[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EVALUATING CFIUS:
ADMINISTRATION PERSPECTIVES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
MARCH 15, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-80
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
31-385 PDF 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
Shannon McGahn, 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
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Page
Hearing held on:
March 15, 2018............................................... 1
Appendix:
March 15, 2018............................................... 39
WITNESSES
Thursday, March 15, 2018
Ashooh, Hon. Richard E., Assistant Secretary for Export
Administration, U.S. Department of Commerce.................... 7
Chewning, Eric D., Deputy Assistant Secretary for Manufacturing
and Industrial Base Policy, U.S. Department of Defense......... 9
Tarbert, Hon. Heath P., Assistant Secretary for International
Markets and Investment Policy, U.S. Department of the Treasury. 5
APPENDIX
Prepared statements:
Ashooh, Hon. Richard E....................................... 40
Chewning, Eric D............................................. 44
Tarbert, Hon. Heath P........................................ 49
Additional Material Submitted for the Record
Pittenger, Hon. Robert:
Written statement of the Department of Justice (DOJ)......... 55
Ashooh, Hon. Richard E.:
Responses to questions for the record from Representative
Emmer...................................................... 58
Chewning, Eric D.:
Responses to questions for the record from Representatives
Emmer and Pittenger........................................ 59
Tarbert, Hon. Heath P.:
Responses to questions for the record from Representatives
Barr, Emmer, Pittenger, and Waters......................... 63
EVALUATING CFIUS:
ADMINISTRATION PERSPECTIVES
Thursday, March 15, 2018
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 10 a.m., in
room 2128 Rayburn House Office Building, Hon. Andy Barr
[chairman of the subcommittee] presiding.
Members present: Representatives Barr, Williams, Lucas,
Huizenga, Pittenger, Hill, Emmer, Mooney, Davidson, Tenney,
Hollingsworth, Hensarling (ex officio), Moore, Meeks, Foster,
Sherman, Green, Heck, Vargas, and Crist.
Also present: Representative Royce.
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 five
legislative days within which to submit extraneous materials to
the Chair for inclusion in the record.
This hearing is entitled, ``Evaluating CFIUS:
Administration Perspectives.'' I now recognize myself for 4
minutes to give an opening statement.
Today's hearing is the third time in this Congress that the
subcommittee has publicly examined the Committee on Foreign
Investment in the United States, or CFIUS. While our first two
hearings brought together former CFIUS practitioners, industry
representatives, and think tank experts, this morning we will
be hearing from Trump Administration officials at three of
CFIUS's key member agencies. These witnesses will discuss the
current state of CFIUS, its challenges, and those it is likely
to face in the future.
Our colleague, Representative Pittenger from North
Carolina, along with the gentleman from Washington, Mr. Heck,
have introduced legislation that seeks to update the CFIUS
process. Everyone I have met with agrees with the goals of
CFIUS reform. First, we must improve our security review
process to ensure that bad actors do not get American
technology or information that can be used against us; and
second, make certain that the CFIUS process does not create
disincentives for benign foreign direct investment (FDI) in the
United States, killing jobs and much needed capital sources for
national security advancements.
There are different views on how to achieve these goals and
our hearings are intended to show a path forward that will have
broad bipartisan support in the same way this issue has always
had in this committee. As we move forward in the legislative
process, I want to make it clear that we need to be precise
about what national security is and what the real threats or
vulnerabilities are and are not.
The security of this country rests on a strong defense and
an equally strong and vibrant economy, but our economy will not
remain strong or innovative if we unnecessarily block access to
it or try to shield it from a free and fair competition. Down
that road eventually lies weakness. American workers and
American businesses are the best in the world and can compete
with anyone, anywhere, anytime if we remove both barriers to
their creativity and regulations that stand in the way of
progress.
We are very well aware of the threat that the Chinese pose
to the American people. In no way do we want important
technologies or know-how, that could be used for military
purposes, traded to foes under the justification that it is
good for business. At the same time, we must also be keenly
aware of the benefits that foreign direct investment can
provide to the American people. For example, Toyota, a Japanese
company, has its largest automotive manufacturing plant in the
world located in my district in Georgetown, Kentucky. Thousands
of direct and indirect jobs have been created by this
investment.
Our default position should always be that foreign direct
investment is good for both our economy, our competitiveness,
and our security as it contributes nearly $900 billion in value
to our annual GDP and is responsible for 6.8 million high-
paying American jobs.
Overshadowing today's debate is the recent use of Section
232 authorities to invoke national security as a justification
to impose steel and aluminum tariffs. As the response to these
tariffs on Capitol Hill has made clear, there is significant
disagreement over their wisdom and their connection to keeping
America safe. The tariffs have reminded members that once
authorities are delegated by Congress they are no longer under
our control and may be used in unforeseen ways and with
unintended consequences.
I have personally heard from constituents who fear that
closing ourselves to trade will invite retaliation from abroad,
even from our allies, which can undermine rather than
strengthen our security. We must keep this in mind as our
discussion of CFIUS proceeds. Again I want to thank our
witnesses in advance for their contributions to this important
discussion on how we can properly balance the needs of our
economy and our competitiveness with the imperatives of
national security.
With that, the Chair now recognizes the Ranking Member of
the subcommittee, the gentlelady from Wisconsin, Gwen Moore,
for 5 minutes for an opening statement.
Ms. Moore. Thank you so much, Mr. Chairman, and as always I
really look forward to benefiting from the wisdom of our expert
witnesses here today.
I really do want to start out by acknowledging the
tremendous work effort that you, Mr. Chairman, have put into
this, and others on this committee like Mr. Pittenger and Mr.
Heck put into this legislation. We live in a world that is
increasingly changing and requires us to continue to refine and
enhance our regulations, especially this regulatory tool that
has national security implications. I might add, Mr. Chairman,
I am relieved to know that the majority does see someplace for
regulation and restraint in this ever-changing environment.
Situations have been presented where the current CFIUS
regime seems deficient and I think we can easily reach a
bipartisan consensus on many of these circumstances and expand
CFIUS in ways that address holes while continuing to encourage
foreign direct investment in the United States. I think where I
may have some pause with some proposals, I think they have
moved beyond the intent of CFIUS and require a larger
conversation which will include a review of our export regimes
and of course it will require a lot more staffing resources.
Now all this can happen, but I don't want to overlay
competing regulatory regimes that are not rational and
harmonious. I understand that the majority plans to hold a few
more hearings on this important issue, so I think we have time
to continue this discussion and drum out a product that we can
all agree upon and address the concerns of members and
stakeholders. I want to thank you again, our witnesses, and I
want to yield the last 2 minutes to Mr. Heck.
Mr. Heck. Ranking Member Moore, thank you very much.
Chairman Barr, I appreciate your convening this hearing. I want
to begin by thanking our witnesses. I appreciate not only your
appearance today, but the important work you do in keeping us
safe.
I am proud to represent Joint Base Lewis-McChord which is
the U.S. military's premier West Coast power projection
platform. For me and the community I represent national
security is personal. If my friends, family, and neighbors must
head into battle I want them to have every advantage possible.
I want our capabilities to be strong enough, unique enough to
be a deterrent to potential adversaries picking a fight in the
first place. CFIUS is how we protect that technological edge.
It is obscure but incredibly important. Let's be clear, there
are strategic competitors who want what we know. We have seen
the DIUx report on Chinese technology transfer strategy and
this committee unanimously recognized aggressive Chinese
industrial policy as a significant challenge facing CFIUS
during our budget view markups last week.
I ask unanimous consent, Mr. Chair, to enter into the
record two letters from CFIUS about the recently blocked
Broadcom bid to buy Qualcomm which have already been released
into the public domain. Our witnesses today are barred by law
from discussing specific transactions in an unclassified
setting, so I encourage my colleagues to read them. In my view,
the letters make clear that Broadcom had taken repeated action
in defiance of CFIUS interim orders to preserve the status quo
while they reviewed the transaction including initiating steps
to redomicile to the United States potentially causing CFIUS to
lose jurisdiction.
There are companies who are seeking to do an end run around
the rules set in place to ensure foreign investment does not
harm our national security. Now if we are in a race for the
latest technology, I will be the first to say we are not going
to win unless we run faster by investing in our knowledge and
our infrastructure and do more to make sure that nobody in this
country is left behind. I want the U.S. to remain a great place
for foreign investment because we can't accomplish those goals
without it.
But I think it is also important to keep the other guys
from cheating, and protecting ourselves against underhanded
tricks. That is why we need a modernized, well-resourced CFIUS
process. Congressman Pittenger, Senator Feinstein, Senator
Cornyn, and I worked together on the bill to accomplish that--
FIRRMA. Since we introduced that bill in November, we have been
working closely with CFIUS to incorporate feedback into the
bill to make it stronger and even more tightly focused on the
national security gaps we need to address.
The progress we have made is in large part thanks to the
critical and constructive engagement of our witnesses today.
While we are still working through some issues, principally
resources, I look forward to addressing those and to your
testimony today. Nobody knows CFIUS like you do and your
knowledge will be invaluable as our committee moves forward on
this issue. Thank you very much, Mr. Chairman.
Chairman Barr. The gentleman's time has expired and the
Chair now recognizes the Vice Chair of the Subcommittee on
Terrorism and Illicit Finance, the author of the legislation in
question, the gentleman from North Carolina, Robert Pittenger,
for 1 minute for an opening statement.
Mr. Pittenger. Thank you, Chairman Barr, for your
leadership and calling this hearing. Thank you to the witnesses
for being with us today. There are significant gaps in CFIUS'
ability to fulfill its responsibility to protect the U.S. from
foreign investments that threaten our national security. Our
adversaries, the Chinese Government in particular, are aware of
CFIUS deficiencies and are actively exploiting them.
Specifically, the Chinese Government has used weaponized
foreign direct investment to evade our safeguards and review
processes in order to acquire state-of-the-art, military-
applicable technologies from U.S. firms. In recent years, we
have seen a massive transfer of dual use technology from U.S.
firms to Chinese entities with close ties to the Chinese
Government. This technology and know-how has been instrumental
in China's military buildup and modernization efforts and has
denigrated America's military industrial base and alarmingly
depleted our technological superiority.
Mr. Chairman, this is a very serious problem that needs to
be addressed with diligent haste. As I detailed in my op-ed for
the Washington Journal published this morning, export controls
alone are not capable of protecting the U.S. from harmful
foreign investment. Last fall, I introduced bipartisan
legislation called the Foreign Investment Risk Review and
Modernization Act, which modernizes CFIUS' process by
addressing national security deficiencies in a measured and
highly targeted manner. FIRRMA has been endorsed by the White
House and is the product of nearly a year of outreach with
close collaboration with Treasury, DOD, DOJ, ODNI, and DHS.
Years of Chinese exploitation of CFIUS and outdated
processes has been detrimental to U.S. national security. This
is a serious problem that we must address now and my bill does
that in a diligent and laser-focused manner.
Thank you, Mr. Chairman. I yield back.
Chairman Barr. Thank you and the gentleman's time is
expired. Today we welcome the testimony of the Honorable Heath
Tarbert, Assistant Secretary for International Markets and
Investment Policy at the U.S. Department of Treasury. Dr.
Tarbert oversees a diverse portfolio of issues in Treasury's
Office of International Affairs. He focuses on investment
security, supporting the work of the Committee on Foreign
Investment in the United States to promote U.S. investments
while protecting national security. The Assistant Secretary
earned his JD and SJD from the University of Pennsylvania and
his Ph.D. in Philosophy from Oxford University.
