Balancing National Security and Free Trade: Regulation of Foreign Investment in the U.S. and Japan


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When: Jul 31 2013 - 12:00pm until Jul 31 2013 - 1:30pm
Where: East-West Center in Washington: 1819 L St. NW, Suite 600. Washington, DC. 20036

Balancing National Security and Free Trade: Regulation of Foreign Investment in the U.S. and Japan

An Asia-Pacific Political Economy Seminar featuring:

Dr. Rikako Watai

Visiting Fellow, East-West Center in Washington
Professor of Law, Keio University Law School in Tokyo, Japan

Mr. Carl J. Green (Discussant)

Senior Advisor, Hitachi Ltd.

Balancing National Security and Free Trade: Regulation of Foreign Investment in the U.S. and Japan from East-West Center on Vimeo.

Dr. Rikako Watai (seated left) explains her research on the foreign direct investment regulation in the US and Japan in the case of national security in her seminar at the East-West Center in Washington.

As the first and third largest economies in the world, the United States and Japan are major recipients of inward foreign direct investment (FDI). FDI from competitor states can raise national security concerns, yet the free competition-based economic order does not allow national security as an excuse for protectionist trade and investment policies. Despite this, both nations have passed laws that allow the government to halt the foreign takeover of domestic companies if deemed a threat to national security. Japan’s FDI regulations are patterned on those enacted by the United States in 1988 and 2007; specifically the Exon-Florio Amendment and later Foreign Investment and National Security Act (FINSA).

Dr. Rikako Watai explained how the Exon-Florio amendment was enacted in response to Japanese investment in the American tech industry in the 1980s, wherein Congress was concerned about the dependency of the defense sector on foreign capital. The law allowed the US president to block the foreign take-over of a US company in the case of national security, but not for industry protection. After 9/11, the definition of "national security" in the US changed, from defense production and procurement, to areas of "homeland security;" critical infrastructure and strategic resources. The 2007 FINSA law revised Exon-Florio in this light and delegated the authority to review FDI transactions to a Committee for Investment in the US (CFIUS). CFIUS reviews the deals to determine any national security risk, with special scrutiny given for foreign buyers with government backing and/or transactions related to sensitive locations or resources. Ultimately, the president maintains the authority to halt a deal.

Japan, she explained, used the US as its model for FDI regulation in its Foreign Exchange and Foreign Trade Act (FEFTA). It allows the Minister of Finance and Minister of in charge of the relevant industry to halt FDI if it threatens national security, order, or safety. Unlike the US system, which leaves national security undefined, Japan's system carefully spells out which industries are subject to special scrutiny under this law. Also unlike the US system, only investors dealing in the listed sectors must file their case in advance, all others can do so after the fact.

Displaying his extensive private sector experience, Mr. Carl Green recalled the political debates that lead to both the Exon-Florio and FINSA laws. He explained that it was the growth of the dual use of technology in the 1980s that made purely civilian firms suddenly critical to national security. While Exon-Florio was the result of a fight between President Ronald Regan and Congress over the redefinition of security as a means of protectionism, Green argued that the post-9/11 evolution of the definition of national security allowed challenged industries to seek shelter from competition by appealing for public fears of "foreign meddling." In his view, FINSA, by allowing congressional involvement in FDI regulation, left the system more open to abuse by economic interests and demagoguery. 

Dr. Watai concluded that both countries can do more to improve the environment for international investment and that regulation for national security reasons must be just, reasonable and transparent. She proposes that the US should provide a list of the industries subject to additional scrutiny as in the Japan model, and that Japan should make all investors register in advance, but hasten the process. Both need to work to ensure that any system that regulates investment be clear of political baggage.


Dr. Rikako Watai is a Japan Studies Visiting Fellow at the East-West Center in Washington and Professor of Administrative Law at Keio University Law School in Tokyo. She has written and spoken on regulatory treatment over foreign direct investment. She received her Ph.D. from Tsukuba University, LL.M. from Harvard Law School, and LL.B. from Keio University.

Mr. Carl J. Green is Senior Advisor in the Washington, DC office of Hitachi, Ltd, where he formerly served as Senior Representative. Prior to joining Hitachi in 1997, Mr. Green practiced and taught international business law. He was a partner in the Washington and Tokyo offices of Milbank Tweed Hadley & McCloy and a faculty member of the Georgetown University Law Center. Mr. Green is a graduate of Harvard College and Yale Law School and is a member of the Council on Foreign Relations.

Primary Contact Info:
Name: Grace Ruch
Phone: 202-327-9762