    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                        EXAMINING THE OPERATIONS OF THE

                        COMMITTEE ON FOREIGN INVESTMENT

                          IN THE UNITED STATES (CFIUS)

    =======================================================================

                                    HEARING

                                   BEFORE THE

                            SUBCOMMITTEE ON MONETARY

                                POLICY AND TRADE

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               DECEMBER 14, 2017

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-66

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               _________

                    U.S. GOVERNMENT PUBLISHING OFFICE

     31-297                 WASHINGTON : 2018

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                      Kirsten Sutton Mork, Staff Director
                   Subcommittee on Monetary Policy and Trade

                         ANDY BARR, Kentucky, Chairman

    ROGER WILLIAMS, Texas, Vice          GWEN MOORE, Wisconsin, Ranking
        Chairman                             Member
    FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
    BILL HUIZENGA, Michigan              BILL FOSTER, Illinois
    ROBERT PITTENGER, North Carolina     BRAD SHERMAN, California
    MIA LOVE, Utah                       AL GREEN, Texas
    FRENCH HILL, Arkansas                DENNY HECK, Washington
    TOM EMMER, Minnesota                 DANIEL T. KILDEE, Michigan
    ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
    WARREN DAVIDSON, Ohio                CHARLIE CRIST, Florida
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        December 14, 2017............................................     1
    Appendix:
        December 14, 2017............................................    33

                                   WITNESSES
                          Thursday, December 14, 2017

    Estevez, Hon. Alan F., Deloitte Consulting LLP, and former
      Principal Deputy Under Secretary of Defense for Acquisition,
      Technology, and Logistics, Department of Defense...............     7
    Kimmitt, Hon. Robert M., Senior International Counsel,
      WilmerHale, and former Deputy Secretary and General Counsel,
      U.S. Department of the Treasury................................     5
    McLernon, Nancy, President and Chief Executive Officer,
      Organization for International Investment......................    11
    Segal, Adam, Ira A. Lipman Chair, Emerging Technologies and
      National Security, Director, Digital and Cyberspace Policy
      Program, Council on Foreign Relations..........................    10
    Wolf, Hon. Kevin J., Partner, Akin Gump Strass Hauer & Feld LLP,
      and former Assistant Secretary of Commerce for Export
      Administration, U.S. Department of Commerce....................     8

                                    APPENDIX

    Prepared statements:
        Estevez, Hon. Alan F.........................................    34
        Kimmitt, Hon. Robert M.......................................    38
        McLernon, Nancy..............................................    43
        Segal, Adam..................................................    47
        Wolf, Hon. Kevin J...........................................    55

                  Additional Material Submitted for the Record

    Pittenger, Hon. Robert:
        Written statement for the record.............................    61
    Estevez, Hon. Alan F.:
        Written responses to questions for the record submitted to
          Representative Moore.......................................    63
        Written responses to questions for the record submitted to
          Representative Barr........................................    65
        Written responses to questions for the record submitted to
          Representative Pittenger...................................    68
    Kimmitt, Hon. Robert M.:
        Written responses to questions for the record submitted to
          Representative Barr........................................    74
        Written responses to questions for the record submitted to
          Representative Pittenger...................................    75
    McLernon, Nancy:
        Written responses to questions for the record submitted to
          Representative Moore.......................................    76
        Written responses to questions for the record submitted to
          Representative Barr........................................    77
        Written responses to questions for the record submitted to
          Representative Pittenger...................................    78
    Wolf, Hon. Kevin J.:
        Written responses to questions for the record submitted to
          Representative Moore.......................................    81
        Written responses to questions for the record submitted to
          Representative Barr........................................    85
        Written responses to questions for the record submitted to
          Representative Pittenger...................................    92

                        EXAMINING THE OPERATIONS OF THE

                        COMMITTEE ON FOREIGN INVESTMENT

                          IN THE UNITED STATES (CFIUS)

                                  ----------

                          Thursday, December 14, 2017

                         U.S. House of Representatives,
                     Subcommittee on Monetary Policy and Trade,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 9:09 a.m., in
    room 2128, Rayburn House Office Building, Hon. Andy Barr
    [chairman of the subcommittee] presiding.
        Present: Representatives Barr, Lucas, Huizenga, Pittenger,
    Love, Hill, Emmer, Mooney, Davidson, Tenney, Hollingsworth,
    Foster, Sherman, Green, Heck, and Crist.
        Chairman Barr. The committee will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the committee at any time, and all members will have
    5 legislative days within which to submit extraneous materials
    to the Chair for inclusion in the record. This hearing is
    entitled ``Examining the Operations of the Committee on Foreign
    Investment in the United States.'' I now recognize myself for 5
    minutes to give an opening statement.
        The free flow of capital is a bedrock tenet of the United
    States economy, ensuring that free flow worldwide has always
    been a bipartisan goal. And, to that end, I am proud to serve
    as Co-chair of the Global Investment in America Caucus, along
    with our colleagues Mr. Holding, Mr. Himes, and Mr. Meeks. The
    caucus promotes global investment in the United States economy,
    and helps educate members about the importance of foreign
    direct investment. Today, the United States is both the largest
    foreign investor, and the recipient of the greatest amount of
    foreign direct investment.
        That capital has provided a good deal of the energy that
    has kept our economy vibrant, compensating, to some extent, for
    our notoriously low national savings rate to provide the fuel
    for growth of U.S. businesses and jobs. Today, almost 5 percent
    of U.S. workers and jobs are related to foreign investment.
    Most of these jobs pay handsomely, far better, on average, than
    other U.S. jobs. But, if foreign investment is to be a force
    for good, it must not be welcomed unthinkingly any more than
    one might leave the front door of a house open around the
    clock. Investment that might weaken us is not good or welcome
    investment, and we must guard against it. That investment might
    come for purely economic reasons. But especially in this era of
    international turmoil, conflict, and economic uncertainty, it
    can also come from individuals or nation-states that might wish
    to weaken our economy in comparison to theirs, or try to spirit
    away technology or know-how that could strengthen their
    military to gain an advantage over ours.
        To maintain a vigilant watch on investment, the multi-
    agency Committee on Foreign Investment in the United States, or
    CFIUS, reviews many inbound investments to determine if they
    pose a threat to national security. This involves rigorous
    scrutiny of proposals by all appropriate departments or
    agencies, including a scrub by the intelligence community. And
    the President has the power to block transactions, or order
    divestments, if such concerns cannot be mitigated by a change
    in the original proposal.
        Today, we face new threats on a number of fronts, not just
    the threat of a hollowed-out industrial sector, but also from
    terrorism and from major nations that are economic competitors,
    but also potential military competitors. I am referring, of
    course, mainly, to China. Concerns have risen sharply in the
    past years about Chinese companies using that country's vast
    financial reserves to acquire key technology with an eye toward
    taking the lead in the industrial markets of the future. The
    Chinese Government, for example, has set aside $250 billion to
    be used in dominating the vital semiconductor market. This is
    not a new phenomenon, but just a new challenger.
        President Ford set up CFIUS in 1975 out of concern that the
    vast inflows coming from OPEC countries could weaken our
    economy. In 1988, among concerns that Japan was seeking to buy
    critical technology, Congress gave President Reagan the
    authority to actually block deals. That authority only has been
    used sparingly. Interestingly, the first use came when
    President George H.W. Bush blocked the sale of an airplane
    component maker to a Chinese company.
        More recently, President Obama, just before he left office,
    blocked a Chinese deal, and President Trump already has blocked
    the proposed purchase of lattice semiconductors by a Chinese
    company.
        CFIUS has also approved foreign direct investment
    conditionally, approving a deal only when divestment of
    divisions with sensitive technologies or activities has
    occurred. But the statute under which CFIUS operates has not
    been updated in a decade, and, clearly, we should think about
    modernizing it. Aside from China's intentions, there are
    burdens on the CFIUS process from the volume and complexity of
    proposed deals. There were about 40 percent more reviews in
    2017 than 2016, and a more than fourfold expansion in the
    number of Chinese-backed deals just since 2013.
        To that end, our colleague, Representative Pittenger and
    Senator Cornyn, have spent more than a year studying the CFIUS
    process and considering possible reforms. I commend their work.
        This hearing is the beginning of the committee's study of
    CFIUS and will be followed by further hearings soon. In
    considering any reforms, the committee will seek to ensure that
    CFIUS has the tools and resources it needs to examine foreign
    investment. As Members of Congress, it is our duty to advance
    the national security of the United States. At the same time,
    we must aspire, to the greatest extent possible, a welcoming
    investment climate so that U.S. companies have the capital
    needed to grow. As well, we need to be mindful that the
    investment climate for U.S. companies overseas is not
    unnecessarily compromised.
        To start that process, today the subcommittee has a panel
    of witnesses with unique abilities to discuss the operations of
    and challenges that CFIUS faces. This hearing and their
    testimony is intended to prepare members to make wise and
    cautious decisions on this vital topic. This should provide the
    beginning of a strong and thoughtful review.
        With that, I would now recognize a member of the Democratic
    side, the gentleman from Washington, Mr. Heck, for 5 minutes
    for an opening statement.
        Mr. Heck. Thank you very much, Mr. Chairman. And, Mr.
    Chairman, to begin with, I would ask unanimous consent to enter
    into the record a letter I sent to you and the Chairman of the
    full committee on December 8 requesting that a witness from the
    Department of Treasury be added to this hearing.
        Chairman Barr. Without objection.
        Mr. Heck. Thank you.
        While I look forward to hearing from today's witnesses, I
    believe, frankly, there is no substitute for hearing from
    people who actually are administering CFIUS. I have given
    Treasury a very hard time in this committee--some of you may
    recall it was a very hard time--about this issue in past
    hearings. I want to make clear that they have begun to engage
    in what I would characterize as a constructive manner. I
    acknowledge that and express my hope that the committee could
    benefit from their expertise during a future hearing. I would
    be happy to yield to Chairman Barr if he would like to respond.
        Chairman Barr. Yes. I appreciate the gentleman yielding.
    And just to clarify, this is the first of a series of hearings.
    We most certainly will be extending an invitation to Treasury
    officials who obviously have a large role in the CFIUS process
    to testify, and you will have that opportunity. I yield back.
        Mr. Heck. Again, thank you very much, Mr. Chairman. I am
    glad to hear that, and I thank you, again, for convening this
    hearing.
        I believe the CFIUS process generally works well for
    private, commercially motivated transactions. But in the 10
    years since Congress last passed legislation dealing with this
    issue, we have seen some countries gain the resources and
    sophistication needed to pursue a comprehensive strategy to
    acquire U.S. technology, or dominate strategically important
    industries. Existing CFIUS authorities were not designed and
    are not sufficient to deal with that kind of challenge. And
    although, as many of our witnesses will note, this is a problem
    that every part of the U.S. Government will have to work
    together to address. I believe there are some aspects of this
    problem that can only be addressed through legislative action
    to close gaps in existing CFIUS authority.
        When I asked Secretary Mnuchin about this in July, he
    agreed that this was a pressing issue, and that we could not
    afford to do nothing. I hope we can all bring that sense of
    urgency to how this committee approaches its work on CFIUS
    reform, the kind of urgency and unity which I know this
    Congress can still bring to bear on issues critical to our
    national security, because here we are dealing with just such
    an issue.
        And there are certainly things we need to keep in mind as
    we move forward. I am glad many of today's witnesses have
    raised issues, will raise issues like the need to improve
    information sharing and cooperation with our allies and
    partners, many of whom are also in the process of reevaluating
    their own CFIUS equivalents. I am glad many of today's
    witnesses will raise the need to provide more resources to
    CFIUS, which I agree are urgently needed to keep pace with the
    times, and the demand, and the need. And I am proud that the
    United States is, in fact, a place that welcomes foreign
    investment.
        But the broader legitimacy and acceptance of that principle
    of openness, which I believe in, and the ability of the United
    States to stand up for a free and open global economy, is, in
    fact, dependent on our national security. As Secretary Mnuchin
    affirmed, doing nothing is not an option. But I am confident
    that starting with this hearing, we can find a bipartisan path
    forward, and strike that balance between continuing to allow
    robust foreign investment, which I think does serve our
    Nation's needs, our economic prospects, while at the same time,
    balancing it against very legitimate security concerns, which
    are growing in number, in velocity, and in complexity.
        CFIUS needs to be reformed. It starts here with this
    committee, and it starts here with this hearing today, Mr.
    Chairman. So, finally, thank you, again, very much, for
    convening it.
        Chairman Barr. Thank you. The gentleman yields back.
        And today we welcome the testimony of the Honorable Mr.
    Kimmitt, a Senior International Counsel at WilmerHale. From
    2005 to 2009, he served as Deputy Secretary of the U.S.
    Treasury, where he had significant responsibility for the
    Department's international agenda, which included a revamp of
    CFIUS. He also served in the Reagan White House as National
    Security Council Executive Secretary and General Counsel from
    1983 to 1985. During 1997, Mr. Kimmitt was a member of the
    National Defense Panel, and from 1998 to 2005, he was a member
    of the Director of Central Intelligence National Security
    Advisory Panel.
        Mr. Kimmitt served in combat in Vietnam with the 173rd
    Airborne Brigade, retired as a major general in the Army
    Reserve, and also served as the U.S. Ambassador to Germany.
        The Honorable Mr. Estevez is a national security strategy
    and logistics executive at Deloitte Consulting, who served for
    36 years at the Department of Defense. From 2013 to January
    2017, Mr. Estevez served as the Principal Deputy Under
    Secretary of Defense Acquisition Technology and Logistics. In
    this position, he represented the Department of Defense at
    CFIUS while Chinese investment in the United States accelerated
    rapidly. Previously, he held several key positions, including
    Assistant Secretary of Defense for Logistics and Materiel
    Readiness and Assistant Deputy Under Secretary of Defense for
    supply chain integration.
        The Honorable Mr. Wolf is a partner at Akin Gump, and from
    2010 to January 2017, he was the Assistant Secretary of
    Commerce for Export Administration. In this role, he was
    primarily responsible for the policy and administration of the
    U.S. dual-use Export Control System. And as a result of the
    export control reform effort, he helped lead part of the
    defense trade system. Also during this time, Mr. Wolf was the
    primary Commerce Department representative to CFIUS.
        Mr. Segal is the Ira A. Lipman Chair in Emerging
    Technologies and National Security and Director of the Digital
    and Cyberspace Policy Program at the Council on Foreign
    Relations, an expert on security issues, technology
    development, and Chinese domestic and foreign policy. Before
    coming to CFR, Segal was an arms control analyst for the China
    Project at the Union of Concerned Scientists. He has been a
    visiting scholar at the Hoover Institution at Stanford
    University, the Massachusetts Institute of Technologies Center
    for International Studies, the Shanghai Academy of Social
    Sciences, and Tsinghua University in Beijing.
        Ms. McLernon is President and CEO of the Organization for
    International Investment, an association representing the
    unique interests of U.S. subsidiaries of global companies. With
    a strong background in economics, her efforts focus on the
    important role U.S. subsidiaries play in the American economy
    and policy issues that would make the U.S. a more competitive
    location for foreign direct investment and job creation.
        Prior to being named President and CEO, Ms. McLernon was
    OFII's Senior Vice President, where she focused on strategic
    communications and advocacy. Each of you will be recognized for
    5 minutes to give an oral presentation of your testimony. And,
    without objection, each of your written statements will be made
    part of the record.
        The Honorable Mr. Kimmitt, you are now recognized for 5
    minutes.