The Honorable Richard Ashooh, Assistant Secretary for
Export Administration, U.S. Department of Commerce, in this
role he is responsible for the U.S. dual use export control
policy and also participates on the Committee on Foreign
Investment in the United States. Prior to assuming his current
role, he served as the Director of Economic Partnerships at the
University System of New Hampshire, the Executive Director of
the Warren Rudman Center at the University of New Hampshire
School of Law, and was a Senior Executive in the aerospace
industry working for both Lockheed Martin and BAE Systems.
Mr. Eric Chewning, Deputy Assistant Secretary for
Manufacturing and Industrial Base Policy (MIBP) U.S. Department
of Defense, in this capacity he is the Principal Advisor to the
Undersecretary of Defense for Acquisition and Sustainment for
analyzing the capabilities, overall health, and policies
concerning the industrial base on which the Department relies
for current and future warfighting capabilities and
requirements. MIBP is also responsible for developing the
Department's position on the business combinations and
transactions, both foreign and domestic, that shape and affect
national security. The Deputy Assistant Secretary is a U.S.
Army veteran that served in Operation Iraqi Freedom and he has
earned his MBA from the University of Virginia.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. Without objection, each of
your written statements will be made part of the record.
Assistant Secretary Heath Tarbert, you are now recognized
for 5 minutes.
STATEMENT OF HON. HEATH TARBERT
Mr. Tarbert. Chairman Barr, Vice Chairman Williams, Ranking
Member Moore, and distinguished members of the subcommittee,
thank you for the opportunity to testify in support of FIRRMA
and about CFIUS more generally. I would also like to thank
Representatives Pittenger and Heck for their bipartisan
leadership on the bill.
My top priority as Assistant Secretary is ensuring that
CFIUS has the tools and resources it needs to perform its
critical national security function. I believe FIRRMA, a bill
introduced with broad bipartisan support, is designed to
provide those tools and resources. FIRRMA will protect our
national security and strengthen America's longstanding open
investment policy.
The United States has always been a leading destination for
investors. Alexander Hamilton argued foreign capital is
precious to economic growth. Foreign investment provides
immense benefits to American workers and families such as job
creation, innovation, and higher median incomes. At the same
time, we know that foreign investment isn't always benign. On
the eve of America's entry into World War I, concerned by
German acquisitions in our chemical sector, Congress passed
legislation empowering the President to block investments
during national emergencies.
During the Depression and World War II, cross-border
capital flows fell dramatically. In the boom years of the
1950's and 1960's, investment in the U.S. was modest compared
to outflows. During that time, foreign investment also posed
little risk. Our main adversaries, the Soviet Union and its
satellites, were communist countries economically isolated from
us.
But when the post-war trend changed in the 1970's, CFIUS
was born. The oil shock that made OPEC countries wealthy led to
fears that petro dollars might be used to buy strategic U.S.
assets. In 1975, President Ford issued an Executive Order
creating CFIUS to monitor foreign investments. Then, in 1988, a
growing number of Japanese deals motivated Congress to pass the
Exon-Florio Amendment. For the first time, the President could
block a foreign acquisition without declaring a national
emergency. For the next 20 years, CFIUS pursued its mission
without fanfare.
But in the wake of the Dubai Ports controversy it became
clear that CFIUS needed greater procedural rigor and
accountability. In 2007, some of you helped enact FINSA which
formally established CFIUS and codified our current committee
structure and process. Now we find ourselves at another
historic inflection point. The foreign investment landscape has
shifted more than at any point in CFIUS' 40-year history.
Nowhere is that shift more evident than in the caseload CFIUS
now faces. The number of annual filings has grown within the
last decade from an average of 95 or so, to nearly 240 last
year.
But it is the complexity and not simply the volume that has
placed the greatest demand on our resources. In 2007, about 4
percent of the cases went to the more resource-intensive
investigation stage. In 2017, nearly 70 percent did. This added
complexity arises from a number of factors--strategic
investments by foreign governments, complex transaction
structures, and globalized supply chains. Complexity also
results from the evolving relationship between national
security and commercial activity. Military capabilities are
rapidly building on top of commercial innovations. What is
more, the data-driven economy has created vulnerabilities never
before seen.
New risk require new tools. The Administration has endorsed
FIRRMA because it embraces four pillars critical for CFIUS
modernization. First, FIRRMA expands the scope of transactions
potentially reviewable by CFIUS to include certain nonpassive
investments, joint ventures, and real estate purchases. These
changes lie at the very heart of CFIUS modernization. Right now
we can't review a host of transactions that present identical
national security concerns to those we can examine.
Second, FIRRMA allows CFIUS to refine its procedures to
ensure the process is tailored, efficient, and effective. Only
where existing authorities like export controls can't resolve
the risk will CFIUS step in. Third, FIRRMA recognizes that our
closest allies face similar threats and incentivizes our allies
to work with us to address those threats.
Finally, FIRRMA acknowledges that CFIUS must be
appropriately resourced. Since testifying in the Senate in
January, I have been meeting regularly with the Members of
Congress, the business community and other stakeholders to hear
their views on the bill. While some have proposed changes, all
agree on an essential point, Congress needs to pass CFIUS in
one form or another. As a result of these meetings, we have
been working on proposed technical amendments to address
jurisdictional gaps while encouraging investment in our
country.
There is only one conclusion, CFIUS must be modernized. In
doing so, we must preserve our longstanding open investment
policy, we must also protect national security. These twin aims
transcend party lines and they demand urgent action. I look
forward to working with the subcommittee to improving and
advancing FIRRMA. Thank you.
[The prepared statement of Mr. Tarbert can be found on page
49 of the appendix.]
Chairman Barr. Thank you, Secretary Tarbert.
Now Assistant Secretary Richard Ashooh, you are now
recognized for 5 minutes.
STATEMENT OF HON. RICHARD ASHOOH
Mr. Ashooh. Thank you, Mr. Chairman, and thanks to you and
Ranking Member Moore and the members of the committee and also
in particular to the sponsors of FIRRMA for your important
leadership on this issue. I appreciate the opportunity to
testify before the subcommittee today on CFIUS and to share the
perspective of the Department of Commerce in this area both as
a member of CFIUS and also as an export control agency.
Within Commerce, the International Trade Administration and
the Bureau of Industry and Security, or BIS, play important
roles in the Department's review of CFIUS matters. BIS is the
administrator of the Export Administration Regulations, or EAR,
as the regulatory authority for the licensing and enforcement
of controls on dual use items, which are items that have
civilian end use but could also be used for a military or
proliferation related purpose and that also includes less
sensitive military items.
The export control system is a process that like CFIUS
involves multiple agencies, primarily the Departments of
Defense, Energy, and State. We work closely with these agencies
to review not only license applications submitted to BIS, but
also to review and clear any changes to the EAR itself,
ensuring that the export control system is robust. Further, the
export control system benefits from close cooperation with our
international partners through four major, multilateral export
control regimes focused on national security as well as missile
technology, nuclear, and chemical weapons' nonproliferation.
Through these regimes, the United States and our partners
coordinate on which items and technologies merit control and
how those controls should be applied.
The EAR's authority covers an array of in-country transfers
of technology as well as exports of goods, software, or
technology to foreign countries. For example, the EAR regulates
the transfer of controlled technology within the United States
to foreign nationals under what we call deemed exports. It
differentiates between countries that range from our closest
allies to embargoed nations thus allowing the export control
system to handle technology transfers under different licensing
review policies depending on the level of concern over the
recipient country.
The EAR also includes lists of end users of concern that
trigger extraordinary licensing requirements as well as
prohibitions on certain end uses. The export control system is
also highly adaptable to evolving threats and challenges. BIS
is currently reviewing control levels and procedures to
specifically address such threats from adversary nations as
well as their interest in emerging critical technologies.
Our export control system includes aggressive enforcement
capabilities. BIS's special agents are located across the
United States and overseas with a primary focus on identifying
violations of the EAR and bringing to justice domestic and
foreign violators. In fact, just recently BIS, in conjunction
with other Federal law enforcement agencies, announced
prosecution against two individuals conspiring to violate
export control laws by shipping controlled semiconductor
components to a Chinese company that was under a commerce
license restriction known as the Entity List.
The export control system and CFIUS are complementary tools
that we utilize to protect U.S. national security, with CFIUS
addressing risks stemming from foreign ownership of companies
important to national security and export controls dealing with
the transfer of U.S. goods, software, and technologies to
foreign nationals regardless of the mode of transfer.
As with the export control system, it is also crucial that
CFIUS remain adaptive to current and evolving security
challenges. The FIRRMA legislation introduced in the House and
the Senate, if enacted, would take several important steps in
this direction, especially the provision requiring mandatory
filings for certain transactions involving foreign government
controlled entities as well as the provision which would
facilitate greater cooperation and information sharing with our
allies and partners. Such international cooperation is an
essential part of our export control system and would benefit
CFIUS as well.
In sum, the export control system and CFIUS are both vital
authorities and complementary tools that the United States
relies upon to protect our national security. Strengthening
CFIUS through FIRRMA, while ensuring that CFIUS and export
control authorities remain distinct, will enable stronger
protections of U.S. technology. The Department of Commerce
looks forward to working with the committee and bill cosponsors
on this important effort. Thank you and I would be pleased to
take your questions.
[The prepared statement of Mr. Ashooh can be found on page
40 of the appendix.]
Chairman Barr. Thank you.
Now Deputy Assistant Secretary Chewning, you are now
recognized for 5 minutes.
STATEMENT OF ERIC CHEWNING
Mr. Chewning. Thank you. Mr. Chairman, Ranking Member
Moore, and members of the subcommittee, thank you for the
invitation to share the Department of Defense's role in CFIUS.
Protection of our national security innovation base from
strategic competitors like China and Russia is an increasingly
important priority of the Department and I appreciate the
opportunity to speak with you this morning.
The Defense Department strongly supports modernization of
the CFIUS process to ensure the interagency committee has the
authorities required to address the evolving risks to our
national security. We are thankful for the broad bipartisan
support for the FIRRMA legislation. To quote Secretary of
Defense Mattis who stated this Department's position in his
letter of support, the DOD depends on critical, foundational,
and emerging technologies to maintain military readiness;
preserve our technological advantage over potential
adversaries, FIRRMA would help close related gaps.
I have spent the last 17 years working at the intersection
of national security, industry, and finance in both the private
and public sectors. It is important that this bill not be
considered an additional regulation on business. Under this
bill, the United States should and will likely continue to
welcome the vast majority of foreign investment that does not
present any threat to our national security. Rather, this bill
should be considered a whole of Government response to our
critical national security challenge, an insurance policy on
the hundreds of billions of dollars per year we invest in our
own defense industrial base.
But most importantly, this bill will help safeguard our
sons and daughters who volunteer to step into harm's way armed
with the weapons that that industrial base produces. Simply
put, United States military fights and wins wars through the
unmatched performance of our men and women in uniform and our
superior military technology. Knowing this, our competitors are
aggressively attempting to diminish our technological advantage
through a multifaceted strategy by targeting and acquiring the
very technologies that are critical to our military success now
and in the future.
China in particular publicly articulates its policy of
civil-military integration which ties into the intentions for
it to become the world leader in science and technology and to
modernize its military in part by strengthening its own defense
industrial base. While methods like industrial espionage and
cybertheft are clearly illegal, other approaches including
technology and business know-how transferred through
acquisitions of U.S. companies may not be. Acquiring or
investing in U.S. companies offers an opportunity for our
competitors to gain access and control over technologies with
potential military applications, enabling them to create their
own indigenous capabilities ultimately eroding our
technological edge and military advantage.
The current CFIUS authorities are limited to investments
that would result in a foreign controlling interest. There are
other transaction types such as certain joint ventures and
nonpassive, noncontrolling investments that pose national
security concerns such as technology transfer of critical
capabilities. Additionally, the purchase of real estate by
foreign persons provides opportunities to potentially establish
persistent surveillance near sensitive military sites and this
would currently fall outside CFIUS' scope to review.
