[Senate Hearing 117-752]
[From the U.S. Government Publishing Office]







                                                        S. Hrg. 117-752


                     EXAMINING OUTBOUND INVESTMENT

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                                   ON

   EXAMINING CURRENT ISSUES RELATED TO OUTBOUND U.S. INVESTMENT AND 
 WHETHER THERE ARE GAPS IN EXISTING AUTHORITIES THAT PRESENT NATIONAL 
                  SECURITY RISKS TO THE UNITED STATES

                               __________

                           SEPTEMBER 29, 2022

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                 Dan Sullivan, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                        Pat Lally, Hearing Clerk

                                  (ii)

















































                            C O N T E N T S

                              ----------                              

                      THURSDAY, SEPTEMBER 29, 2022

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    30

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     3
        Prepared statement.......................................    31

                               WITNESSES

Senator Robert P. Casey, Jr., of Pennsylvania....................     5
    Prepared statement...........................................    32
Senator John Cornyn of Texas.....................................     7
    Prepared statement...........................................    35
Sarah Bauerle Danzman, Associate Professor of International 
  Studies, Indiana University....................................    10
    Prepared statement...........................................    36
    Responses to written questions of:
        Senator Sinema...........................................    53
Richard Ashooh, Former Assistant Secretary for Export 
  Administration, U.S. Department of Commerce....................    11
    Prepared statement...........................................    44
    Responses to written questions of:
        Senator Sinema...........................................    53
Thomas Feddo, Former Assistant Secretary for Investment Security, 
  U.S. Department of the Treasury................................    13
    Prepared statement...........................................    46
    Responses to written questions of:
        Senator Sinema...........................................    53
Robert Strayer, Executive Vice President of Policy, Information 
  Technology Industry Council....................................    15
    Prepared statement...........................................    48
    Responses to written questions of:
        Senator Sinema...........................................    54

              Additional Material Supplied for the Record

Statement submitted by the AFL-CIO...............................    55
Statement submitted by Representative Rosa L. DeLauro of 
  Connecticut and Representative Bill Pascrell, Jr., of New 
  Jersey.........................................................    57
Statement submitted by BSA / The Software Alliance...............    58

                                 (iii)

 
                     EXAMINING OUTBOUND INVESTMENT

                              ----------                              


                      THURSDAY, SEPTEMBER 29, 2022

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., via Webex and in room 538, 
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of 
the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Committee on Banking, Housing, and 
Urban Affairs will come to order. Good to see my two colleagues 
here. I will introduce them in a moment. I will begin with 
opening statements, as the Ranking Member, Senator Toomey, will 
too.
    Today's hearing, as many of ours always are, I believe 
every case, is a hybrid format. Witnesses, both two colleagues 
and the other witnesses, are in person, but Members have the 
option to appear in person or virtually.
    Earlier this year Secretary of State Antony Blinken said 
that ``Beijing wants to put itself at the center of global 
innovation and manufacturing, increase other countries' 
technological dependence, and then use that dependence to 
impose its foreign policy preference. And Beijing is going to 
great lengths to win this contest,'' unquote.
    It is critical that the Administration has the tools it 
needs to protect our national security. This Committee has 
played a key role. We have done that through export controls 
that restrict the flow of sensitive technology, and we have 
done that through the screening of foreign direct investment 
into the U.S., to guard against adversaries accessing our 
technology or critical infrastructure capabilities.
    Four years ago, we enacted the Export Control Reform Act, 
ECRA, which provided permanent statutory authority for the U.S. 
Government to regulate U.S. exports that have commercial and 
defense applications.
    Those controls can apply to important technology, like 
semiconductors. They can apply to the way a technology is used, 
like military intelligence, and they can apply to who uses it, 
like a Chinese quantum computing company.
    Along with ECRA, we also passed the Foreign Investment Risk 
Review Modernization Act, known as FIRRMA. That law 
strengthened and expanded the jurisdiction of CFIUS, and 
Senator Cornyn especially worked on that issue, that reviews 
foreign investments, like mergers or acquisitions, of U.S. 
businesses. We passed these bipartisan laws because we all 
recognize the importance of maintaining U.S. technological 
leadership, and the need to protect that leadership.
    We know that threats to our national security are evolving. 
We also know that our adversaries will use any means they can 
to close the gaps between our technological capabilities and 
theirs, without much care to how legal their tactics actually 
are. What we do not know is to what degree U.S. investments are 
helping them close those gaps.
    U.S. investments--a venture capitalist or pension fund--
could wittingly or unwittingly support foreign technological 
investments that, in the words of our Secretary of State, 
could, quote, ``increase other countries' technological 
dependence, and then use that dependence to impose its foreign 
policy preference.''
    We cannot let that happen. It is why policymakers have been 
examining the role that U.S. investments abroad are playing to 
enable foreign adversaries, as they develop technologies that 
could take away our technological edge and damage our national 
security.
    Senators Casey and Cornyn introduced a bill designed to 
address these concerns by requiring notifications of certain 
investments, and enabling the President to prohibit others. I 
thank them for that introduction.
    Without objection, I would like to enter into the record 
letters of support for that bill, the first from 
Representatives DeLauro and Pascrell, who introduced companion 
legislation in the House, and the second from the AFL-CIO, 
which supports that legislation. Without objection, so ordered.
    Chairman Brown. We need to better understand whether U.S. 
investments abroad pose national security risks. In a global 
economy where capital flows freely, we need to ensure that we 
are not investing in technologies that harm our national 
security.
    Prior to creating CFIUS, we had not systematically tracked 
foreign investments into the United States. Times change, and 
so do the threats we face. We must understand the scope of 
outbound investment and address the impact it plays in 
supporting efforts by our adversaries to achieve their 
``foreign policy preferences.''
    Protecting U.S. technological leadership is an important 
part of this conversation, and it is why we are here today. But 
it is also not the whole story. And I talked with Senator Casey 
about this privately over the years, many times. The story is 
an issue that Ohioans and Pennsylvanians, especially the 
industrial Midwest, know well.
    Over the last 30 or 40 years, corporations searched the 
globe for cheap labor. First they went to anti-union States, 
shutting down in Pittsburgh or Cleveland and moving production 
to Mississippi or Alabama. Then corporations lobbied for tax 
breaks and bad trade deals to help move jobs overseas, always 
in search of lower wages. They started with manufacturing jobs, 
but they did not stop there. Corporations, in some cases, moved 
R&D jobs abroad too.
    And Wall Street rewarded them over and over and over.
    In some cases, investments abroad outpaced investments in 
American workers, undermining our national security and in so 
many communities in the industrial Midwest but really all over 
the country, hollowed out our middle class.
    Protecting technological leadership and protecting jobs are 
connected. Ohioans know how much innovation happens on the shop 
floor.
    Investing in our workers, our infrastructure, our 
educational system, and our research, development, and 
manufacturing will help shore up supply chains.
    From the Infrastructure bill to the CHIPS and Science Act 
to the Inflation Reduction Act, this Congress is laying down a 
new marker: the technology of the future, from semiconductors 
to batteries to electric vehicles, will be developed in America 
and made in America, by American workers.
    It has not been easy, and our work is far from finished, 
but I am optimistic.
    I look forward to working with the Administration and my 
colleagues on this crucial issue for our economy.
    Senator Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman. Welcome to my 
colleagues.
    China's economic and military rise poses the greatest 
challenge to core U.S. interests since the end of the cold war. 
Under Xi Jinping's autocratic rule, China is seeking to 
dominate the Indo-Pacific, with clear security implications for 
U.S. allies and partners there, and they are engaging in 
relentless efforts to undermine human rights and American 
values, including free expression, the rule of law, and 
democratic governance.
    Recently, White House officials and a few of my Senate 
colleagues have advanced a peculiar idea that in order to fully 
meet this challenge posed by China the United States should 
adopt some of the Chinese Government's strategies for managing 
its economy. That thinking has led this Congress to enact 
industrial policy like new distortive taxpayer subsidies for 
semiconductor manufacturing. I thought that approach was a big 
mistake.
    Especially given that recent episode, I am concerned about 
efforts to impose new capital controls on American investment 
in China. Advocates want a new regulatory regime so U.S. 
officials are notified of, and can potentially stop, U.S. 
investments in certain Chinese businesses. If those investments 
credibly pose a risk to our national security, then I am not 
reflexively opposed to this concept.
    However, there are several reasons why we should proceed 
very carefully with this idea.
    Some claim that current U.S. legal authorities, including 
our dual-use Export Control System overseen by the Bureau of 
Industry and Security, or BIS, are inadequate or incapable of 
addressing the risk posed by American investments in China. But 
it is important to remember that BIS regulates the flow of 
goods, software, and technology into jurisdictions and to end 
users of concern, including China, and retains the force of law 
in the context of a U.S. investment.
    As Commerce Undersecretary Alan Estevez told this Committee 
in July, BIS has complete authority to block the transfer of 
any kind, of technology, intellectual property, blueprints, 
procedural know-how, or software going to China, including when 
made in the context of an American investment in China. What, 
then, is the need for an outbound investment notification 
regime?
    Well, in the words of National Security Advisor Jake 
Sullivan, it would capture outbound investments that, and I 
quote, ``circumvent the spirit of export controls,'' end quote. 
It appears Mr. Sullivan was referring to certain U.S. 
investments in China that are legal under U.S. law, but might 
be, nevertheless, of concern.
    It appears that Mr. Sullivan's concern is investments that 
could result in the transfer of operational and managerial 
expertise and enhance the ability of Chinese firms to make 
sophisticated technologies might be prohibited from receiving 
if a U.S. company wanted to export those technologies. The 
inherent problem with Mr. Sullivan's invoking the ``spirit of 
export controls'' is it is hard to define a ``spirit,'' and 
therefore, it could be subject to expansive and varying 
interpretation.
    I think we should carefully examine this issue. I am 
concerned that the White House is reportedly rushing to issue 
an Executive order that establishes an outbound investment 
regime unilaterally. Let me be very, very clear about this. An 
Executive order is not a substitute for a new congressionally 
passed law. Legislation benefits from a deliberative, open, 
accountable democratic process.
    A White House EO will inherently lack these 
characteristics, even if an EO is accompanied by a notice and 
comment period, and certainly it should not precede a law. In 
addition, an EO will, it is my understanding, very likely place 
no limits on what technologies can be added to the regime in 
the future.
    Why is it important to establish clear parameters on an 
outbound regime from the outset? Because time and again, 
Presidents of both parties have misused sweeping national 
security authorities in ways far beyond how Congress initially 
intended. President Trump nearly used IEEPA to impose tariffs 
on Mexico over immigration policy, and Democrat and Republican 
senators were shocked when President Trump abused Section 232 
``national security'' authority to impose tariffs on U.S. 
partners and our closest allies. And frankly, we should all be 
equally opposed to the Biden administration's continuation of 
the Trump administration's abuse of power under Section 232, 
which continues to this day.
    Appropriately scoping an outbound regime is very, very 
important to preclude it from being used as a back door for 
trade protectionism in the future.
    It is absolutely vital that we prevail in this contest with 
China. We can do so by ensuring that the United States remains 
the single greatest global destination for capital formation, 
research and development, and the smartest minds in the world 
to come and work.
    Creating a flawed outbound investment regime would 
undermine our economic leadership, discouraging the flow of 
capital, ideas, and people into the United States. After all, 
why would you start a firm in the U.S. if you know doing so 
risks precluding you from investing in China, the second 
largest economy in the world?
    Given these stakes, I am recommending a set of principles 
to guide the creation of any outbound investment regime. These 
principles are based on the premise that it would be wholly 
irresponsible to have a regime that does not have clear 
statutory boundaries on its application. Therefore, a 
notification regime for outbound American investments in China 
should, at a maximum, only be applicable to direct U.S. 
investments in Chinese entities that are manufacturing, 
producing, developing, or testing a technology for which a U.S. 
exporter would otherwise be required to seek a license under 
current U.S. law to export. I intend to solicit feedback on 
these principles, and I would like very much to work with 
Senators Cornyn, Casey, and Chairman Brown to incorporate them 
into the upcoming National Defense Authorization Act.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    Today the Committee has the honor of welcoming Senator 
Casey of Pennsylvania, who came to the Senate in 2007, and 
Senator Cornyn of Texas, who came 2 years earlier. When I 
joined this Committee in 2007, Senator Casey and I sat down at 
the end of the dais. You could barely see the Chairman's chair 
from there, and his has always been a critical voice for 
workers in the Senate.
    Welcome back, Bob.
    We also welcome back Senator Cornyn. It was just 5 years 
ago this month that Senator Cornyn testified before this 
Committee on legislation to reform and strengthen our outbound 
investment review process. Thank you for that work. Today we 
hear from them about the need for outbound investment screening 
and about their proposals.
    Senator Casey, proceed. Thank you.

   STATEMENT OF SENATOR ROBERT P. CASEY, JR., OF PENNSYLVANIA

    Senator Casey. Chairman Brown, thank you very much, and 
Ranking Member Toomey and Members of the Committee , I want to 
thank you for this opportunity to testify in support of an 
outbound investment screening mechanism.
    I am grateful that Senator Cornyn is here with us today and 
for his ongoing partnership on this effort, as well as our 
colleagues in both the House and the Senate who are sponsors of 
the legislation, the National Critical Capabilities Defense 
Act, Senate Bill 1854, including, in the House version of this 
legislation Representatives DeLauro, Pascrell, Fitzpatrick, and 
Spartz.
    For decades, the United States has steadily ceded its 
manufacturing power to other countries, particularly foreign 
adversaries, like the People's Republic of China. Outsourcing 
our manufacturing and supply chains has put our economic and 
national security at risk. The pandemic exacerbated this 
problem, as we experienced shortages of PPE and computer chips 
simply because we were reliant on other countries to 
manufacture them and a broken supply chain to get them to us.
    In 2020, during the pandemic, I first introduced the 
National Critical Capabilities Defense Act to require targeted 
Government screening of certain transactions by U.S. companies 
doing business in adversarial countries. This bill would help 
the U.S. better understand the risks of relying on foreign 
adversaries to design and manufacture goods critical to our 
economic and national security interests.
    Our goal must be--it must be to safeguard critical domestic 
industries and capabilities for American workers, 
manufacturers, and innovators. We must avoid any action that 
aids or abets our adversaries.
    Manufacturing, as we all know, is the foundation of our 
economic competitiveness. Working men and women in 
Pennsylvania, for example, have seen the damage of decades of 
offshoring and the hollowing out of American manufacturing 
strength and the knowledge that goes with it, what that does to 
communities and those industries.
    According to the Economic Policy Institute, the People's 
Republic of China cost the U.S. 3.7 million jobs between 2001 
and 2018--2.8 million of those jobs, three-fourths of the 
total, were in manufacturing. In Pennsylvania, 137,300 of those 
jobs were our manufacturing jobs. But job numbers alone provide 
little insight into the family and community trauma, as well as 
the economic scarring that have ravaged many small towns in 
Pennsylvania and other States. In key sectors such as 
communications equipment, electronics, and computer technology, 
we have ceded up to 40 to 60 percent of the domestic market 
share to Chinese imports.
    As U.S. firms continue to invest in high-tech and advanced 
services sectors, many of these investments have been made in 
countries that are owned, controlled, or influenced by the 
Chinese Communist Party.
    As of 2020, U.S. investments in Chinese companies totaled, 
in terms of capital investment, $152 billion to Chinese State-
owned enterprises, $54 billion to Chinese military companies. 
At present, the U.S. has little knowledge of where these 
dollars are going and what sort of projects they may be 
supporting.
    We risk funding threats to our own national security. 
According to former U.S. National Security Adviser H.R. 
McMaster, venture capital firms are pouring billions into 
Chinese companies that are, quote, ``developing dual-use and 
sensitive technologies that are going to be weaponized against 
us or already are aiding and abetting the Russians,'' unquote. 
Without a mechanism or a process to understand the ways in 
which the export of U.S. investments and capabilities are 
resulting in a wholesale transfer of American R&D and expertise 
to our adversaries, without that the U.S. is an active party in 
the decline of our own economic might and national security.
    The Chinese Communist Party has made clear its willingness 
to sever access to critical supply chains and use economic 
coercion to bully other Nations. I will not give you examples 
of that. There are many in Australia and Lithuania and so many 
others.
    So I believe we have to confront a Chinese regime that is 
determined to cheat and bully its way to economic superiority. 
Some critics have said that outbound investment screening is 
something that should be left to the free market and private 
companies to sort out. Our adversaries, as we all know, will 
violate international law and they will ignore both private 
enterprise itself and free market rules.
    The People's Republic of China and its broader military and 
governmental ambitions are intertwined with its trade and 
economic actions because the Chinese Government's agenda blurs 
the lines between its economic and defense sectors by way of 
its ``civil-military fusion.'' When Chinese firms and State-
owned enterprises compete against America's, it is done so with 
broader objectives in mind, including those of their military.
    It is up to U.S. policymakers, not international markets, 
to be vigilant regarding our national security, our 
manufacturing capacity, and the protection of our workers.
    There are significant gaps that exist in our export control 
programs and existing authorities. The U.S. should align our 
own outbound investment review mechanism with those of allies 
and partners such as South Korea and Taiwan, who have already 
taken the necessary steps to protect their national security.
    So I want to thank so many others who have worked on this, 
in addition to Senator Cornyn, as I mentioned, and thank the 
Administration for its support. And with that, being a little 
bit more than a minute over, I will conclude my remarks. Mr. 
Chairman and Mr. Ranking Member, thank you for the time.
    Chairman Brown. Thank you, Senator Casey.
    Senator Cornyn is recognized. John, welcome.