                   STATEMENT OF HON. ROBERT M. KIMMITT

        Mr. Kimmitt. Thank you, Mr. Chairman, members of the
    subcommittee. Thank you for your invitation to offer
    perspective on the Committee on Foreign Investment in the U.S.
    This is one of those rare instances where advancing age,
    including three decades of service on CFIUS, has some benefits.
        My experience with CFIUS began in 1985 as Treasury General
    Counsel under President Reagan and Secretary Baker. As you
    noted, Mr. Chairman, CFIUS was then governed by an Executive
    Order signed in 1975 by President Ford because of concern about
    Saudi petrol dollars being recycled to buy American assets.
        By 1988, concern had shifted to Japanese purchases, which
    lead to passage of the Exon-Florio amendment. And in 1992,
    concern about state-owned companies buying sensitive U.S.
    technologies lead to passage of the Byrd amendment.
        In 2005, I returned to Treasury as Deputy Secretary. After
    deals involving the Chinese National Overseas Oil Company and
    Dubai Ports were blocked by Congressional concerns, Congress
    passed the Foreign Investment and National Security Act of
    2007.
        Today, growing concern about Chinese investment,
    particularly by state-owned enterprises, and especially in the
    technology sector, has led to legislation proposed by
    Congressman Pittenger, Senator Cornyn, and bipartisan
    cosponsors. I would like to offer some observations that may
    assist in your deliberations.
        Earlier this year, this committee helped legislate the
    Secretary of the Treasury as a statutory member of the National
    Security Council, demonstrating that U.S. economic strength is
    tightly linked to our overall security. And foreign direct
    investment (FDI), as both you and Mr. Heck have noted, Mr.
    Chairman, makes an important contribution to the U.S. economy.
    Almost 7 million Americans will receive their paychecks this
    month from companies headquartered overseas. Close to 40
    percent of those workers are in manufacturing jobs. And, as you
    noted, FDI jobs pay about 25 percent more than the economy-wide
    average.
        A more open investment policy is integral to U.S. economic
    success, and I urge President Trump to issue the traditional
    U.S. open investment policy statement at the earliest
    opportunity. But in issuing that statement, it is important to
    make clear that the U.S. Government must ensure foreign
    investment does not harm U.S. national security interests.
        Chinese investment has an appropriately high priority for
    close scrutiny, because China seeks to compete strategically
    against the United States in multiple spheres: Military,
    diplomatic, and economic, using all elements of the state,
    including state-owned enterprises in that competition. Current
    legislation provides significant authority to block troublesome
    Chinese acquisitions. As you noted, Mr. Chairman, the first
    acquisition unwound by a President was under George H.W. Bush
    in 1990. Huawei's acquisition of 3Com did not proceed under
    President George W. Bush, and President Trump recently blocked
    the acquisition of Lattice Semiconductor by a Chinese
    investment group.
        As you consider new legislation, then, I would be sure to
    address actual gaps in existing authority. There is particular
    concern the Chinese companies may be using creative legal
    structures to conclude deals short of ownership and control
    that could nonetheless impair U.S. national security. I believe
    this is a very valid area of stricter scrutiny in the United
    States. I would be careful, however, about extending CFIUS'
    reach to transactions occurring outside the United States.
        CFIUS is intended to give the President exceptional
    authority to protect the United States without, however,
    superseding important authorities in other statutes. For
    example, if a joint venture abroad raises concerns about
    technology transfer or compromise, the export administration
    regulations, or international traffic in arms regulations,
    should be the first line of defense.
        Although additional legislative authority is warranted, the
    greatest problem facing CFIUS today is a lack of resources. As
    cases filed before CFIUS climbed to 250 this year, and with the
    prospect that CFIUS agencies lead by Treasury could be involved
    next year in a major legislative and regulatory implementation
    exercise, the increase in workload may begin to delay jobs-
    producing investments that do not raise national security
    concerns.
        I urge that matching requirements to resources continue to
    be a central point in your further deliberations. Today's
    hearing, and your future actions, are also being watched
    closely overseas. Of particular concern, the European
    Commission (EC) in Brussels is establishing an investment
    review mechanism even though, under European law, the
    Commission has no authority or jurisdiction on national
    security matters. So the new EC review may become a political
    screening process that could create a new barrier to U.S.
    investment into that important market of over 300 million
    consumers.
        In conclusion, I am more concerned today about growing
    investment protectionism than trade protectionism. If we want
    to grow well-paying jobs in the United States through foreign
    direct investment, we must send a clear message that the United
    States is open to investment except in those instances where a
    CFIUS process focused squarely on national security determines
    an investment must be blocked. I know you will strive to strike
    that important balance. Thank you.
        [The prepared statement of Mr. Kimmitt can be found on page
    38 of the Appendix]
        Chairman Barr. Thank you. The gentleman's time has expired.