The Department of Defense does not view CFIUS as a panacea.
Instead, it is part of a layered defense that can along with
export controls and other regulatory mechanisms stem the flow
of critical technologies to our potential adversaries. In order
to do that, however, CFIUS authorities need to adjust to keep
pace with the rapid change of technology. Let me add one more
important point as I conclude my remarks.
While the Department of Defense believes defensive measures
like CFIUS modernization are necessary, they alone are not
sufficient for winning a technology race. We must be proactive
to ensure we improve our technology and innovation base because
our future economic security will be a key determinant of our
national security.
I would like to close with another statement from Secretary
Mattis. I strongly support the Foreign Investment Risk Review
Modernization Act of 2017. The Defense Department continues to
support foreign investment consistent with protection of
national security. However, as the national security landscape
changes, the existing processes and authorities must be
updated.
Thank you very much for the opportunity to testify on this
important topic, and I look forward to working with the
subcommittee to improve and advance FIRRMA.
[The prepared statement of Mr. Chewning can be found on
page 44 of the appendix.]
Chairman Barr. Thank you all for your testimony, and the
Chair now recognizes himself for 5 minutes for questioning. I
will start with you Secretary Tarbert. Thank you again for your
testimony.
I recognize that you cannot talk about some of the specific
circumstances related to the Broadcom Qualcomm decision but,
generally speaking, does CFIUS currently have and should it
have the authority to block deals that may not in themselves
compromise national security but could give an adversary that
is unrelated to the specific transaction a competitive edge?
Mr. Tarbert. I think that CFIUS currently is focused solely
on national security and our view is that it should continue to
be focused solely on national security. It would depend on the
various facts and circumstances of the transaction, but if that
competitive edge had no major national security implications
then I would say no. CFIUS is focused solely on national
security.
Chairman Barr. Obviously the definition of national
security is really critical in establishing those boundaries
and those limits. In the case of 5G wireless technology, can
you just discuss how that does implicate national security
potentially?
Mr. Tarbert. I am not sure if I can. I think to be most
helpful to you, I would recommend a classified briefing on the
transaction as well the specific national security rationale
for the transaction.
Chairman Barr. OK, thank you for that.
Let me go to Secretary Ashooh. As you discussed in your
testimony, both CFIUS and the export control systems are vital
in terms of advancing our national security interests and you
testified that it is important that remain complementary and
not overlap unnecessarily as that has the potential to
overburden the CFIUS process and potentially duplicate the more
comprehensive coverage of technology transfer under the export
control system.
Could you give us your thoughts in terms of the FIRRMA
legislation, how we can structure reform and make the necessary
modernization of CFIUS without duplicating your jurisdiction if
Commerce already has experienced doing this and doing it
quickly and tailoring controls beyond a single transaction?
Mr. Ashooh. Thank you, Mr. Chairman. In any situation where
you are expanding authorities, and by the way I am aware that
there is an effort underway in the House Foreign Affairs
Committee to expand and modernize the Export Administration
Act, so we have a lot of legislating that is necessary. Any
time you expand in that way you need to make sure that you are
going to continue the good relationships between authorities
that have worked so effectively as CFIUS and export controls
have.
In this particular case, CFIUS and the export control
system are both well designed to do different things. CFIUS is
very well designed to be a transactional review which
oftentimes is necessary whether or not there is a technology
transfer issue, whereas the export control system really is not
focused on particular transactions and in fact is agnostic to
them. What it does do well is focus on the very specific nature
of the national security threat from a technology transfer.
As a participant in both processes, I have the unique
experience of seeing how they not only work together but
support each other. As we grow authorities that is where we
need to make sure that they work as designed.
Chairman Barr. Assistant Secretary Tarbert, could you also
offer your views about how we can update CFIUS without
duplicating the efforts of the export control system?
Mr. Tarbert. Absolutely, and my colleague is exactly right.
We view it, we view the regimes as mutually reinforcing. I
think the JV provision which you may be talking about or
referring to implicitly, that is meant not to simply be a
technology transfer provision but it is very specifically meant
to be a situation where you have what is, in effect, an
acquisition by another name where someone, a foreign actor, is
getting the capability of a U.S. business and replicating it
overseas when they could only get that capability if they had
otherwise bought the business here in the United States.
We want to make that distinction clear and I think we have
some technical amendments that can help clarify that even
further to ensure there is no unnecessary duplication.
Chairman Barr. You would contemplate that those technical
amendments would clarify which joint venture arrangements look
more like a transaction or a concealed, disguised transaction
versus those joint ventures that would not be implicated in
CFIUS jurisdiction.
Mr. Tarbert. As well as those joint ventures that are
already subject to specific licensing under other regimes where
there is adequate and independent authority that is addressing
them.
Chairman Barr. Thanks for your assistance on that. My time
is expired and the Chair now recognizes the Ranking Member, Ms.
Moore, for 5 minutes.
Ms. Moore. Thank you so much, Mr. Chairman. Let me thank
the witnesses once again, and welcome to the committee. I have
a couple of questions. I would like to, and I indicated this in
my opening comments that I was concerned about the expanded
jurisdiction that FIRRMA, that this legislation would require.
I was wondering if there was any notion about the numbers of
full-time employees or budgetary authority that you would need
in order to do an adequate job of the expanded responsibilities
that are being proposed.
Mr. Tarbert. I will go first, if I may.
Ms. Moore. Right.
Mr. Tarbert. FIRRMA does very specifically address the
resource issue or acknowledge that there needs to be resources.
But the other thing before we even get to the resources that
FIRRMA does is it allows, as I mentioned in my testimony, the
tailoring to make sure that really what FIRRMA does is it
acknowledges that CFIUS doesn't need to look at every
transaction, but we really only want to be focused on those
transactions that are most likely to raise national security
concerns.
Before we can even gauge the amount of resources, I think
we want to focus on tailoring the bill both on the text itself
as well in the regulations so the actual transaction--
Ms. Moore. OK, I get that. But you would have to look at in
order to tailor it or narrow it, you would still have a much
broader range of things you were looking at so it would require
resources.
Mr. Tarbert. It would, absolutely.
Ms. Moore. You don't have a number or anything?
Mr. Tarbert. We are working on that now, but I think we--
Ms. Moore. Anybody else have any notion of some concrete
number of employees or departments or offices that would have
to be created?
Mr. Ashooh. We are certainly trying to do some thoughtful
planning. But it is important to reiterate that CFIUS, right
now the caseload is at a historic high and so we are actively
seeking resources to meet the current challenges that we are
facing.
Ms. Moore. Exactly, because sometimes you have to ask
people to restart the application process, redo it in order to
give yourselves more than that 30-day time. My time is waning,
so let me move on.
You say, I think it was Mr. Ashooh, you talked about real
estate transactions, something other than intellectual property
and sensitive technology, you brought in real estate
transactions. I am concerned about real estate and the
transactions that are done anonymously through shell
corporations and I am thinking now of course of Trump Tower
where we have numbers of Russians and Chinese that are buying
real estate and I am wondering if these are the kinds of
transactions that would trigger a review.
Mr. Ashooh. It was not I that mentioned the real estate
provision so I may defer to my colleague from Defense, but I do
believe that is an important provision. There has certainly
been in my experience a gap in CFIUS's authorities to be able
to address real estate transactions that could pose an
opportunity for nations who would appropriate our technology to
perform intel activities. But I will ask DOD to reinforce.
Mr. Chewning. Yes. No, and I think just to use a
hypothetical situation, if there was a piece of real estate
outside of Joint Base McChord and it didn't have a business on
it, right now somebody could go ahead and buy that if it was
just real estate and potentially set up a surveillance
operation to surveil what is going on on the post. If it had a
lemonade stand on it, it would constitute a business so it
would potentially come under current CFIUS jurisdiction.
I think as we are thinking about the need for modernizing
CFIUS it is just like let's look at raw real estate purchases
next to military installations.
Ms. Moore. We have seen, for example, just reported in the
news recently President Abe in Japan, bought real estate that
belonged to the Kushners and it is just sitting there doing
nothing. Would that generate some review where there is no
activity in an investment?
Mr. Chewning. The way we approach CFIUS cases now centered
around what we call risk-based analysis has three parts--
threat, vulnerability, and consequence--so transactions are
viewed along that lens.
Ms. Moore. OK. All right, well, thank you very much and I
yield back.
Chairman Barr. The gentlelady yields back.
The Chair recognizes the Vice Chairman of the subcommittee,
Mr. Williams from Texas.
Mr. Williams. Mr. Chairman, thank you for your leadership
on this important issue and to all the witnesses thank you for
your testimony this morning and for your committed service to
the American people.
Foreign investment in the United States touched each and
every American in one way or another and I represent an
extremely diverse district with one of the Nation's premier
military installations, Fort Hood. I represent a booming
technology and a welcoming business environment. These factors
are all reasons why it pays to do business in Texas, as I like
to tell people, and certainly in our District 25.
The pervasiveness of Chinese influence is growing. As we
continue to discuss CFIUS reform we must be committed to
finding the right solutions, so such an important tool cannot
be left to chance and we must ensure that we do our due
diligence. I look forward to your responses this morning;
appreciate the ones you have given us in the past.
Secretary Chewning, I just want to continue to talk a
little bit about, as I said, I represent Fort Hood, one of the
largest military installations in the world. As you are aware,
wind energy and foreign energy investment around our Texas
bases has been an ongoing point of discussion for several years
and it is my hope that any policy change is in the best
interest of soldiers and their families in my district.
Some CFIUS observers believe that purchase of real estate
which we have been talking about near military bases or other
sensitive locations is not a transaction CFIUS can review. My
question would be, according to a 2016 GAO (Government
Accountability Office) report DOD has made limited progress in
conducting risk assessments on foreign encroachment on military
bases so how can CFIUS effectively review real estate
transactions near such sites if you have not implemented GAO's
accounting recommendations?
Mr. Chewning. Thank you for the question, Congressman. I
spent time at Fort Hood, in my time in the Army, so I
appreciate the beautiful hill country there and the concerns
you have outlined. We are working on looking at that issue here
specifically. It hearkens back to a couple of other questions
around resources, hypothetically around how we can improve what
we are doing isn't just additional resources but it is process
improvements.
For example, if there were a transaction that would involve
a change of control that has, let's say, 1,400 different
subsidiaries in the United States, right now we have to go
request the information for all those different locations,
physically have an analyst go input those addresses, identify
the locations, and then cross-queue them against military
installations. As you might imagine that is a very time-
intensive effort.
What we would like to do is move to a model where that can
be automated where we would require geolocation information to
be provided that then we could very quickly do that through a
larger technology solution set. Ideas like that in addition to
the ability to cover a broader set of transactions are how we
plan on balancing.
Mr. Williams. OK, thank you.
Secretary Tarbert, good to see you. In the subcommittee's
oversight hearings we have consistently heard that the CFIUS
resources are stretched thin. Again we have talked a little bit
about that. The caseload has reached record highs due to
enhanced scrutiny and the increased complexity of deals. Do you
believe that CFIUS is sufficiently resourced to each of its
member agencies and, if not, how does the present Fiscal Year
2019 budget allow CFIUS needs to be fully funded?
Mr. Tarbert. I can't speak for the other agencies in the
committee but I can speak for Treasury. Right now we have
resources available to meet the statutory obligations and we
are meeting the statutory obligations. That said, our people
who are absolutely top-notch are working long, hard hours and
so we are committed to making sure that there is adequate
resources there.
CFIUS at Treasury does not have a specific line item, but
we are part of the departmental offices and so one of the
things we are looking at is ensuring that all departmental
offices meet their obligations and that could mean shifting
resources inside of Treasury to ensure that CFIUS has what it
needs. It is a big priority to the secretary.