           STATEMENT OF SENATOR JOHN CORNYN OF TEXAS

    Senator Cornyn. Thank you very much, Mr. Chairman, Ranking 
Member Toomey for scheduling this hearing on a very important 
topic. The Chairman's comments about the reforms we made to the 
Committee on Foreign Investment in the United States 5 years 
ago--it is amazing how quickly time flies--which have now been 
modeled by other countries, other democracies around the world 
because of the awareness of the threat of some foreign 
investment technology transfers and the like posed to not only 
those democracies' economies but also to their national 
security.
    I am pleased to be here with my friend, Senator Bob Casey. 
It is no coincidence that we are both members of the Senate 
Select Committee on Intelligence. We get regular reports, some 
we cannot talk about here, about what our adversary, the 
People's Republic of China, is doing. But I think the contours 
are pretty well-known in the open record.
    Deng Xiaoping opened up the Chinese economy recognizing the 
only way they were going to be able to grow their economy was 
by soliciting foreign investment to that country from the 
United States, and they did a magnificent job. They are, as I 
think Senator Toomey mentioned, the second-largest economy in 
the world and growing still, although they do have serious 
challenges, both economic and from a demographic standpoint.
    But there is no question that China poses a threat to our 
national security. We had hoped that they would join the 
liberal rules-based order, particularly when they were admitted 
to the World Trade Organization, but those hopes and wishes 
have certainly been dashed by the hard reality that Senator 
Casey mentioned a moment ago. It did not take long for the 
openness that we hoped would follow, was abused by the Chinese 
Community Party through outright theft and control.
    And now we are seeing the vulnerabilities of an open door 
between our economies. The Chinese Communist Party has 
weaponized our trade and financial apparatuses and is using 
them to achieve control, dominance, and self-sufficiency in the 
area of our national critical capabilities. ``Made in China 
2025'' is just one example of that. And, of course, they resort 
to all sorts of illicit means to secure access to not only our 
intellectual property but also the know-how that makes it more 
likely that they will achieve that goal.
    But as we look at technologies such as semiconductors, 
quantum computing, and artificial intelligence, which are high 
on the list of priorities for the Senate Select
    Committee on Intelligence, the U.S. is the only allied 
Pacific Nation that provides domestic semiconductor incentives 
and does not have an outbound investment mechanism.
    The CCP's predatory trade practices paint an alarming 
picture for our national security, which requires a whole-of-
Government response as well as that by American businesses, our 
friends and allies around the world, and those Nations who at 
least attempt to abide by the rules-based international trading 
system.
    That said, to the point made by the Ranking Member, my 
friend, Senator Toomey, we must not overreach. Trade and 
investment with China must continue, and it will continue, so 
any legislative or regulatory actions must be targeted. And I 
prefer whichever comes first. We need the scalpel, not the 
sword.
    The first step is to improve visibility into the human, 
financial, and intellectual capital in foreign adversary 
Nations. We must know the full extent of the problem.
    Recently we had an open hearing of the Intelligence 
Committee where one witness testified that the market value of 
American investments in the People's Republic of China was $2.3 
trillion. American businesses literally funded the rise of the 
People's Republic of China. And no one is suggesting that we 
decouple entirely, but we do need to look at this with our eyes 
wide open.
    I know a robust process that focuses on transparency and 
notification is the best answer. The American people should 
know if a company is investing in critical industries on a 
foreign adversary's soil. And as you know, there is no real 
firewall between the People's Liberation Army and private 
businesses. Businesses in China are compelled to share critical 
information with the People's Liberation Army that could be 
used for military purposes as well.
    And of course, in the event of a conflict with Taiwan or 
worse, our own men and women in uniform, would be at a 
disadvantage to a Chinese military that was funded in part by 
an American company.
    I would like to note that this is not just a hypothetical. 
This happened. That is why this is so critical.
    There is an old saying attributed to Vladimir Lenin. ``The 
capitalists will sell us the rope with which we will hang 
them.'' That is exactly what China is trying to do--using the 
enterprising minds of America to choke our economy.
    The challenge we face with regards to China in particular 
requires a shift in our way of thinking, a new paradigm. This 
is not the China that Richard Nixon visited many years ago. The 
focus on proxy wars and diplomacy are a relic of the past. We 
need real action.
    That said, our Government cannot risk playing politics with 
an important topic like outbound investment to settle 
centuries-old debates over protectionism versus free trade or 
labor versus big corporations. But I know we need to act soon. 
I agree with Senator Toomey that legislative action is far 
preferable to Executive orders, for a variety of reasons that 
we do not need to go into here. But I know that the 
Administration, in my conversations with Secretary Raimondo in 
particular, they would welcome congressional action, and I 
think taking that initiative is very important, which is what 
Senator Casey and I have been trying to do for quite some time 
now.
    The perspectives of this panel are very important, and I 
again welcome the continued conversation as we work our way to 
hopefully a negotiated outcome. I like the idea suggested by 
Senator Toomey that maybe this would be a candidate for 
inclusion in the National Defense Authorization Act.
    But let me just say again my thanks to Senator Casey for 
his leadership and for being such a productive partner.
    I appreciate the work of this Committee on this topic, as I 
do the work that we have done in the past together on things 
like CFIUS. And I hope it is one of several hearings to come 
that will provide additional and diverse perspectives and 
oversight on this topic.
    Thank you very much.
    Chairman Brown. Thank you, Senator Cornyn and Senator 
Casey. I know you both have busy schedules. That is my nice way 
of saying you are dismissed and we need to have the witnesses 
sit there, so thank you for joining us and your thoughtful 
testimony.
    I will introduce the second panel as they arrive.
    Sarah Bauerle Danzman is an Associate Professor of 
International Studies at Indiana University and a nonresident 
senior fellow at the Atlantic Council. Previously she was at 
the Council on Foreign Relations, working on the Office of 
Investment Affairs at the State Department. Welcome, Ms. 
Bauerle Danzman.
    The Honorable Richard Ashooh is the Former Assistant 
Secretary for Commerce for Export Administration, currently 
Vice President of Global Government Affairs for Lam Research 
Corporation. Welcome, Mr. Ashooh.
    The Honorable Thomas Feddo, former Assistant Secretary of 
the Treasury for Investment Security after FIRRMA created the 
position, leading the Committee on Foreign Investment in the 
U.S. Presently he is the founder of The Rubicon Advisors. 
Welcome, Mr. Feddo.
    And last, joined by an Ohioan and Dennison University 
graduate, where my father and brother went, Mr. Robert Strayer. 
He served as Deputy Assistant Secretary for Cyber and 
International Communications Information Policy at the State 
Department. He is now the Executive Vice President of Policy, 
Information Technology Industry Council.
    Thank you all for joining us, and Ms. Bauerle Danzman, 
please proceed. Thank you.

  STATEMENT OF SARAH BAUERLE DANZMAN, ASSOCIATE PROFESSOR OF 
           INTERNATIONAL STUDIES, INDIANA UNIVERSITY

    Ms. Bauerle Danzman. Thank you, Chairman Brown, and Ranking 
Member Toomey, as well as your hard-working staffs for inviting 
me to testify on outbound investment. It truly is an honor to 
speak with the Committee today.
    I am an Associate Professor of International Studies at the 
Hamilton Lugar School at Indiana University where I study the 
intersection of national security and investment policy. As a 
Council on Foreign Relations International Affairs Fellow, I 
worked as a policy advisor and CFIUS staffer in the Office of 
Investment Affairs at the Department of State in 2019 and 2020.
    And as a Fellow at the Atlantic Council I have had the 
distinct pleasure of coleading a policy working group on 
outbound investment controls with Emily Kilcrease of the Center 
for New American Security. Emily and I recently published a 
policy brief where we lay out our suggestions for how to design 
an appropriately scoped outbound screening mechanism. Much of 
my comments today draw directly from that coauthored report.
    I want to spend my time offering five observations that 
Congress should keep in mind while contemplating outbound 
investment controls.
    First, there are some actual real gaps in the United 
States' ability to address national security risks associated 
with some kinds of outbound investment. Export controls can 
stop the flow of U.S. technology to these activities, but 
active forms of U.S. investment, particularly foreign direct 
investment and venture capital, can provide intangible benefits 
to the Chinese firms and industries in which they invest, and 
we do not currently have controls on that.
    Second, Congress should resist temptations to use outbound 
investment screening for purposes other than national security. 
To be consistent with a longstanding commitment to open 
markets, the authority to intervene in an outbound transaction 
must be limited to a fact-based national security risk 
assessment, as is the case with inbound investment through the 
CFIUS process. It is my assessment that any outbound screen 
should focus on the national security risks associated with 
indigenous technology development in countries of concern.
    Third, Congress should recognize the uncertainty that 
pervades this issue. Current data collection on U.S. investment 
flows to China are not detailed enough to be able to assess the 
national security implications of individuals transactions. A 
notification regime could help to scope the size of the problem 
and is an important first step.
    An Executive order related to outbound screening may be a 
good first step because it would also allow for more 
experimentation before committing to a statutory requirement. 
This mirrors the experience of CFIUS, which was first 
established through Executive order in 1975, and only gradually 
became a statutory requirement through a series of amendments 
to the Defense Production Act.
    Fourth, Congress should not assume that a mirror image of 
CFIUS will work for outbound screening. The enforcement issues 
associated with regulating the movement of investment abroad is 
more challenging to address than regulating inbound flows. 
Congress should only move forward with a screening concept if 
it is reasonably sure that it has adequate monitoring and 
enforcement capabilities to give the regulation teeth.
    And finally, Congress should think in network terms when 
contemplating which technologies a screening regime should 
cover. An administrable outbound investment review system will 
need to be relatively narrow in scope. We should avoid a 
boiling-the-ocean mentality. A broadly scoped review is likely 
to generate substantial negative consequences for U.S. 
companies' competitiveness and capacity to innovate. Congress 
can narrow its focus while remaining maximally effective by 
examining technology checkpoints and supply chain networks, 
where U.S. firms currently have the advantage and where process 
and knowhow are central to the production of these 
technologies.
    Technologies for which China has the least domestic 
capacity tend to be in areas with very high-quality control 
specifications. These kinds of technologies are likely of high 
national security value, require substantial knowhow to 
perfect, and have outsized follow-on effects to other 
technologies relevant to U.S. national security. Those would be 
good candidates for review.
    However, we should be wary of overreach. Prudent policy 
must balance the national security imperative to deny countries 
of concern indigenous capabilities in technologies of high 
national security import while also avoiding an overly 
restrictive regime that would actually inadvertently further 
push Chinese entities toward self-sufficiency.
    Thank you for the opportunity to speak with you today, and 
I look forward to your questions.
    Chairman Brown. Thank you, Ms. Bauerle Danzman.
    Mr. Ashooh, welcome.

  STATEMENT OF RICHARD ASHOOH, FORMER ASSISTANT SECRETARY FOR 
       EXPORT ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE

    Mr. Ashooh. Thank you, Mr. Chairman. It is good to be with 
you and also with you, Ranking Member Toomey. It is an honor to 
be here today.
    Having served as Assistant Secretary at BIS I contend with 
many of the issues which are the subject of today's hearing, 
and I certainly share the concerns that were stated in both of 
your statements. And it is in that capacity, my experience at 
BIS, that I would like to testify today and share with you.
    The concerns at the heart of this hearing are well-founded. 
From the moment of my swearing in at BIS, the challenges 
presented by the PRC were apparent, serious, and alarming. 
While great strides have been made in addressing these 
concerns, national security is never static and must be 
constantly addressed.
    Much of what has been accomplished is the result of 
legislation this Committee championed, as has already been 
mentioned, in 2018, which led to the Export Control Reform Act 
and Foreign Investment Risk and Review Modernization Act, also 
known as ECRA and FIRRMA.
    And I would like to take a minute to underscore my 
gratitude to the Committee for the thoughtful approach it took 
at that time, which involved bipartisan, bicameral, and 
multijurisdictional legislating to advance a long-overdue 
modernization of some very complex and powerful authorities. 
Any consideration of measures which could significantly alter 
U.S. capital flows merits a similarly thoughtful and thorough 
approach.
    I will confine my comments today to three recommendations 
that are drawn from the lessons learned in the implementation 
and passage of FIRRMA and ECRA.
    First, clearly define the national security threat to be 
addressed. While this objective appears obvious, the temptation 
to address a broad panoply of otherwise legitimate concerns 
that do not necessarily meet the test of national security is 
very alluring.
    However, a fundamental premise in national security 
specificity during the ECRA and FIRRMA debate, concerns over 
joint ventures with Chinese companies, led to a robust 
discussion of whether to expand the scope of CFIUS to regulate 
that activity. Once the key issue was distilled to one of 
concerns over technology transfer, the purview of export 
controls, the appropriate tailoring of ECRA could occur, thanks 
in large part to the concomitant updating of that law along 
with FIRRMA.
    Second, I recommend in this area that we regulate 
horizontally. National security threats are rarely stove-piped, 
and solutions to address them should not be either. Multiple 
agencies must collaborate--the Department of State regulates 
persons, Treasury the financing, and Commerce the technology.
    One of the most crucial updates in FIRRMA and ECRA was to 
dovetail their respective definitions and authorities, which 
established a unified definition of critical technologies, 
which grounded that definition in well-defined export 
restriction criteria such as the Commerce Control List and the 
United States Munitions List under ITAR. This created clear, 
specific, updatable tools for regulating. And since the 
Commerce List categorizes countries and restricts them based on 
national security concerns, this obviated the need for Treasury 
to develop its own country criteria, another robustly debated 
issue at that time. This synchronization is a model for 
enhancing the power and effectiveness of U.S. policy 
implementation.
    Third, I recommend building on what works. For all the 
progress made because of and since the passage of FIRRMA and 
ECRA, gaps do exist. As has already been mentioned, it is 
possible that export control technology could be the 
beneficiary of U.S. financing, intentionally or not.
    This disconnect is one which could be addressed through 
alterations to current authorities. ECRA and FIRRMA allowed the 
two regimes to reinforce each other as complementary tools to 
protect national security. As a CFIUS-reviewing agency, 
commerce has the opportunity to vet applicants against other 
important national security authorities such as compliance with 
Export Control System and the Defense Priorities and 
Allocations System, also known as DPAS, making for an even more 
comprehensive national security review.
    A recent enhancement to the Export Administration 
Regulations defines the term ``support'' by ``U.S. persons'' to 
include, among other things, financing. While further study 
must be conducted, this feature of the law creates a regulatory 
``hook'' to limit financial activities already tied to 
restrictions based on export controls.
    Amendments to current authorities hold the potential to 
address the most pressing concerns regarding outbound 
investments without, as has been proposed, the establishment of 
an additional, entirely new regime with potentially overlapping 
or conflicting authorities.
    Finally, just as alignment among relevant agencies and 
authorities is critical, consideration must be given to 
alignment with partner Nations. Since the passage of FIRRMA and 
ECRA, many like-minded countries have embarked on similar 
national security reviews of both foreign direct investment 
screening and export controls. It is clear from the behavior of 
our allies that the U.S. led in these areas, resulting in a 
more global, and therefore far more effective, approach. It 
should continue this leadership in this area.
    And I am happy to take your questions.
    Chairman Brown. Thank you very much, Mr. Ashooh.
    Mr. Feddo, welcome. Thank you for joining us.

   STATEMENT OF THOMAS FEDDO, FORMER ASSISTANT SECRETARY FOR 
      INVESTMENT SECURITY, U.S. DEPARTMENT OF THE TREASURY

    Mr. Feddo. Thank you, Chairman Brown, Ranking Member 
Toomey, and distinguished Members of the Committee. When I last 
appeared before you I was fortunate to receive your endorsement 
to be the Treasury Department's first-ever Assistant Secretary 
for Investment Security. In that role,
    I oversaw the Committee on Foreign Investment in the United 
States, including the successful implementation of FIRRMA in 
2018.
    By virtue of that experience and over 20 years of service 
in national security-related capacities, I hope to contribute 
to your consideration of outbound investment screening.
    At the outset, I will say that I believe we are engaged in 
one of history's most consequential great power competitions, 
and that technology plays a key role in that contest. In the 
1990s, I was as an officer on a Los Angeles class submarine. 
That boat was a tech marvel, carrying the world's most 
sophisticated weapons and equipment, largely a result of 
America's innovation ecosystem. My submarine service has made 
crystal clear the imperative for maintaining America's 
technology advantage.
    The PRC poses grave threats to the United States, its 
allies, and global order, including its strategy to exploit 
technology, raw materials, market power, and energy resources 
to achieve its ends. Key supply chains such as semiconductors 
are vulnerable to these same goals.
    The 2018 enactment of FIRRMA and ECRA was largely in 
response to the potential risks arising from foreign actors' 
activity with high-tech U.S. businesses. Now, both Congress and 
the Biden administration are considering a new agency with 
potentially sweeping powers to oversee American firms' 
allocation of property and capital outside the United States.
    A version of this interagency panel was considered in this 
year's CHIPS bill. The regime would have limited investments, 
sharing of Indo-Pacific, financing, and even sales that could 
benefit a country of concern, in a wide list of sectors. Key 
terms were broad and undefined and left substantial latitude to 
the Executive branch. Virtually every U.S. business transacting 
internationally could have been impacted. Subsequent proposals 
were narrowed, but I believe more homework is still necessary.
    Recent reporting say that the Administration is close to 
creating establishing outbound screening by Executive order. I 
strongly believe that doing so would be a significant mistake. 
Rather, Congress is best suited to assess and respond to an 
issue of this complexity and potential scope and impact.
    There should be no dispute that to ensure America's 
security the PRC's technology theft must be prevented. The 
question is whether a new and potentially far-reaching 
bureaucracy is the answer. The debate has taken on an apparent 
presumption that outbound screening is necessary, but 
decisionmakers would greatly benefit by resisting that 
temptation to rush into a ``solution.''
    I commend the Committee for today's hearing. There should 
be more before any solution is enacted to define objectives and 
determine costs and benefits.
    When a bipartisan Congress and the Trump administration 
collaborated to make the most extensive changes to CFIUS in its 
history, those efforts included roughly a half-dozen hearings 
with national security experts, the IC, the private sector, and 
former and current senior Administration officials. Congress 
and the President were thus well informed as to the gaps they 
intended to fill, the law's reach, and the attendant increases 
in capacity and cost. Afterwards, it took 2 intensive years 
within an existing CFIUS bureaucracy to effectively implement 
the law. Here, outbound screening would be out of whole cloth.
    As with FIRRMA, decisionmakers would be best served by 
building a comprehensive record, exploring whether existing or 
other authorities could be less bureaucratic and costly and 
more impactful. These options do not appear to have been fully 
considered, by they may, in fact, offer a better cost-benefit 
calculus.
    My written testimony includes a foundational list of issues 
for a fulsome congressional examination of outbound screening.
    From my CFIUS experience I know that a new screening 
mechanism would be time--and resource--intensive and require 
substantial effort to build a clear regulatory framework, and 
have the key human capital to ensure success.
    It is an honor to contribute today to your scrutiny of this 
consequential matter. To H.L. Mencken is attributed the wisdom 
that ``for every complicated problem there is a solution--easy, 
simple, and wrong.'' In the interests of national security, a 
strong, open economy, and accountable Government, all Americans 
should hope and expect policymakers to get this right. The 
alternative could be an unrestrained bureaucracy, wasted time 
and resources, and no meaningful response to the PRC's ominous 
goals. Thank you.
    Chairman Brown. Thank you, Mr. Feddo. This may be the only 
hearing ever where H.L. Mencken, and earlier Senator Cornyn 
quoted Lenin. The scope of that, I do not quite know how to 
analyze.
    Mr. Strayer, you are recognized for 5 minutes. Thank you.