                    STATEMENT OF HON. ALAN F. ESTEVEZ

        The Honorable Mr. Estevez, you are now recognized for 5
    minutes.
        Mr. Estevez. Chairman Barr, distinguished members of the
    committee, thank you for the opportunity to appear before you
    today and discuss the Committee on Foreign Investment in the
    United States, or CFIUS. While I am now at Deloitte, I do want
    to be clear that my views today are my own views, not those of
    my firm.
        I believe it is important to review while CFIUS is critical
    to the national security from the DoD perspective. There are
    many reasons that the United States has the finest military in
    the world, most importantly, the men and women who volunteer to
    join that force. However, another reason is the technological
    superiority of our military force that we have over our
    adversaries. CFIUS is one of the tools that helps our military
    retain its technological advantage. Based on my experience, the
    CFIUS interagency process not only worked, it worked well in
    protecting national security of the United States for those
    cases that CFIUS had jurisdiction over. I never signed off, nor
    did I ever ask the Deputy Secretary of Defense to sign off, on
    a CFIUS case resolution that, in any way, would imperil
    national security. The DoD always achieved the mitigation terms
    that we asked for or received committee support to propose a
    block for those cases in which mitigation was too risky.
        When I assessed the national security risk involved in each
    CFIUS transaction, I used the construct which I called the
    three C's, plus one. The C's represent the country, company,
    and commodity, commodity including technology. The plus one was
    co-location. That is when a foreign company was buying a
    company that was located near a sensitive military
    installation.
        The framework worked like this: For country, we assessed if
    the home country of the purchasing party was a potential
    adversary of the United States, or if the country was lax in
    its protection of technology or personally identifiable
    information.
        In assessing companies, we would determine if the company
    was a state-owned enterprise, or whether the company had been
    created for that specific deal, or if the company or its
    ownership was reliable and stable.
        To assess commodities or technology, we would review the
    criticality of those technologies to DoD weapons systems, both
    current and future, how cutting edge the technology was, and
    whether the technology was already globally available.
        In co-location cases, we would assess what activities were
    taking place at a given location and whether the purchasing
    party would be able to observe or impact those activities.
        If we had concerns with two or more of those C's, my
    experience was that such cases were heading to mitigation, at a
    minimum, or potentially a block.
        I would like to now turn to areas where I believe CFIUS
    needs expanded authorities. I recognize that there are
    proposals currently being reviewed by Congress. My comments
    aren't based on that specific piece of legislation. The first
    area is joint ventures. While the vast majority of joint
    ventures do not threaten national security, some joint ventures
    may put national security at risk through technology or
    intellectual property transfer. Bankruptcy is another area
    where I believe we need to expand CFIUS authorities.
    Bankruptcies of U.S. companies, especially those involved in
    cutting-edge technologies, could end in the sale of technology
    or intellectual property assets to countries or companies of
    concern.
        The final area I believe we need to assess with regard to
    CFIUS authorities is what I call connecting the dots. During my
    time as the DoD CFIUS representative, we noticed trends in
    which specific countries and companies were engaged in multiple
    transactions involving industry segments.
        Most times, the companies and technologies being purchased
    were relatively small. They were not State-of-the-art, and they
    were not critical to national security. Nonetheless, I believe
    there comes a point where too much of a particular industry
    segment is under foreign control and this may put national
    security at risk.
        The last area I would like to address is resources. The
    reality is just to process, manage, and mitigate the cases in
    the current workload, CFIUS needs more resources. The cases
    coming before the committee are growing in their complexity.
    Resources are needed to adequately perform the due diligence on
    the cases, to radically assess unfiled transactions, and to
    radically perform mitigation and oversight.
        I thank the committee for holding this hearing. This is a
    critical topic for continuing long-term viability of our
    technical superiority. I look forward to your questions.
        [The prepared statement of Mr. Estevez can be found on page
    34 of the Appendix]
        Chairman Barr. Thank you. The gentleman yields back.
        The Honorable Mr. Wolf, you are now recognized for 5
    minutes.

                     STATEMENT OF HON. KEVIN J. WOLF

        Mr. Wolf. Thank you, Chairman, other members, for inviting
    me and holding this hearing on a very important topic. Although
    I am now a partner at Akin Gump, also my views are my own. I am
    not speaking for or against any particular legislation. Rather,
    I am here to answer your questions about how the CFIUS and the
    Export Control System worked. I am also not going to speak
    about any case that Alan or I or others worked on or that is
    before CFIUS now.
        The other panelists have already described very well how
    CFIUS works, and we will get into that. So I want to get
    straight to my main point, which is that CFIUS and the Export
    Control System complement one another. CFIUS has the authority
    to control, and regulate, and block the transfer of national--
    technology of national security concerns if there is a
    transaction however defined. The Export Control System, the
    very purpose of the Export Control System, is to regulate the
    transfer of technology, regardless of whether there is an
    underlying transaction. This means that if specific concerns
    arise with respect to any particular type of technology,
    whether it is part of a CFIUS review or any other activity of
    U.S. Government, that the Export Control System, the rules
    governing the flow of goods, technology, software, and services
    out of the United States, should and could control that
    technology of concern to specific destinations, specific end
    users, and specific end uses.
        Now, I realize that identifying, describing that
    technology, particularly dual U.S. technology that has both
    benign commercial applications, as well as military and other
    applications, is complex. I also realize that the Export
    Control System itself is very complex.
        However, the system is designed, it was created, to
    constantly evolve to address new threats, new technologies, new
    issues, new end users of concern. In particular, the export
    administration regulations at the Bureau of Industry and
    Security, where I was for the previous 8 years, has the
    authority to impose these controls and alter them in
    coordination with, largely, the Departments of Defense, State,
    and Commerce. The descriptions of technology can be as broad or
    narrow as the concern arises. The scope of the controls can
    apply to specific entities, or entire countries, or they can
    apply to particular end users and end uses.
        Most of the export administration regulations implement
    multi-lateral controls that are controls that are agreed to by
    between 30 and 40 other allied countries with similar concerns.
    And this is a reflection of the fact that multi-lateral
    controls, controls that our allies all work on together, are
    the most effective because they achieve a common objective.
        It is also a reflection of the understanding that
    unilateral controls, controls that are imposed only by one
    country, generally tend to be counterproductive, because they
    result only in harming the industry of a country imposing the
    controls and don't actually block, in the end, the technology
    to the country of concern.
        So recognizing these two competing structures, and
    recognizing that the multi-lateral system can move very slowly
    because it is a need for consensus with our allies to decide
    which technologies to impose, we created, during my time, a
    unilateral process to be able to tag and identify sensitive
    technologies of control unilaterally in order to be able to
    address the threat quickly and tailor it to whatever the
    concern is on the condition that eventually, it gets presented
    to the multilateral regimes for controls there.
        There are many additional tools in the export
    administration regulations that can be tailored, such as a
    process of informing particular companies about particular
    technologies and particular end users, again, regardless of
    whether there is an underlying transaction that there is
    technology of particular concern.
        I focused in my comments here in the first 4 minutes on
    just technology transfer issues. But with respect to CFIUS, you
    also need to keep in mind that the national security issues we
    looked at are co-location issues, transactions involving those
    that create espionage or cybersecurity vulnerabilities, those
    that could reduce the benefit of U.S. Government investments,
    transactions that would reveal personally identifying
    information, those that would create security of supply issues
    for the Defense Department and other Government agencies, those
    that would implicate law enforcement issues, and those that
    would create exposure for their critical infrastructure such as
    telecommunications. Each one of these individual topics has
    their own issues and warrants their own hearing. So I am here
    because I have a 3-minute, and a 30-minute, and a 3-hour, and a
    3-day version. I will stop here with the 5-minute version and
    be available for your questions over the course of the hearing.
    Thank you for inviting us.
        [The prepared statement of Mr. Wolf can be found on page 55
    of the Appendix]
        Chairman Barr. Thank you, Mr. Wolf.
        Mr. Segal, you are now recognized for 5 minutes.

                         STATEMENT OF ADAM SEGAL

        Mr. Segal. Chairman Barr, Ranking Member, members of the
    committee, thank you for inviting me here today. My purpose is
    to provide a context for Chinese activities and what the
    motivations and challenges might be. I am going to make three
    points. The first is that China has a comprehensive strategy to
    move up the value chain and develop high technologies for
    national security and economic interests. That strategy
    involves many parts. It involves increased investments in R&D
    and in science and technology, industrial policy, and, in
    particular, policies focused on semiconductors, artificial
    intelligence, and what is called Made in China 2025, which is
    the use of the Internet of things and automation in
    manufacturing. It has its own foreign investment regime, which
    forces foreign companies to transfer technology, and fails to
    protect IPR, and is involved in cyber and industrial espionage,
    and then, finally, is involved in foreign acquisitions.
        So can it acquire those technologies in the United States,
    Europe, India, Israel, and other locations? The policy that
    China has adopted is broad and comprehensive, and any U.S.
    response will similarly have to be broad and comprehensive.
        Second, as a number of people have already noted, the
    investment decisions behind Chinese firms is often opaque. Who
    the actors are is opaque. They may say that they are private.
    They may, in fact, be private, but still receive significant
    support from state-owned enterprises. They may have tight
    connections to local or provincial governments. And so, the
    sources of the money and the motivations of that money are
    often unclear. They may be strategic. They may be economic.
    They may be hiding money from a corruption scandal.
        The problem is compounded by the fact that President Xi
    Jinping has accelerated a process that was started under
    President Hu Jintao of civil military fusion. And that goal is
    to tightly link the civilian and military economies so that any
    benefits that are brought to the civilian economy are
    eventually turned into military strength as well. And so that
    means that in this context, any advantage that is brought to
    the civilian economy could also be brought to the military
    economy.
        Third and final, while I support many of the specific
    reforms that have been mentioned about increased capacity,
    increased information sharing, and other points for CFIUS, it
    is extremely important to point out that the U.S. and Chinese
    technology platforms and systems are increasingly integrated.
    We have seen that in information technologies where it is very,
    very hard to draw a line between where China starts and where
    the United States starts. We see a massive flow of people back
    and forth. We see co-investment.
        We see a huge amount of co-research and co-writing of
    research papers. When Chinese scientists look for co-authors,
    they look to the United States. Over 40 percent are U.S.
    authors. And this pattern is going to be reproduced in these
    new areas of frontier technology.
        So we already see this in AI, in artificial intelligence,
    that the two systems, although right now are often cast as
    competitors, as running a race against each other, they are
    going to be tightly integrated. And Google's announcement
    yesterday that it was setting up an R&D center inside China is
    just the most recent example of how tightly linked those
    systems are going to be. That means that for any type of either
    export control law or CFIUS reform, there is a high degree of
    chance that we could, in fact, hurt ourselves, that we would be
    affecting science and technology that feeds back into the U.S.
    system that drives U.S. companies and drives U.S. innovation.
        Thank you very much, and I look forward to your questions.
        [The prepared statement of Mr. Segal can be found on page
    47 of the Appendix]
        Chairman Barr. The gentleman yields back.
        Ms. McLernon, you are now recognized for 5 minutes.