Mr. Williams. Thank you. Another question for you, Mr.
Secretary, is some proposals to modernize CFIUS could increase
the time a case could be examined by the committee by nearly
half at a time when companies are grumbling the committee
already takes far longer to complete its work than the
statutory 75 days.
Could you please advise us on the balance between the
necessary time for adequate review and the point of which a
review just takes too long, recognizing that the review has to
have adequate time to be done correctly? Is there a danger that
at some point investors just throw up their hands and invest
elsewhere?
Mr. Tarbert. Thanks for that question. The number one thing
as you said is making sure we actually have adequate time to do
the national security review. I actually think with the changes
that FIRRMA is bringing the average case time, particularly for
those cases that can be cleared more easily, will be shortened.
Two reasons for that, one is the review period will be
lengthened by 15 days. But, paradoxically, I think it will
actually shorten the period because right now we have a lot of
cases that normally would be cleared in 30 days that are
getting kicked to the 75 days. By making it 45 days I think we
will be able to clear a lot more, quicker.
Also there is the declarations provision in there which
allows short form filings for those cases that can more easily
be put through and again I think that will also shorten the
time. Finally, I would mention that many of our other countries
that have similar security screening programs are much longer
than ours than even now and even what they potentially could be
at the longest under FIRRMA.
Mr. Williams. Thank you for your testimony. I yield back.
Chairman Barr. The gentleman yields back.
The Chair now recognizes the gentleman from New York, Mr.
Meeks.
Mr. Meeks. Thank you, Mr. Chairman. Thank you for your
testimony. Thank you for being here today. Let me ask a
question. Historically, the CFIUS analysis always focused
primarily on, and I guess what you are talking about when you
said, national security and now I think what you are also
saying that we need to expand the concern, expand CFIUS, its
role. I think the Chairman asked a question and where I am
getting confused, if we are going to expand CFIUS' role
shouldn't we have a clear definition of what is national
security or its national security mandate, because otherwise we
create uncertainty for companies, for both U.S. companies and
foreign companies, and that could have a negative economic
impact here in the United States when it comes to foreign
direct investments of trade and outbound transactions? My
question is can you clarify then what is national security
because it seems like we are just broadening what CFIUS is.
Mr. Tarbert. Thank you. Just to be clear, I think for the
most part FIRRMA is not trying to broaden the definition of
national security but simply broaden the types of transactions
that are potentially reviewable. The statute lists a number of
factors that constitute national security and we want to make
sure they are clear. At the same time, I guess national
security concerns are changing over time so we would want some
flexibility to keep up with new national security threats.
That said, our concept of national security is based
ultimately on a national security threat assessment by the
intelligence community which also feeds into the Defense
Department's input. It is certainly not any economic benefits
test or anything of that nature. I yield to my colleague at the
Defense Department to maybe offer some more points on that.
Mr. Chewning. If I might, I think that is right. At the
heart of CFIUS is the RBA, the risk-based assessment. We think
about it in terms of the threat, vulnerability, and
consequences, that the threat piece is informed by a national
intelligence estimate from the intelligence community, and then
there is dialog on the committee about how to think about what
that means, what the potential implications are based on our
various stakeholders.
Within the Department of Defense I represent 33 different
equity holders who may have a concern with a particular
transaction and what I personally appreciate about the process
is there is a discussion around those three elements. For a
case to go to the President there has, thus far, always been
consensus around that.
Mr. Meeks. All right. My concern just is that I was
thinking if there are enough controls currently to prevent
CFIUS from misusing its authority to thwart transactions for
reasons that may be loosely associated with national security
so for other reasons, and it should be tight.
But I am running out of time. I have another question I
just want to ask Mr. Tarbert. For decades, the United States
has issued a formal open investment policy statement clearly
articulating that it is open for foreign direct investment and
recognizes the contributions that these investments bring.
However, the Administration, the current Administration, has
yet to do so.
With 232 tariffs and recent CFIUS action it is time that I
think we should reassure the world that we are indeed open for
business and want global companies to locate here. As you
mentioned, the Administration's commitment to an open
investment policy, is the Administration going to formally
issue a statement as has been done for decades?
Mr. Tarbert. That is obviously a question for the White
House and the President, but we do support an open investment
policy. In the endorsement of FIRRMA that came out from the
White House there was a specific statement about it, open
investment policy.
Mr. Meeks. I just asked because you said, and I haven't
heard it, haven't happened yet, and I know in talking to some
of our companies both ways they are waiting for the statement
from this Administration. They are concerned when we hear the
way the Administration is moving with regards to the tariff
issue.
The other concern that I have, because whether we like it
or not our economy is global and there is no way of putting
that genie back in the box as the way many folks would like to,
it is a global economy. Countries can put forth policies to
protect their companies from globalization but those countries,
I believe, will do so at their own peril.
Considering that many U.S. companies are in fact
international in scope, do you have any concerns that CFIUS',
or if CFIUS' overreach can disadvantage U.S. companies by
limiting their access to non-U.S. technologies and could this
encourage the offshoring of research and development?
Mr. Ashooh?
Mr. Ashooh. I am happy to respond. Thank you for the
question. Certainly from an export control perspective, and
again this is why export controls and CFIUS need to work well
together, we want to be as narrowly focused on what we control
so that the things we don't control can be free to be traded
and commercialized. That is the primary precept of what informs
us as we go forward not only in reviewing how we need to
address emerging threats, but also expanding FIRRMA.
There is no question that there are advantages to having a
system, and by that I mean advantages to companies and
innovators to do that work here under a system, that does
protect technology that is developed here. We believe it is a
reassuring state of affairs when we are prepared to protect
that technology.
Chairman Barr. The gentleman's time has expired.
The Chair would now recognize the gentleman from Oklahoma,
Mr. Lucas.
Mr. Lucas. Thank you, Mr. Chairman, and I appreciate you
holding this hearing as we continue to look at the CFIUS reform
process. Just so the panel is aware, I represent a region that
is heavy in the oil and gas industry and thus would like to
discuss with the panel how CFIUS deals with the purchase of
energy assets.
First off, I will note for our witnesses the currently,
nearly 30 percent of the U.S. refining capacity is foreign
owned and I don't just mean the owners are foreign, but in this
situation, in this instance, most such owners are state-owned
or state-sponsored enterprises. My concern about this should be
obvious. These are primary assets that have a large effect on
the American economy and yet they are in the hands of foreign
state-owned enterprises. In addition, often foreign owners
refit their refineries to match their own product making it
harder to refine oil and gas extracted in the United States.
I want to make sure these transactions are accounted for as
a part of the CFIUS reform act. One complication, however, is
that such transactions are increasingly complicated which makes
CFIUS review harder. For example, in order to get a loan from
Russia it appears that Venezuela put up energy infrastructure
in the United States as collateral. Imagine the consequences of
that, the Russians being able to expand their ownership of
critical energy infrastructure in the event of a default
without a public transaction. I would note also that Saudi
Aramco not only attempted to purchase a major facility in Port
Arthur, Texas in recent memory, but is currently the owner of
one of the largest refining facilities in the country after
dividing up a joint venture.
Number one, Mr. Chewning, as an initial matter, do you
think it would be fair to characterize refineries and pipelines
as critical assets?
Mr. Chewning. Thank you, Congressman, and we agree with
you. It is complicated, which is why the need for both CFIUS
and export controls is necessary as an interlocking defensive
system. To your question specifically, we would evaluate that
transaction through the same lens of what is the threat, the
vulnerability, and the consequence. If the critical
infrastructure at the time, given who the potential buyer would
be, was evaluated as a potential threat to national security
then we would, and then we would want to look at it and have a
conversation on the committee.
Mr. Lucas. In particular, if the enterprise, the
transaction involved a state-owned entity it most assuredly
would get that review, I would hope.
Mr. Chewning. I think that the view on what that threat and
the potential vulnerability would probably determine the nature
of who the state owner was.
Mr. Lucas. Mr. Chairman, I also want to point out for
everyone here that this is a real concern for the booming and
very successful energy industry in the United States. We are on
a path to being a net energy exporter in only a couple years.
We were net energy exporters until, I believe, 1958 in
particular in crude oil. Energy independence depends on being
able to maintain our assets and our place.
One other question while I am on the topic, and I would
turn to Mr. Ashooh for this, explain to us in general terms,
and anyone on the panel who would care to follow up I would
appreciate that, how do you make the distinction under present
law or the proposed law about how we deal with technology when,
say, on one hand it might involve older, more widely available
technology; on the other hand cutting-edge technology, things--
we don't care about who can make a vacuum tube anymore, but
once upon a time it mattered. How do you sort out the
difference between new and old, what is relevant and what is
not relevant? Thumbnail sketch, if you would.
Mr. Ashooh. Well, thank you. That is core to what we do at
the Bureau of Industry and Security. We are constantly
reviewing the commerce control list which is where the things
we are concerned about go and the things that we are not
concerned about, the vacuum tubes, are removed from. To my
earlier point so that we are not over controlling and focus
instead on the things that are a threat, we do that through
several ways. One important way is certainly the BIS staff,
which includes scientists and engineers and subject matter
experts, which again also provide their expertise in the CFIUS
process.
But then, second, we deeply rely on technical advisory
committees which draw from private sector subject matter
experts because that is where the new technology is coming from
and we actively engage them through these technical advisory
committees to help us sort out that very question.
The final point, I would say, is those technical advisory
committees also have robust interagency participation so we
routinely have Department of Defense, Department of Energy, and
other representatives there so that they are also able to
understand from that subject matter expert domain what matters
and what doesn't.
Mr. Lucas. Because, after all, we only want to protect the
things that must be protected. We don't want to broad brush
resources, assets, technology that really doesn't make a
difference in our day-to-day existence.
Mr. Ashooh. Exactly, sir. Exactly.
Mr. Lucas. Thank you. I yield back, Mr. Chairman.
Chairman Barr. Thank you. The gentleman yields back.
The Chair now recognizes the gentleman from Texas, Mr.
Green.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing, I thank the Ranking Member as well, and of
course I thank the members who have been working on the
legislation.
Let's take a hypothetical situation. Let's assume that we
have as President a billionaire who has worldwide investments,
any resemblance is just coincidental, and let's assume that his
worldwide investments are huge. With this as a possible
possibility, can you give me an example of when these worldwide
investments might become of concern to CFIUS?
Yes, sir?
Mr. Tarbert. Thank you. I am not sure if we can provide a
specific example, but--
Mr. Green. No, no. Not a specific example that relates to
anything that is in fact in existence, just give me an example
of when a worldwide investment would become of concern.
Mr. Tarbert. It might be helpful to give you the analysis
that we would go through.
Mr. Green. I would really prefer an example. Just give me
an example of when a worldwide investment, one of them, a
billionaire president, there has to be a circumstance when one
of those investments could become of concern. Just give me an
example. It doesn't have to relate to anyone. This is a
hypothetical.
Mr. Tarbert. I am not sure. Every--
Mr. Green. You can think of no example of when that would
become of concern to CFIUS?
Mr. Tarbert. I am sure there are instances when potentially
some type of transaction--
Mr. Green. Give me an example.
Mr. Tarbert. --depending on the specific--
Mr. Green. Well, just give me an example.
Mr. Chewning. A billionaire, multinational person, Bruce
Wayne as an example--
Mr. Green. OK. I am good with that.
Mr. Chewning. If Bruce Wayne owned a defense company, if
that defense company--
Mr. Green. He is president, go ahead.
Mr. Chewning. No. If that defense company--
Mr. Green. In my example he is.
Mr. Chewning. If that defense company was acquired by a
non, if a non-U.S. entity wanted to make a controlling interest
in that defense company that would fall under CFIUS review.
