Chinese investment in the United States was chugging along at a record pace toward the end of 2016 when the improbable happened: Donald Trump won the U.S. presidency on his America-first platform.

Global dealmaking generally continued to hum along, buoyed by a strong stock market and high business and consumer confidence, but inbound Chinese deals with American companies declined 56 percent in 2017, according to Bloomberg LP.

“In 2017, we witnessed a dramatic, off-the-cliff decline in China outbound investment into the United States,” says John Reiss, global head of White & Case’s mergers and acquisitions group.

China’s new regulations on outbound investment contributed to the drop. But greater scrutiny by the U.S. Department of the Treasury’s interagency Committee on Foreign Investment in the United States was also a big factor, M&A lawyers say.

Under the Trump administration—and arguably even earlier—CFIUS, the secretive panel that reviews transactions for national security threats, has been reviewing transactions with China ever more closely. The panel, whose dealings are confidential, is particularly wary of deals involving sensitive technology, personal information on Americans, and assets with military applications.

Only five deals since 1990 have been blocked by a president on national security grounds. All involved Chinese investments in U.S. companies, including Trump’s rejection of Broadcom’s $117 billion bid for Qualcomm in March.

Deals can drag on for months at the CFIUS: 60 percent of 52 notices filed between 2014 and 2016 were withdrawn and later refiled, according to a Bloomberg Law analysis. In general, CFIUS reviews are taking much longer than they used to, even though there are statutory limits on them, lawyers say.

An Unsettled Year

“2017 was a year of significant uncertainty and disruption,” says Scott Flicker, chair of the Washington, D.C., office of Paul Hastings. It seemed that more deals failed to close after a strong start to the year, he says, while not discussing any particular transaction.

Flicker attributes much of the uncertainty to the Trump administration’s slow start filling vacancies at key agencies. “Failure to fill a position at Justice or Defense has a knock-on effect for the CFIUS process,” he says.

Moreover, “there was an elevated level of rhetoric that seemed to be more protectionist in nature and the question was how that was going to play out,” Flicker says.

Luke Bergstrom, global co-chair of Latham & Watkins’ M&A practice, says the decline in Chinese deals has been somewhat offset by growth elsewhere.

“[CFIUS] is the issue that is on everybody’s mind doing cross-border work,” Bergstrom says. “If it has an impact here in the U.S., it also has an impact across the globe, because if buyers are not looking at U.S. targets because they’re concerned about regulatory risks in the U.S., they may look overseas. It’s not like they stop doing M&A.”

Looking Ahead

Cross-border M&A lawyers generally agreed early this year—barring major wild cards—that the outlook for cross-border dealmaking in 2018 should stay strong, even for U.S.-China deals. The shock of the Trump transition seemed to be wearing off after substantial uncertainty at the beginning of last year.

“To some degree, I think people have adapted to the new normal,” Bergstrom says. “CFIUS remains a challenge. There is still a lack of clarity around that, but people are adapting and deal activity seems to be picking up.”

That was before Trump announced in early March his intentions to impose new tariffs on steel and aluminum imports, however, temporarily throwing the financial markets for a loop.

“The tariff situation is generally not good for M&A,” warns Reiss. “Chaos and uncertainty” could pull down the stock market and affect M&A activity.

Aside from financial market conditions, and notwithstanding a possible CFIUS overhaul—some companies are lobbying Congress to avoid protectionist economic measures—deals should be able to pass review, lawyers say.

“The public rhetoric with respect to the inability of Chinese companies to obtain approval to invest in the United States has been overblown and will begin to be reduced over time as people see that transactions will be approved,” Reiss says. “We will see a return to more normal levels of investment.”

Still, companies must plan early for CFIUS review, which is voluntary. Bergstrom says he tells clients that transactions across all industries can be done. He’s been telling clients to bring in regulatory counsel much earlier than usual to address potential challenges.

“Deals are getting done. Even Chinese deals are getting done,” Flicker says. “But the degree of planning and strategy that needs to go into those deals is simply much higher.”