                       STATEMENT OF NANCY MCLERNON

        Ms. McLernon. Chairman Barr, Ranking Member Moore, and
    other distinguished members of the subcommittee, thank you for
    your invitation to testify this morning. I am Nancy McLernon,
    and I have the pleasure of being the President and CEO of the
    Organization for International Investment, OFII, the only
    business association exclusively comprised of U.S. subsidiaries
    of international companies. Our members represent a wide
    variety of industries from companies headquartered all over the
    world, including Siemens, Lego, Samsung, and BAE. I applaud
    this subcommittee's effort to take the time to examine the
    economic importance of foreign direct investment to America's
    economy, and the effectiveness of the CFIUS process.
        OFII's mission is to ensure the United States remains the
    most attractive destination for foreign direct investment due
    to the outsized impact it has on the economy and work force.
    6.8 million workers in the United States take home a paycheck
    from an international company, including 20 percent of the U.S.
    manufacturing work force offering 24 percent higher
    compensation than the economy-wide average. And somewhat
    counterintuitively, international companies manufacture in the
    U.S. not just for our consumption, but also for worldwide
    consumption. In fact, U.S. workers at international companies
    produce about 25 percent of all U.S. exports.
        International companies are also tied to their communities.
    They provide world-class training and--world-class work force
    training and help strengthen the communities in which they
    sustainably operate. For example, Toyota, whose Kentucky plant
    is the largest manufacturing facility in the world, is applying
    its manufacturing know-how to help children's hospital reduce
    infection rates with a neonatal intensive care unit, decreasing
    infection rates by 80 percent. Think about it, a Japanese
    company, in Kentucky, the largest manufacturing facility they
    have in the world.
        Historically, the vast majority of FDI flows into the
    United States through mergers and acquisitions in line with
    other advanced economies. And the vast majority of that cross-
    border investment flows into industries totally unrelated to
    national security. For example, Loreal's successes have been
    achieved by their strategic acquisitions here. They have
    expanded their footprint in the United States to include
    research, manufacturing, and distribution facilities across 13
    States. In fact, I recently had the opportunity to go out to a
    facility in Little Rock, Arkansas that was the result of an
    acquisition of a Maybelline facility. Now that facility is the
    largest cosmetic manufacturing facility in the world in Little
    Rock, Arkansas, a French company manufacturing for consumers
    all around the world.
        Indeed, examples like Loreal demonstrate that when global
    companies acquire or merge with U.S. companies, they often
    raise the industry's economic performance, become reliable
    commercial and investor anchors, making large capital
    investments, and reinvesting U.S. earnings into their
    operations here. Without cross-border M&A (mergers and
    acquisitions), our economy would not receive the full benefits
    that international companies provide. A critical factor in the
    attraction of the U.S. to foreign investors is our country's
    commitment to the rule of law, and the stability of the
    regulatory environment. FINSA (Foreign Investment and National
    Security Act), as was mentioned earlier, the result of
    extensive deliberations in Congress, laid the foundation for
    success. Importantly, during 2008, Congress engaged in an
    equally thoughtful process to implement FINSA. The resulting
    regulations carefully captured the balance that Congress
    sought, providing helpful guidance on the kind of transactions
    that are within the purview of CFIUS and the wide range of
    factors relevant to national security assessments.
        Based on publicly available information and anecdotal
    experience of OFII members, it seems clear the CFIUS process is
    under stress. There appears to be more investigations and
    mitigation agreements, withdrawals of cases, and a lengthening
    period for resolution. Our members report that although CFIUS
    staff members continue to impress with their long hours and
    attention to unique circumstances, resource constraints are
    straining CFIUS' ability to handle its current workload. Such
    delays increase the risk to foreign-owned bidders in an M&A
    auction process, potentially forcing them to pay a premium.
        But let me underscore that the international business
    community supports the efforts of CFIUS to ensure America
    remains safe, and we are in full agreement national security
    should be paramount. Yet, I caution that CFIUS should not be
    viewed as a panacea to address all the concerns that have been
    raised. The Government has a wide variety of tools at its
    disposal, ensuring fairness, predictability, and efficiency in
    national security reviews must remain the tenets of the CFIUS
    process. Any changes to the process need to be done
    thoughtfully with the full awareness of the economic states.
        Once again, thank you, Mr. Chairman, I look forward to
    answering your questions.
        [The prepared statement of Ms. McLernon can be found on
    page 43 of the Appendix]
        Chairman Barr. Thank you.
        The Chair now recognizes himself for 5 minutes for
    questioning. I appreciate the witnesses' outstanding testimony,
    very illuminating and educational.
        Mr. Kimmitt, let me start with you because of your
    background in the development and evolution of CFIUS and your
    expertise. Obviously, as Ms. McLernon was pointing out, foreign
    direct investment is critical to the U.S. economy. She
    mentioned Toyota in Kentucky. But in my home State of Kentucky,
    foreign direct investment supports 117,000 jobs, a little more
    than 7 percent of the entire employment.
        At the same time, as many of the witnesses pointed out here
    today, national security of our country is of critical
    importance. And FDI, if not carefully watched, could enable our
    enemies to inflict harm not just on our economy, but create a
    whole lot of national security concerns. And I will just quote
    the U.S.-China Economic and Security Review Commission, ``China
    appears to be conducting a campaign of commercial espionage
    against U.S. companies involving a combination of cyber
    espionage and human infiltration to systematically penetrate
    the information systems of U.S. companies to steal their
    intellectual property, devalue them, and acquire them at
    dramatically reduced prices.'' The central question of this
    hearing is, how can we balance both the desire for strong
    foreign investment and strong national security? And can you
    give us a little bit of guidance on that?
        Mr. Kimmitt. Mr. Chairman, I think you put your finger on
    it just precisely: Striking that balance that not only you as a
    subcommittee and committee seek to do, but really, what the
    members of the Administration do on a daily basis. I think it
    is important to reiterate that the U.S. is open to investment
    for the reasons that you and others have mentioned. At the same
    time, no one serving in public office has a higher
    responsibility than protecting the national security. I think
    we start out from the point of view that we are looking for
    ways to attract good, high-paying FDI jobs to the United
    States. Appearing before this committee now almost 30 years
    ago, my then boss, Jim Baker, said that foreign direct
    investment was our ace-in-the-hole. As Nancy said, it is
    foreign companies deciding that our marketplace, our system,
    and our workers are worth that investment. I think that is
    where we start. But that is not where we end. We have to look
    precisely at those security considerations you mentioned.
        And I think today, unlike past concerns--the Saudis,
    perhaps the Japanese--we are talking about someone who not only
    wants to be a peer competitor, but a peer winner against the
    United States. That is China. And we have to look at Chinese
    investment particularly closely. That doesn't exclude that
    there could be Chinese investment that does not raise national
    security concerns. It doesn't exclude that there could be
    Chinese investment that needs to be regulated or looked at by
    others. But I think, again, we start with the point of view
    that we want to attract that investment, but not at the cost of
    harming U.S. national security.
        Chairman Barr. And, Ms. McLernon, what interests me about
    this issue is why there are not robust--sufficiently robust
    capital markets in the United States to provide alternative
    sources of capital for startups, or for mature companies in
    financial distress. Is there an alternative to foreign direct
    investment? And why do we not have strong enough capital
    markets in the United States to provide that capital as an
    alternative to a Chinese entity?
        Ms. McLernon. Yes. Well, I would start with the fact that
    we don't want to close--we don't want to close our borders to
    foreign direct investment, right? So even if there was a way to
    try to figure out how to fund through our capital markets here,
    we don't have all the answers. And foreign companies, when they
    come to the United States, they don't just bring capital. They
    bring innovation. They bring world-class work force training,
    as I mentioned. They bring new ways to do things. We have seen
    that in the auto sector, right?
        So I don't think that it would be a desire to wall us off
    and think that we have all the smarts, and we can have all the
    answers if we just contain it here. And the reason why we
    don't--we have had many people on the panel, and you yourself
    talked about the amazing benefits that foreign direct
    investment mean to the U.S. economy and to the workforce. So I
    wouldn't even think that would be a goal.
        Chairman Barr. In the remaining time, Mr. Estevez,
    observers have said that the CFIUS process offers the view that
    other committee members somehow rolled the Pentagon on a
    decision or that the brass at the Pentagon somehow caved to
    outside influences and ignored input from Pentagon staff. Can
    you elaborate on that?
        Mr. Estevez. I will. I don't think that is true. Inside the
    Pentagon--when I looked at a case, we brought in all the
    pertinent parties from the breadth of the Pentagon, there were
    military services, key agencies like National Security Agency,
    who have concerns on cyber cases, for example. And I always got
    the signoff at the senior leadership level. We always went into
    a case looking to say--I believe in foreign direct investment
    too. And we need to have that flow of capital, and we need the
    innovation that that brings. But I always wanted to make sure
    that we were protecting national security in doing that. And we
    brought the full gamut of the Pentagon resources when we
    examined a case. My three C's construct--China was always a
    case that we looked at regardless of the next step. And then
    when we went to the committee, I had to make the case. I could
    never say that the committee rolled me against. I was pretty
    far in my discussions--
        Chairman Barr. Thank you. Thank you.
        Mr. Estevez. --as Mr. Wolf would tell you.
        Chairman Barr. My time has expired. Well, more than
    expired. I appreciate members' indulgence.
        And now I would like to recognize the gentleman from North
    Carolina, Mr. Pittenger. And I would just note not only is Mr.
    Pittenger the author of the Foreign Investment Risk Review
    Modernization Act, he is also the author of the legislation
    that made the Treasury Secretary a member of the National
    Security Council. And, with that, I yield to my friend from
    North Carolina, and applaud his leadership on this issue.
        Mr. Pittenger. Thank you, Chairman Barr. Thank you for your
    commitment and leadership. And thank each of you for being with
    us today and your expertise and background. I would say, too, I
    am from North Carolina. We have the largest hog processing
    plant in the world in my district owned by the Chinese,
    Smithfield, 5,000 jobs.
        Right across the border from me is a big textile plant
    owned by the Chinese. So I have a real interest in Chinese