Mr. Green. Well, let's take another possible example. Let's
assume that this billionaire's son-in-law met with some foreign
investors at the White House. Let's assume that after that
there was an offer to finance a piece of property that this
son-in-law who is an investor had. By the way this is a
hypothetical. If we took a real case someone might say well,
that never happened so it didn't happen, but would CFIUS be
concerned?
Mr. Tarbert. If the case was filed before CFIUS?
Mr. Green. Yes.
Mr. Tarbert. National--yes.
Mr. Green. Would you be concerned?
Mr. Tarbert. The intelligence community would perform a
national security threat analysis that would involve looking at
the individuals who purchased the property, their potential
intentions and capabilities as well as the vulnerabilities in
the property itself and that would yield the committee's
analysis.
Mr. Green. Given that there are circumstances where you
would be concerned, would it be a benefit to know what this
hypothetical billionaire investment actually has invested in on
a worldwide scope?
Mr. Ashooh. Sir, I might jump in to say this is, you are
making actually an argument of why FIRRMA is important because
right now the way CFIUS works is it is a voluntary filing
system. Under certain conditions under FIRRMA there would be
more mandatory filings and that would certainly allow CFIUS to
increase its scope into transactions, in particular complicated
ones. There are a number of ways that CFIUS is not able to
review transactions because of the complicated nature of the
investments and FIRRMA would approve our ability to do that.
Mr. Green. I thank you for that indication because I am
concerned about investments that are worldwide that we may not
have knowledge of because this billionaire who happens to be
President doesn't share a lot of intelligence with us and
ultimately makes a lot of decisions about investments that may
conflict with what he is doing. I think Mr. Trump ought to be
scrutinized a bit closer and I hope that this legislation will
help us do that. I yield back.
Chairman Barr. The gentleman yields back. The Chair
recognizes an author of FIRRMA, the gentleman from North
Carolina, Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman, and again thanks to
the panelists. Considering the public statements of our
adversaries, competitive adversaries, particularly President
Xi, can we afford to delay CFIUS any longer even 6 months? What
is the impact of their aggressive interest to acquire our
intelligence and our technology?
Mr. Chewning. Congressman, I don't believe we can delay 6
months. We are very concerned about erosion of our
technological advantage.
Mr. Ashooh. Sir, and I would add, and I assume you mean
FIRRMA, a delay in--
Mr. Pittenger. Yes.
Mr. Ashooh. I would quote the Secretary of Commerce who
essentially said, ``a delay, any day that we delay is an
additional day of risk.''
Mr. Tarbert. As I said in my testimony I believe it demands
urgent action.
Mr. Pittenger. Thank you. For clarification, would you
kindly tell us the distinctions between CFIUS and export
control? I want to be real clear if updating export control
alone would that solve the gaps that we have identified? Dispel
the rumor, if you would, please, that CFIUS and export controls
are competing functions.
Mr. Ashooh. Sir, I would be happy to and I thank you for
the question because it is an important one. CFIUS is a tool
many people understand. Foreign transaction, it is relatively
easy to understand, export control system is not. As one who
again participates in both processes and in my private life was
part of a company that was, if you will, CFIUS, I have a
perspective from several angles and I can tell you that both
systems are essential. Both systems not only should, but must
support each other because they bring different strengths to
the table.
As far as one against the other, the threats that we are
dealing with--and I took on this role approximately 6 months
ago and since that day I have been dealing day in and day out
with the threats you mention--we cannot do it with one
authority alone. We need several. Both the export control
system and CFIUS need to be adaptable to this wave of threats
that we are experiencing. I have said it before, but I am
grateful for your leadership on this issue because it is
needed.
Mr. Pittenger. Thank you.
Secretary Talbert, the current CFIUS process, do you
believe it is an overwhelming burden to foreign direct
investment and will the FIRRMA bill make it an overwhelming
burden, overall, do you believe, to FDI?
Mr. Tarbert. Not at all. There is no evidence to suggest
that America is anything other than a preeminent destination
for investors and I believe the FIRRMA bill will not change
that if not enhance that. Having represented foreign investors
over the last decade in private practice, one of the things
that investors look for is a country that protects its national
security. I think that stronger protections on our own national
security make America an even better investment environment.
Also some of the specific things that you have in the
FIRRMA bill to help speed up that process, to have declarations
for those repeat players and things that don't necessarily need
to go through the full notice, will only make investment
easier.
Mr. Pittenger. Yes. In this bill which is not included in
the current FIRRMA we have a process for a good guys list for
our countries who adapt the same type of oversight. Would you
clarify how that is really going to open up greater foreign
direct investment and make it even more accessible?
Mr. Tarbert. Yes. I think it is absolutely critical because
many of our allies--there was just a newspaper, I think, in the
Financial Times this morning about how Germany is facing
similar risks that we are.
To really be effective CFIUS has to be investment screening
the same as our allies. The thought is that if our allies are
protecting their investments, we are protecting our
investments, and they meet specific criteria that is in our
national security, we could potentially exempt some of those
investments as well to help facilitate greater investment.
Mr. Pittenger. Secretary Chewning, just to close out,
clarify for us the national security risk that we will face if
we do not update CFIUS.
Mr. Chewning. Thank you, Congressman. We face the loss of
our technological edge. Just to underline how important this
is, the last time we lost a U.S. soldier or marine on the
ground to enemy air fire was 1953. For the last 60 years, the
United States has enjoyed complete air dominance because we
have great people flying that aircraft and we have great
aircraft and CFIUS is an important part of maintaining that
technological advantage that enables our defense industrial
base to produce that type of decisive lead.
Mr. Pittenger. Thank you, sir. I yield back.
Chairman Barr. The gentleman yields back. The Chair now
recognizes the gentleman from Washington, another valuable
contributor to the reform effort, Mr. Heck.
Mr. Heck. Thank you, Mr. Chairman. Indeed I want to
reiterate my expression of gratitude to you for the manner in
which you have undertaken this subject in the subcommittee. I
am very appreciative. I was sorely tempted to initially begin
my questioning with asking you all to reiterate the urgency
surrounding the need to modernize CFIUS, but you guys have
really done a good job and I thank you for that. I am just not
sure that it can be stated too often that there is an urgent
need here and the threats we are talking about aren't
hypothetical in any way, shape, or form. Thank you for your
testimony today.
Instead, I think I want to get back to this issue of the
relationship between export control system and the need for a
modernized CFIUS regime. Some have suggested that if we update
or modernize the export control system that that would abrogate
or mitigate the need to update CFIUS. You all have talked about
how these things really need to work together. Let's be clear
on this point. Assume we update export control system, what is
the gap if we don't also modernize CFIUS? Be as specific as
possible. Why is it important that we do both, and if we don't,
what have we exposed ourselves to? Secretary Tarbert, why don't
we start with you, sir.
Mr. Tarbert. Sure. Well, first of all, our jurisdiction
hasn't been revisited in 30 years and so we have pointed out
the jurisdictional gaps. Several of those jurisdictional gaps
have nothing to do with export controls, the real estate
provision, for example, next to U.S. military installations,
the nonpassive, noncontrol investments.
The only provision that I think gets to the export controls
issue is the so-called joint venture where you are depositing
intellectual property with associated support. As I mentioned
before that is something that is very distinct from export
controls. I think strengthening export controls in our view is
very important. It helps CFIUS. But not addressing CFIUS and
modernizing it not only, in my view, will not help CFIUS but it
could also undermine export controls.
Mr. Ashooh. Sir, thank you again for the important
question. One additional gap that would be represented, it
exists right now, as I stated earlier the export control
system, one of its strengths is our ability to work with
partner nations. When we agree over a certain technology that
we are going to deny to what we consider to be a common
adversary, that is far more potent a solution than just a
unilateral control on something we are concerned about.
Well, the same dynamic could apply on CFIUS and it does not
now. We are limited to working with partner nations, many of
whom if they don't already are coming up with a CFIUS-like
process. That is an area that I believe would certainly enhance
our CFIUS process in the way that the export control systems
work well.
Mr. Chewning. Congressman, I tend to think of them as a
first line and second line of defense. Export controls, both
ITAR and EAR, are the first line of defense. We have a list of
technologies, we control the list of the technologies about who
can access that. CFIUS is our backstop. If something gets
through whether it is a real estate transaction, whether it is
actual transition of capability for the replication of an
industrial capability in a competitor state as opposed to just
the technology, whether it is our ability to identify something
that should have been on the list but wasn't, CFIUS helps us
inform what that could look like. There is interaction there.
You have to think about CFIUS as our backstop. I think the
other point I would make is a keen difference between CFIUS and
export controls is you can mitigate transactions through CFIUS.
You can't necessarily do that with export controls. I think our
ability to mitigate transactions is also something that is a
very powerful tool.
Mr. Heck. Thank you. In my time remaining, Secretary
Tarbert, I want to deal with this elephant in the room, get
back to something that Congressman Meeks talked about which is
the concern some have expressed to be blunt that someone might
block a transaction for either political reasons or for
protectionist reasons as opposed to the national security
reasons. Can you briefly summarize why it is you do not think
that concern is valid?
Mr. Tarbert. Yes. There is a statutory and a regulatory
process that is focused on national security and there are a
number of steps that are taken every single transaction that
CFIUS reviews. There is a national security threat assessment
made by the intelligence community that is then supplemented by
a risk-based analysis which involves all the CFIUS agencies
again focused on the specific national security factors laid
out in the statute. Only then is a recommendation made to clear
or potentially present it to the President.
There is a documented process that focuses on national
security and, moreover, under FIRRMA Congress has the ability
to request a classified briefing. If there is a transaction
where Congress is not sure, well, what was the actual
rationale, obviously we can't talk publicly about the rationale
in pretty much all cases because of classification, but then
Congress has the ability to look at it and to provide that
extra check on the process.
Mr. Heck. Thank you, sir.
Chairman Barr. The gentleman's time is expired. The Chair
now recognizes the gentleman from Arkansas, Mr. Hill.
Mr. Hill. I thank the Chairman. I thank the Ranking Member.
I appreciate the opportunity to follow up on Mr. Pittenger's
good work here in the House and Mr. Cornyn's good work in the
Senate. There is no doubt that with the changing strategies by
our adversaries in finance and economics that CFIUS has to
catch up with that and be very clear and intentional in how our
review process is done and also not burden the committee's
efforts to the point of too much congestion, because you are
asking for a very broad increase in the types of transactions
that you will review. I hope that Congress is well aware of the
staffing that you need in order to adequately do that work
should this proposal become law.
I also have said before on this topic, no doubt America for
60 years has led the world in market development, transparency,
global trade, and at the same time carefully protected things
that we consider integral to our intelligence and security
requirements. With that said, I want to bring up this recent
transaction on Broadcom Qualcomm because I think this is an
issue where we have to be very clear. You have said Congress
can request a classified brief and all this, we have to be very
clear about why something is in the national security interest
as we look at each of these transactions. Since that one is in
the news now, it gives me a chance to talk about something that
was in the letter regarding it.
In the Department's concern list it said that Broadcom
could take a, quote, ``private equity style direction if it
acquired Qualcomm, which means reducing long-term investment
such as R&D and focusing only on short-term profitability,''
close quote. That sounds more like an opinion to me and
indicting a business strategy or a business model rather than
the national security concerns.
Should Congress be suspect of private equity investors from
a national security point of view? Who wants to tackle that?
Sir?
Mr. Tarbert. I will tackle it. The answer is not at all.
Every transaction goes through the specific analysis. I would
encourage everyone not to read anything other than the
particulars of the transaction as to the specific and I would
also encourage you to undertake the classified briefing,
because then it will put everything into much greater context.
