[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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