    investments, foreign investments of all kinds. I have a great
    appreciation for that. Having said that, I certainly read the
    statement by President Xi regarding his clear vision for China,
    his 5-year plan to acquire, aggressively acquire, technology
    companies. They have been pretty focused on that since 2014. I
    think they have acquired 43 semiconductor companies, 20 of
    which have been in the United States.
        To that end, it brings us enormous concern. And I think
    those concerns are shared by many other leaders who support our
    interest in reform of CFIUS. I would read you a few of them.
        Attorney General Jeff Sessions says, ``CFIUS is not able to
    be effective enough. Your legislation is first rate. We think
    it has great potential to push back against the abuses and
    dangers we face.''
        Secretary Mattis, ``CFIUS is outdated. It needs to be
    updated to deal with today's situation.''
        Director Coats, ``We should do a significant review of the
    current CFIUS situation to bring it up to speed.''
        Admiral Rogers, NSA Director, ``We need to assess the CFIUS
    process and make sure it is optimized for the world of today
    and tomorrow.
        Does anyone disagree with those perspectives?
        Thank you for that.
        With that in mind, I would like to just ask you, Mr. Wolf--
    and thank you for your service. Again, you served as Assistant
    Secretary of Commerce for Export Administration. At that time,
    you were involved in providing relief in the arms embargo that
    the U.S. and EU had imposed in 1999, following the Tiananmen
    massacre. These efforts in export controls reduce--enabled
    through President Obama's Export Control Reform Initiative lead
    to a massive Chinese military modernization effort. And, of
    course, today the U.S. military faces a far more capable PLA
    because, frankly, I believe, of these efforts.
        Under the same tenure that you had, it took half a decade
    to punish the Chinese for the actions by ZTE in selling what we
    have in technology to North Korea and Iran. I worked on this.
    Ultimately, they were fined $1 billion. But it took a long time
    to get that done.
        And I would just like to know from you how credible you
    believe you can be as a witness on this CFIUS process given the
    lapse and what has occurred through the time of your tenure.
        Mr. Wolf. Thank you for the question.
        With respect to the ZTE case, that was 2 years of my life
    pursuing the matter. And I was the one that signed the denial
    order in pursuing it. So I think we were actually
    extraordinarily aggressive with respect to that matter, and the
    record speaks for itself.
        With respect to the export control reform effort, with all
    due respect, we did exactly the opposite with respect to China.
    The whole point of the reform effort was to make it easier with
    respect to trade with our close allies, NATO in particular, so
    that we would have more resources in order to focus enforcement
    attention and to strengthen the embargo with respect to China.
        Mr. Pittenger. The net effect, though, was that it provided
    the Chinese access and greater capability as a result of what
    occurred and did not occur.
        I would like to clarify for this committee what we intend
    not to do in the bill. The bill does not impose a ban, or
    automatically block all Chinese investments or that being of
    any other country. It does not require CFIUS to consider
    investment reciprocity as part of this bill. It does not cover
    all joint ventures. Joint ventures are a concern, but it does
    not cover all of them. It does not require any list of
    countries of special concern. No country is named in this bill.
        It does not require any list of technologies or duplicate
    functions performed by the Export Control System. And it does
    not designate specific technologies that are to be safeguarded.
        So I think there has been prudent consideration for what
    needs to be done and what should not be done. But I would
    convey to this committee and to each of you that without this
    type of clear focus and commitment, America's interests will be
    greatly threatened.
        I yield back my time. My time is gone.
        Chairman Barr. The gentleman's time has expired.
        The Chair now recognizes the distinguished gentleman from
    Arkansas, an outstanding member of the committee, Mr. Hill.
        Mr. Hill. I thank the Chairman. I appreciate our witnesses
    being with us today. Thanks for the effort to start this
    process, Mr. Barr, in evaluating how we adjust CFIUS' resource
    needs on behalf of the Administration, as well as balance the
    new challenges to our country. And I appreciate my friend from
    North Carolina taking a leadership role in the topic as well.
        I would like to explore the issue, maybe starting with you,
    Ambassador Kimmitt, talking about the challenges of licensing
    technology as opposed to outright acquisition of it. Could you
    reflect on that and how that gets reviewed in the process?
        Mr. Kimmitt. I would defer to my--
        Mr. Hill. We will let others, too.
        Mr. Kimmitt. --two panelists to the left. But what I would
    say is there is no definition of national security either in
    existing law or in the new bill. And I think that is very wise,
    because national security is a dynamic concept. It is quite
    different today than it was during the cold war. To me, it is
    the summation of our foreign, defense, and international
    economic policies, all resting on a strong intelligence base.
    So when those CFIUS committee members come together, they have
    the responsibilities in their statutes, in their regulations,
    to protect national security at the fore. And particularly for
    State, defense, and commerce, licensing issues that are
    proceeding on another track are very often brought into CFIUS
    for consideration on the facts of that particular case.
        I think it is really important to note that CFIUS shouldn't
    substitute for the work that is done on licensing, export
    controls, or other areas. But certainly, it needs to be part of
    that consideration. I just would make sure that CFIUS isn't
    leading in an area that I think is more properly the domain of
    State, Defense, and Commerce.
        Mr. Hill. Somebody else want to comment? Mr. Wolf?
        Mr. Wolf. Yes. Thank you. That is exactly my main point,
    which is if there is technology of concern, we should be
    controlled about the technology of concern and the transfer of
    it regardless of whether there is a transaction, regardless of
    whether there is a joint venture, regardless of whether there
    is an acquisition or a licensing arrangement. If we are going
    to spend the time, and attention, and government resources of
    identifying dual-use commercial technology of concern--and I
    grant everything that has been said today with respect to the
    underlying anxieties, and the motivations, and the concern,
    then we should do that.
        And the Export Control System is specifically created,
    again, regardless of the nature of the transaction to control
    it, and without the collateral consequences of spooking or
    having an otherwise broader impact on foreign direct
    investment. And it can be tailored to the country, end user,
    and technology of concern without affecting the entire economic
    ecosystem.
        So that is why I am an advocate for, to the extent humanly
    possible--it can't solve all problems. But if there is a
    technology concern issue, spend the time identifying that and
    working it through the system to regulate it accordingly.
        Mr. Hill. And you think the statute gives you the ample
    authority to go through that process, identify that, and
    coordinate it inside the Executive Branch?
        Mr. Wolf. The legislation is already there, absolutely, to
    already do that. It is a function of will, and resources, and
    time, and commitment. It is not a statutory issue.
        Mr. Hill. And what about just--what is a bigger challenge
    of this country, foreign direct investment of sensitive assets,
    or just outright theft of American intellectual property?
        Mr. Wolf. In my view, it is clearly the latter. That
    foreign direct investment, by and large, is not the issue, but
    the underlying tech transfer or IP theft that you are referring
    to can occur in many circumstances, not necessarily in
    connection with something captured by foreign direct
    investment.
        Mr. Estevez. I would agree with that.
        Mr. Hill. Something like 5 to 10 percent of exports are not
    exports. But export value is just sheer theft of intellectual
    property from Europe and the United States. Would you agree
    with that estimate?
        Mr. Wolf. I don't know the percentages, but that seems
    reasonable. I haven't looked at the exact data, but that seems
    reasonable, yes.
        Mr. Estevez. That was always a concern of mine, things that
    weren't in our process, the CFIUS process. But cyber theft was
    a major concern. In fact, we put in some rules through--
    acquisition rules requiring companies to have at least a
    minimum standard of protection that were doing business with
    the Department of Defense to protect their IP that we were
    using.
        Mr. Hill. Do you think inside the Executive Branch that
    that is--in today's world, since intellectual property, cyber
    risk, data security, true protection--I am not talking about
    just the trademark on Mickey Mouse, but I am talking about all
    of the above. Is that really adequately coordinated in the
    Executive Branch process? And is that--what is your view,
    having worked in it recently, as opposed to Mr. Kimmitt--we
    were centuries ago. We didn't even have email then. So talk to
    me, are we adequately coordinated there?
        Mr. Wolf. No. I agree with the essence of your question,
    which is a lot more time and resources and commitment could and
    should be made to the effort of identifying those technologies
    that are commercial, that want control. Absolutely. Both--
        Mr. Hill. Thank you.
        Mr. Wolf. --and from an export control--
        Mr. Hill. Thanks, Mr. Wolf. My time has expired.
        Thank you, Chairman.
        Chairman Barr. The gentleman's time has expired.
        The Chair now recognizes the gentleman from Ohio, Mr.
    Davidson.
        Mr. Davidson. Thank you, Chairman. Thank you to our
    witnesses. I really appreciate your expertise in this vital
    matter for our national interests. And I certainly appreciate
    the importance of foreign direct investment in the United
    States. And we want to be clear that we are talking about
    things that would be counter to our national security
    interests, not things that would be counter to our national
    interests. We want foreign direct investment. We don't want to
    give away our national secrets, even at a high price, if they
    would jeopardize the security of our country.
        I became concerned about this when I was a cadet at West
    Point. And in 1993, one of the first things the Clinton
    Administration did was transfer release authority for sensitive
    technology from Department of Defense to Department of
    Commerce. And we proceeded to sell, via Hughes, the capability
    to China to launch multiple satellites, in this case, not
    warheads, off of one launch vehicle. That seemed tantamount to
    treason to me at the time. But it was really a commercial
    decision. But it seemed really a bad thing for U.S. national
    security.
        So I am really grateful to Mr. Pittenger and to the folks
    in this committee that have tried to address a modernizing of
    legislation that is post 1993 but really past due for some
    reforms. One of my big concerns is, where are the gaps, even
    with this legislation? What is left to be done? And so Mr. Hill
    talked about licensing. But also, one of the big things that
    you see is startup companies, and venture capital, venture
    investing. And we spent a little bit of time talking about
    China. We are certainly not only concerned about the
    relationship with China. On balance, we benefit greatly from
    that trade relationship, with some real concerns about trade
    policy.
        Here we are talking about national security. So putting
    aside countries, the kinds of mechanisms which were technology
    that we may still need to address beyond this CFIUS as it
    stands today.
        Ms. McLernon, would you care to start?
        Ms. McLernon. I think that you raise a number of very
    important issues. And there are a variety of different security