But what I will say is that we regularly clear private equity
transactions and I don't suspect that would change.
Mr. Hill. Right. Well, I think that is important because
business people, you are right. This right now is a voluntary
submission to the committee for review and we want that as
clear and transparent and easy for those companies and their
lawyers to anticipate this so that we do maintain that
international flow of goods and services where America is a
leader and not bog down transactions that don't deserve it.
When people see a business model question, you can imagine
the lawyers at your former employer's asking, oh my gosh, we
have to do a CFIUS review, or are we micromanaging the private
sector by this, because you are going to broaden your reach. I
think those are things that as we talk about the exact language
in the bill we need to be sensitive to that and certainly the
report language and the direction to the Executive Branch what
we mean in Congress, let's be clear and intentional about what
we mean in Congress.
I love the joint venture addition. I think that has been a
loophole for a long time. I like the intellectual property
licensing piece. I like the careful scrutiny of subsidiaries
that are in other countries that have a different ownership. I
think those are all improvements. But when you think about
joint ventures like a code sharing arrangement in airlines and
things like that clearly with national carriers out there they
are in countries that are not necessarily always in favor with
the U.S. Government.
Can you reflect on that subject when it is, I guess that is
a joint venture. It is certainly a memorandum of understanding
to share revenue on passengers. But talk about a little bit
like that where it is very open. These are for the most part
public companies in the United States who are entering into
those. What is your--
Mr. Tarbert. Sure. I will be happy to address it.
First of all, I think that the joint venture provision
right now in FIRRMA is pretty clear. It requires the depositing
of intellectual property along with associated support. In many
joint ventures that don't have anything to do with intellectual
property they wouldn't be brought into this. Second, we have
been meeting with industry groups as I mentioned, other
stakeholders, Members of Congress, to make sure that this
provision is narrowed through technical amendments to get at
those transactions that are really most likely to raise
national security issues.
Mr. Hill. Well, we appreciate your service to the country
in protecting the national security and intelligence assets of
our private sector and public sector, and thanks for the
opportunity, Mr. Chairman.
Chairman Barr. Thank you. The gentleman's time is expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. I have so many questions that a lot of them
will have to be questions for the record. The first is if you
could tell us what is the cost of the CFIUS process both in
terms of the direct cost, the budget of the agencies you
represent, and then some estimate of the indirect costs. The
intel community of course does an awful lot of work to support
what you do. Then this Congress would have to evaluate whether
it is appropriate that the taxpayer pay for the costs caused by
businesses that choose to merge or engage in other acquisition
transactions or whether those costs should instead be borne by
the businesses whose actions are under review.
The second question for review is we already have a
requirement that we look in cases involving government
controlled entities whether the foreign country's record on
cooperating in counterterrorism efforts is what we would like
to see. The problem with that is for most of those with bad
participation with us in counterterrorism, they don't have our
model of separation between business on the one hand and the
government on the other. To say that a business in Iran or
China is independent to the government is to cast upon their
society our legal system. I hope I will convince my colleagues
that we should look at these factors based on where the company
is based whether or not it claims to be independent of the
government.
I want to focus on the media. The question is whether
national security should include control of the most important
element of soft power, what people hear and see. We already
have China exercising control over our studios by their system,
and this is outside the scope of this hearing, of only allowing
35 or so movies into China. Every studio has to figure out how
they can kiss something in Beijing so that maybe they get five
or eight of their movies into the Chinese market.
No one is going to make a movie about Tibet. Not only will
that movie not be shown in China, but none of your other movies
are going to be shown in China. But it goes worse. CFIUS
allowed, and I guess that is because of the statute as much as
anything else, AMC Theaters to be controlled by a Chinese
enterprise. Even if you could make a movie about Tibet and not
worry about your Chinese revenue, who is going to show it, how
is that going to pencil out if one-third or one-quarter or one-
eighth of the movie screens in the country are not allowed?
Let me ask, do we have a statute adequate to prevent
foreign entities from controlling our media either by being in
physical control like owning the studio or being in a position
where they can turn on or off the studio's profits so as to
thereby exercise soft power over our soft power?
I don't know who it is--Mr. Tarbert?
Mr. Tarbert. I don't believe we have a specific statute
that would forbid that. As far as CFIUS goes, so we review
foreign acquisitions of U.S. companies where there is control.
In the national security threat assessment, the intelligence
community would do an analysis of what are the intentions of
the foreign acquirer and capabilities and conceivably, if there
was a specific intention to utilize media for propaganda
purposes or other things to undermine our national security
that would be something that would no doubt be analyzed.
Mr. Sherman. Let me move on to one more question and then I
will have even more questions for the record that will just be
for the record.
Keeping jobs in the United States is not explicitly part of
CFIUS' mandate, but our industrial base is critical as one of
our witnesses pointed out. We haven't been hit on the ground
from the air since 1953 for a reason and that is our industrial
base. If we lose the factories we lose the know-how, we lose
the industrial base. I will ask all three panelists, does
anyone here disagree that we should take into account how a
foreign investment can result in the loss of American jobs
especially when outsourcing means our industrial base and our
knowledge goes overseas?
Mr. Chewning. I am happy to take a first cut at it. Under
FISMA, or the statute in 2007, loss of critical production
capability with an adverse impact on national security is one
of the factors we are to look at and so access to critical
capability within our own domestic industrial base typically
would warrant concern.
Mr. Sherman. But jobs are not--
Mr. Chewning. It would depend on the context of the jobs.
Just any job not necessarily, a job that would create a
national security concern, would.
Mr. Sherman. Let's hear from the other witnesses.
Mr. Ashooh. Yes, sir, if I might chime in. This is where
the value of the interagency nature of CFIUS really, really
comes home. Because in addition to as you have heard me go on
about the export controls system, one of the other authorities
that Commerce holds is management of the Defense Priorities &
Allocation System, which is essentially a review of our
industrial, defense industrial base to make sure that it is not
only adequate but ready. That is a sensibility that we bring
into CFIUS transactions.
Chairman Barr. The gentleman's time is expired.
Without objection, the gentleman from California, Mr.
Royce, is permitted to participate in today's subcommittee
hearing. Mr. Royce is a member of the Financial Services
Committee and chairman of the House Foreign Affairs Committee
with jurisdiction over the export controls system and we
appreciate his interest in this important topic also as the
author of the Export Control Reform Act of 2018.
Mr. Royce. Thank you very much, Mr. Chairman. I thank the
panel for being here. As we have heard today, export controls
and CFIUS have different, independently important, and
complementary responsibilities. I think U.S. technological
leadership is going to be essential. Personally, I am a little
chagrined that we didn't have higher standards a long time ago
with respect to chip manufacturers in terms of the security
aspect of that and the reliability of that and I think that our
leadership with respect to emerging and foundational
technologies are absolutely essential to our long-term view as
national security concerns here.
My view is that the U.S. should pursue a whole of
Government strategy that does not rely exclusively on CFIUS or
exclusively on export controls, but builds strength by
countering illicit technology transfer and enhancing the U.S.
economic competitiveness and enhancing our technological
superiority. I think we have to keep an eye on that in its
totality. Does anyone disagree with that proposition or want to
make a caveat to that?
Mr. Ashooh. No, sir, heartily endorse what you are saying.
Mr. Chewning. Yes, 100 percent.
Mr. Royce. I thank the panel.
Secretary Ashooh, then I will ask you. The Export
Administration Act was designed to impose trade controls on the
Soviet bloc and it was never comprehensively updated. It has
been in lapse most of the last quarter century. I have
introduced the Export Control Reform Act of 2018, as the
Chairman mentioned, which would repeal the expired authorities
and replace it with a modern structure, a structure to regulate
the export of dual use items and emerging critical
technologies.
Do you agree with the proposition that it is time to enact
a modern statute that lays out clear policies and procedures
for the Administration of our dual use export controls
including requirements that such controls are adapted and
regularly updated to respond to the evolving demands of the
21st century?
Mr. Ashooh. Sir, it is not just time, it is overdue. I will
reiterate my gratitude for your thoughtful leadership on this
issue. The statute that is in lapse refers to cold war
anachronistic not only terminology but authorities and so this
is a very, very important initiative you have begun. Dual use
technology at one time was a fairly slim slice of American
technology leadership. It used to be, quite frankly, driven out
of the national security establishment. That has changed as we
all know and we need to update our authorities to reflect that.
Currently, we are operating under an Executive Order called
IEEPA, the International Emergency Economic Powers Act, and
that allows us to operate but is not reflective of the
challenges we are trying to meet. Your efforts on this are
really quite important and we appreciate it.
Mr. Royce. Well, thank you. My own view on this and that is
reflected in the hearing that we had before the Foreign Affairs
Committee yesterday is that it is actually the export control
system, in my view, that is best place to lead a whole of
Government solution to this, especially when we consider what
is necessary to counter Chinese and other adversarial efforts
to acquire sensitive U.S. technology, to do this in tandem with
CFIUS. Our export in controls and CFIUS both require this
attention.
But in terms of how we are going to lead to this to achieve
this result, I think it is an important point and I raise it
here at the committee today and I again thank the Chairman for
giving me some time to make that point. Thank you very much,
panel.
Chairman Barr. Thank you and the gentleman yields back. The
Chair now recognizes the gentleman from Ohio, Mr. Davidson.
Mr. Davidson. Thank you, Chairman, and I thank our
witnesses. I really appreciate the attention that this topic
has received by our whole committee, by the subcommittee, by
Mr. Pittenger, and by Mr. Heck as well. I really appreciated
Mr. Heck's opening remarks in particular about the sense of
urgency that this topic needs.
I was a cadet at West Point when similar topics came to
mind to me because that was when release authority for
sensitive technology migrated from Defense to Commerce. One of
the first actions was for Hughes to transfer the technology to
launch multiple vehicles off of one launch platform. One rocket
goes up, multiple little satellites go out into precise orbit,
obvious applications for warheads and other things. I felt like
we started down a bad path with that very decision, I don't
know that we have entirely recovered.
But in that same timeframe we have seen that China has
figured out a grand strategy in a way that the rest of the
world really hasn't. We have been playing in a very different
dynamic. In a lot of ways, in my opinion, we haven't figured
out a course of action. We have vacillated from the, say, John
Bolton school of thought to the John Kerry school of thought
and there is a wide gulf in between. But we don't have a
unified way to deal with much of our national security. That
has implications from everything like we are still on the same
authorization for military force that happened days after 9/11
despite missions that we know can't be jammed down it, but we
lack the sense of cohesion. Until we really get that top level
grand strategy I don't think we will get a lot of things right.
In the meantime, we can't afford to get this wrong or
continue to get this wrong because underlying it technology is
being used by those people that do employ grand strategy and
all the resources of their country, not just militarily but
their economy, their academia, to accomplish their stated
national objectives. China's One Belt One Road is probably the
best example of that though not the only one.
With that a lot has already been said by the time you come
to someone in the rank order that I get to question, but Mr.
Pittenger and Mr. Royce had good dialog about the concern and
the differentiation between export control. Mr. Ashooh, you had
a good answer to that but I guess, if you could, just boil it
down into the why should CFIUS control intellectual property if
that intellectual property is already controlled by Commerce?
Mr. Ashooh. Well, intellectual property is actually a
broader term than just the technology transfers that export
control worries about so it is a much larger category. But
again I go back and it is less about the subject matter of the
technology and more about the method that we are talking about.
CFIUS is designed to get at transactions and quite frankly
there are a lot of innovative transactions out there that CFIUS
has trouble getting at. Again this is why we are here today.
But by the same token, export control system is trying to
aim at those technologies that are a problem. In the current
state where China is in particular, although let's not forget
there are other adversary nations that are also quite
aggressive, but China in particular has a strategy to accost
our system to appropriate technology. Again that is why they
are both necessary, but they are designed to do different
things.