   STATEMENT OF ROBERT STRAYER, EXECUTIVE VICE PRESIDENT OF 
        POLICY, INFORMATION TECHNOLOGY INDUSTRY COUNCIL

    Mr. Strayer. Mr. Chairman, Ranking Member Toomey, I am 
currently the lead of the global policy team at the Information 
Technology Industry Council, or ITI. ITI represents 80 global 
leading companies from across the ICT sector, including 
hardware, software, semiconductors, network equipment and 
cybersecurity.
    The U.S. Government has no more important responsibility 
than to protect the Nation's security. ITI therefore commends 
the Committee for holding this hearing. It is essential that 
there be a structured, deliberative process to include the 
views of all stakeholders on outbound investments. We also 
appreciate the leadership of Senators Cornyn and Casey on this 
issue and for their letter this week calling for robust 
stakeholder engagement.
    We are committed to working with Congress and the 
Administration to achieve effective national security outcomes. 
U.S. national security depends on continued U.S. technological 
leadership. Today, other Nations and their companies are 
competing to find the next transformational technology.
    Global competition in tech innovation is occurring in 
increasingly rapid cycles. U.S. companies must use the profits 
earned from global sales of current products to fund future R&D 
of the next improved generation of products. Companies also 
face fierce competition on cost and efficiency. U.S. companies 
use global supply chains to access the best talent, components, 
and manufacturing capabilities to be competitive. Global 
markets for sales and diversified supply chains are therefore 
vital to American technological leadership, and that leadership 
contributes to a shared goal of enhancing U.S. national 
security.
    U.S. Government policies have helped companies run faster 
and better compete in global markets. The incentives in the 
recently enacted CHIPS and Science Act are a good example of 
incentives to buildup U.S. tech capabilities. ITI was a 
steadfast supporter of this legislation and appreciate Congress 
passing that legislation.
    As U.S. Government examines ways to maintain its 
technological advantage and protect national security, there 
are five considerations that will help an outbound investment 
framework be successful.
    First, it is imperative that policymakers examine existing 
authorities, identify gaps that implicate national security, 
and craft new authorities in a manner that is sufficiently 
narrow to avoid capturing transactions already subject to 
existing regimes. For example, U.S. Commerce Department has 
extensive authority to restrict the transfer of technology, 
software, and commodities to and from countries and entities of 
concern.
    Second, we should be specific and targeted about national 
security risks of the technologies and investments to be 
covered. My perspective on this point is shaped by my time at 
the U.S. State Department. I served as the Deputy Assistant 
Secretary for Cyber Policy there. In that role, I was 
responsible for leading the U.S. Government's international 5G 
security campaign, and I was also involved in planning to 
protect U.S. technology networks.
    In 2018, we identified that significant risk was related to 
one particular type of technology platform, wireless 5G 
networks, and we focused the U.S. Government on a 
governmentwide campaign to establish policies to protect the 
United States and convince our foreign partners and allies to 
adopt consistent policies that were based on a governmentwide 
strategy.
    A similar degree of focus on particular technologies is 
needed for the U.S. Government to be successful in outbound 
investment screening. Its scope needs to be manageable and 
enforceable, and the rationale must be understood by the 
private sector and allied Governments. An assessment of 
emerging technologies should be done by the intelligence 
community and other experts in U.S. Government and in the 
private sector. That would help identify the most 
transformative technologies and consider their impacts on 
economic growth, national security, and military capabilities, 
as well as an adversary's ability to monopolize that 
technology. That analysis should take place before a framework 
enters into force.
    Third, U.S. Government should consult with industry 
regularly. The private sector has the best data and 
understanding of supply chains. It can share this information 
with the Government to design policies that achieve U.S. goals 
while minimizing costs to supply chains.
    Fourth, companies need as much certainty as possible to 
plan and time to adjust their supply chains. In most cases, 
those take years to develop. The best way to provide certainty 
is with clear lines about the investments that would be covered 
by regulatory restrictions.
    Fifth, build international coalitions. It is critically 
important that new regulatory mechanisms be coordinated with 
U.S. allies and partners to ensure that U.S. actions do not 
cause investments to leave the United States and be made 
through countries that do not have similar investment 
restrictions.
    Thank you for the opportunity to testify today, and I look 
forward to your questions.
    Chairman Brown. Thank you, Mr. Strayer. Thank you all for 
your thoughtful comments on a complicated subject.
    I will start with you Dr. Bauerle Danzman, if I could. You 
state that there are, quote, ``gaps,'' unquote, in the U.S.'s 
ability to address national security risks associated with 
outbound investment. Elaborate if you would on what those gaps 
are and the type of risks associated with those gaps.
    Ms. Bauerle Danzman. Absolutely. So, you know, when we are 
talking about gaps in authority we are really addressing 
whether there are certain kinds of intangible benefits that 
U.S. investment provides that are separate from technology 
transfer and thereby not addressable through export controls.
    I lay out some of this in my written testimony, but I 
really focus on two kinds of active investments, FDI and 
venture capital. Let us set aside portfolio flows which are 
just passive financial investments and not suitable for 
screening.
    For FDI, for example, a semiconductor company building a 
fabrication plant in China or a software development company 
opening an AI R&D facility in China, there is a vast literature 
on the role of FDI in broader economic development of receiving 
States. This literature focuses on identifying positive 
spillovers to local industry from FDI, usually through 
knowledge, knowhow, and market-making channels. Multinationals 
can act as catalysts for domestic industry. They do so even 
through these non-tech transfer channels. Multinationals help 
foster indigenous industries by incorporating local firms into 
their supply chains, by importing knowledge about international 
markets, through building connections to multinationals' 
broader supplier and buyer networks, and by transferring 
managerial practices that encourage efficiency and quality 
control.
    We know that by interacting with multinationals, domestic 
firms gain foreign market knowledge to directly compete in 
international markets, and domestic firms that integrate into 
multinational supply chains are actually statistically 
significantly more likely to become exporters, to increase 
their ability to supply the domestic market, as well as to 
produce higher quality and more complex products. This is how 
developing countries move up the value chain.
    And these are all less tangible contributions to the 
domestic market that are not controllable through export 
controls, and normally they should not be. Normally all of 
these spillover effects of FDI are beneficial to economic 
development, and this is a success story that illustrates how 
economic integration can generate shared prosperity.
    So in general, this is a good thing for everyone involved. 
But in very narrow cases, we may want to prevent U.S. firms 
from building China's innovation ecosystem in technologies that 
are so vital to U.S. national security that we just cannot 
afford to cede that tech to the PRC.
    And then in terms of venture capital, we all know that the 
whole point of venture capital is not to just the investment 
but that investors provide mentorship and advice to founders 
who need substantial strategic and logistical help to scale up 
their businesses. Venture capital play prominent roles on 
corporation boards. They provide founders and their teams with 
access to investors' financial, commercial, professional, and 
even political networks. A company with VC funding is able to 
leverage the legitimacy of its funder to find more investors, 
board members, and customers.
    Again, venture is an essential part of our innovation 
ecosystem. Forty-two percent of U.S. companies that went public 
from 1974 to 2015 were venture-backed. So as a general matter 
we should encourage venture. But on the flip side, these same 
features that have been so central to the journey from startup 
to commercial viability in the United States could generate 
national security risks if U.S. venture contributes to critical 
technology startups in countries of concern.
    Chairman Brown. Thank you. Let me ask you another question, 
and we are down to about a minute.
    Ms. Bauerle Danzman. Sorry.
    Chairman Brown. In the paper you coauthored with Emily 
Kilcrease you call for a broad notification requirement that 
would provide additional information to investors dealing with 
certain investments. How should policymakers consider the scope 
of such a notification requirement?
    Ms. Bauerle Danzman. So in that paper we believe that 
starting with export controls is a kind of good way to mirror. 
Basically, outbound review should mirror U.S. export controls, 
similar to the solution that Senator Toomey afforded just a few 
minutes ago. So if you need a license to export an item to 
China you would need a review before investing in a Chinese 
company developing or operating in that same technology.
    The inevitable criticism of that approach is that it leaves 
out emerging technologies. So we also suggest that it may be 
useful to go through a process of narrowing the critical and 
emerging technology list to a few areas that matter on that 
list as well that are not currently controlled. The important 
part there is to have a public notice and comment period that 
really allows to get down to greater specificity in terms of 
what the precise technology would be so that it is 
administrable.
    Chairman Brown. Thank you. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. You know, I quoted 
Jake Sullivan's definition or indication of why this was 
necessary, in which he said the problem is ``circumvent the 
spirit of export controls,'' I do not quote that because I want 
to criticize or mock this. What I want to do is underscore the 
sort of imprecise and vague and not terribly well-defined 
nature of the problem we are trying to solve.
    So maybe we could, and Professor, I have to ask you to be 
very, very short if you could, if you could give us a specific 
example of a transaction, a process, something that is not 
captured under existing export controls, and you think we would 
all agree is problematic.
    Ms. Bauerle Danzman. Sure. So I do not claim to speak for 
the National Security Advisor, and I also share many of the 
concerns that you mentioned before about making sure to scope.
    Senator Toomey. Right.
    Ms. Bauerle Danzman. But as a hypothetical, you know, 
Commerce recently announced four new tech controls under 
Section 1758. One newly controlled technology is a specific 
electronic computer aid design software.
    Senator Toomey. OK, but this is--just to be clear, this is 
a hypothetical.
    Ms. Bauerle Danzman. Right. This is a hypothetical. I do 
not want to talk about specific transactions.
    Senator Toomey. Do you know of specific transactions?
    Ms. Bauerle Danzman. Yes, but I do not want to talk about 
specific transactions that would implicate particular 
companies. So I am just saying that if a U.S. company invested 
in a Chinese entity that was trying to develop this controlled 
technology indigenously, but it was trying to develop it 
indigenously without using U.S.-controlled tech, that would be 
an indication, in my mind, of a company trying to circumvent 
the spirit of export controls.
    Senator Toomey. All right. There is another aspect to this. 
Maybe Mr. Ashooh--am I saying that correctly?
    Mr. Ashooh. It rhymes with cashew.
    Senator Toomey. OK. China has obviously got a lot of 
accumulated capital. Plenty of money. Government has enormous 
resources. Private sector has enormous resources. So would you 
agree that if there is a problem here, the problem is not 
providing money. The problem is something else. And we know 
that the export restriction regime has the ability to limit the 
export of products, including software.
    So it seems to me what we are really getting at here, what 
comes up periodically in the discussion, is this much more 
difficult to define concept of like knowhow, expertise, 
professionalism, process, a way of doing business that is 
likely to enhance your ability to be successful. How would you 
react to that characterization of what seems to me to be the 
thing that folks are going after?
    Mr. Ashooh. Thank you for the question, Senator. I actually 
think there is only one area that, in a specific way, presents 
a disconnect between the goals and the authorities, and that is 
cash money. it is conceivable that an end user that would be 
export restricted could still receive U.S. investment, and that 
to me is a disconnect. I do not have a specific example because 
during my time at BIS I did not encounter one.
    But I think it is important to, on the question of 
associated transfer of intangibles, like knowhow, the Export 
Administration Regulations covers that. It defines technology 
primarily as information. So it is important to think, it is 
not just the phone or this pen, it is the manual that goes with 
it. That is technology. That is controlled, in whatever form, 
usually intangible, that it goes.
    So we have a very robust and textured series of regulations 
that are already in place that with some adjustment could 
address whatever concerns there are.
    Senator Toomey. Mr. Feddo, I wonder if you could address, 
we are at a situation where we might have an Executive order 
come out in the absence of legislation. We might be able to get 
legislation done. Could you just discuss a little bit your 
sense of how important it is that whatever is done here is 
defined in statute by Congress?
    Mr. Feddo. Senator, I think this is the prerogative of the 
Congress. It is Article I of the Constitution for a reason, and 
you have explicit authority to regulate commerce with foreign 
Nations. Such a complicated issue and question, and the problem 
has not been sufficiently designed. An Executive order that 
creates this committee, when you create a committee like this, 
a bureaucracy, it is not going to be unrung.
    But there are so many questions, as I list in my written 
testimony, that I think need to be answered, in terms of 
capacity--how many transactions we expect to capture, what sort 
of risk analysis would be involved, how are we going to fund 
this committee, accountability, who is in charge, and has the 
institutional heft within the Executive branch to move forward 
and implement it in an appropriate way, and then answer to 
committees of jurisdiction in oversight? All of that comes with 
legislation and not necessarily with an Executive order.
    A statute also gives an opportunity, as I have maintained, 
for the Congress to build a record, to get folks from the 
Administration on the record to identify the problem and answer 
precisely the question you just posed to my fellow witnesses 
about an example of a gap. Those sorts of thing we did during 
FIRRMA. Treasury Department, Commerce, DoD came up here and 
worked with you all and explained gaps. We had the intelligence 
community brief the Congress on the gaps that needed to be 
filled.
    As far as I am aware, that sort of dialogue and 
establishment of a record and a foundation for this kind of 
committee has not yet been executed here.
    Senator Toomey. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    Senator Menendez, of New Jersey, is recognized.
    Senator Menendez. Thank you, Mr. Chairman.
    As a country we need to consider, I believe, how we 
regulate outbound investments of critical sectors as part of 
our broader economic resiliency strategy. The COVID pandemic 
revealed structural weaknesses in the United States supply 
chain, and we are still feeling the pain of those 
vulnerabilities today.
    So Professor Danzman, what were some of the consequences of 
having so much of our critical production abroad, particularly 
in countries like China?
    Ms. Bauerle Danzman. Thank you for the question. I think 
that when we think specifically about the supply chain shocks 
that we experienced because of COVID we should separate out 
what were demand shocks plus supply shocks of zero COVID policy 
versus national security concerns for extended periods of time. 
So the CHIPS Act, in particular, has been working to--you know, 
the idea behind that is to bring back some supply and to 
diversify the supply chain so that we are not over-reliant on 
just a few nodes in the chip supply chain.
    But I think that we want to be careful to not overlearn the 
example of the COVID pandemic, which was very much about shocks 
to the system that are now working themselves out.
    Senator Menendez. Yeah. But it is interesting, shocks to 
the system that we are working out. But at the same time we had 
doctors and nurses who had to improvise in the creation of 
personal protective gear as we struggled to get it from other 
parts of the world. I do not know what the next virus will be. 
There will be one at some point, and hopefully not, but at some 
point there will be one, and we have to think about that.
    Let me ask you, would lack of a comprehensive outbound 
investment strategy for certain critical sectors mitigate the 
benefits of recent efforts to strengthen our supply chains?
    Ms. Bauerle Danzman. Well, I think when we consider the 
reasons why firms move overseas it is normally because of 
commercial viability in the U.S. And so if the goal of the 
Congress is to ensure that we retain some amount of domestic 
capabilities, there are other measures that we should use 
beyond prohibiting outbound investment to actually help on the 
side of making those types of investments in the U.S. 
commercially viable.
    Senator Menendez. OK. Well, I believe our lack of outbound 
investment oversight in the sensitive industries has the 
potential to hamper the competitiveness of our firms. Practices 
such as intellectual property theft are all too common in parts 
of the world, especially China, which harm the ability of U.S. 
firms that are playing by the rules to compete.
    Mr. Feddo and Mr. Ashooh, how has the stolen intellectual 
property in countries like China degraded our economic 
competitiveness and national security?
    Mr. Ashooh. Thank you for the question, Senator. It is an 
incredibly important issue. It is hard to measure how it has 
degraded because, regrettably, it is not limited only to China. 
Intellectual property theft is a global issue, quite frankly, 
which makes it all the harder to deal with.
    And during my time at BIS we were often confronted with the 
question that in the presence of an IP violation should we then 
take an export action? And that was a reasonable request 
because the ability to deal with IP theft in the courts is 
insufficient. The bomb has already gone off. The information 
has already been purloined, and even if you pursue legal 
action, how do you undo that? You cannot really disgorge the 
IP.
    Export controls as a solution to that are not ideal. So it 
is worth us contemplating how else to get at it, because the 
legal system, it is important, it is necessary, it needs to be 
used, but it does not necessarily solve the problem.
    Mr. Feddo. Sir, thank you for the question. I will just 
add, recently FBI director Wray commented that every 12 hours 
the FBI is opening a new investigation related to espionage or 
hacking or something that relates to theft of intellectual 
property.
    The FBI actually has on its website a wheel of doom, I will 
call it, that lists all of the different ways that the CCP 
steals our technology, everything from espionage to hacking to 
research partnership to academic institutions, inbound 
investment, the CFIUS problem. And so all of that is part of 
the calculus, and his estimate was, his comment was that over 
2,000 active investigations by the FBI at the time he made the 
comment.
    And so I am not sure how to quantify that, but I think that 
the damage to our intellectual property and our knowhow is 
profound. What I would say is to me it brings home the point 
that we need more information. I think many who have testified 
today have commented. We do not fully understand the problem, 
and so we need to gather more data, the problem that is with 
risk from outbound investment and how it compares, for example, 
to hacking and espionage and the other risks that we face and 
whether the cost-benefit is there with respect to how much 
resources we dedicate to one versus another.
    Senator Menendez. Yeah. I would just close by saying I 
think that maybe one of the things that outbound investment 
would help us with, it seems to me that we want American 
companies, obviously, to continue to compete in the global 
economy. By the same token, it seems to me that we need to 
preserve the apex, the tip of the iceberg, of the most 
sophisticated, sensitive elements that we need to preserve to 
have a competitive edge and a security edge. And that the rest 
of what is underneath of that tip, that might be generally 
commercially available, is a way to look at how we can continue 
to be competitive.
    But I think there are some sectors, it seems to me, that we 
have to be concerned about, not only the economic equation but 
the security equation as well.
    Thank you very much.
    Chairman Brown. Senator Tester, of Montana, is recognized.
    Senator Tester. Thank you, Mr. Chairman, and I want to 
thank the folks that are here testifying today. I appreciate 
your testimony.
    In my real life I am a farmer, and I have been on the land, 
between my parents, grandparents, myself, for 110 years-plus. 
One of the things that I am somewhat concerned about, which is 
why I am asking the question, is the potential to buy up 
farmland from a foreign country, potentially even a foreign 
adversary country.
    I will direct to you, Mr. Feddo, but anybody can jump in if 
you want to add value, and that his, is this something that we 
are seeing, number one, or is this something that we are even 
tracking?
    Mr. Feddo. I will answer the second part first. I am not 
sure to what extent we are tracking it. I have seen, as to 
whether it is a problem, I am aware that there is increasing 
reporting about buying up land. Certainly with respect to 
CFIUS, the Congress provided the Committee jurisdiction over 
real estate investments, land investments close to military 
installations and otherwise. That provides us some overlap, 
some jurisdiction to look at those types of investments. But as 
to other agriculture-related investments I am not aware of the 
scope of the problem. But it is something that attention has 
been raised, and I think is worth this Committee and others 
thinking about.
    Senator Tester. Anybody else want to add to that?
    [No response.]
    Senator Tester. So I appreciate your answer and I 
understand we cannot look at everything. But the fact that we 
are not doing this, and food supply is pretty critical to 
national security--and you can screw the food supply up pretty 
easily. The thought comes to my mind about putting nitrogen 
fertilizer in grain, which adds protein on a test but also 
poisons the product, is a big deal.
    I mean, whose job would it be to look at that? I am talking 
about people buying land up in the U.S. Do we have an agency 
that would?
    Mr. Ashooh. I think it was appropriate to direct the 
question to Tom because I think CFIUS does exist to look at 
national security, implications of acquisitions. And the real 
estate scope did grow substantially. I think, Senator, what you 
are saying in this is a very good thought, which is food 
security is really an infrastructure issue, which has grown to 
become a national security issue. So my view is the authority 
is there. Getting those definitions right is something that 
with Congress' help should be looked at.
    Senator Tester. How about from an agribusiness standpoint? 
Do we look at that at all, do you know? I will say to you, Mr. 
Feddo, again, how about foreign purchasing of agribusinesses? 
Is anybody looking at that?
    Mr. Ashooh. Absolutely. I mean, that is the core 
jurisdiction of the committee. If a foreign business buys a 
U.S. business it is within the jurisdiction for consideration 
of national security risk.
    Senator Tester. So I probably need to visit with some of 
you offline, but I will just give you an example. And I am not 
saying that these guys are not legit. I do not know that they 
are. I do not know that they are not. But there is a lot of 
land being purchased around me, in north-central Montana, by 
Canadians. I do not know if it is Canadian money, though. It 
may be money from somewhere else. And if nobody is checking 
this out--and I do not know how hard it would be to check this 
out. I just do not know--it seems to me that we are opening 
ourselves up for a risk that we might regret later. That is 
all.
    So the previous question. Senator Menendez was talking 
about intellectual property theft and research partners and 
universities is one of the places. I will go to you, Ms. 
Danzman, because you are from Indiana University, a great 
university in this country. Is the university aware that there 
might be--look, we have a very open Government and we wanted to 
work together and share information. I think it is foundational 
to who we are as a Nation, by the way. But when people are 
trying to steal stuff, that puts a little different light on 
it.
    Is a place like Indiana University aware of what kind of 
threats are out there when we are talking particularly about 
research but it could fall into a lot of other areas too.
    Ms. Bauerle Danzman. I appreciate the question. You know, 
academics really value the openness of science, and so that is 
an important part of what it means to be in the global academy. 
At the same time, it is the case--I know that the FBI goes 
around to universities and works with universities to discuss 
the risks that we currently need to be thinking about in our 
current environment, particularly around the development of 
technologies that do have important dual use. And I think that 
is a very important thing for the FBI to be doing, and that 
program should be probably expanded.
    Senator Tester. OK. So you think it is important what they 
are doing but the adequacy may need to be--the adequacy is not 
where it needs to be?
    Ms. Bauerle Danzman. You might also look at in the EU there 
has been some recent movement on this issue, specifically 
around who is funding universities and university research. So 
this is an issue that I imagine the U.S. and EU Trade and 
Technology Council is also engaged with as well.
    Senator Tester. The more I learn, the more I am scared. 
Thanks.
    Chairman Brown. Thank you, Senator Tester.
    Senator Warren, from Massachusetts, is recognized.
    Senator Warren. Thank you, Mr. Chairman.
    So last month President Biden made a historic investment in 
our future by signing the CHIPS and Science Act into law. In 
addition to boosting Federal funding for scientific research--
yay--the law provides $52 billion in subsidies to revitalize 
our domestic semiconductor manufacturing industry.
    Semiconductor chips are critical ingredients for everything 
from cellphones to cars, so this is a very important investment 
to strengthen our supply chains, create good union jobs, and 
bring down prices for consumers.
    But to ensure that corporations exclusively use CHIPS funds 
for these purposes rather than simply for boosting their own 
profits, Congress put guardrails up, and one of these 
guardrails prohibits semiconductor manufacturers from using 
CHIPS funds for buying back their own stock. Stock buybacks 
mainly serve to manipulate share prices and boost corporate 
executives' profits, money that could instead be used to build 
a factor or hire workers or invest in worker training.
    So Dr. Bauerle Danzman, you are an expert on investment in 
critical sectors like semiconductors, so let me just ask you. 
The CHIPS and Science Act clearly prohibits chip manufacturers, 
like Intel or IBM, from using CHIPS funds to conduct stock 
buybacks. But could Intel or IBM accept CHIPS funds and then 
use its own money for stock buybacks?
    Ms. Bauerle Danzman. Possibly.
    Senator Warren. All right. So here is the issue. If Intel 
is awarded CHIPS funds it is required to use those funds to 
fulfill the purposes of the CHIPS program. I totally get this. 
But money is money. Money is fungible. By taking CHIPS funds, 
Intel would have more money, which might free up other funds 