    experts on the panel other than myself.
        I do think that it is important that we don't lull
    ourselves into a false sense of security. If we do focus only
    on one country and we ring-fence it, we risk being vulnerable
    to other areas of threat, and we also risk discouraging
    investment from that particular country that could actually
    benefit the U.S. economy.
        Mr. Davidson. Yes. Thank you for the clarification.
        Mr. Kimmitt?
        Mr. Kimmitt. I would say that your point about instances
    beyond normal M&A activity is really an important one,
    Congressman.
        And let's remember that the current law applies not only in
    the cases of ownership but also control. And CFIUS looks very
    closely at investments, including in startups, where a foreign
    company or investor would have enough equity ownership and
    enough governance rights--board seats, observer status,
    accumulation rights, special voting rights--that that could
    trigger the CFIUS covered transaction rule.
        I think, having spent 2 years, myself, running a software
    company in Silicon Valley, that isn't well-understood there. I
    think we need to do a better job of letting people in our
    technology hubs--not just Silicon Valley but the Research
    Triangle, down around Austin, around the country--know that
    they have to be careful as they take that foreign investment
    that it does not rise to the level of control, which would then
    trigger CFIUS.
        And so, for example, if they are going to set up an
    investment fund, let's make sure any foreign limited partners
    are truly limited, that they are passive investors. I think
    that is an area that CFIUS actually looks at fairly closely,
    but I think, on the company side, particularly in that startup
    community, there is not as clear an understanding as there
    should be of what foreign investors, particularly any with
    malign purposes, may be trying to do.
        Mr. Davidson. Thank you.
        Mr. Estevez?
        Mr. Estevez. Well, first of all, I agree with Ambassador
    Kimmitt on that point.
        We also have to watch the negative implications. So if you
    are a startup in Silicon Valley with some really cool
    technologies, I want those companies to do business with the
    Department of Defense. And I don't want them to not want to do
    business with the Department of Defense because suddenly we are
    going to put a fence around them. So--
        Mr. Davidson. Yes, correct. And I think the big thing is,
    and to your point--because my time has expired--the point is
    that a lot of these early stage folks don't even realize the
    national security implications. It is a brilliant technology.
    It has dynamic, profound potential applications for our
    economy, for the global economy, but it could be used for
    nefarious purposes.
        My time has expired. Mr. Chairman, I yield back.
        Chairman Barr. The gentleman yields.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman, for 5 minutes.
        Mr. Sherman. With Dubai Ports, we had a company that
    happened to be owned by the government, and that government
    was, at the time, supporting international terrorism.
        Should we have in any CFIUS law a provision that says you
    explicitly must take into account whether the host government
    of whatever company is making the investment supports
    terrorism--whether or not is a state sponsor of terror?
        Does anyone have a comment?
        Anybody here think that we shouldn't take into
    consideration whether the company making an investment in U.S.
    assets is based in a country that supports terrorism?
        Mr. Kimmitt. Mr. Chairman, I think at Treasury, which I
    know--
        Mr. Sherman. Right.
        Mr. Kimmitt. --a bit better, although the CFIUS process is
    run by the International Affairs Division, as you know, the
    people in TFI, Terrorist Finance, comment on every--
        Mr. Sherman. They comment, but there is not an explicit
    provision that says: It might be a wonderful company buying a
    wonderful asset; it just happens to be based in Tehran. And
    there is nothing in the law that I read or that you can point
    to that says that that would be one of the factors, correct?
        Mr. Kimmitt. There is nothing specifically in FINSA,
    although, as you know, in the wake of CNOOC and Dubai Ports,
    there was much greater scrutiny put on acquisitions by state-
    owned or--controlled entities.
        Mr. Sherman. But I am not just talking about state-owned
    or--controlled entities.
        Mr. Kimmitt. No, but I would say where you will find that
    specific language is in legislation that you have passed and
    Executive Orders that have been issued by the President on
    state sponsors of terrorism, including the Iranians and others.
    So--
        Mr. Sherman. The government or private enterprises based in
    Tehran?
        Mr. Kimmitt. I would say both--
        Mr. Sherman. You would say it would be rejected just on
    that basis? Or what weight would it be given?
        Mr. Kimmitt. Certainly, if it were a company based in
    Tehran, it would be rejected, I think, outright.
        But I think the key point you are making--
        Mr. Sherman. And maybe Dubai, we would look at it more
    carefully.
        I would point out that we may be looking too narrowly when
    we look at ownership or control of a company, as if you have to
    have seats on the board to control them.
        And I will give you one example. We have allowed a terrible
    situation in our weak position with China, so they are able to
    turn to Boeing and say, ``We won't buy your planes unless you
    make the fuselages here in China.'' So they don't have anybody
    on the board, they don't own any stock, but they control
    corporate decisions.
        Now, I don't know whether it was a fuselage or the wing
    assembly, and I don't know whether that poses a risk to our
    national security or intellectual property. But I do know that,
    once we consent to a situation where a country can have a huge
    trade surplus with us, over $300 billion, and then turn to our
    companies and say, ``And you can't even sell your products here
    unless you transfer this technology, unless you build this
    plant here, unless the patents are located here, unless the
    computer system or cloud is located here,'' that we may be
    looking over at corporate ownership and not looking at
    corporate control. The fact is, if you can close your markets,
    you can control corporate decisions.
        Another thing I will point out is that I think it is
    important to note that, if bad decisions are made by CFIUS,
    they can be reversed under the International Emergency Economic
    Powers Act. Now, that would be extraordinary; it has never been
    done before. But I think that, as we plan to revisit CFIUS, we
    should be aware of that act which could be used--and I cite 50
    U.S.C. 1702--to reverse a bad decision.
        And I yield back.
        Chairman Barr. The gentleman yields back.
        The Chair recognizes the gentleman from Minnesota, Mr.
    Emmer.
        Mr. Emmer. Thank you, Mr. Chair.
        And thanks to the witnesses for being here today.
        So I want to go back to Chairman Barr's opening when he was
    talking about how does CFIUS balance national security versus
    foreign direct investment. And I want to tie it together with--
    I think it was something that Ambassador Kimmitt said about
    there is no definition of national security in the law.
        So what is the priority for CFIUS when you are reviewing a
    transaction? Is it national security or is it foreign direct
    investment? Which one comes first and then has to be balanced
    against the other one? And when you are talking national
    security, I will just add, how do you define it?
        And we will start with the Ambassador.
        Mr. Kimmitt. My point only was that national security is a
    dynamic, ever-changing concept. It meant one thing during the
    cold war, another in the post-cold war period, post-9/11, and
    post-financial crisis.
        And I think the important thing is CFIUS, which exists only
    to screen investments for national security concerns, has at
    the table every department and agency that is responsible for
    safeguarding the national security interests of the United
    States. So the Defense Department might bring their concerns
    about military technology. The State Department might bring, or
    Treasury, some of the concerns, for example, that Mr. Sherman
    mentioned about terrorist activity. Commerce will bring
    concerns about export controls. DHS and DOJ bring a very
    different set of concerns.
        So, basically, each of the agencies is looking at the
    investment in an open investment policy environment. But the
    reason that they are there is to say, even though we are open
    to investment, are there any elements of this transaction, if
    concluded, that would raise concerns from our department or
    agency's perspective? If so, they need to be identified,
    addressed, mitigated. Or if they can't be mitigated, the deal
    needs to be blocked.
        Mr. Emmer. Well, it doesn't look like--when I look at this
    summary, a total of 770 transactions over the last, what is it,
    6 years, something like that, that are cited in this graph.
    There aren't many.
        And I go back, and maybe Mr.--I shouldn't call you
    ``mister''--the Honorable Mr. Estevez, you were talking about
    when you review something inside the Pentagon. There is a case
    that I tried to look up, because it is back from 2011 and 2012
    involving Cirrus Airplanes in Duluth, Minnesota, that a Chinese
    company came in and put a purchase agreement together, and all
    kinds of red flags went up, because the argument was they are
    going to buy this very interesting technology, they are going
    to reverse-engineer it in China, so we lose the jobs, we lose
    the--it is great to want this foreign direct investment, but I
    think Mr. Sherman had a great point. You also have it going on
    with what Mr. Hill is talking about, with outright theft.
        What happened--do you remember the case I am talking about?
    And is it one of the ones that was--there were 20 back in 2012
    that the notices were withdrawn after commencement of the
    investigation.
        Mr. Estevez. First, being a member of the committee, we
    don't really want to talk about specific cases, because the
    confidentiality of that process helps us dig into those
    companies. But the reality is I also don't recall that case,
    specific case.
        Mr. Emmer. Well, no, and that is great, and I respect that.
    If I can just add, before I forget about it and let you finish,
    it would be very helpful if at some point down the road, when
    you think it is not hot anymore, where policymakers can
    actually see some of these cases and the deliberations that you
    go through. Maybe it would help us understand how CFIUS is
    working.
        Mr. Estevez. On any case, we would have looked at the
    technology. And, again, it is not about--economic security is
    part of national security, absolutely. And we would discuss
    that, too, when we were discussing cases. But we would look at
    the technology and say, is this technology state-of-the-art? Is
    it useful militarily, that it would advance their capability,
    whoever ``they'' are, in this case China, over ours? And if
    there was any doubt about that, I would be in there arguing
    that we either have to put control around this, depending on
    who the company was and the country was and whether we would
    trust them on those controls, or I would be arguing for a
    block.
        Again, as the Honorable Mr. Wolf sitting next to me would
    say, I was usually sitting there pounding the table saying
    this--
        Mr. Emmer. Yes, but then you could get overruled.
        Mr. Estevez. Never.
        Mr. Emmer. OK. Good.
        I see my time has expired. Thank you.
        Chairman Barr. The gentleman yields back.
        The Chair recognizes the gentleman from Illinois, Mr.
    Foster.
        Mr. Foster. Thank you, Mr. Chairman and to our witnesses.
        Let's see. Mr. Segal, in your testimony, you mentioned
    things like source code as one of the things that are hard to
    keep under control when you get an investment. And are there
    investment models that allow us to accept money but keep the
    intellectual property here, or is that pretty much a lost cause
    once you have a significant investment?
        I am happy to have everyone--is there a workable model of
    that? Or once you have someone who has a 20-percent stake, they
