the United States. So there will be plenty of smart opportunities in those areas. But if you try to exclude all investment which could possibly have a wide interpretation of national security challenge to it, you’re going to face a problem. One of the interesting things about the Huawei 5G episode for us in the United Kingdom was that one of the questions we would ask US counterparts was, “Okay, so if we don’t go with Huawei, who do we go with? Where are the alternatives?”

(39:14):
And in areas like EVs in wind turbines, that is a question. And therefore trying to achieve a better transatlantic lineup behind investment in key technologies I think would be highly advantageous. But I recognize again that that depends very much on whether this is America first or America only. I think there is a real opportunity for us to build coalitions around technology, and of course that does happen to a fair degree, but I think there is more that will need to be done in that area to create the right investment environments in a whole range of critical technologies if we are not to repeat the mistakes that we have made so far of allowing dependency to develop on supply chains or sources of origin, which we then come to regard as being unreliable and potentially dangerous.

Michael Leiter (40:05):
I agree with what Simon just said. And in fairness to the Biden administration’s last minute issuance around control of AI related chips, they are trying to make that consortium in partnership. And I certainly agree to the extent most of this work focuses on enabling allies to counter Chinese control of key areas, partnerships are critical.

(40:33):
I think one of the most challenging pieces we face here is let’s put foreign direct investment issues and tariffs and trade aside, if anyone on this podcast or almost anyone listening to this podcast can tell me where AI will be in 10 years, I welcome to hear it with any accuracy, let alone precision. It’s very, very hard to protect. And in that same way when we talk about AI, to know where it leads from a national security risk or opportunity perspective is unbelievably challenging, unbelievably challenging.

(41:08):
And in that sense, government national security people will always tend to worst case, not entirely wrong if that’s what your incentive is to protect national security. You don’t know what the future looks like. Your inclination will be to say control, control, control. That’s not sustainable. It won’t work. But it’s also, I want to give them some credit, it’s enormously challenging task when there is so much uncertainty and so much opportunity but also risk on a front like artificial intelligence and of course all the technology that has to support that.

Jason Hewitt (41:43):
And I think, Mike, for a lot of investors, it is their role to educate to a degree governments on what these new and emerging technologies are, what they mean, what the implications are. Because AI is a great example. Investment in AI isn’t this amorphous blob. Investment in AI can be investment in foundational models, it can be development of enhanced models, it can be investment in compute, it can be investment in data and training data sets. Fundamentally different national security risk profile. Fundamentally different businesses and implications for government as well as for investors.

Sir Simon Gass (42:17):
Completely agree with that in principle. Part of the problem of course is that Mike says that we can’t forecast where AI will be inside, let’s say five years. Problem is that the frontier labs can’t do it either. They don’t know where AI is going to be. Nobody knows where it’s going to be and-

Michael Leiter (42:34):
Exactly.

Sir Simon Gass (42:35):
... the position is moving so quickly, Jason, that when you go to the people who understand the issue best, you are almost always going to find that they are looped in with a very strong commercial interest, which may mean that the advice which they give governments is not as totally free of interest as one would wish. I think it’s just very, very difficult for governments to manage.

Jason Hewitt (42:58):
Well, I think we’re coming up to our time, so I wanted to offer some thoughts on what I’ve heard. I’ve heard that national security is a broad and fuzzy concept, economic security, defense autonomy easily covered, and perhaps everything else is legitimate as well. It seems hard to question the credibility. National security is whatever the nation says it is. But that doesn’t mean we’re talking about excluding the potential for investment. I think it leaves in that sword and shield theme. There are areas that are desperately looking for investment and that investment is important for national security. And Western and perhaps I’ll say benign investors have an opportunity to continue filling that gap with some thoughtful nuance about how they manage risk, how they deal with government on risks.

(43:45):
And to the extent that China leaves a gap in that investment landscape, it leaves an opportunity and one to be navigated with some caution around things like Chinese adjacency, especially in these new and emerging sectors that we’ve talked about where if they’re uncertain for investors, it sounds like they’re definitely uncertain for governments and that knowledge of uncertainty seems to be a risk in of itself. So let me offer you both a last word then before we wrap up, perhaps starting with you Simon.

Sir Simon Gass (44:16):
Well, I’d like to take the conversation back a little bit because I was just reflecting on a point which you’ve made, Jason, which Mike raised, which is about the expansion of the concept of national security. And I think we approach that perhaps with a of twitch of our lips as to whether governments are really thinking about it in the right way. I actually think that governments have a duty to think about national security in a very wide way. We’ve been talking just now about technology and all of our governments would say that if we get left behind in technology, if we find ourselves as outposts in the technology drive, that will damage our economic security, quite possibly our national security in all sorts of ways.

(45:03):
And therefore we will see governments taking more decisions, which may look to people to be only tenuously connected with national security. But in a world where economic security equals national security, I don’t think the governments can afford not to expand their definition of national security, take a pretty wide holistic view of it, and to think very deeply about how they maintain nascent industries in the tech space without finding their IP is being shuffled off, whether that’s in an eastward or westward direction.

Michael Leiter (45:42):
Well, I think both you and Simon captured it very well, Jason. At exactly the time that we’re seeing some of these most significant restrictions and questioning of foreign investment is exactly when every country that regulates it needs it more than ever. And there is going to be a natural push and pull between the national security and the economic sides of governments and also the private sector. No one should think this is anything but fluid for the future. And in the same way that predicting AI is challenging, predicting exactly how governments react is challenging. But the one thing I’m confident of, no one is going to say national security no longer matters and everyone is going to say they need more capital and critical sectors, and those two are going to have to find a happy medium going forward.

Jason Hewitt (46:34):
Well, it sounds like it should give us plenty to continue talking about. So I wanted to say thank you so much to Simon Gass from SC Strategy, and thank you to Mike Leiter from our team here at Skadden. We’ve really appreciated having you both on for this foreign correspondent FDI podcast. As a reminder, this is the first of hopefully a number of monthly conversations with leading national security policy experts, regulators, and our foreign investment screening team here at Skadden on the intersection of national security policy and investment transactions. So thanks so much for spending your time with us.

Michael Leiter (47:08):
Thanks so much.

Sir Simon Gass (47:09):
Thank you. It’s been fun.

Voiceover (47:11):
Thank you for joining us for today’s episode of Foreign Correspondent: An FDI Podcast. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found at skadden.com.