that it could then use for stock buybacks.
    You know, this is not a hypothetical risk. Between 2011 and 
2020, five of the largest semiconductor companies--Intel, IBM, 
Qualcomm, Texas Instruments, and Broadcom--all of which heavily 
lobbied for the CHIPS Act, spent $250 billion, or 70 percent of 
their collective profits, five times more than we put into the 
CHIPS Act, on what? On stock buybacks. Just a few weeks ago, 
Texas Instruments authorized a new, $15 billion stock buyback 
program.
    Now Secretary Raimondo says CHIPS funds will not be used 
for buybacks on her watch, period. Commerce said CHIPS money is 
not, quote, ``a subsidy for companies to make them more 
profitable or enable them to have more cash for stock buybacks 
or to pad their bottom lines,'' end quote.
    So, Dr. Bauerle Danzman, why is it important that the 
Commerce Department lives up to its promises that taxpayer 
funds in the CHIPS programs are not used, directly or 
indirectly, to fund stock buybacks or other shareholder 
payouts?
    Ms. Bauerle Danzman. Thank you for the question. It is 
important. You know, when you are designing these sorts of 
subsidy programs it is important to get the balance right 
because you want the companies to actually take the funds and 
to expand production, which is good for national security and 
good for American workers.
    That said, taxpayers are investing billions of dollars in 
the semiconductor manufacturing industry on the basis of two 
things, right, the U.S. will be physically safer and more 
economically resilient if we build back more of this capacity, 
and that reshoring is not commercially viable without 
Government support.
    And so if we see a lot of stock buybacks this is going to 
undermine the U.S. public support for these sorts of programs, 
and that will make it harder to appropriate such funds in the 
future, as well if we are not expanding domestic production as 
much as we should, that could have national security 
consequences.
    Senator Warren. Thank you very much. You got a lot of 
points in there about why it is important that the money we 
invest means that the companies are spending money on 
reinvesting and not on something like stock buybacks.
    How do we get there? That means tougher rules like 
requiring companies on the application to attest that they will 
not engage in stock buybacks, by giving additional preferences 
to companies that commit to longer buyback moratoria, by 
clawing back funds from companies that go back on their word.
    So I am looking forward to working with Secretary Raimondo 
and my colleagues to ensure that this critical investment 
onshores our supply chain, creates those good union jobs, 
lowers prices for families, and powers our economy into the 
future in ways we intended, rather than helps line the pockets 
of the CEOs of these giant corporation.
    I appreciate your work in this area, and I hope we can work 
together to get this done. Thank you.
    Chairman Brown. Thank you, Senator Warren.
    Senator Van Hollen, of Maryland, is recognized.
    Senator Van Hollen. Thank you, Mr. Chairman, and thank you 
for having this hearing. I thank all of you for your testimony. 
I think we can all agree that it is important for the United 
States to maintain its competitive edge in areas that are 
critical to our national security, our economy, areas of 
strategic importance.
    The CHIPS and Science Bill, which we passed, was a really 
important part of that. Making sure that we do our business 
here at home is a critical piece. Another piece is to make sure 
we do not allow companies and a lot of companies associated 
with foreign Governments to steal U.S. intellectual property.
    Senator Sasse and I introduced a bill that is part of the 
current conference of what remains of USICA, to do that so that 
U.S. companies who have had their IP stolen do not have to take 
a case-at-a-time approach on patent infringement, but the U.S. 
Government can take action through sanctions to make it very 
clear that we are not going to be firing with an economic BB 
gun but we are going to have more strength.
    The third is this topic that we are discussing today, and I 
do think most of us share a concern that without some 
sufficient Government oversight, transparency, guidelines, that 
U.S. outbound investment could strengthen the capabilities of 
China or other adversaries in areas that are of strategic 
importance to the United States. I mean, that is what we are 
focused on here.
    I think there are good-faith disagreements as to how you 
define the scope, exactly what the mechanism is to implement 
that. But it does seem to me that in order to be effective, in 
addition to figuring out how we want to do this here at home, 
what kind of mechanism we want, we also have to make sure that 
our allied partners adopt similar mechanisms.
    Ms. Danzman, would you agree with that?
    Ms. Bauerle Danzman. I do not think you can overstate the 
importance of multilateral engagement on this issue.
    Senator Van Hollen. Right. And just each of you, yes or no, 
in terms of whether you agree with that principle.
    Mr. Ashooh. I strongly agree.
    Mr. Feddo. Likewise. Multilateral efforts area always 
stronger than going in alone.
    Mr. Strayer. Agree.
    Senator Van Hollen. Right. So, you know, with FIRRMA we 
created a mechanism to create incentive for our partners 
overseas, allies overseas, to adopt similar mechanisms to our 
CFIUS process. And it seems to me whatever we decide in terms 
of the shape and form of rules that apply to outbound 
investment or transparency, it will only be affective if we get 
our partners around the world to adopt it, for a couple of 
reasons. One is if they do not, they can send capital to 
support the same sort of investments in strategically important 
areas, and number two, that would then put U.S. firms at a 
disadvantage because we are essentially saying that we are not 
going to allow this but leave the door open for others.
    Can you address where we stand right now in those 
conversations, and are there any of our partner countries today 
who have adopted a screening process on their outbound 
investment? I do not know who would be best to answer that.
    Mr. Ashooh. I can at least make an initial comment. I am 
aware that outbound screening exists in some of our allied 
partners, but I would like to take a moment to talk about the 
multilateralism that exists today. There is a bit of a common 
theme here among the witnesses, which is that an initial step 
in any outbound screening criteria should be to synchronize it 
with the existing national security criteria that exists 
between CFIUS and the Export Control System, and to look at 
whether or not outbound screening should align with that.
    Export controls are overwhelmingly multilateral, so that 
work is already in place in many ways--not completely. Work 
needs to be done. But there is a lot to work with there right 
now.
    Senator Van Hollen. Any others? Ms. Danzman?
    Ms. Bauerle Danzman. Sure. So both South Korea and Taiwan 
have very narrowly scoped outbound screening mechanisms so that 
answers one of your questions. I am not currently in the 
Government so I do not know how much there has been discussion 
at the multilateral level specifically around this issue, but 
in informal conversations with those over in the EU, this seems 
like this is going to really take a long time to develop a 
shared understanding of the problem and of the likely best 
solutions to such a problem.
    Senator Van Hollen. I appreciate that. You know, I was 
overseas a number of years ago, before the COVID outbreak, and 
there was a lot of discussion on the CFIUS rules and getting 
the EU and other partners to align some of their rules with 
that. And I think we are going to have to go through the same 
kind of process with respect to this regime, you know, once we 
get a better sense of what we want to do and what those rules 
should be. I appreciate all of your agreement that that is an 
essential piece of any successful mechanism. Thank you.
    Chairman Brown. Thank you, Senator Van Hollen.
    Senator Warner, from Virginia, is recognized from his 
office.
    Senator Warner. Thank you, Mr. Chairman, and thank you for 
having this hearing. I think it is critically important, and 
getting this right is a challenge.
    I am going to talk for a minute or two before I ask 
questions about the fact that this has been such a focus of the 
Intelligence Committee over the last 4 years. As a matter of 
fact, there was always a disconnect between what I was hearing 
from business circles and what I was hearing from the 
intelligence community about the enormous challenges and 
threats posed by the PRC. And let me be clear that my beef is 
with the Communist Party of China and Xi Jinping's leadership. 
It is not with the Chinese people or the Chinese diaspora here 
in America or anywhere else in the world.
    But we have to acknowledge that there is no such thing as 
an independent company in China at this point. Chinese law 
dictates that all these companies have to be first and foremost 
loyal to the Communist Party, not their shareholders. So 
starting in 2018, we have now had 21 separate classified road-
show briefings to alert industry sector by industry sector of 
this challenge.
    I think we have made progress, and I think even groups like 
private equity, which were reluctant to hear this story at 
first because they were making so much money in Chinese tech 
companies, are starting to get the message, the level of 
intellectual property theft, the level of China investing not 
just directly but through subsidiaries. I am going to come back 
to that in a moment with my question.
    But this technology competition, I think, is the challenge 
of our time. We have got to deal with Russia, obviously, and 
Ukraine, but the technology competition with the PRC going 
forward, we have never faced this kind of economic competitor.
    And I would say to my colleagues, you know, and I know we 
have to get the CHIPS bill right, but without the CHIPS bill 
there would not be another chip manufacturing plant built in 
America. You know, you look at the last 15, 18 years, I think 
there has been over 120 chip fabs built around the world. Only 
17 of them built in America. And every country around the world 
has this kind of program. We can either complain about that or 
we can get in the game in terms of competition. And I think 
what we are doing in chips we are going to have to do in other 
technology domains in a very, very careful way.
    But I want to start my question with Dr. Danzman, and one 
of the things that you have talked about in your statement was 
the idea of we need to think about this issue in almost network 
terms, because what we have seen, particularly in terms of our 
challenges with China, not only intellectual property theft, 
not only kind of Chinese inbound investments in the form of 
venture firms and other entities, but increasing we are seeing 
China mask these activities through investments in, for 
example, European subsidiaries. And you have talked about some 
of the leakage that takes place, and my fear is that while 
there are some new entities out there trying to clearly 
identify the supply chain, because I have seen private 
enterprises that indicate you go second or third level 
suppliers, and even now we have got firms that are reliant upon 
China and Russia sources.
    Do we know enough about kind of the overall supply chain so 
that whether it is inbound investing or outbound investing we 
have a good idea of identifying who we ought to be monitoring 
and making sure that we are accurately assessing the threats on 
investments?
    Ms. Bauerle Danzman. Thank you very much for the question. 
I am happy to talk longer afterwards because this could be a 
long question and I want to keep my answer short.
    There are kind of two aspects that I think are important 
here in your question. One is about entity resolution, which is 
how do we know who actually owns or who controls the entity 
that is investing. I think that we do have good intelligence 
and good ability, in the U.S., at least, to track that entity 
resolution quite well, but sometimes that is not something that 
all of our partners and allies have access to.
    But on kind of the broader question of how do we know what 
is going on in the supply chain, one thing that we have learned 
is that not even companies oftentimes know what is happening 
throughout their supply chain. Normally there is knowledge 
first-tier suppliers, but going down into the second and third 
tiers, so the suppliers to the suppliers, and the suppliers to 
the suppliers to the suppliers, there is not a lot of 
understanding of how that whole system works.
    Senator Warner. Yeah, and I think there, and let me just 
quickly say, I want to make one last point. I am not going to 
get another question in. But there are private sector entities. 
There is a company in Virginia called Interos that tracks some 
of this. I think we need to have more of those sources.
    I do not have time for a question but I will point out, Mr. 
Chairman, that we ought to not only look at outbound investment 
but I do think we need to call into question, for example, 
Apple is a great American company. The idea that they are 
potentially buying lots of their semiconductor chips from YMTC 
frankly strengthens China's position in that market, and it is 
something that I know Senator Rubio and I and the Intel 
Committee have raised questions. And I think we need to look at 
this issue as well.
    Thank you very much, Mr. Chairman.
    Chairman Brown. Thank you, Senator Warner.
    Senator Toomey and I would like to do a second round. It 
will take no more than 10 minutes, probably less, and we are 
also called to a vote at 11:30.
    I have a question together for Mr. Feddo and Mr. Ashooh. 
You both have experience working in positions that review the 
national security risks associated with certain business 
transactions. I will start, Mr. Ashooh, with you. Based on your 
Government experience, if policymakers established a 
notification requirement what information would be helpful to 
collect?
    Mr. Ashooh. Well, the most important information would be 
whether or not whatever they are engaged in intersects with our 
export restrictions. That currently exists right now, under 
CFIUS, thanks to FIRRMA. Mandatory declarations are required, 
where there is critical technology that requires a license 
involved. I think, again, building on what works, that is a 
place I would start.
    Chairman Brown. And Mr. Feddo, same question. What 
information would be helpful to collection, in your mind?
    Mr. Feddo. I agree with Mr. Ashooh. I also think this is a 
place where relying on the IC and the FBI to identify certain 
sectors of greatest risk with respect to this outbound 
investment question and have that inform where we are asking 
for reporting, because in some cases there may not be export 
controls but it is a cutting-edge technology that we need to 
know more about.
    Chairman Brown. Thank you, Mr. Feddo. Senator Toomey.
    Senator Toomey. Thanks, Mr. Chairman. So, you know, I 
remain concerned about how well-defined the problem we are 
trying to address actually is. I think I have heard that maybe 
the gap between what we are able to limit now and what we might 
wish to might just be cash. I think we have heard a discussion 
about how there are these processes and knowhow, which seems 
extremely difficult to define.
    Let me ask this, and I think I would just put this to each 
of our panelists. If we do go down the road of standing up an 
outbound screening notification regime, how important do you 
think it is that we limit the application to very precise and 
well-defined boundaries and maybe even the importance that 
these boundaries be a reference to existing law that 
recognizes, that has already identified technologies that we 
are concerned about? We have got very limit time--I apologize 
for that--but maybe we could start with Mr. Strayer and work 
our way down.
    Mr. Strayer. Yes, Senator. I very much agree that we need 
to be very precise about how we are identifying those 
technologies. But the other thing that I have heard multiple 
times suggested is just because something is on the Commerce 
Control List that should immediately be something that is 
sought to be controlled in the investment level. But one needs 
to understand that the Commerce Department's Export Control 
List is very specific. So if there is an AI technology in a 
specific application added somewhere to the Commerce Control 
List, that should not prohibit investment in all artificial 
intelligence.
    So that translation is going to be very hard. It needs to 
be precise for the reasons I outlined in my technology.
    Senator Toomey. Thank you. Mr. Feddo?
    Mr. Feddo. I agree, precision is imperative if we move 
forward with this, compliance costs for the private sector. 
Even entities that are not necessarily directly impacted by 
this will have compliance costs and will need to consult with 
advisors and lawyers and others to make sure that they are on 
the right side of the law. So specificity is imperative.
    Senator Toomey. Thank you.
    Mr. Ashooh. Yeah, I fully agree. In fact, I would say the 
power of our existing Export Control System, and it is 
powerful, is in its specificity because it allows commerce to 
flow freely where we are not doing the restricting.
    Senator Toomey. Thank you. Professor?
    Ms. Bauerle Danzman. I will just agree. I think it is 
really important to have clarify for the certainty it will 
provide to firms about what it is that they need to be worried 
about when they are thinking about outbound investment. Thank 
you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    Thanks to the witnesses. Thanks to the four of you today 
for your thoughtful, helpful testimony.
    Senators wishing to submit questions for the record, they 
are due 1 week from today, Thursday, October 6th, and we ask 
you, as witnesses, to please submit the responses to those 
questions for the record within 45 days from the day you 
receive them.
    Thank you again for joining us. The Committee is adjourned. 
Thank you.
    [Whereupon, at 11:37 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    Earlier this year Secretary of State Antony Blinken said that, 
``Beijing wants to put itself at the center of global innovation and 
manufacturing, increase other countries' technological dependence, and 
then use that dependence to impose its foreign policy preference.''
    ``And Beijing is going to great lengths to win this contest.''
    It is critical that the Administration has the tools it needs to 
protect our national security.
    And this Committee has played a key role. We've done that through 
export controls that restrict the flow of sensitive technology.
    And we've done that through the screening of foreign direct 
investment into the U.S., to guard against adversaries accessing our 
technology or critical infrastructure capabilities.
    Four years ago, we enacted the Export Control Reform Act, known as 
ECRA, which provided permanent statutory authority for the U.S. 
Government to regulate U.S. exports that have commercial and defense 
applications.
    Those controls can apply to important technology, like 
semiconductors. They can apply to the way a technology is used, like 
military intelligence. And they can apply to who uses it, like a 
Chinese quantum computing company.
    Along with ECRA, we also passed the Foreign Investment Risk Review 
Modernization Act, known as FIRRMA.
    That law strengthened and expanded the jurisdiction of the 
Committee on Foreign Investment in the United States, known as CFIUS, 
that reviews foreign investments, like mergers or acquisitions, of U.S. 
businesses.
    We passed these bipartisan laws, because we all recognize the 
importance of maintaining U.S. technological leadership, and the need 
to protect that leadership.
    We know that threats to our national security are evolving. We also 
know that our adversaries will use any means they can to close the gaps 
between our technological capabilities and theirs--without much care to 
how legal their tactics are.
    What we don't know is to what degree U.S. investments are helping 
them close those gaps.
    U.S. investments--whether from a venture capitalist or pension 
fund--could wittingly or unwittingly support foreign technological 
investments that, in the words of our Secretary of State, could 
``increase other countries' technological dependence, and then use that 
dependence to impose its foreign policy preference.''
    We cannot let that happen.
    It's why policymakers have been examining the role that U.S. 
investments abroad are playing to enable foreign adversaries, as they 
develop technologies that could take away our technological edge and 
damage our national security.
    Senators Casey and Cornyn introduced a bill designed to address 
these concerns by requiring notifications of certain investments, and 
enabling the President to prohibit others.
    Without objection, I'd like to enter into the record letters of 
support for that bill--the first from Representatives Rosa DeLauro and 
Bill Pascrell, who introduced companion legislation in the House, and 
the second from the AFL-CIO, which supports that legislation.
    We need to better understand whether U.S. investments abroad pose 
national security risks to the United States. In a global economy where 
capital flows freely, we need to ensure that we are not investing in 
technologies that harm our national security.
    Prior to creating CFIUS, we had not systematically tracked foreign 
investments into the United States.
    Times change, and so do the threats we face.
    We must understand the scope of outbound investment and address the 
impact it plays in supporting efforts by our adversaries to achieve 
their ``foreign policy preferences.''
    Protecting U.S. technological leadership is an important part of 
this conversation, and it's why we're here today.
    It's also not the whole story.
    Part of this story is an issue that Ohioans know all too well.
    Over the last 30, 40 years, corporations searched the globe for 
cheap labor. First, they went to anti-union States in the South.
    Then, corporations lobbied for tax breaks and bad trade deals to 
help move jobs overseas--always in search of lower wages.
    They started with manufacturing jobs, but they didn't stop there--
corporations moved R&D jobs abroad too.
    And Wall Street rewarded them for it, over and over and over.
    In some cases, investments abroad outpaced investments in American 
workers. It undermined our national security and hollowed out our 
middle class.
    Protecting technological leadership and protecting jobs are 
connected. Ohioans know how much innovation happens on the shop floor.
    Investing in our workers, our infrastructure, our educational 
system, and our research, development, and manufacturing ecosystem will 
help shore up supply chains.
    From the Infrastructure bill to the CHIPS and Science Act to the 
Inflation Reduction Act, this Congress is laying down a new marker: the 
technology of the future--from semiconductors to batteries to electric 
vehicles--will be developed in America and made in America, by American 
workers.
    It hasn't been easy, and our work is far from finished, but I'm 
optimistic.
    I look forward to working with the Administration and my colleagues 
on this important issue.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Mr. Chairman, thank you.
    China's economic and military rise poses the greatest challenge to 
core U.S. interests since the end of the Cold War. Under Xi Jinping's 
autocratic rule, China is seeking to dominate the Indo-Pacific, with 
clear security implications for U.S. allies and partners there, and 
engaging in relentless efforts to undermine human rights and American 
values, including free expression, the rule of law, and democratic 
governance.
    Recently, White House officials and a few of my Senate colleagues 
have advanced a peculiar idea that in order to fully meet this 
challenge posed by China, the United States should adopt some of the 
Chinese Government's strategies for managing its economy. That thinking 
has led this Congress to enact industrial policy like new distortive 
taxpayer subsidies for semiconductor manufacturing. I thought that 
approach was a big mistake.
    Especially given that recent episode, I am concerned about efforts 
to impose new capital controls on American investment in China. 
Advocates want a new regulatory regime so U.S. officials are notified 
of, and can potentially stop, U.S. investments in certain Chinese 
businesses.
    If those investments credibly pose a risk to our national security, 
then I'm not reflexively opposed to this concept. However, there are 
several reasons why we should proceed carefully with this idea.
    Some claim that current U.S. legal authorities, including our dual-
use export control system overseen by the Bureau of Industry and 
Security, or BIS, are inadequate or incapable of addressing the risk 
posed by American investments in China. But it's important to remember 
that BIS regulates the flow of goods, software, and technology into 
jurisdictions and to end users of concern, and retains the force of law 
in the context of a U.S. investment.
    As Commerce Undersecretary Alan Estevez told this Committee in 
July, BIS has complete authority to block the transfer, of any kind, of 
technology, intellectual property, blueprints, procedural know-how, or 
software going to China, including when Americans make investments in 
China. What, then, is the need for an outbound investment notification 
regime?
    Well, in the words of National Security Advisor Jake Sullivan, it 
would capture outbound investments that ``circumvent the spirit of 
export controls.'' It appears Mr. Sullivan was referring to certain 
U.S. investments in China that are legal under U.S. law, but might be 
of concern.
    It appears that Mr. Sullivan's concern is investments that could 
result in the transfer of operational and managerial expertise and 
enhance the ability of Chinese firms to make sophisticated technologies 
might be prohibited from receiving if a U.S. company wanted to export 
those technologies. The inherent problem with Mr. Sullivan's invoking 
the ``spirit of export controls'' is it's hard to define a ``spirit,'' 
and therefore, it could be subject to expansive and varying 
interpretation.
    While I think we should carefully examine this issue, I'm concerned 
that the White House is reportedly rushing to issue an Executive order 
that establishes an outbound investment regime unilaterally. Let me be 
very, very clear about this: An Executive order is not a substitute for 
a new congressionally passed law. Legislation benefits from a 
deliberative, open, and democratic process.
    A White House EO will inherently lack these characteristics--even 
if an EO is accompanied by a notice and comment period--and certainly 
should not precede a law. In addition, an EO will, very likely, place 
no limits on what technologies can be added to the regime in the 
future.
    Why is it important to establish clear parameters on an outbound 
regime from the outset? Because time and again, presidents of both 
parties have misused sweeping national security authorities in ways far 
beyond how Congress initially intended. President Trump nearly used 
IEEPA to impose tariffs on Mexico over immigration policy. And Democrat 
and Republican senators were shocked when President Trump abused 232 
``national security'' authority to impose tariffs on U.S. partners and 
allies.
    We should all be equally opposed to the Biden administration's 
continuation of the Trump administration's abuse of power under Section 
232, which continues to this day. Appropriately scoping an outbound 
regime is important to preclude it from being used as a backdoor for 
trade protectionism in the future.
    It's vital that we prevail in this contest with China. We can do so 
by ensuring that the United States remains the single greatest global 
destination for capital formation, research and development, and the 
smartest minds in the world to come and work.
    Creating a flawed outbound investment regime would undermine our 
economic leadership, discouraging the flow of capital, ideas, and 
people into the United States. After all, why would you start a firm in 
the U.S. if you know doing so risks precluding you from investing in 
China--the second largest economy in the world?
    Given these stakes, I'm recommending a set of principles to guide 
the creation of any outbound investment regime. These principles are 
based on the premise that it is wholly irresponsible to have a regime 
that does not have clear statutory boundaries on its application. 
Therefore, a notification regime for outbound American investments in 
China should, at a maximum, only be applicable to direct U.S. 
investments in Chinese entities that are manufacturing, producing, 
developing, or testing a technology, for which a U.S. exporter would 
otherwise be required to seek a license under current U.S. law to 
export. I intend to solicit feedback on these principles, and work with 
Senators Cornyn, Casey, and Chairman Brown to incorporate them into the 
upcoming National Defense Authorization Act.
                                 ______
                                 