Mr. Davidson. Thanks for that.
Mr. Tarbert, some of the country's largest tech firms have
been concerned that if CFIUS reform is done incorrectly it
could create a parallel export control system so that balance
that is there, differentiation, the group believes that the
impact of a dual system could greatly hinder the speed of which
business transactions are done. Frankly, sometimes because of
the structure it has been a little bit ambiguous as to whether
the transaction desired would fall under what type of oversight
or regulation. Is there a risk that technology companies' fears
are justified?
Mr. Tarbert. No. I think every intention was made for the
regulations to make sure there is unnecessary duplication. We
have been meeting with the technology companies and firms and
all sorts of other stakeholders. I think now we are working
with a set of technical amendments to make sure that
clarification is in the text of the bill itself so we won't
create a dual two-tiered system.
Mr. Davidson. Thanks. I think there has been a lot of
attention given to that and as my time wraps up I do want to
echo Mr. Hill's concerns about the designation of private
equity as a suspect way to transfer technology. I hope we can
keep the vibrant economy we have and protect the vital
technology that we need to. With that, Chairman, I yield.
Chairman Barr. Thank you. The gentleman yields. Now the
Chair recognizes the gentleman from Indiana, Mr. Hollingsworth.
Mr. Hollingsworth. Well, happy Thursday. I appreciate the
opportunity to frankly listen to a lot of the testimony and
hear some of the remarks and frankly wanted to add that I
really appreciate Mr. Pittenger's effort here and the
legislation before us to talk about how we might reform some of
these programs that, as you well said, haven't been reformed in
a long period of time. I am no advocate for the status quo. I
think with the emergence of new threats, the emergence of new
opportunities, we need to make sure that we are keeping up with
the times. But I admittedly do have a lot of concern about the
potential unintended effects of creating a larger and larger
structure here.
I think one thing that this town does very poorly is we see
a problem and there may be an existing solution to that problem
that we could revise and fix but instead we layer a whole new
superstructure on top of it to layer over the problem and then
we get into more and more duplicative work, more and more
duplicative regulations that end up having a chilling effect on
American competitiveness around the world. I certainly don't
believe that we need to put American national security in the
backseat but I don't believe that we should put American firms
at a competitive disadvantage around the world.
There are so many great things about this legislation and
the concern that I continue to have and wanted to really talk
through today with you guys was really about this outbound
portion making sure that U.S. firms are still able to work
abroad. What I want to be careful of is the insinuation that
certain companies or certain firms are engaged in inherently
un-American activities, inherently handing away their prized
possession, the intellectual property that they have spent
decades and billions of dollars developing in some willy nilly
approach instead of a thoughtful, dutiful approach.
Taking it as a given that we want to reform the status quo,
I guess I want to better understand what the unintended
consequences could be to American firms and the American
economic competitiveness around the world and their ability to
engage with other firms and in other markets around the world.
What might be the unintended consequences of taking an expanded
CFIUS to outbound transactions as well? Let's just think about
the negative, and I will start with Mr. Tarbert.
Mr. Tarbert. Sure. Actually CFIUS now can cover outbound
transactions. Our regulation now allows us anytime there is a
U.S. business that is being taken outside of the United States
and put in a JV we have--
Mr. Hollingsworth. This is certainly an expansion of the
outbound. Yes.
Mr. Tarbert. Yes. I would say what this does is it looks at
a business capability, something that falls a little below what
we can actually, technically, view as a business. I think we
are very mindful of ensuring that our American businesses can
compete abroad. Obviously national security is our first
priority, but I don't think it is an and/or. I think we can get
this right through technical amendments, through rolling up our
sleeves working with you and your staff to ensure we do both.
Mr. Hollingsworth. Yes. Additionally, so we have talked a
lot about this legislation and I am a big fan of legislative
process. I am a big fan of Article 1 certainly, but legislation
takes time. Writing the rules, putting forth the procedures
from this legislation isn't something that we are going to pass
on day one, day two we are going to get this thing up and
running. I continue to come back to some of the existing
structures that we have in place, really updating those, really
making sure that we can enforce something very quickly. It is
two to 3 years that it might take to pull this together from a
legislative aspect. That is forever in technology today.
I wondered if Mr. Ashooh might talk a little bit about what
we might do in the interim that could be a better, more
appointed solution at controlling some of this work that might
need to be done on those emerging technologies we don't want to
be transferred to other countries.
Mr. Ashooh. Thank you, sir. Yes, to your point, we can't
afford to wait if there are things we can do now, we need to do
them now. The Department of Commerce is doing that. We have
talked a little bit about emerging technologies. That is
clearly an area where we need to up our game. We are not
waiting for legislation.
Mr. Hollingsworth. How do we up our game? Is it going back
to export control? Is it making sure that we update these and
have new technologies placed on the list instead of a building
an expanded CFIUS? How do we do that in the interim? What does
up our game mean?
Mr. Ashooh. Well, we do that now and gratefully we do it
with the help of the interagency where we are constantly
reviewing our controls. That has always occurred. It is more in
terms of what are the challenges we have been facing recently.
In one area commonly referred to as emerging technologies, that
is this class of technology that really is coming at us at a
rapid pace, very broad, very deep, but it is also coming from
nontraditional areas, the classic two people in a garage come
up with some idea. They know nothing about CFIUS. They know
nothing about export controls.
What Department of Commerce does have is an outreach
capability to encourage knowledge, so that they comply with the
system that we have, that we need to do better at and are.
Mr. Tarbert. May I just chime in? I just want to say, we
are modernizing CFIUS so we are not creating a new process, but
rather we are taking something that has worked for 30 to 40
years.
Mr. Hollingsworth. Yes, but it is certainly an expansion of
the existing process and it is certainly an expansion of the
resources.
Mr. Tarbert. It is.
Mr. Hollingsworth. What I am really worried about is that
in order to continue to build and maintain this competitive
advantage companies have to have the ability to work around the
world to be able to garner the type of revenues needed to
continue the huge amount of R&D that they have to do to compete
around the world and to continue this advantage. The more speed
bumps we put in their place, the more opportunity we give other
countries' firms the opportunity to be able to develop R&D
faster than us. To me it is accelerating our own R&D, not just
putting speed bumps in place around the world.
Mr. Tarbert. We fully agree and we don't view it as a speed
bump.
Mr. Hollingsworth. All right. With that I will yield back.
Chairman Barr. The gentleman yields back. With the
indulgence of the witnesses, and I see Mr. Chewning may have an
interest in chiming in on that point as well, just a few more
brief questions if we could on related topics.
Let me start again with the Secretary Tarbert. I think you
have made a compelling case for the need for modernization of
CFIUS. Certainly I applaud the gentleman from North Carolina
and his work and Senator Cornyn and Mr. Heck, here, for their
work. The case I think has been made that we do need to
modernize CFIUS.
But what the committee continues to hear and it dovetails
with what Mr. Hollingsworth was saying that is a concern is
that if FIRRMA were enacted as it is presently proposed CFIUS
cases could rise to an estimated 10,000 cases in short order.
Even if that expansion is only a couple thousand additional
cases that is still a massive increase and every business that
we talk to says that CFIUS resources are already constrained.
The question is both one of caseload, the agency's
capabilities to handle increased caseload that very well may be
justified by national security developments, but answer that
question for us, all of you, the capabilities of handling an
increase in caseload and, second, what that means in terms of
your resource needs. The current legislation has a mechanism
for a fee. There are some concerns that fees associated with
additional costs for benign transactions would create those
speed bumps that Mr. Hollingsworth was talking about.
Could you just respond to those concerns and how you would
propose this legislation address those concerns?
Mr. Tarbert. Sure, so I will go first. I think again as I
have said before, we want to narrow the scope of transactions
to those that are most likely to raise national security
concerns and not look at other transactions that are not likely
to raise national security concerns. The more we can put that
tightening in the text of the bill itself the easier that will
be for us. It will provide added clarity for the business
community. That is number one.
Number two, I would say, is that the fees are an important
factor here. I think we want to make sure that the level of the
fees, if we decide to charge them, don't impact the economics
of the transaction, but at the same time shift some of that
burden to the people in the business that are actually doing
the transaction instead of the American taxpayer. Those would
be my points.
One final point to Mr. Hollingsworth's good question about,
look, what are we going to do now. Section 26 of the bill says
that this doesn't go into effect until the secretary signs,
certifies that we have the resources, the regs in place, but
the other thing it does in subsection C is it allows us to
conduct pilot programs. If there is a very specific national
security risk that we need to focus on, a subset of
transactions, we could do that on day one, conceivably the day
that a legislation is passed.
Chairman Barr. OK, thank you for your answer there.
Mr. Chewning, I wanted to follow up with you and if you
wanted to react to Mr. Hollingsworth's questions, please feel
free, but it was very helpful your testimony about thinking of
CFIUS as a backstop and I wanted to follow up on that. How does
the FIRRMA legislation update CFIUS in a way to capture
technology transfers that the export control system might miss
and could you maybe give us a scenario of how that would work?
Mr. Chewning. Yes. No, I think happy to and I think I can
probably respond to both. I think it is important just to
reframe the context for why we think this is important from a
national security dimension. The National Defense Strategy
which recently came out from the Department of Defense said,
inter-state rivalry is now the primary national security
concern for the Department of Defense.
One of the competitors we are facing is the second largest
economy in the world and spends about 2 percent of their GDP on
military equipment. They have an industrial policy that is
designed to extract technology from Western companies, put up
walls to defend their own industry so they can get global
scale, and then eventually outcompete our domestic industry. I
think it is important to, as we think about this measure, also
make the point that ultimately it is about protecting U.S.
industry and putting appropriate value on intellectual property
so it can't be stolen through technology transfers. That is in
the long run good for American business.
Chairman Barr. Thank you.
Secretary Ashooh, did you want to chime in on that?
Mr. Ashooh. Well, I would certainly go back to the resource
question because that is an important one. As has been said, we
are already at an all-time high. From a Commerce perspective,
one of the ways that I think is an effective way that we
approach CFIUS is that we actually have very few, hundred
percent dedicated to CFIUS, employees. We leverage the bureaus,
science, and technology and business transaction personnel that
we have now.
Having said that, in the case of a large scope increase
that might occur that means is, it is going to put pressure on
the whole organization which does all the other things that we
talked about. We do need to be thoughtful about how we go
forward. Having said that, we also think it is a really good
approach to leverage the organization as a whole rather than
have as many dedicated.
Chairman Barr. Thank you. My time is expired and the Chair
will now recognize for a second line of questioning, Mr.
Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman. I do appreciate it.
To the point of my friend Mr. Hollingsworth's inquiry, I would
say that what we have done in this bill, in creating a good
guys list, is going to create even greater access to foreign
investment, capital investment in this country, to those who
subscribe to the same standards that is not correct today.
In consideration of the resources that are needed, I think
we should keep in mind the Chinese, particularly, investment,
and there are other concerned parties, in 2010 was about $4
billion, 2016 is $46 billion. Let's assess the scope of the
problem that we are addressing now. Since 2015, they have
acquired 43 semiconductor companies, 20 of which have been in
the United States. This is a very significant concern. These
are supply chains to our DOD very often.
The crisis is there, the concern is there. I would welcome
the comments from those on our panel to again show the
distinction between export control and CFIUS. CFIUS is
prospective. CFIUS looks--this is export control. Apple is
CFIUS. It is the company that owns this. I think what gets lost
in the maze here is the distinction of what CFIUS is capable of
doing that is not consistent with export control, if you would
comment on any of those issues.