    are going to want to see a review of the technology on regular
    intervals and want to have basically, people injected into the
    company and see both the present and the future intelligent
    developments? Any way to keep that from happening?
        Mr. Segal. Thank you.
        I think that that specific case refers to investment inside
    of China. So when--
        Mr. Foster. OK. It was just an example of the sort of
    intellectual property that is hard to--that is hard to keep in
    one place.
        Mr. Segal. So I think it would go back to Ambassador
    Kimmitt's point that when you are investing in a startup or
    another technology company, what percentage control you get,
    what the terms are, and what access to the information, I think
    those are often individually negotiated. And then it would have
    to be brought to the attention, depending upon what the source
    code was, what the technology was, that was to be transferred.
        Mr. Foster. And is there a retrospective look at how
    successful those have been in keeping the technology from
    escaping? Or this is a one-time decision and then you don't
    look back 5 years later and see if the technology has actually
    not been adequate?
        Mr. Estevez. So we would always look at the technology and
    see, again, how cutting-edge it was and how it would impact
    potential adversaries' capability, again, from the Department
    of Defense perspective.
        And not only would we look at the technology itself, we
    would look at the industrial process. So some companies are
    better at doing things than other companies, and we wouldn't
    want the secret sauce, if you would, to migrate overseas if it
    was a very state-of-the-art company.
        We would consider all those things. If we thought we could
    mitigate, we would propose the mitigation on how to wall off
    the fact that there was foreign cash going into the company. If
    we didn't think we could do that, we would propose a block.
        Mr. Foster. And when you believe you have walled it off, do
    you then have a process in place to review how successful that
    walling off has been?
        Mr. Estevez. If we propose mitigation, we would enforce
    that mitigation agreement in perpetuity. So you were assessing
    how that was working.
        Now, with that said, I will go to my earlier testimony:
    There are not enough resources to continue doing that,
    especially as cases get more complex.
        Mr. Foster. And if you look further into the future, it is
    easier to catch up than to develop new technology that doesn't
    previously exist. And so, in the medium/long term, we are going
    to be co-equals with many countries in Europe and Asia in a lot
    of areas.
        And so then the question is, do we have a structural
    disadvantage? Or will it become as easy for us to invest and
    get their technologies moving back in areas where they are
    ahead of us? Or is that something where we should start
    negotiating now to make sure we haven't built in a structural
    disadvantage as coequals? And this is in a world where we are
    coequal technologically.
        Mr. Segal. Well, I think, in particular with the case of
    China, we do want to insist on greater reciprocity. There are a
    number of sectors in high technology that are still off limits
    for U.S. investment. The amount of openness and access to U.S.
    R&D, U.S. universities does not exist in the Chinese case. So,
    as China becomes a more capable player, I think it behooves us
    to insist on greater reciprocity and access to those resources.
        Mr. Foster. Now, in addition to absolute cutting-edge
    technological spaces, a lot of the future military applications
    are going to be things like drone swarms, like just massive
    numbers of security cameras, things like that, where it is
    actually the price that is as important--the mass production of
    very large numbers of relatively low tech, where ``low tech''
    includes cameras with facial ID and things like that.
        And I was wondering, is there a lot of concern that, even
    though the technology might not be leading-edge, that just the
    very high-volume manufacturing is another area where we could
    fall behind and have to protect the technology?
        Mr. Estevez. Yes. Let me address that very briefly.
        We would look at the technology. If it wasn't cutting-edge,
    we believe that our innovation would pace that. And, more
    importantly, from a military perspective, our tactics,
    techniques, and the men and women that are in our forces
    constitute an advantage on how they use that technology that
    would pace whatever competitors there are in the globe.
        Mr. Foster. All right. Thank you.
        And I yield back.
        Chairman Barr. Thank you.
        The gentleman's time has expired.
        The Chair recognizes the gentleman from Indiana, Mr.
    Hollingsworth.
        Mr. Hollingsworth. Good morning. I appreciate all of the
    witnesses being here today. This is certainly an interesting
    topic and a vital topic that we discuss further.
        Mr. Foster, my colleague, had brought up some of the
    ongoing monitoring, and I know Mr. Estevez had answered some of
    those questions. But I wanted to get back to that and talk a
    little bit about these monitoring agreements and how vital it
    is that we ensure what we set in place and the guardrails
    around that are continually being looked at and updated.
        So I know you mentioned that resources are a problem. Can
    you talk a little bit about previous issues with resources,
    what resources might be required, what apparatus we have in
    place, what apparatus we need in place, and just fill in some
    of the color around the ongoing monitoring agreements?
        And others can certainly take the question as well.
        Mr. Kimmitt. I would start at the general, let my
    colleagues go to the specifics.
        I have spent a lot of time working in Government. Most of
    the energy and the resources go in on the upside--that is,
    until the policy decision is reached, the legislation is
    enacted--and we don't give the attention and resources to the
    implementing side of it, which is really important. You know
    that from your business time. You have to drive to results.
        And so what I would say is let's make sure we have
    resources on both sides of that equation. And if in the middle
    of it is a mitigation agreement, let's make sure there is as
    much energy put into implementing and overseeing that
    mitigation agreement as there was in negotiating it.
        That is where I think we run into a real resource problem.
    I think both in Treasury and in the interagency process more
    broadly we have barely enough people to address today's cases.
    And if you then have an increase in cases or implementation
    responsibilities because you pass new legislation, I think the
    place that is going to lose is on continuing to watch those
    mitigation agreements, make sure that they are faithfully
    executed, and, as Mr. Estevez said, very importantly, that we
    connect the dots across decisions that are made. That is where
    I think the resource constraint comes in.
        Mr. Estevez. One other factor--and I fully agree with
    Ambassador Kimmitt on that--is that, as time elapses from the
    time a mitigation agreement is put in place--so if we did one
    for DoD in 2013, I remember it. I am gone. Some of the staff
    has turned over. Some of the outside directors that we put in
    have turned over. So I am real concerned about institutional
    memory that comes with resources to do that enforcement.
        Mr. Hollingsworth. Yes. I think that both your comments are
    really, really thoughtful in ensuring that, ultimately, if we
    are going to make a certain decision, we need to have the
    resources to enforce those decisions.
        And as you well said, if we are going to be faced with many
    more cases and resources are barely enough to even face those
    cases, if there is a probability any greater than zero that
    some of those will be accepted and there will be monitoring
    agreements, then resources need to be allocated to those
    monitoring agreements in the long term as well.
        I wanted to specifically also ask of Mr. Wolf, was there
    ever a time in your tenure where you felt like you didn't have
    enough time to adequately review, thoroughly vet, and arrive at
    the right decision in your mind--
        Mr. Wolf. No.
        Mr. Hollingsworth. --that the process was rushed?
        Mr. Wolf. No. I agree with Alan. We never cleared off on a
    transaction for which any of the departments believed there was
    an unsolved national security threat. To the extent we needed
    more time, there were withdrawals and refiling. And with
    massive terrific support from the intelligence community, I am
    confident that, with all the cases we reviewed, we made it to
    the right outcome.
        And to refer to a comment made earlier, they were never a
    balance--we were never balancing investment with national
    security. If there was an unresolved national security threat,
    we blocked or mitigated; we didn't balance. And so the answer
    to your question is no.
        Mr. Hollingsworth. Well, that answer to the question
    certainly will help Hoosiers back home sleep better at night,
    knowing that we are thinking about those things and we are
    giving them the adequate amount of time to vet them.
        And I really appreciate the comments. And I think this is
    something, more broadly, as you well said, as a problem, an
    epidemic across all aspects of Government, that we spend too
    few of our resources focused on the enforcement of a decision
    instead of just on the decision itself.
        And, with that, I will yield back, Mr. Chairman.
        Mr. Kimmitt. Mr. Chairman, could I just add one point, just
    picking up on the point that Mr. Wolf just made?
        It is really important to understand the critical role that
    the intelligence community plays in the CFIUS process. When the
    case is filed, it is sent to the Director of National
    Intelligence for a community-wide look at the case. I would
    say, going to Mr. Foster's point, particularly some of the S&T
    considerations that need to be looked at very closely, and the
    DNI then comes back with a low, medium, or high assessment,
    that helps guide--it doesn't make the decision, but guide what
    the committee does. And then, as was mentioned, almost all of
    the major CFIUS agencies have their own intelligence elements
    inside. So there are almost two bites at that apple.
        I think for looking ahead, that 5-year look-ahead, in
    addition to make sure that we implement correctly, we are
    really relying on the intelligence community to come with us
    not just on the instant concerns on these transactions but what
    are those trends, those 5- and 10-year trends that we need to
    be concerned about.
        Chairman Barr. Thank you.
        The gentleman's time has expired.
        The Chair now recognizes the gentleman from Texas, Mr.
    Green.
        Mr. Green. Thank you, Mr. Chairman.
        I thank the witnesses for appearing today. I think this is
    an exceedingly important hearing. And I am very much concerned
    about assuring ourselves that we are on the right course.
        Mr. Segal, you have indicated that unilateral action may
    not be sufficient, that there is something more that we have to
    do so as to protect our U.S.-originated science and technology.
    Would you give some additional intelligence on this, please?
        Mr. Segal. The fundamental issue is that there are very
    few, if any, science and technology issues that the United
    States still monopolizes. And so, for any technology that the
    United States has decided that it represents a dual-use threat,
    it is very possible to go find, except for a very, very narrow
    range of technologies, similar producers.
        To give just an example, on issues on cybersecurity or AI
    or computer science or technology, the Chinese are sending
    delegations to Israel every week. And while the Israelis are
    more aware of our concerns about dual-use, they are not going
    to find in the same ways that we are in every instance.
        So I think the issue is that, unless you have a fairly
    broad set of agreements among your partners, it will be very
    easy for Chinese actors to find most technologies in other
    markets.
        Mr. Green. With reference to partners, are there certain
    institutions that can validate a partner's position such that