  PREPARED STATEMENT OF SENATOR ROBERT P. CASEY, JR., OF PENNSYLVANIA
    Thank you, Chairman Brown, Ranking Member Toomey, and Members of 
the Committee for inviting me to this important hearing today. I am 
pleased to have this chance to testify in support of an outbound 
investment screening mechanism. And I am grateful to Senator Cornyn for 
his partnership in this effort, as well as our colleagues in both the 
House and the Senate who are sponsors of the legislation, the National 
Critical Capabilities Defense Act (S. 1854), including Representatives 
Rosa DeLauro, Bill Pascrell, Brian Fitzpatrick, and Victoria Spartz.
    For decades, the United States has steadily ceded its manufacturing 
power to other countries, particularly foreign adversaries, like the 
Chinese Communist Party (CCP) and the Russian Federation. Outsourcing 
our manufacturing and supply chains has put our economic and national 
security at risk. Unfortunately, the pandemic exacerbated this problem, 
as we experienced acute shortages of things like PPE and computer 
chips, simply because we were reliant on other countries to manufacture 
them and a broken supply chain to get them to us.
    In 2020, during the COVID-19 pandemic, I first introduced the 
National Critical Capabilities Defense Act to require targeted 
Government screening of certain transactions by U.S. companies doing 
business in adversarial countries. This bill would help the U.S. better 
understand the risks of allowing foreign adversaries to gain access to 
critical capabilities and technology and to design and manufacture 
goods critical to our economic and national security interests. Over 
the past 2 years, we have garnered growing bipartisan and bicameral 
support for this concept, and Biden administration officials and key 
stakeholders have expressed support for an outbound investment screen, 
but we need more focus on this across the Government and Congress.
    Without such a focus--without an outbound investment screening 
mechanism--we cannot understand, much less safeguard, critical domestic 
industries and capabilities for American workers, manufacturers and 
innovators. We must avoid aiding and abetting our economic competitors 
and potential adversaries.
    At the heart of this is manufacturing, which is core to our 
economic competitiveness. In the United States, manufacturing 
represents about 11 percent of GDP, but is responsible for 70 percent 
of R&D, according to analysis from the consulting firm McKinsey. \1\ 
Manufacturing drives innovation. When you lose manufacturing, you lose 
innovation. Countries that don't make things don't endure.
---------------------------------------------------------------------------
     \1\ Foroorhar, Rana, ``Why Manufacturing Matters to Economic 
Superpowers'', Financial Times (April 11, 2021) https://www.ft.com/
content/22dd4058-c283-45c3-8877-8c2507ec7d6b.
---------------------------------------------------------------------------
    Working men and women in Pennsylvania have seen the damage that 
decades of offshoring and the hollowing out of American manufacturing 
strength and knowledge does to communities and industries. Pennsylvania 
suffered record manufacturing job losses over the last generation. 
According to the Economic Policy Institute, China, governed by the CCP, 
cost the U.S. 3.7 million jobs between 2001 and 2018. 2.8 million 
jobs--three-fourths of the total jobs lost in this time period--were in 
manufacturing. 137,300 of those jobs were in Pennsylvania. \2\ Jobs 
numbers alone provide little insight into the family and community 
trauma, as well as economic scarring, that have ravaged many small 
towns. In key sectors such as communications equipment, electronics and 
computer technology, we have ceded up to 40 percent to 60 percent of 
the domestic market share to Chinese imports, and globally the People's 
Republic of China (PRC) has captured extensive market shares in those 
sectors as well. \3\ We have learned from the intelligence community 
and law enforcement of the security risks that the loss of that 
production and those capabilities has fueled.
---------------------------------------------------------------------------
     \2\ Robert Scott and Zane Mokhiber, ``Growing China Trade Deficit 
Cost 3.7 Million American Jobs Between 2001 and 2018'', Economic Policy 
Institute (Jan. 30, 2020), available at https://www.epi.org/
publication/growing-china-trade-deficits-costs-us-jobs/.
     \3\ Robert Scott and Zane Mokhiber, ``Growing China Trade Deficit 
Cost 3.7 Million American Jobs Between 2001 and 2018'', Economic Policy 
Institute (Jan. 30, 2020), available at https://www.epi.org/
publication/growing-china-trade-deficits-costs-us-jobs/.
---------------------------------------------------------------------------
    To add insult to injury, investments are being made in our rivals, 
such as the PRC and Russia. The level of U.S. investment in Chinese 
companies is staggering, which benefits the CCP. U.S. foreign direct 
investment has flooded into the PRC over the last three decades. 
Lately, U.S. firms have been targeting investments in high-tech and 
advanced service sectors. According to SEC data, in 2020, U.S. firms 
collectively invested in Chinese companies over $200 billion in 
artificial intelligence, $50 billion in biotech, and approximately $80 
billion in telecom, semiconductors and other technologies. \4\ In fact, 
many of these investments have been made in companies owned, controlled 
or influenced by the CCP. As of 2020, U.S. investments in PRC companies 
totaled by capital investment $152 billion to Chinese State-owned 
enterprises and $54 billion to Chinese military companies. \5\
---------------------------------------------------------------------------
     \4\ Nikhaktar, Nazak, Testimony Before Senate Select Committee on 
Intelligence, Open Hearing: Countering the People's Republic of China's 
Economic and Technological Plan for Dominance, (May 11, 2022). https://
www.intelligence.senate.gov/sites/default/files/documents/os-
nnikakhtar-051122.pdf
     \5\ Ibid.
---------------------------------------------------------------------------
    But it's not just the investment dollars, it's the actual 
operations and capabilities that are being outsourced to the PRC. 
Research from the U.S.-China Economic & Security Review Commission, a 
bipartisan entity created by Congress, showed that, based on official 
U.S. data, the rate of R&D investments by some of our firms in the 
chemical and pharmaceutical sector in the PRC outpaced the rate of 
their domestic investments during the period examined almost three-
fold. \6\ We have seen our growing reliance on the PRC for many of our 
life-saving and life-supporting drugs. We cannot afford to continue 
that dependence.
---------------------------------------------------------------------------
     \6\ Malden, Kaj, and Listerud, Ann, ``Trends in U.S. Multinational 
Enterprise Activity in China, 2000-2017'', U.S.-China Economic and 
Security Review Commission (July 1, 2020). https://www.uscc.gov/sites/
default/files/2020-06/US-Multinational-Enterprise-Activity-in-China.pdf
---------------------------------------------------------------------------
    At present, the Executive and Legislative branches of our 
Government have little knowledge of where these dollars are going and 
what sort of projects they may be supporting once dollars are invested. 
They could very well be used against us or our allies in the future. We 
risk funding threats to our own national security and that of our 
allies. According to former U.S. National Security Adviser H.R. 
McMaster, venture capital firms are pouring billions into Chinese 
companies that are ``developing dual-use and sensitive technologies 
that are going to be weaponized against us or already are aiding and 
abetting the Russians.'' The National Critical Capabilities Defense Act 
would help us prevent such threats to our own security.
    Outbound investment of this kind aids the CCP in its ongoing 
efforts to steal our technology for the benefit of its industries. 
Without a mechanism to understand the ways in which the export of U.S. 
investment and capabilities are resulting in a wholesale transfer of 
American R&D and expertise to our adversaries, the U.S. Government is 
an active party to the decline of our own economic might and national 
security.
    The CCP has made clear over the past decade and more its 
willingness to sever access to critical supply chains and use economic 
coercion to bully other Nations. The CCP has acted on such threats. It 
has used market access as a weapon against one of our core security 
partners, Australia. In 2020, when Australia called for an independent 
inquiry into the origins of COVID-19, the PRC responded by slapping 
duties on Australian exports and revoking Australian producers export 
licenses. Last year, when Lithuania allowed the opening of a Taiwanese 
representative office in its capital of Vilnius, the PRC began a 
punishing campaign of economic coercion including market access and 
import restrictions. The PRC obstructed the export of rare earth 
materials to Japan as leverage to compel Japan to release the captain 
of a Chinese fishing boat who was detained after a boating accident in 
disputed water. There are countless other examples like these from 
around the world.
    It's not hard to imagine a scenario where the PRC ceases the export 
of computer chips or critical rare metals to the U.S. or an ally, 
leaving us unable to respond due to a lack of domestic capacity or 
alternative means of procuring them. The U.S. must confront a Chinese 
regime determined to bully or steal its way to economic superiority.
    Some critics have said that outbound investment screening should be 
left to the free market and private companies to sort out. The PRC and 
Russia will continue to ignore international law, as well as private, 
free market rules. Nazak Nikakhtar, in testimony before the 
Intelligence Committee earlier this year said as follows: ``These are 
not incidental consequences of open and free trade. These are the very 
perverse and adverse consequences of one country exploiting open 
borders to cripple other Nations' economies. Our economic losses have 
resulted from the PRC's deliberate attempts to hollow out our 
industries in order to create dependency on their own distorted 
market.'' \7\
---------------------------------------------------------------------------
     \7\ Nikhaktar, Nazak, Testimony Before Senate Select Committee on 
Intelligence, Open Hearing: Countering the People's Republic of China's 
Economic and Technological Plan for Dominance, (May 11, 2022). https://
www.intelligence.senate.gov/sites/default/files/documents/os-
nnikakhtar-051122.pdf
---------------------------------------------------------------------------
    The PRC's broader military and governmental ambitions are 
intertwined with its trade and economic actions because the Chinese 
Government's agenda blurs the lines between its economic and defense 
sectors by way of its ``civil-military fusion'' approach. The Chinese 
Government's investment in, and theft of, technology and innovation 
supports the expansion of its security posture through development of 
surveillance technology, nuclear powered submarines and products across 
the commercial spectrum. This means the PRC does not view competition 
strictly through the lens of dollars and cents. When Chinese firms and 
State-sponsored enterprises compete against America's, it is done so 
with broader objectives in mind, including those of their military.
    It is up to U.S. policymakers, not international markets, to be 
vigilant regarding our national security, our manufacturing capacity, 
and our workers.
    We have existing authorities that already play an important role in 
preventing some transfer of technology and expertise but there are 
significant gaps that exist in our export control programs. The Export 
Control Reform Act (ECRA) expansion was a compromise reached during the 
Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) 
debate. However, the ECRA expansion does not cover much of the goods 
and production that our bill focuses on. We need better oversight 
pertaining to supply chains, sourcing and investments that do not rise 
to the level of export control.
    Today, we will hear testimony from Dr. Sarah Danzman, a Professor 
at Indiana University. In her recent paper on designing an outbound 
investment mechanism she acknowledges the gaps in export controls and 
has written as follows: ``Export controls can regulate specific 
transfers of technology, but are not well suited to capture the full 
range of operational activities that relate to development of 
indigenous capacity and that may flow along with an investment. For 
example, running a successful semiconductor-fabrication plant that can 
produce quality chips at scale requires extensive management expertise 
and skilled leadership, in addition to the underlying technology and 
capital contribution. Export controls cannot constrain all of these 
factors, yet these are the exact types of contributions that would 
naturally flow into China's domestic sector by virtue of a U.S. 
investment.'' \8\
---------------------------------------------------------------------------
     \8\ Danzman, Sarah, and Kilcrease, Emily, ``Sand in the Silicon: 
Designing an Outbound Investment Controls Mechanism'', (September 14, 
2022). https://www.atlanticcouncil.org/in-depth-research-reports/issue-
brief/sand-in-the-silicon-designing-an-outbound-investment-controls-
mechanism/
---------------------------------------------------------------------------
    The focus of our NCCDA bill is foreign adversaries like the PRC and 
the Russian Federation. We need a specific outbound screening mechanism 
to prevent a foreign adversary from threatening access to critical 
capacities or supply chains. We do not need to screen every country, 
only adversaries and ``countries of concern''.
    Our legislation also recognizes the need for a multilateral 
approach with our partners and allies to ensure that we help them 
foster their development and implementation of similar, complementary 
mechanisms. In the long term, we need to expand coordination and 
diplomatic efforts to effectively confront the threats posed by our 
common foreign adversaries. The U.S. should align our own outbound 
investment review mechanism with those of allies and partners, such as 
South Korea and Taiwan, who have already taken this necessary step to 
protect their national security.
    I want to thank the stakeholders and companies that over the past 
year have engaged with my office and our fellow cosponsors to offer 
constructive feedback and input to revise our legislation. We must put 
our Nation and its long-term national security and economic strength 
over short-term corporate profits. Our national security, our workers 
and our economic interests should never be sold out just for short-term 
gains. Americans across the political spectrum recognize the problem we 
are confronting and the need for a solution.
    I want to commend the Biden administration for its support for our 
revised legislation and their efforts to advance an outbound investment 
screening mechanism. Commerce Secretary Gina Raimondo, United States 
Trade Representative Katherine Tai and National Security Council 
Advisor Jake Sullivan, have all publicly expressed support for our 
legislation.
    I still believe our revised legislation provides the U.S. with the 
strongest path forward to compete in a global economy. American workers 
and our national security cannot afford to wait. Legislative action on 
this front is long overdue to address the scope and magnitude of the 
substantial risks we face as a country. This week, I sent a letter with 
Senator Cornyn, Majority Leader Schumer, Speaker Pelosi and 
Representatives DeLauro, Fitzpatrick, Pascrell, and Spartz to President 
Biden urging the Administration to move forward with Executive action 
to safeguard our national security and supply chain resiliency by 
screening outbound investments to foreign adversaries. We stand ready 
to learn how we can support the Administration's proposals and shore up 
the resources the Administration will need to stand up such a 
mechanism.
    An outbound investment screen is an idea whose time has come. We 
must move beyond examination to action because our national security, 
American workers and industry, can no longer wait.
    Thank you for your time and consideration.
                                 ______
                                 
           PREPARED STATEMENT OF SENATOR JOHN CORNYN OF TEXAS
    Thank you Chairman Brown and Ranking Member Toomey for organizing 
this hearing on such an important and timely topic.
    As many of you know, China poses a vast threat to our national 
security.
    Nearly 20 years ago, our Government opened the door to do business 
in China and our industry did what they do best--found a market, 
captured it, and achieved efficiency and innovation.
    But it didn't take long before that openness was abused by the 
Chinese Communist Party through theft, control, and perversion.
    Now, we're seeing the vulnerabilities created by the open door 
between our economies.
    The Chinese Communist Party has weaponized our trade and financial 
apparatuses and is using them to achieve control, dominance, and self-
sufficiency in the area of our national critical capabilities.
    This includes technologies such as semiconductors, quantum 
computing, and artificial intelligence.
    Following passage of the CHIPS act, the U.S. is the only allied, 
Pacific Nation that provides domestic semiconductor incentives and does 
not have an outbound investment mechanism.
    The CCP's predatory trade practices paint an alarming picture for 
our national security.
    This requires a collective response by the U.S. Government, 
American businesses, our allies, and those Nations who at least attempt 
to abide by the rules-based international trading system.
    That said, we must not overreach. Trade and investment with China 
must continue, so any legislative or regulatory actions must be 
targeted.
    We need a scalpel, not a sword.
    The first step is to improve visibility into human, financial, and 
intellectual capital in foreign adversary Nations. We must know the 
full extent of the problem.
    I support a robust process that focuses on transparency and 
notification. The American people should know if a company is investing 
in critical industries on a foreign adversary's soil.
    For example, if a U.S.-headquartered company chooses to finance AI 
software for the People's Liberation Army, it is actively investing in 
China's military strength.
    In the event of a conflict with Taiwan or worse, our own men and 
women in uniform, China would have a military advantage that was funded 
in part by an American company.
    I'd like to note that this is not a hypothetical example--this 
happened. That's why this is so critical.
    There's an old saying attributed to Vladimir Lenin. ``The 
capitalists will sell us the rope with which we will hang them.''
    That's exactly what China is trying to do--use the enterprising 
minds of America to choke our economy.
    The challenge we face with regards to China in particular requires 
a shift in our way of thinking--a new paradigm. The focus on proxy wars 
and diplomacy are a relic of the past. We need real action.
    That said, our Government cannot risk playing politics with an 
important topic like outbound investment to settle a centuries-old 
debate over protectionism versus free trade or labor vs big 
corporations.
    And we must act soon, or we risk policy being made on the campaign 
trail.
    I know that I am not alone, and I speak for many of my colleagues 
who understand the grave national security risks.
    The perspectives of the members of this panel, especially my good 
friend and Ranking Member Toomey, are necessary in us finding balance.
    I thank the Chair and Ranking Member for inviting me here today to 
set the scene for today's hearing.
    I also want to thank my colleague Senator Casey for being a 
productive partner in this effort.
    I hope it is one of several hearings to come that will provide 
additional, diverse perspectives and oversight on the topic.
                                 ______
                                 
              PREPARED STATEMENT OF SARAH BAUERLE DANZMAN
    Associate Professor of International Studies, Indiana University
                           September 29, 2022
    Thank you, Chairman Brown and Ranking Member Toomey as well as your 
hard-working staff for inviting me to testify on outbound investment, 
its implications for national security, and factors to consider if 
Congress decides to move forward with legislative proposals around 
screening or controlling such investments. It is an honor to speak with 
the Committee today.
    Let me clarify from the outset that the views expressed in my 
testimony today are my own, and do not necessarily reflect the view of 
my employer, Indiana University, or of the Atlantic Council, where I am 
a nonresident fellow.
    I speak today as someone with both an academic and a Government 
background. I am an associate professor of international studies at the 
Hamilton Lugar School at Indiana University. My research expertise 
includes the politics of investment liberalization, investment 
attraction, and the intersection of national security and investment 
policy, most notably inbound investment screening.
    As a Council on Foreign Relations International Affairs Fellow, I 
worked as a policy advisor and CFIUS staffer in the Office of 
Investment Affairs at the Department of State from August 2019 to 
August 2020.
    And, in my capacity as a fellow at the Atlantic Council I have had 
the distinct pleasure of coleading a policy working group on outbound 
investment controls with Emily Kilcrease of the Center for New American 
Security. Emily and I recently published a policy brief where we lay 
out our suggestions for how to design an outbound screening mechanism. 
Much of my comments today draw directly from that coauthored report.
    The point of today's hearing is to take a step back from tactical 
issues of policy design to instead:

  1.  Lay out the potential national security risks that outbound 
        investment may engender,

  2.  Identify existing gaps in U.S. authorities to adequately address 
        these risks, and

  3.  Develop overarching principles to guide the development of any 
        additional authorities related to outbound investment controls 
        that the USG, including Congress, may pursue.