Mr. Ashooh. Sure. Sir, sometimes there are just
transactions that cause concerns. By that I mean a marriage of
two entities may just not be what you want to see done and it
could have reasons that go beyond technology transfer and I
won't go into specific cases. Having said that and why you need
them to work together is if CFIUS denies a transaction that
doesn't necessarily stop the technology transfer if there is
technology transfer at concern. But most importantly is there
are transactions that could be a concern to the United States
national security establishment even though there is no
technology transfer issue there, so we need both.
Mr. Pittenger. Are you concerned historically that we have
an issue with the transfer of intellectual property in the past
and that is why we need to address this today?
Mr. Ashooh. Oh yes, absolutely. I think it is important to
note America is the technology world leader, no question, has
been for awhile. That is the result of authorities we have been
using to this point. The authorities that we have had, export
controls, CFIUS, those authorities have worked but they have
also been adapted along the way and it is time to continue
that.
Mr. Pittenger. Is this a particular concern in China in
terms of their enhancing their avionics or their--
Mr. Ashooh. Yes, in particular in two ways and I think it
is important to be specific. Eric has already mentioned the
volume of dollars that China is willing to spend. That is
clear. But even trickier is they are becoming quite adept at
using their massive market as almost a bludgeon to U.S.
industries that need access to large markets in order to keep
our industrial base secure. That is the path that we need to
find a way to--
Mr. Pittenger. They have accessed that through American
markets and through the ability to obtain intellectual property
through our own companies.
Mr. Tarbert. Representative Pittenger, I think I am not the
best person to speak to your point about the costs because I am
from the Treasury Department and we generally don't like to
spend money. But I think it would be helpful if maybe the
Pentagon could weigh in on the proposition, the value
proposition here.
Mr. Pittenger. Yes, sir.
Mr. Chewning. Yes. I think you can look at the costs or the
incremental costs, but you also have to look at what it is
protecting. If you think about it is an insurance policy on the
hundreds of billions of dollars a year we spend on our own
defense industrial base, it is a really small investment to
make sure that what we are investing for our own military
advantage and we are investing in our companies to be able to
continue to replicate that still can and that investment
doesn't get eroded because of theft.
Mr. Pittenger. Thank you. I would like to ask if I can
quickly, regarding technologies in the avionics industry would
you all consider that a critical industry that must be
protected and addressed by both our export controls and CFIUS
processes?
Mr. Tarbert. Yes, sir.
Mr. Chewning. Yes.
Mr. Pittenger. Well, there are specific firms in China that
have been very engaged in this concerns of national security
way. Do you think there are scenarios where private sector
engagement with Chinese firms could create national security
vulnerabilities?
Mr. Chewning. Yes.
Mr. Pittenger. Can you speak to the industries and
capabilities in China that have benefited from the gaps
identified in our export controls and CFIUS process and which
industries in particular have benefited most from the gaps
identified in our CFIUS laws?
Mr. Chewning. I think to provide a complete context for
that we probably need to have a closed door session. I think
just in general the way we would view that is, think of the
emerging technologies that we all would imagine that would have
military application but that may not be on specific military
programs right now.
Chairman Barr. The gentleman's time is expired.
Just for the record we are going to clear two, possibly
three more members for questions and then we will conclude the
hearing. With that we recognize the gentleman from West
Virginia, Mr. Mooney.
Mr. Mooney. Thank you, Mr. Chairman, for hosting this
hearing and Congressman Pittenger for putting the bill in. I am
already a cosponsor. Thank you for coming to testify on this
important issue with these cyberthreats and advanced
technology, this is just a critical, critical issue.
I guess my first question is to Mr. Chewning. In a 2006
report, the Government Accountability Office noted that the
Militarily Critical Technologies List, MCTL, and the Developing
Science & Technologies List, which your Department manages,
have produced critical technology lists of questionable value.
In a 2003 report, GAO further found that the MCTL, quote,
``remains outdated and updates have ceased. The MCTL is not
used to inform export decisions, its original purpose. Export
control officials from DOD and the Department of Commerce and
State reiterated their longstanding concern that the MCTL is
outdated and too broad to meet export control needs,'' close
quotes.
Mr. Chewning, can CFIUS agencies rely on you to promptly
and effectively identify emerging technologies given the
Pentagon's own lack of confidence in the MCTL?
Mr. Chewning. Yes. Just to be clear, the MCTL updates to
that we have carried through, through on the USML and the CCL.
While the MCTL itself we may have stopped updating, by statute
we considered updates to USML and CCL as official updates.
But your point, I think, is very accurate when,
Congressman, in terms of how to think about the need for
updating lists and obviously the role that that has in terms of
export control versus the more holistic evaluation that a
transaction would go through under FIRRMA and CFIUS. I think
attention between knowing that technology has military
application ahead of time versus realizing a specific
transaction is worrisome based on the threat, the
vulnerability, and the consequence evaluation that is done to
complete it.
Mr. Mooney. OK, thank you. This is a separate question for
whoever wants to answer, do you believe it would benefit or
harm our national security if we included some NATO allies on a
CFIUS white list but not other NATO allies on that white list?
Mr. Chewning. What we are currently doing with our allies
because they recognize a similar set of concerns, the 2017
National Defense Authorization Act asked the Department to
establish the NTIB or the National Technology Industrial Base
which is a partnership between ourselves, Canada, Australia,
and the United Kingdom. That program is beginning to get
underway now. One of the pilot programs that we are doing as
part of that is a collective FDI protection regime so that we
can create a common standard for foreign direct investment
protection within that global set of industrial based
activities.
Mr. Mooney. On a follow up to that also, I saw Australia
and New Zealand are not part of NATO but they are members of
the Five Eyes intelligence alliance, so intelligence and
academic reports have noted that China has sought influence in
these countries' political systems through the use of campaign
donations. Do you believe Australia and New Zealand should be
on a CFIUS white list in light of China's actions?
Mr. Chewning. I think we need to make sure our allies are
aligned with us and we have a collective set of protection
regimes for our friends who are also under threat from the same
set of concerns that we have here.
Mr. Tarbert. Congressman Mooney, first of all, thank you
for your cosponsorship of FIRRMA and, second, the criteria for
that list hasn't been established yet. It will be established
hopefully in FIRRMA and then also further by regulation. But I
can tell you that we are working closely with all of our allies
now because they are facing similar threats to us and they are
starting to do similar processes in their legislatures and
their regulatory to beef up their investment security as well.
We are having an active dialog.
Mr. Mooney. OK. Thank you, Mr. Chair. I will yield my time
back to the Chair.
Chairman Barr. The gentleman yields back. The Chair now
recognizes for a second round, the gentleman from Indiana, Mr.
Hollingsworth.
Mr. Hollingsworth. Back again. I probably won't take the
full 5 minutes but I did want to address a few things that were
said over the last little bit. The reality is America's
technological advantage wasn't created or wasn't enduring
because of CFIUS, because of Export Control Act, it was created
and enduring because of the R&D of thousands of firms across
this country because of the great academic institutions we
have, because of the ingenuity of Americans overall.
That is what I am concerned about. What I am concerned
about, as the gentleman Mr. Chewning said, was their Chinese
goal of reaching global capacity and then competing with us.
Well, if we did deny our firms the same capability and say now
you can't do business over there, you can't do business over
here, you can't do business over there, then we deny them the
ability to gain more and more resources to do more and more R&D
so that we compete with this advantage.
I think the history of moats has been very poor over time,
but the history of doubling down on your advantage, continue in
your work, and using older technology, these companies spent
billions of dollars investing in and now they can use that as a
cash cow so they can pour more money into R&D to develop new
technology. I want that to happen in the United States. I want
that to happen and be led by U.S. firms. What I am worried
about is we are denying them the ability to do that and that
things through the regulatory or bureaucratic process will
begin to get mired up such that they can't leverage those
capabilities that they spent decades and billions of dollars
building these platforms for.
I think there have been instances and continue to be
instances where we use decades-old technology, go to emerging
world countries, go to other countries and begin to sell that
relatively low cost, high margin businesses that they can use
those dollars to reinvest back here so that we have those
advantages in the future. I think that history has shown time
and time again that that is what creates enduring competitive
advantages and gaps between us and the other world.
I am not in any way saying CFIUS needs to remain unchanged.
I am not in any way saying that China doesn't have a
comprehensive, thoughtful, and tactful strategy for how they
might get at these technologies. What I am simply saying is
they will find some way to get in the door. I have seen them
hack OPM down the street. We need to make sure that we have the
advantage because our companies are leading the world in the
work that they do in their fields and their industries and I am
worried we are putting them at a disadvantage in doing this.
With that I will yield back, Mr. Chair.
Chairman Barr. The gentleman yields back.
Does anybody seek--the gentleman from Washington seeks--OK.
The gentleman from Washington is recognized.
Mr. Heck. Thank you, Mr. Chairman. I appreciate the
comments from my friend from Indiana very much and would like
to, however, at least put it within a different context.
Namely, our technological advantage was developed over a long
period of time which was not within a global economy. We exist
today under a much different world than we did at the time in
which our technological advantage accelerated. In fact, I think
I read recently that global trade has increased fivefold just
since 1980. It is a stunning increase in the interweaving of
the economies of the nations of the earth in the relatively
recent past. We have a different context.
I think it is also important to note that our technological
advantage has been brought about in no small part because of
public investment in research and development and that is an
investment that we need to continue to make. Indeed, I have
also read recently that the public investment in basic science
research and development as a percentage of GDP is the lowest
level that it has been since the early 1950's. There are a lot
of dimensions to this in order for us to keep our technological
advantage.
Again, those of us who are cosponsors and supportive of
FIRRMA also believe very much that foreign investment in the
United States is an important part of our Nation's future and
that this bill in fact will enable that by virtue of providing
them with the certainty and us with the security that we need
in order to do that.
But the essential point remains and it should not be
forgotten that what we are talking about here is an existential
threat to the national security of our country. For those of
you who aren't yet behind that, I strongly encourage you to go
back and, for example, be the beneficiary of the classified
briefing that could be available to you and to look at as an
example the Broadcom effort to acquire Qualcomm. I understand
the concerns. That is a part of this process and I am glad they
have been brought forward. I think, however, that the
theoretical concerns, the hypothetical concerns are materially
outweighed by what has clearly been demonstrated to be, as I
indicated, an existential threat.
What we should leave here with is consensus on a
conclusion. CFIUS needs to be modernized. CFIUS needs to be
updated. Let's engage in the give and take about what the
specifics of that may look like, but nobody should doubt that
in the best national security interest of this country this is
something that this Congress should do and should do
immediately.
With that I would be glad to yield my time to my friend
from North Carolina.
Mr. Pittenger. Thank you, Mr. Heck, and thank you for your
leadership with this important legislation. You have been a
real thoughtful individual to work with. I would like, Mr.
Chairman, to submit for the record a Department of Justice
statement regarding the FIRRMA bill--
Chairman Barr. Without objection.
Mr. Pittenger. --Unanimous consent for that. One more
question if I could ask the panel, if that is OK.
We just would like for you all to just comment on the
importance of the inclusion of joint ventures within the
jurisdiction of CFIUS.
Mr. Tarbert. I think it is incredibly important. We have
seen a number of cases where people have had an M&A transaction
that is under CFIUS jurisdiction and they have simply
restructured it as a joint venture to evade our jurisdiction.
Mr. Pittenger. Thank you. I yield back, Mr. Chairman.
Thank you very much to each of you.
Chairman Barr. Thanks to all of our witnesses for their
testimony today. It has been a very helpful hearing for all
members and we appreciate your contributions to this important
work.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record. I would ask our witnesses to please respond as
promptly as you are able. This hearing is now adjourned.
[Whereupon, at 12:04 p.m., the subcommittee was adjourned.]
A P P E N D I X
March 15, 2018
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