    we can feel more comfortable with it as opposed to someone that
    might not be associated or affiliated with the institution?
        Mr. Segal. I may defer to Mr. Wolf, but I suspect that the
    intelligence agencies cooperate and share information.
        Mr. Green. If you would, please.
        Mr. Wolf. Sure.
        To the extent that there is information about an entity
    that creates national security or foreign policy concern, my
    old bureau, Bureau of Industry and Security, had the authority
    to identify it publicly as an entity to which exports are
    blocked or other transactions are red flags.
        And then, within the CFIUS review process, the intelligence
    community will provide to us information about other entities
    that might not necessarily be known to the parties, and we
    factor that into our decisions to either block or mitigate.
        Mr. Green. What about NATO, a membership in NATO? Does that
    give you some degree of assurance?
        Mr. Wolf. With respect to the country--as a country,
    absolutely. But it doesn't mean that every company inside each
    NATO country is, per se, not a concern. So we review not only
    the country of issue but the company, the personnel, the
    funders, people that may be behind it. So just because it is
    from Germany or France doesn't, per se, mean that there are
    absolutely no concerns.
        Mr. Green. And how effective are we at spotting companies
    that have investors that may have ill intentions such that they
    are in a position to take advantage of knowledge that they
    acquire notwithstanding the fact that they look legitimate?
        Mr. Wolf. Well, that is one--real quick, that is one reason
    for my emphasis on the focus on the technology. If the
    technology is of concern, it warrants review, period,
    regardless of who the parties are. And the licensing process
    gives the U.S. Government the opportunity to do a deep dive
    into who the investors or other parties are, as opposed to the
    other way around.
        Mr. Estevez. And the intelligence community does a very
    good job of digging out all the facets of a company, including
    whether--who are the bad investors that may not be good actors.
        Mr. Green. We have some sensitive areas in the United
    States where we have certain things being developed that are to
    be kept under wraps, for want of better terminology. Do we have
    any concerns about persons locating businesses in and around
    these very sensitive areas?
        Mr. Estevez. If it was a covered transaction, we absolutely
    address that under the CFIUS regime.
        Mr. Green. Well, my time is up. Thank you, Mr. Chairman. I
    yield back.
        Chairman Barr. The gentleman's time has expired.
        And with the witnesses' indulgence, we are about ready to
    have a vote on the House floor, but we will take the liberty of
    asking one final 5-minute round of questioning, with members'
    agreement here.
        We heard from Ms. McLernon earlier that, although the U.S.
    capital markets are the deepest, most liquid and competitive in
    the world, in and of themselves, U.S. domestic capital markets
    are not sufficient to provide the level of financing that
    startups and other companies need, and foreign direct
    investment is a very critical part of financing of our
    companies in this country. And they provide, in the cases of
    foreign direct investment, many times, other assets other than
    just capital.
        We also heard today that there are legitimate national
    security threats, and we need to strike the right balance.
        So just in the remaining time, could each of you briefly--
    if you could identify one policy recommendation to improve the
    current or modernize the current CFIUS review process, what
    would that one policy recommendation be?
        And we will start with Mr. Kimmitt and work our way down.
        Mr. Kimmitt. I would go back to what has been the common
    theme, and that is we need to make sure that we have adequate
    resources both for the identification of potential issues, the
    review and adjudication of those, and then implementation of
    any agreement that might be reached, a mitigation agreement, to
    bring us to a ``yes'' answer.
        And I would think it is very important, going back to Mr.
    Pittenger's point of the number of senior officials in the
    Administration who have talked about the need to reform CFIUS,
    I would just say I hope those senior officials will themselves
    get involved in the process both to identify the resources they
    need in their departments and agencies and empower their people
    involved in the CFIUS process to deal with these cases
    expeditiously on behalf of the American people.
        Chairman Barr. Thank you.
        Mr. Estevez?
        Mr. Estevez. Of course, in my testimony, I address certain
    areas. There are many of the areas in Mr. Pittenger's bill. The
    resources need to be addressed.
        But I would also say that CFIUS is one tool in the toolbox.
    We need to look at the gamut of our legal capabilities and what
    industrial policy and reciprocity that we might want to enforce
    across the board in our dealings with foreign nations and
    foreign companies. So, while CFIUS is one way to get at that,
    it is not just CFIUS.
        And the final point I will make is you need carrots as well
    as sticks in this process.
        Chairman Barr. Mr. Wolf?
        Mr. Wolf. A significant, massive, whole-of-Government
    effort that is creative and digs into all the types of emerging
    technologies and other technologies that aren't on either of
    the control lists that are in commercial applications that are
    sensitive or of concern that have been discussed behind all the
    comments today. That requires a lot of agencies, a lot of
    creativity, a lot of attention, and a lot of resources,
    frankly, to do that.
        With everything we are talking about today, it all depends,
    whether it is part of the legislation or export controls, on
    the ability of either CFIUS or the Export Control System to
    identify the technologies of concern, whether broadly or
    specifically. That is the work that is at the core of
    everything we are talking about today. And that is my policy
    recommendation.
        Chairman Barr. Mr. Segal?
        Mr. Segal. If the concern is primarily China, then I think
    we need to address all of the other forms of technology
    transfer that are occurring, so some of the issues of
    reciprocity that I mentioned before, as well as battling back
    on techno-nationalism in Chinese industrial policy.
        On the CFIUS process itself, I echo the calls for resources
    and also, perhaps, new mechanisms for tapping into the
    expertise in academic and business communities about how the
    technologies are developing, which ones are going to be the
    ones we are worried about 2 to 5 years from now, and what types
    of joint ventures and other types of agreements our people are
    thinking about in the future.
        Chairman Barr. Ms. McLernon?
        Ms. McLernon. Let me just also echo the important need for
    resources. It is very hard to determine how well CFIUS works
    now and what the gaps are if they don't have the resources to
    do the job that is in front of them now. If we expand the
    scope, we risk leaving ourselves vulnerable and may take their
    eye off the true defense-related, national security concerns.
        I don't think it was mentioned earlier the number of deals
    blocked. I don't think that that is an indicator of whether
    CFIUS is working. You have no idea how many deals don't even
    start because CFIUS exists. So I wouldn't look at those
    numbers, per se, that it wasn't functioning properly.
        But I cannot emphasize enough the need for resources there,
    not only for national security but for our ability to be
    competitive. Because foreign-based companies are concerned now
    with the length of time that has to happen in order to get a
    review. So I can't emphasize that enough, as well as looking at
    other tools, that CFIUS cannot be the one and only thing that
    we focus on to protect our national security in this space.
        Chairman Barr. Thank you.
        And I would like to yield to the gentleman from North
    Carolina for a comment.
        Mr. Pittenger. Thank you, Mr. Chairman.
        Thank each of you for being with us today. It is very, very
    meaningful to all of us.
        I would like to enter into the record statements of support
    for CFIUS, which would include former Secretary of Commerce
    Penny Pritzker and Secretary Wilbur Ross, the Secretary of
    Commerce.
        Chairman Barr. Without objection.
        Mr. Pittenger. I would also really like to thank Senator
    Cornyn for his leadership. It has been remarkable. He and his
    team have really worked very hard on this. It is been an honor
    to work with them.
        I also would like to thank Secretary Mnuchin and Treasury.
    They have played a significant role in writing this
    legislation, along with Chairman Nunes, who is a cosponsor of
    this bill, and Chairman Burr. Everyone has participated in a
    very significant way to make sure that we have a good
    perspective on what needs to be done going forward.
        Thank you, Chairman Barr.
        Chairman Barr. Thank you.
        The gentleman yields back.
        And for a final comment, I will yield to the gentleman from
    Illinois.
        Mr. Foster. Well, I just want to thank you and, I guess,
    apologize for the attention deficit disorder of Congress on
    this sort of issue. And thank you, Chairman, for attempting to
    remedy that.
        Because this is something where I think our Government and
    our Nation suffers from the lack of the long-term vision that
    you actually, frankly, see in China, that a lot of our
    investment model, where you are bonused on the quarterly
    profits as opposed to the 10-year performance of a company,
    causes us to not invest as strategically as we should.
        And I hear you very clearly about the lack of resources.
    When we have some big mess like the Ebola crisis and so on,
    there is a big temporary spike in funding, and then it gets
    eaten away until the next time things become a crisis. This has
    been on ongoing crisis for more than a generation.
        Now, one thing that occurred in some of your testimony was
    reference to intellectual property violations. And one of the
    reasons that we have to depend on foreign capital for things
    like venture capital is that, when you have a really good
    invention, like Microsoft Word, and then find that it gets
    pirated in other countries, you don't have the follow-on
    investment capital.
        And I was just wondering if you see that as an important
    area where we have to--this would be a much smaller problem if
    there was a huge increase in the amount of venture capital
    available simply because we didn't have our inventions ripped
    off offshore.
        There was a number, like, 150 billion of Chinese investment
    into startups? Was that a number that occurred in one of your
    testimonies? And that is probably small compared to the amount
    of software that gets stolen, for example, in China every few
    years. And so I think we have to keep our eyes on that one very
    strongly.
        I just want to thank the Chairman for having this hearing.
    It is a big deal. And thank you.
        Chairman Barr. Thank you.
        I appreciate the gentleman, and he yields back.
        And I would like to thank all of our witnesses for their
    testimony today. It was very educational, illuminated a lot of
    issues for the members.
        As we indicated before, this subcommittee will continue to
    review the CFIUS process. We will have several more hearings at
    the beginning of 2018, and we invite the continued engagement
    of these witnesses and others as we continue to review and
    update this process.
        And I would echo the comments that we do hear you loud and
    clear on the resources point, which was a unanimous point that
    was made here today.
        Without objection, all members will have 5 legislative days
    within which to submit additional written questions for the
    witnesses to the Chair, which will be forwarded to the
    witnesses for their response. I ask our witnesses to please
    respond as promptly as you are able.
        This hearing is now adjourned.
        [Whereupon, at 10:43 a.m., the subcommittee was adjourned.]

                                A P P E N D I X

                               December 14, 2017

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