    The central guiding point of my testimony is this: While there are 
a set of national security risks that some kinds of outbound 
investments generate, there remains a great deal of uncertainty about 
the size of the problem and the cost of potential solutions. Given that 
the openness of the U.S. economy has been a major driver in our 
prominent position in the global innovation economy and therefore our 
national security, any attempt at addressing the risks of outbound 
investment must equally consider the potential unintended consequences 
of action. Smart policy will be narrowly scoped to national security, 
rooted in fact, tailored to the technologies of greatest concern, 
mindful of the limits of de facto enforcement power, nonduplicative of 
existing tools, and attuned to the need to act multilaterally. This is 
not to say that controls are not desirable or feasible, but that any 
action should be carefully measured.
    I want to use the remainder of my time this morning to offer five 
observations that Congress should keep in mind while contemplating 
outbound investment controls.
    First, there are gaps in the United States' ability to address 
national security risks associated with some kinds of outbound 
investment. Export controls can stop the flow of U.S. technology to 
these activities. But active forms of U.S. investment--particularly 
foreign direct investment (FDI) and venture capital (VC) can provide 
intangible benefits to the Chinese firms and industries in which they 
invest. The United States can cut off all economic activity between 
U.S. persons and problematic entities through list-based sanctions 
programs. However, there are reasonable arguments for why narrowly 
scoped expanded review authorities are necessary to protect national 
security.
    Second, Congress should resist temptations to use outbound 
investment screening for purposes other than national security. The 
United States has national and economic security interests that 
intersect, and sometimes conflict, with the outbound investment 
activities of U.S. multinationals and investors in several respects. To 
be consistent with a broader and long-standing commitment to market 
openness, the authority to intervene in an outbound transaction must be 
limited to a fact-based national security risk assessment, as is the 
case with inbound investment through the CFIUS process. It is my 
assessment that any outbound screen should focus on national security 
risks associated with indigenous technology development in countries of 
concern.
    Third, Congress should recognize the uncertainty that pervades this 
issue. Crucially, current data collection on U.S. investment flows to 
China is not detailed enough to be able to assess the national security 
implications of individual transactions. This is one reason why I 
advocate for a notification regime to help scope the size of the 
problem. An Executive order related to outbound screening is likely a 
good first step because it allows for more experimentation before 
committing to a statutory requirement. This mirrors the experience of 
CFIUS, which was first established through Executive order in 1975 and 
gradually became a statutory requirement through a series of amendments 
to the Defense Production Act, starting in 1988.
    Fourth, Congress should not assume that a mirror image of CFIUS 
will work for outbound screening. The enforcement issues associated 
with regulating the movement of investment abroad is more challenging 
to address than regulating inbound flows. In the CFIUS case, a 
prohibition is enforced by preventing a foreign entity from buying a 
domestic asset, which is subject to U.S. regulation. For outbound 
transactions, the United States can impose penalties on the U.S. entity 
implicated in the transaction. But enforcement options become much less 
palatable if a multinational decides to channel the otherwise 
prohibited investment through a third country. It is also easier to 
compel a U.S. target of a CFIUS review to provide the Committee with 
the sensitive nonpublic technical information often required to 
complete a risk analysis. Compelling similar information revelation 
from a foreign target in the context of an outbound review will be much 
harder. The PRC might simply prohibit the transfer of such information.
    Congress should be clear-eyed about the compliance and enforcement 
challenges likely to arise from outbound investment review that are 
less problematic in the context of inbound review. It should only move 
forward with a screening concept if it is reasonably sure that it has 
adequate monitoring and enforcement capabilities to give the regulation 
teeth.
    Finally, Congress should think in network terms when contemplating 
what technologies to work hardest to protect. An administrable outbound 
investment review system will need to be relatively narrow in scope. We 
should avoid a ``boiling the ocean'' mentality. A broadly scoped review 
is likely to generate substantial negative consequences for U.S. 
companies' competitiveness and capacity to innovate. Congress can 
narrow its focus while remaining maximally effective by examining 
technology chokepoints in supply chain networks where U.S. firms 
currently have the advantage and where process and know-how are central 
to the production of these technologies. A recent Center for Security 
and Emerging Technology report mapped China's technology chokepoints. 
It found that the technologies for which China has the least domestic 
capacity tend to be in areas with very high quality control 
specifications. These kinds of technologies are likely of high national 
security value, require substantial know-how to perfect, and have 
outsized follow-on effects to other technologies relevant to U.S. 
national security. They are good candidates for review.
    At the same time, the United States' ability to leverage its 
network position depends on China being integrated to some degree into 
the technology network. Congress should be mindful to not control 
technology and outward investment so much as to push China out of the 
network entirely. Take semiconductors as an example. The sanctions 
alliance against Russia's invasion of Ukraine has been highly effective 
at cutting off Russia's access to advanced semiconductors. As National 
Security Advisor Sullivan recently stated, this has substantially 
degraded the Russian military's capabilities. \1\ However, if Chinese 
entities could fabricate advanced semiconductors without access to U.S. 
and other alliance members' technology, we would lose this powerful 
tool. Right now, many Chinese companies seem to prefer to use U.S. 
technology rather than invest the capital and time necessary to develop 
their own solutions. But, if we cut them off from this technology 
entirely, or if we develop policies that create enough uncertainty 
about future access, they will have no choice but to develop critical 
technologies domestically.
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     \1\ https://www.whitehouse.gov/briefing-room/speeches-remarks/
2022/09/16/remarks-by-national-security-advisor-jake-sullivan-at-the-
special-competitive-studies-project-global-emerging-technologies-
summit/
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    Prudent policy must balance the national security imperative to 
deny countries of concern indigenous capabilities in technology of high 
national security import, while also avoiding an overly restrictive 
regime that would inadvertently further push Chinese entities toward 
self-sufficiency.
U.S. Investment in China
    To determine the size of the problem, we must first gather basic 
facts about how much U.S. investors are active in China, through what 
vehicles, in what industries and for what purposes. According to 
surveys of the Bureau of Economic Analysis's surveys of U.S. 
Multinational Corporations activities abroad, U.S. companies have 
accumulated about $118 billion in foreign direct investment positions 
in China. \2\ This equates to about 1.8 percent of all U.S. FDI abroad. 
For comparison, 61.4 percent of all U.S. FDI abroad is located in 
Europe. Measurement of U.S. assets abroad, rather than FDI positions, 
suggest U.S. multinationals have roughly $779 billion in assets in 
China. \3\ U.S. venture capital, which is usually not included in FDI 
figures, has invested about $60 billion into Chinese start ups since 
2010. To place this figure in context, venture capital activity in the 
United States over the same period was roughly $1.28 trillion. \4\
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     \2\ See https://www.bea.gov/sites/default/files/2022-07/
dici0722.pdf.
     \3\ Thilo Hanemann, Mark Witzke, Charlie Vest, Lauren Dudley, and 
Ryan Featherston. 2022. ``Two Way Street--An Outbound Investment 
Screening Regime for the United States?'' Rhodium Group. January. P. 
15. Download here: https://rhg.com/research/tws-outbound/
     \4\ Data from Pitchbook. Download here https://www.statista.com/
statistics/277501/venture-capital-amount-invested-in-the-united-states-
since-1995/.
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    These numbers suggest that U.S. investment in China remains 
relatively small compared to U.S. investment activity at home and also 
compared to U.S. investors' activity overseas. Other argue, however, 
that evaluating the risks of such investment into China also requires 
attention to trends and to the specific activities to which U.S. 
investors are contributing. On the first point, all measures of U.S. 
investor activity suggest direct forms of U.S. investment into China 
peaked between 2015-2018 and have declined since then. The second point 
is harder to address given the data that are currently available. Data 
on sector specific investments provide some relevant information. U.S. 
investments in theme parks, real estate, and consumer retail are not 
likely to have substantial deleterious effects on national security. 
Investments in some information communication technology businesses and 
activities--which was the sector that received the largest share of 
U.S. FDI in recent years--could have security implications. But even 
sectors are too aggregated of a level of analysis to determine national 
security concerns. For example, investment in an enterprise software 
company serving the China market and investment in advanced 
semiconductor research and development likely have very different 
national security implications.
    In other words, whether U.S. investment in China poses national 
security concerns is best analyzed at the level of transaction, item, 
or activity rather than by aggregated investment values. And, currently 
available data do not provide enough insight to adequately judge the 
potential national security consequences of these investments because 
they do not provide detailed enough information about the activities of 
the investment target.
Defining Policy Objectives of a Potential Outbound Screening Mechanism
    The United States has national and economic security interests that 
intersect, and sometimes conflict, with the outbound investment 
activities of U.S. multinationals and investors in several respects. 
These include to prevent U.S. capital from supporting firms implicated 
in China's systemic abuse of human rights, to enhance the resiliency of 
critical U.S. supply chains, and to address concerns arising from 
China's indigenous development of technologies relevant to U.S. 
national security.
    At the same time, an open, market-based economy remains a key 
source of economic and technological strength of the United States. The 
fungibility of capital and the global mobility of firms limits the 
ability of unilateral U.S. actions to prevent capital, knowledge, and 
technological flows to countries of concern. Policy action in this 
space needs to balance justifiable national security restrictions with 
a broad commitment to an open, market-based economy that seeds and 
sustains technological innovation. Bureaucratically complex and 
resource-intensive authorities are likely to have negative effects on 
competitiveness and could encourage the most innovative and productive 
businesses to relocate to less restrictive jurisdictions. Authorities 
that are too broad or ambiguous may have the same effect. Additionally, 
rules that do not have clear enforcement mechanisms for noncompliance 
will be of limited value.
    The United States should limit any outbound control measures to 
national security--rather than broader economic competition--policy 
objectives. Furthermore, it should focus attention at the nexus of the 
most pressing national security concerns and the areas where 
interventions are most likely to successfully impede the most 
problematic policy objectives of countries of concern. This entails 
strengthening existing authorities before creating new ones and finding 
opportunities to pursue multilateral coordination or action with allies 
and partners wherever possible. National concerns related to China's 
indigenous technology development are those that can be most directly 
addressed through an outbound investment mechanism and represent a 
genuine gap in existing authorities. Human rights concerns and issues 
of supply chain resiliency are best addressed through other measures.
Human Rights
    The United States has several existing tools that can be used to 
address concerns related to the use of U.S. capital or technology in 
facilitating human rights abuses. First, it can use the Non-Specially 
Designated Nationals Chinese Military-Industrial Complex Companies List 
(SN-CMIC) sanctions program to prevent U.S. capital from contributing 
to Chinese companies operating in the surveillance technology or 
defense and related materiel sectors. Second, export controls--via the 
Entity List or other means--can effectively stop the flow of U.S. 
technology to these activities, especially if the Export Control Reform 
Act of 2018 (ECRA) is amended to expand a prohibition on U.S. persons 
from providing support to a ``foreign military, security, or 
intelligence services.'' \5\ The Uyghur Forced Labor Prevention Act is 
another example of authorities Congress and the Executive branch can 
use to address similar concerns.
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     \5\ Currently, the ECRA language prohibits U.S. persons from 
supporting ``foreign military intelligence services.'' Rep. Malinowski 
(NJ) has proposed this targeted change in language.
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Supply Chains
    Recent legislative efforts have coalesced around supply chain 
resiliency issues, which is not surprising in the context of COVID-19 
and related supply chain disruptions. However, outbound investment 
screening is a poor tool for addressing supply chain restructuring. 
Because so much of the U.S. supply chain is already offshore, policies 
addressing supply chain security must focus on how to move operations 
already in countries of concern back to the United States or onward to 
partners and allies. Blocking a proposed outbound investment on 
reshoring grounds would not provide the company attempting to offshore 
with the capability to succeed in the United States on commercially 
viable terms. In other words, screening would only address a symptom 
rather than the cause of offshoring.
    Moreover, using outbound screening to address supply chain 
resiliency is likely to generate problematic legal issues as well as 
complicate economic and security cooperation with our partners and 
allies. Blocking a proposed outbound investment on issues of supply 
chain resiliency would require either: (a) an outbound review mechanism 
to provide the President with the authority to block a transaction for 
reasons beyond national security, or (b) a further expansion of the 
concept of national security in ways that would damage the United 
States' reputation as an excellent place to start and grow innovative 
companies.
    Expanding blocking rationale beyond national security would likely 
invite increased litigation from U.S. firms subject to an investment 
prohibition. CFIUS largely avoids such litigation because courts 
provide the President with substantial deference in the area of 
national security. Prohibitions on other grounds will likely be easier 
to challenge in court, and could create lengthy and costly legal 
battles that would increase regulatory uncertainty, thereby reducing 
the United States' status as one of the most desirable places to do 
business.
    Further expanding the concept of national security also has 
important negative consequences. The first has to do with perceived 
legitimacy of U.S. Government action. While the public and industry 
mostly recognize the right of the U.S. Government to intervene in 
market activity that generates clear risks to national security, this 
support rests on common understandings of what is a reasonable claim to 
national security. Overuse of national security rationales to justify 
Government intervention into private sector transactions decreases the 
public's trust in the reasonableness of these claims. Eroding trust 
could lead to reduced voluntary compliance with the law, more creative 
work-around solutions, and a U.S. public that is increasingly skeptical 
of U.S. actions in the area of national security and economic policy.
    Whatever the United States does with respect to outbound screening, 
we should be prepared for other countries to develop similar 
authorities. Outbound mechanisms focused on supply chain structures as 
an essential security issue and/or an economic resiliency issue that 
warrants prohibitory intervention could be used among our European 
allies and others in ways that would create substantial harm to U.S. 
interests, including by making it harder to develop more redundancy and 
multiple suppliers in critical supply chains through increased ties 
with allies' economies.
    Establishing more resilient supply chains requires an affirmative 
industrial policy that addresses the root economic causes of offshoring 
of critical capabilities long before a company enters an offshoring 
transaction and that makes reshoring production commercially viable. In 
this regard, the incentives and other ``run faster'' provisions of the 
CHIPS and Science Act of 2022 are an excellent start. Attempts to 
reshape supply chains must also consider how to do so without creating 
additional negative supply shocks. These considerations are 
particularly important in the current context of high inflation that 
has been largely driven by supply-side shocks.
Impeding Chinese Indigenous Technology Development
    Concerns over how U.S. technology and investment can support 
indigenous technology development in China was central to the policy 
discussion surrounding the 2018 reforms of CFIUS and export control 
authorities, through the Foreign Investment Risk Review Modernization 
Act (FIRRMA) and ECRA. The initial draft of FIRRMA provided CFIUS with 
review authority over outbound investments. Some lawmakers were 
especially worried that the PRC was benefitting from critical 
technology transfer from U.S. firms to Chinese counterparts through 
joint ventures. After substantial debate, Congress found a compromise 
in which CFIUS would remain focused on inbound--though it does have 
jurisdiction over some forms of outbound joint ventures--while national 
security concerns related to outbound investment would be regulated 
through expanded export control authorities.
    The gap in this approach is that there are ways in which the 
participation of U.S. multinationals and investors in China's 
innovation economy can harm U.S. interests through channels other than 
technology transfer. Decades of research on the role of foreign direct 
investment in development has shown that inward FDI, particularly when 
paired with active host country regulatory strategies, can help FDI-
receiving countries expand domestic markets and move up the value 
chain. \6\ Multinational corporations and their affiliates make up 36 
percent of global output and are responsible for two-thirds of exports 
and one-half of imports. \7\ Domestic firms participate in global 
supply chains largely through incorporation into MNCs supply chain. For 
instance, MNCs operating in the United States source 25 percent of 
their inputs domestically. MNCs in Japan source over 50 percent of 
inputs domestically. The more domestic firms interact with MNCs, the 
more they learn from those MNC, including how to increase their 
production capabilities. By interacting with MNCs, domestic firms gain 
foreign market knowledge to directly compete in international markets. 
Domestic firms that integrate into MNCs' supply chains are 
statistically significantly more likely to become exporters, increase 
their ability to supply the domestic market, and produce higher quality 
and more complex products. Normally, we view all of these spillover 
effects of FDI as beneficial to economic development. However, in 
narrow cases related to specific critical technologies relevant to 
national security, the linkages literature provides insight into how 
U.S. MNCs can help develop Chinese critical industries. The issue goes 
beyond technology transfer. MNCs help foster indigenous industries by 
incorporating local firms into their supply chains and by importing 
knowledge about international markets, connections to MNCs' broader 
supplier and buyer networks, and other managerial practices that 
increase efficiency and quality control. These, less tangible, 
contributions to the domestic market are not able to be controlled 
through export controls.
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     \6\ The research on horizontal and vertical spillovers from inward 
FDI is vast. See, in particular: Christine Zhenwei Qiang, Yan Liu, and 
Victor Steenbergen. 2021. ``An Investment Perspective on Global Value 
Chains''. Washington, DC: The World Bank Group; Tomas Havranek and 
Zuzana Irsova. 2011. ``Estimating Vertical Spillovers From FDI: Why 
Results Vary and What the True Effect Is''. Journal of International 
Economics 85: 234-244. Zuzana Irsova and Tomas Havranek. 2013. 
``Determinants of Horizontal Spillovers From FDI: Evidence From a Large 
Meta-Analysis''. World Development 42: 1-15; Sonal S. Pandya. 2016. 
``Political Economy of Foreign Direct Investment: Globalized Production 
in the Twenty-First Century'', Annual Review of Political Science 19: 
455-475; Sarah Bauerle Danzman. 2019. ``Merging Interests: When 
Domestic Firms Shape FDI Policy''. Cambridge University Press.
     \7\ The figures in this paragraph come from Qiang, Liu, and 
Steenbergen. 2021. ``An Investment Perspective on Global Value 
Chains'', The World Bank Group. See especially pp. 8, 10-13.
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    In the realm of U.S. venture capital (VC), there are also potential 
concerns that are not addressable through export controls. As the 
National Venture Capital Association (NVCA) lays out in their 2022 
Yearbook, venture is distinct from other types of investing because it 
typically entails relatively small equity stakes in a company, but the 
general partner in the investment is much more involved in strategic 
management decisions of the target than passive investors are. \8\ VCs 
provide more than an infusion of capital; they mentor and advise 
founders who often need substantial strategic and logistical help to 
scale up their business. They often play prominent roles on corporate 
boards. Moreover, they provide founders and their teams with access to 
the investors' financial, commercial, professional, and political 
networks. By investing in a company, VCs are putting their seal of 
approval on the enterprise, signaling that the company was able to pass 
a thorough vetting process. And, when VCs invest in a company, they are 
tying their financial future to the company. It is in a VC's interest 
to crowd in more investors into future funding rounds so that the 
companies in which they invested increase in value in each funding 
round, which ultimately leads to an acquisition or initial public 
offering through which the VC can exit the investment, hopefully at 
great profit.
---------------------------------------------------------------------------
     \8\ National Venture Capital Association. 2022. NVCA 2022 
Yearbook. https://nvca.org/wp-content/uploads/2022/03/NVCA-2022-
Yearbook-Final.pdf, p. 10.
---------------------------------------------------------------------------
    Venture Capital plays a critical role in the continued dynamism of 
the U.S. innovation economy. From 1974-2015, 42 percent of U.S. 
companies that went public were venture backed. \9\ These 556 companies 
accounted for 63 percent of the market capitalization of the 1,339 U.S. 
companies that went public over the period and 85 percent of all the 
research and development expenditures associated with those companies. 
The flip side, however, is that these same features that have been so 
central to the journey from start up to commercial viability in the 
United States could generate national security risks if U.S. VC 
contributes to critical technology start-ups in countries of concern. 
Similarly, to the intangible benefits of FDI described above, export 
controls do not provide an adequate remedy to these kinds of national 
security concerns.
---------------------------------------------------------------------------
     \9\ Will Gornall and Ilya A. Strebulaev. 2015. ``The Economic 
Impact of Venture Capital: Evidence From Public Companies'', Stanford 
University Graduate School of Business Research Paper No. 15-55. 
Available at SSRN: https://ssrn.com/abstract=2681841 or http://
dx.doi.org/10.2139/ssrn.2681841.
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Approaching Outbound Controls
    As the Congress moves forward with an outbound screening concept 
tailored to issues of the national security risk of indigenous 
technology development in countries of concern, it should: (1) be 
mindful of dynamics that make outbound investment screening harder to 
enforce than inbound review, (2) measure potential tools against five 
principles of good design, and (3) follow a strategy that leverages the 
United States' privileged position in many technology supply chain 
networks.
Enforcing Outbound Screening
    The conversation around outbound screening is colored by the United 
States experience with inbound review. CFIUS is widely seen as well-
designed and effective and Congress should be careful to not overlearn 
from the CFIUS example. It much easier from an enforcement perspective 
to control market access than to limit outflows. In the CFIUS case, a 
prohibition is enforced by preventing a foreign entity from buying a 
domestic asset, which is subject to U.S. regulation. For outbound 
transactions, the United States can impose penalties on the domestic 
entity implicated in the transaction. But enforcement options become 
much less palatable if a multinational decides to channel the otherwise 
prohibited investment through a third country. Enforcing a prohibition 
in that case would likely require substantial extraterritorial reach 
that the U.S. Government will likely wish to avoid due to issues of 
proportionality and allies' and partners' sensitivities.
    Other aspects of administration and enforcement are much easier for 
inbound investment than for outbound. For instance, it is easier to 
compel a U.S. target of a CFIUS review to provide the Committee with 
the sensitive nonpublic technical information often required to 
complete their review than it would be to compel the same information 
from a foreign target in the context of an outbound review. Indeed, 
other country Government may simply prevent the foreign target from 
providing such information. Additionally, in the case of mitigation 
agreements, it is reasonable to assume it is much easier for the U.S. 
Government to monitor behavior of firms in own jurisdiction than firms 
overseas.
    For these reasons, Congress should be clear-eyed about the 
compliance and enforcement challenges likely to arise from outbound 
investment review that are less problematic in the context of inbound 
review. Congress should only move forward with a screening concept if 
it is reasonably sure that it has adequate monitoring and enforcement 
capabilities to give the regulation teeth.
Design Principles
    Along with having enforcement capabilities strong enough to deter, 
Congress should consider the following principles when designing a 
screening tool.

  1.  Review should be targeted to transactions that present the 
        highest national security threat and any governmental action 
        should be subject to a national security risk assessment. As 
        with CFIUS, an outbound mechanism should be narrowly tailored 
        to national security risks rather than a tool to bolster 
        broader economic competitiveness objectives. Congress should 
        instead pursue issues of competitiveness and social standards 
        through affirmative industrial policy such as the CHIPS and 
        Science Act and through trade and investment frameworks such as 
        the Indo Pacific Economic Framework (IPEF).

  2.  A review mechanism along with any additional outbound controls 
        should be clearly defined and understandable to private-sector 
        participants. This includes clear definitions of what types of 
        investors and economic activities are covered. The private 
        sector will be responsible for the first line of compliance, so 
        they must understand to what they are obligated. For the 
        regulation to be seen as a legitimate use of the Government's 
        regulatory authority, its purpose and necessity must be 
        explainable to the American public. Without public support, 
        firms will not face substantial reputational costs for evading 
        the spirit or the letter of the regulation. A supportive public 
        is key to regulatory compliance.

  3.  Any review should be nonduplicative of existing tools such as 
        export controls. In the context of inbound transactions, CFIUS 
        is designed as a tool of last resort. Any outbound investment 
        screen should be thought of similarly and any use of outbound 
        authorities should occur only when other authorities are 
        insufficient to address the national security risk that arises 
        from the transaction in question.

  4.  Any review mechanism must be scoped proportionately to the 
        Government's institutional capacity to effectively administer a 
        new mechanism. We should not take lightly the administrative 
        burden that a well-functioning outbound review process would 
        place on the Executive branch. For example, CFIUS requires 
        hundreds of staff and attention across its nine member agencies 
        plus ex officio and support agencies. FIRRMA appropriated $20 
        million a year for 5 years to help build up CFIUS agencies to 
        support the expansion of its authorities.

  5.  Finally, any Congressional action on outbound screening should be 
        paired with meaningful multilateral engagement with allies and 
        partners so that U.S. investors are not disadvantaged and so 
        the goal of impeding national security relevant indigenous 
        technology development in countries of concern is more likely 
        to be met. Similar to export controls and inbound screening, 
        outbound investment controls are more likely to be effective if 
        large portions of the global economy implement similar 
        measures. This is especially important in the context of 
        outbound investment where there is justifiable concern that a 
        U.S. outbound mechanism without coordination with other 
        advanced economies could just lead to MNCs from other OECD 
        countries occupying the investments that U.S. firms otherwise 
        would have participated in. Similarly, multilateral engagement 
        is important in the context of critical technologies, as the 
        United States is not the only relevant member of these supply 
        chains.
Leveraging the U.S. Network Position
    As a final conceptual point, I encourage Congress to think in 
network terms as much as possible when contemplating any outbound 
investment control mechanisms. Even before the COVID-19 pandemic, 
scholars of International Relations started to borrow from complexity 
science to understand on the structure of different kinds of global 
networks generate power and vulnerabilities. The United States has 
effectively leveraged its central position in currency and finance 
networks to extend its power in important ways. Even now, we see how 
this centrality has imbued the United States with regulatory power over 
companies that wish to list on U.S.-based exchanges.
    As the Congress shifts from conceptual issues to more tactical and 
technical concerns related to coverage and definitions, I encourage it 
to use insights from complexity science to design its mechanism. This 
entails focusing attention on chokepoint technologies as much as 
possible. Rather than trying to ``boil the ocean'' and cover all 
technologies possible, it will likely be more effective for the U.S. to 
evaluate what specific technologies are especially critical to a host 
of other technologies. For instance, it may be particularly challenging 
to cover all manner of Artificial Intelligence technologies. However, 
limiting investment in specific extreme ultraviolet lithography tools 
and technology as well as most likely candidates for the next next-
generation lithography may be more feasible. To the extent that 
advanced AI relies on advanced semiconductors, controls on NGL will 
have spillover implications for AI as well.
    As another example, the Center for Security and Emerging Technology 
recently published a report evaluating ``China's Self-Identified 
Strategic Technology Import Dependencies''. \10\ It found that China's 
chokepoints tend to be in technologies with very high-quality control 
specifications including precision requirements, consistency 
requirements, and the ability to perform under stress. Focusing 
attention on these areas--or more broadly, areas that the Chinese self-
identify as chokepoints--would likely be particularly because these 
chokepoints relate to production process issues rather than the 
underlying technologies. Additionally, research on information problems 
in authoritarian contexts suggest that achieving high levels of quality 
control will likely remain a challenge for Chinese companies so long as 
delivering bad news is politically dangerous. This suggests not only 
that the PRC currently faces disadvantages in these chokepoint 
technologies, but also that the United States' open, democratic system 
provides us with a clear competitive edge in these areas. This is an 
important reminder that the United States' leadership position in 
advanced technology and economic dynamism is a function of our open, 
non-arbitrary, rules-based system. To best protect our national 
security, we should confidently embrace those core principles that have 
fueled our economic prosperity rather than erect overly complicated 
bureaucratic structures that emulate competitors' systems.
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     \10\ Ben Murphy. 2022. ``Chokepoints: China's Self-Identified 
Strategic Technology Import Dependencies''. Center for Security and 
Emerging Technology. Available here: https://cset.georgetown.edu/
publication/chokepoints/.
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Conclusion
    I close my testimony where I began. Outbound investment creates a 
range of policy issues that Congress may want to address. The issue is 
which issues warrant a policy response and, of those, what policy 
response, or combination of policy responses, is most likely to produce 
outcomes that strengthen U.S. national security.
    I recommend that Congress consider five issues while contemplating 
the path forward:
    First, the gaps that currently exist in the Government's 
authorities relate to the ability to control the intangible benefits 
associated with outbound FDI and VC flows. Export controls already 
provide authority over technology transfer. Policy solutions will need 
to address the components of investment that generate risks through 
managerial expertise, transfer of know-how, connection with supplier 
and buyer networks, and the legitimation effects of partnering with a 
U.S. investor.
    Second, any outbound investment review mechanisms should be 
narrowly focused on national security rather than broader policy 
objectives. Issues of economic competitiveness are best addressed 
through other tools.
    Third, outbound investment screening would be a new authority and 
represent a substantial break from central tenets of decades of U.S. 
economic policy. There is a great deal of uncertainty about the size of 
the problem and the potential negative unintended consequences of 
outbound review. An approach that is designed to gather more 
information as well as allow for experimentation is likely to work 
better than enacting a broad statutory screening requirement all at 
once.
    Fourth, Congress should not assume that a mirror image of CFIUS 
will work for outbound screening. The enforcement issues associated 
with regulating the movement of investment abroad is in many ways more 
challenging to address than regulating inbound flows. Congress should 
make sure that any mechanism be narrowly scoped to national security, 
clearly defined and seen as a legitimate use of Government authorities, 
nonduplicative of existing tools, administrable, and paired with 
meaningful multilateral engagement on the issue with allies and 
partners.
    Finally, smart policy will take cues from networks and complexity 
science. Clamping down on all outbound investment to countries of 
concern is not a viable option. By focusing on chokepoint technologies, 
the United States can scope coverage in a way that is most impactful 
with the least amount of negative economic consequences.
                                 ______
                                 
                  PREPARED STATEMENT OF RICHARD ASHOOH
 Former Assistant Secretary for Export Administration, U.S. Department 
                              of Commerce
                           September 29, 2022
    Chairman Brown, Ranking Member Toomey, and Members of the 
Committee, thank you for the opportunity to testify before you today. 
Today's hearing is a timely, relevant, and critical examination of the 
issues associated with U.S. originated investments to countries, 
companies, or causes which may pose a national security threat or 
otherwise threaten U.S. interests. Having served as Assistant Secretary 
of Commerce for Export Administration at the Bureau of Industry and 
Security (BIS) in the prior Administration from 2017 until 2020, I had 
both the honor and challenge of weighing many of these very issues, 
especially with respect to concerns over unauthorized technology 
transfers as the primary purview of the Bureau. It is in that capacity 
that I am testifying here today. In short, I understand the 
difficulties the Committee and Congress face in the effort to implement 
effective policies and hope my participation today constructively 
contributes to that goal.
    It should be stated at the outset that the concerns at the heart of 
this hearing are well-founded--from the moment of my swearing in at 
BIS, the challenges presented by the People's Republic of China were 
apparent, serious, and alarming. While great strides have been made in 
addressing these concerns, national security is never static and must 
be constantly addressed.
    Much of what has been accomplished in recent years is the result of 
legislation this Committee championed in 2018 which led to the Export 
Control Reform Act and Foreign Investment Risk and Review Modernization 
Act, also known as ECRA and FIRRMA. That debate considered many of the 
issues captured by today's review of the need for enhanced scrutiny and 
action regarding outbound investments and has many lessons to offer 
policymakers. At this point, I would like to underscore my gratitude to 
the Committee for the thoughtful approach it took at that time, which 
involved bipartisan, bicameral, and multijurisdictional legislating to 
advance a long-overdue modernization of some very complex and powerful 
authorities. Any consideration of measures which could significantly 
alter U.S. capital flows merits, in my view, a similarly thoughtful and 
thorough approach.
    While the issues associated with regulating financial behaviors to 
obtain a national interest objective are many, I will confine my 
comments today to three recommendations that are drawn from the lessons 
learned in the consideration and implementation of FIRRMA and ECRA.
    1. Clearly define the national security threat to be addressed. 
While this objective appears obvious, the temptation to address a broad 
panoply of legitimate concerns which do not necessarily rise to the 
level of a national security threat is alluring. National security as 
currently understood in the United States is already very broad, taking 
into consideration factors such as infrastructure, supply chains, and 
data protection, in addition to the traditional concerns over kinetic 
threats. That said, a fundamental premise in national security is 
specificity--the concept that if everything is a threat, then nothing 
is. During the ECRA/FIRRMA debate, concerns over joint ventures with 
Chinese companies led to a robust discussion of whether to expand the 
scope of CFIUS to regulate this activity. Once the key issue was 
distilled to one of concerns over technology transfer, the purview of 
export controls, the appropriate tailoring of ECRA could occur--thanks 
to the concomitant updating of that law with FIRRMA.
    2. Regulate horizontally. National security threats are rarely 
stove-piped--solutions to address them should not be either. National 
security threats are commonly carried out by individuals or groups, 
funded by Governments, with the help of--or in pursuit of--technology. 
Therefore, multiple agencies must collaborate--the Department of State 
regulates persons, Treasury the financing, and Commerce technology, 
with coordination from additional agencies including the Department of 
Defense. One of the most crucial updates to FIRRMA and ECRA--made 
possible by amending these statutes concurrently--was to dovetail their 
definitions and authorities. Establishing a unified definition of 
critical technologies, and grounding that definition in well-defined--
and might I say well-refined--export control lists such as the Commerce 
Control List maintained within the Export Administration Regulations or 
EAR and the United States Munitions List maintained within the 
International Traffic in Arms Regulations or ITAR, created clear, 
specific, updatable tools for regulating. And since it categorizes 
countries and restricts them based on national security concerns, this 
obviated the need for Treasury to develop its own country criteria--
another robustly debated issue. This synchronization--further refined 
in regulation after FIRRMA and ECRA passed--is a model for enhancing 
the power and effectiveness of U.S Government policy implementation.
    Recommendation: Outbound screening criteria should align with the 
criteria that is already the foundation of the export licensing and in-
bound investment authorities.
    3. Build on what works. As mentioned, the passage of ECRA and 
FIRRMA made tremendous improvements to both regulatory regimes and in 
many ways streamlined their implementation. For all the progress made 
because of and since the passage of these important laws, gaps do exist 
in the financial space. For instance, it is currently possible that 
export-controlled technology could be the beneficiary of U.S. 
financing--intentionally or not. This disconnect is one which could be 
addressed through alterations to current authorities. Again, using the 
ECRA/FIRRMA example, the amendments allowed the two regimes to 
reinforce each other as complementary tools to protect national 
security. For example, as a member of the CFIUS committee, Commerce 
reviews cases through the national security lens prescribed by CFIUS, 
but also through the overall lens of the export control system, 
highlighting export control implications and defense industrial base 
issues previously undetected. Further, the review offers Commerce the 
chance to vet the applicants against other important national security 
authorities, such as compliance with the Defense Priorities and 
Allocations System, making for an even more comprehensive National 
Security review.
    In addition, a recent enhancement to the Export Administration 
Regulations defines the term ``support'' by ``U.S. persons'' to 
include, among other things, financing. While further study must be 
conducted, this feature of the law creates a regulatory ``hook'' to 
limit financial activities already tied to restrictions based on export 
controls.
    Recommendation: Congress should consider whether existing 
authorities such as the export control system can be leveraged as a 
tool to obtain insights into financial transactions of concern, or even 
address gaps in the current system.
    As I said at the outset, these concerns are real and gaps in the 
system pertaining to financial transaction merit immediate attention. 
As the principles I have discussed here illustrate, it is my view that 
amendments to current authorities hold the potential to address the 
most pressing concerns regarding outbound investments, without the 
establishment of an additional, entirely new regime.
    One further lesson from prior deliberations bears repeating. These 
issues, which have the potential to staunch billions of dollars of 
investments, demand thorough, thoughtful review and must include public 
input. Input from impacted stakeholders is crucial to effective 
policymaking. Further, just as synchronization amongst relevant 
agencies and authorities is critical, some consideration must be given 
to alignment with partner Nations. Since the passage of FIRRMA and 
ECRA, many like-minded countries have embarked on similar national 
security reviews of both foreign direct investment screening and export 
controls. This point merits emphasis--U.S. goals are far more impactful 
with a coordinated, global response. It is clear from the behavior of 
our allies that the U.S. has led in these areas, resulting in a more 
global--and therefore far more effective--approach. It should continue 
this leadership.
    I am happy to take your questions.
                                 ______
                                 
                   PREPARED STATEMENT OF THOMAS FEDDO
Former Assistant Secretary for Investment Security, U.S. Department of 
                              the Treasury
                           September 29, 2022
    Chairman Brown, Ranking Member Toomey, and distinguished Members of 
the Committee, I am honored to appear before you today, and to join my 
fellow witnesses in this important discussion.
    When I last appeared before the Committee, I was fortunate to 
receive its endorsement to be the Treasury Department's first-ever 
Assistant Secretary for Investment Security. In that role, I led and 
oversaw the operations of the Committee on Foreign Investment in the 
United States (CFIUS), including the timely and successful 
implementation of its historic overhaul after enactment of the 
overwhelmingly bipartisan Foreign Investment Risk Review Modernization 
Act of 2018 (FIRRMA).
    By virtue of that experience, and the benefit of roughly 27 years 
of Government service--more than two decades in national security-
related capacities--I hope to contribute to your consideration of so-
called ``outbound'' investment screening and whether such a tool should 
be implemented.
    At the outset, I will say that I believe we are engaged in one of 
history's most consequential great power competitions, and that 
technology plays a key role in that contest. Leaders of both the 
current and prior Administrations have warned of the existential 
challenge posed by the People's Republic of China (PRC) and its policy 
of ``civil-military fusion''--exploiting corporate advancements and 
innovation in technology to close the battlefield gap. Secretary 
Michael Pompeo's State Department noted that civil-military fusion 
``aims to make any technology accessible to anyone under the PRC's 
jurisdiction available to support the regime's ambitions.'' And 
Secretary of State Antony Blinken has described Beijing's intent as: 
``to spy, to hack, to steal technology and know-how to advance its 
military innovation and entrench its surveillance State.''
    In the 1990s, I served as an officer on a Los Angeles class 
nuclear-powered fast-attack submarine. That boat was, as are today's 
generation of U.S. submarines, a technological marvel; a ``black hole'' 
in the deep, carrying the world's most sophisticated weapons and 
equipment. This is in great part a result of America's innovation 
ecosystem, both in and outside of the defense industrial base. Having 
first-hand experience in that submarine environment, the imperative for 
maintaining America's technology advantage is crystal clear to me--it 
promotes the capability to win decisively on the battlefield, whether 
under or on the sea, on land, or in the air, space, or cyber domains.
    The PRC poses grave threats to the United States and its allies and 
to the global world order; including its strategy to exploit 
technology, raw materials, market power, and energy resources to 
achieve its ends. The last several years have also demonstrated the 
vulnerability of certain key supply chains--such as semiconductors, 
critical minerals, and clean energy technology--to these same goals.
    Enactment in 2018 of both FIRRMA and the Export Control Reform Act 
(ECRA) was largely precipitated by this growing threat and the 
potential risk gaps manifested by foreign actors' activity vis-a-vis 
U.S. businesses involved with cutting edge technology. Now, as another 
step to counter the PRC's thirst for advanced technology and to remedy 
certain supply chain vulnerabilities, both Congress and the Biden 
administration are considering potentially sweeping authorities 
creating a new Government agency with new powers to block international 
business transactions--that is, to oversee American firms' allocation 
of resources, property, and capital outside the United States.
    A version of this new interagency panel was considered in the 
semiconductor bill earlier this year--a Committee on National Critical 
Capabilities (CNCC). The CNCC would have limited capital investments, 
sharing of intellectual property and know-how, financing, and even 
sales, that could benefit a ``country of concern'' in a sweeping list 
of sectors. Many key terms were broad and undefined, and left 
substantial latitude to the Executive branch to expand the ``critical'' 
sectors within its purview and to designate the cabinet secretary 
accountable for leading it. Virtually every U.S. business, private or 
public investment fund, and bank engaged in international business 
could have been impacted if a transaction implicated the ``influence'' 
of a country of concern, and could have been compelled to share 
confidential deal details and obtain the Government's permission to 
proceed. Even foreign entities in third countries transacting with, or 
influenced by, such a country could have been impacted. Subsequent 
proposals were narrowed, but I believe more homework is still 
necessary.
    Recent media reports say that the Biden administration is close to 
creating an outbound screening tool by Executive order. To be clear, I 
hold the strongest view that creating an investment screening mechanism 
by Executive order would be a significant mistake. Rather, Congress, 
collaborating with and receiving key input from the Administration, is 
best suited to assess and respond to an issue of this complexity and 
potential scope and impact.
    There should be no dispute that to ensure America's future security 
the PRC's theft and misappropriation of technology must be prevented. 
The question is whether a new committee and bureaucracy of potentially 
immense scope and authority is the answer. The debate has seemed to 
take on a life of its own, with an apparent presumption that an 
outbound screening committee is necessary. The threat from the PRC is 
real and present, not over-the-horizon, but decisionmakers would 
benefit greatly by resisting the temptation to rush into a ``solution'' 
without adequately assessing the extent to which it will both enhance 
national security and avoid creating unnecessary burdens on U.S. 
persons' business transactions.
    With this context, I commend the Committee for taking the 
initiative with today's hearing. There should be more such hearings 
before any solution is enacted--to define the objectives, determine 
costs and benefits, and assess whether existing national security 
authorities could better meet the challenge.
    When a bipartisan Congress and the Trump administration worked 
together to formulate the most extensive changes to CFIUS in its nearly 
50-year history, those efforts included roughly a half-dozen hearings 
with foreign policy and national security experts, the Intelligence 
Community, private sector stakeholders, and former and current senior 
Executive branch officials. Congress and the President were thus well 
informed as to the gaps they intended to fill, where the expanded 
jurisdiction would reach, and the attendant increases in capacity and 
cost. The resulting strong, stand-alone bill resoundingly passed. 
Afterwards, it took 2 intensive years within an existing CFIUS 
bureaucracy, including at the Cabinet secretary level, to effectively 
implement the law. Here, an outbound screening mechanism would be 
created out of whole cloth with, among other things, little to no 
clarity or consensus yet on who has the capacity and institutional heft 
to effectively implement the tool and be held accountable.
    As with FIRRMA, decisionmakers would be best served by building a 
comprehensive record-taking testimony from experts and key 
stakeholders, including senior Administration officials. That effort 
should explore whether existing or other types of authorities could be 
less bureaucratic and costly, and more precise and impactful, in 
achieving the ends--such as adjusting CFIUS's existing jurisdiction, 
expanding current economic sanctions against Chinese military 
companies, or modifying export restrictions. These tools do not appear 
to have been fully considered, but they may in fact offer a better 
cost/benefit calculus.
    Upon first defining the precise risk gap requiring action, and then 
considering the full spectrum of potential authorities available, a 
considered and careful assessment of a new outbound investment regime 
might as an initial matter examine:

    the financial and human resources required;

    the potential U.S. business compliance costs;

    which agency should be accountable for leading 
        implementation and operations;

    precisely which technologies or sectors warrant investment 
        screening, and why;

    the anticipated impacts on the American economy and global 
        capital flows;

    the extraterritorial effects and likely consequent response 
        from allies;

    the extent to which such a mechanism furthers the 
        decoupling of the world's two largest economies--and whether 
        that is a desired policy outcome;

    the extent to which restrictions on U.S. person 
        transactions would be simply replaced by other capital or 
        intellectual property sources; and,

    the extent to which such a tool would have a ``national 
        security'' standard, as distinguished from a ``national 
        interest'' standard (that is, whether such screening would be 
        intended for broad industrial policy/strategy).

    From my experience in Government and with the interagency process, 
and particularly in leading CFIUS, I expect that a new committee or 
screening mechanism would be time- and resource-intensive. It would 
require substantial energy and effort to build an effective, clear, and 
precise regulatory framework, and to hire the key human capital and 
expertise needed to ensure success. The argument that CFIUS itself 
could be ``leveraged'' for this mission also brings the risk of 
diminishing the capacity of CFIUS to effectively execute its current 
charge.
    It is my privilege to appear before you today and to contribute to 
your scrutiny of a very important issue consequential both to national 
security and the U.S. economy. I would be happy to answer any questions 
that you may have today, and to be a future resource for the Committee.
    In sum, to H.L. Mencken is attributed the wisdom that ``for every 
complicated problem there is a solution--easy, simple, and wrong.'' In 
the interests of national security, a strong, open economy, and 
accountable Government, all Americans should hope and expect that 
policymakers get this right. The alternative could be an unrestrained 
bureaucracy, wasted time and resources, and no meaningful response to 
the PRC's ominous goals.
                                 ______
                                 
                  PREPARED STATEMENT OF ROBERT STRAYER
  Executive Vice President of Policy, Information Technology Industry 
                                Council
                           September 29, 2022
    Chairman Brown, Ranking Member Toomey, and Distinguished Members of 
the Committee, thank you for the opportunity to testify today.
    My name is Rob Strayer, and I'm the Executive Vice President of 
Policy at the Information Technology Industry Council (ITI). I lead 
ITI's global policy team, driving ITI's strategy and advocacy efforts 
to shape technology policy around the globe to enable secure 
innovation, competition, and economic growth, while supporting 
Governments efforts to achieve their public policy objectives. ITI is 
the premier advocate and thought leader in the United States and around 
the world for the information and communications technology (ICT) 
industry. We represent leading companies from across the ICT sector, 
including hardware, software, digital services, semiconductor, network 
equipment, cybersecurity, Internet companies, and other organizations 
using data and technology to evolve their businesses.
    My perspective on this topic is also shaped by my time working for 
the U.S. Government. I served as the Deputy Assistant Secretary for 
Cyber and International Communications and Information Policy at the 
U.S. State Department. In that role, I led dozens of bilateral and 
multilateral dialogues with foreign Governments on digital economy 
regulatory and cybersecurity issues. I was responsible for leading the 
U.S. diplomatic campaign to address supply chain vulnerabilities 
presented by untrustworthy suppliers in foreign partners' 
telecommunications networks, which became an acute risk with the 
deployment of 5G networks. I also was involved in the interagency 
planning to promote trusted technology globally and to protect U.S. 
technology networks.
    Before joining the State Department, I was the general counsel for 
the U.S. Senate Foreign Relations Committee and the legislative 
director for Senator Bob Corker, an active Member of the Senate Banking 
Committee.
Overview
    ITI appreciates the Committee holding this hearing on outbound 
investment screening. It is essential that the views and expertise of 
all stakeholders are employed to shape a new policy framework on 
outbound investment. As explained below, it is essential that the 
Congress and the Executive Branch engage in iterative consultations 
with the technology industry in particular to construct effective 
policy.
    The U.S. Government has no more important responsibility than to 
protect the Nation's security. The United States should continue to 
pursue this commitment while staying true to the principles of free 
enterprise and open markets for capital investments and trade that have 
made the Nation strong and the U.S. tech sector world leading. Our 
organization and the companies we represent are committed to working 
with Congress, the Executive Branch, and the entire stakeholder 
community to achieve essential national security outcomes--notably 
technology leadership, supply chain security, and resilience.
Importance of Technology Leadership
    Companies in the United States have long spearheaded the 
development of the most innovative and cutting-edge technologies. These 
technologies have produced tremendous growth for the United States. In 
2020, the U.S. information technology industry generated $1.2 trillion 
in domestic value added, approximately 5.5 percent of the U.S. economy; 
and the tech sector employed 5.9 million workers, accounting for 4.4 
percent of U.S. private sector jobs. \1\ These were good paying jobs 
with workers earning average compensation double the average U.S. 
private sector wage.
---------------------------------------------------------------------------
     \1\ Information Technology and Innovation Foundation, ``How the IT 
Sector Powers the U.S. Economy'', available at: https://itif.org/
publications/2022/09/19/how-the-it-sector-powers-the-us-economy/.
---------------------------------------------------------------------------
    U.S. national security depends on continued U.S. technological 
leadership. This leadership drives innovation, job creation, and 
economic growth domestically and makes the U.S. more resilient and 
secure as we continue to set the pace for innovation. Transformational 
technologies are emerging at an accelerating rate, and the security 
implications of these new technologies are both more significant and 
more difficult to anticipate. Remaining at the cutting edge of 
developing and commercializing technologies will ensure they are 
available to the private sector and the Government for a wide range of 
applications, including national security.
    Today, other Nations and their companies are competing to find the 
next major technological advancement. They are working harder than ever 
to use, exploit, and otherwise take advantage of emerging technologies 
to advance their own strategic, security, and economic interests. It is 
more important than ever that the U.S. strives to maintain its 
technological leadership and ensures that policy is shaped with that in 
mind.
How Global Technology Supply Chains and Innovation Operate
    Competition in technology leadership means the market-leading 
technology of today will not be cutting edge tomorrow. It is a dynamic 
process where one generation is being improved upon by research and 
development (R&D) to produce the next generation. Companies use the 
profits earned from the sales of current products to fund R&D of the 
next generation. The pace of these product cycles is becoming more 
rapid. Some industry experts estimate that product cycles are only 2 to 
5 years. This rapid innovation pace is evidenced by the Moore's Law 
concept of computing power on a semiconductor doubling every 2 years--
this is because of investment in R&D. To use another example from the 
telecommunications sector, the time between third generation telecom 
technology, known as 3G, and 4G was roughly 10 years; a similar 
timeframe occurred between 4G and 5G. It's now estimated that 6G will 
arrive in about 6 years.
    U.S. companies need the scale of global markets and the concomitant 
sales to fund the R&D to lead globally in the next generation of 
technology. The United States only represents 24 percent of global GDP. 
To compete with other companies that sell products and services 
globally, U.S. companies need access to sales in global markets and in 
the United States to fund the massive amounts of R&D that is necessary 
to be successful in the technology sector.
    Aside from competition in innovation, companies face fierce 
competition on cost and efficiency. U.S. companies use global supply 
chains to access the best talent, components, and manufacturing 
capabilities. Mapping a supply chain is a complex task. A product or 
service often begins with a network of employees around the globe, each 
with unique talents, collaborating on design or software development. A 
technology product is usually based on components that originate in 
different locations from tiers of suppliers that are assembled into an 
intermediate good and then a final product, which often occurs across 
multiple countries. The availability and cost of inputs to a product or 
service will determine whether a U.S. company has a viable product in 
the market when competing with producers from other countries.
Taking a Comprehensive Approach to Technology Policy
    ITI is very supportive of U.S. Government policies ensure that 
leading-edge innovation continues to benefit the United States. For 
example, the billions of dollars in grants and tax credits in the 
recently enacted CHIPS and Science Act help companies ``run faster'' 
and better compete in the global market, and ITI was an active 
supporter of this legislation precisely because of its ability to 
support innovation in the United States. As the U.S. Government 
considers ways to maintain its technological advantage through policies 
that limit outbound investments, it should seek to minimize unintended 
negative impacts on American technological leadership. Those impacts 
could be through foreclosing market access and sales that feed future 
R&D and limiting the availability of key components or increasing 
their costs, thus harming the ability of companies to compete against 
global competitors who have access to those components.
    With these implications in mind, I recommend that Congress and the 
Executive Branch consider five criteria in crafting an outbound 
investment regime:
1. Identify Gaps Between Existing Authorities
    In considering an approach to outbound investment review, it is 
imperative that policymakers carefully examine existing authorities, 
identify clear gaps in those authorities that correspond to core 
national security concerns, and craft new authorities in a manner that 
is sufficiently narrow and targeted to avoid capturing transactions 
already subject to existing regimes. The Executive Branch currently has 
several mechanisms in place to conduct national security reviews of 
transactions and transfers involving information and communications 
technologies (ICTS). Below are key examples of authorities already in 
place.
    The U.S. Commerce Department's Bureau of Industry and Security 
(BIS) has extensive authority to restrict the transfer of technology, 
software, and commodities to countries and entities of concern. 
Expanding this authority, the Export Control Reform Act of 2018 (ECRA) 
required BIS to identify and control the export of ``emerging'' and 
``foundational'' technologies, with the intent of addressing technology 
transfers through outbound and inbound investments. \2\ Congress and 
the Executive Branch should ensure that this legislation has been fully 
and effectively implemented before developing new policy tools, 
including through new legislation.
---------------------------------------------------------------------------
     \2\ Testimony of Kevin J. Wolf, Partner Akin Gump Strauss Hauer & 
Feld, before the U.S. House Committee on Energy and Commerce, 
Subcommittee on Digital Commerce and Consumer Protection (Apr. 26, 
2018), available at: https://docs.house.gov/meetings/IF/IF17/20180426/
108216/HHRG-115-IF17-Wstate-WolfK-20180426.pdf.
---------------------------------------------------------------------------
    By Executive order, the Administration also has implemented 
restrictions on investment in publicly traded securities of Chinese 
companies in the defense and surveillance technology sectors. This is 
known as the Chinese Military-Industrial Complex List, and it is 
maintained by the U.S. Treasury Department. \3\
---------------------------------------------------------------------------
     \3\ See https://home.treasury.gov/policy-issues/financial-
sanctions/consolidated-sanctions-list/ns-cmic-list.
---------------------------------------------------------------------------
    The Secretary of Commerce also has extensive authorities to review 
ICTS transactions under Executive Order 13873 on Securing the 
Information and Communications Technologies and Services Supply Chain 
(ICTS EO). The ICTS EO grants the Secretary broad authority to review--
and block or unwind--any acquisition, importation, transfer, 
installation, dealing in, or use of ICTS subject to U.S. jurisdiction 
that involves any property in which a foreign country or national has 
an interest and which poses a risk to U.S. national security. \4\ The 
Interim Final Rule (Rule) implementing the EO captures a broad swath of 
ICTS transactions. \5\ Based on the broad definition ICTS transactions 
could be interpreted to also implicate outbound investment, thus 
already offering the Secretary the authority to review outbound ICTS 
transactions. While we understand that Secretary Raimondo and this 
Administration do not intend to use the expansive ICTS EO authorities 
to address national security concerns related to outbound investments, 
future Administrations may think differently. As such, it is important 
to consider this existing review authority in the context of developing 
any new policy aimed at reviewing outbound investment transactions and 
ensure that they are de-duplicated or otherwise carefully aligned.
---------------------------------------------------------------------------
     \4\ Securing the Information and Communications Technology and 
Services Supply Chain, Executive Order 13873 (issued on May 15, 2019) 
available at: https://www.federalregister.gov/documents/2019/05/17/
2019-10538/securing-the-information-and-communications-technology-and-
services-supply-chain.
     \5\ Securing the Information and Communications Technology and 
Services Supply Chain, Interim Final Rule; 86 FR 4909, Section 7.3 
(effective date Mar. 22, 2021), available at: https://
www.federalregister.gov/documents/2021/01/19/2021-01234/securing-the-
information-and-communications-technology-and-services-supply-chain.
---------------------------------------------------------------------------
    More generally, with the breadth of these existing authorities that 
can already be used to limit technology transfer, before adding new 
authorities, policymakers must identify gaps to prevent duplication and 
overlap, which could create a confusing landscape for both Government 
and industry. That analysis can serve as a foundation for robust public 
debate with stakeholders to develop effective and efficient mechanisms 
to address those policy gaps. If the policy goal is to reach investment 
activities where there is no technology or software transferred that is 
subject to U.S. export control restrictions, that should be explicitly 
articulated and the particular type of investment activities 
identified.
2. Identify Specific Risks to U.S. National Security
    Any regulatory approach should be tied to narrow and specific 
national security risks. If a transaction does not implicate a 
specific, identifiable threat or vulnerability to U.S. supply chains or 
national security equities, it should not be the subject of additional 
regulatory reviews. A range of rationales have been suggested for 
outbound investment reviews, including limiting the exposure of U.S. 
companies' supply chains to China, preventing the Chinese military from 
acquiring technology, and limiting the advancement of Chinese 
commercial technology. U.S. policymakers should clearly define precise 
end goals to provide the basis for a discussion with stakeholders about 
how best to achieve those outcomes.
    Moreover, after defining the end goals of the policy to ensure an 
effective regime, which as National Security Advisor Jake Sullivan put 
it, continues ``American technological dynamism and innovation,'' \6\ 
the U.S. Government should identify a narrow and specific set of 
transactions. That could be in the form of a limited subset of 
technological capabilities along with the types of transactions and 
ownership limitations.
---------------------------------------------------------------------------
     \6\ Remarks by National Security Advisor Jake Sullivan at the 
Special Competitive Studies Project Global Emerging Technologies Summit 
on Sept. 16, 2022.
---------------------------------------------------------------------------
    The identification of particular technologies and transactions 
should be based on assessments by the U.S. Intelligence Community and 
technology experts from industry, academia, and other parts of the 
Government. These assessments should seek to scan the horizon of 
emerging technologies that may have impacts on U.S. national security 
interests. Important questions need to be considered such as whether 
the technology is transformative, its impact on economic growth, 
national security, military capabilities, and the ability of an 
adversary to monopolize access to it. Recently, efforts have begun in 
the IC and the Commerce Department to expand economic and technological 
analytic capabilities. Those need to be better developed to inform the 
policymaking in this area.
    There are several lessons from the implementation of the 2019 ICTS 
EO that are applicable here. The 2019 EO required the Director of 
National Intelligence to prepare reports on an annual basis regarding 
threats to ICTS, which could then be used to inform actions undertaken 
pursuant to that EO. However, we have never seen a public reference to 
such reports nor have we been made aware of any annual updates. While 
it is possible these reports are only in a classified format, it would 
be useful to know whether they have actually been completed, as they 
could help to inform future policymaking activity. The Secretary of 
Homeland Security was also directed by the EO to produce an analysis of 
ICTS vulnerabilities with greatest consequences. While the Department 
of Homeland Security did produce a ``criticality assessment'', it 
focused only on a subset of the vast ICTS ecosystem--specifically, on 
the ``connect'' function of the National Critical Functions developed 
by CISA's National Risk Management Center.
    The breadth of information and communications technologies and 
services implicated under the ICTS EO means that the U.S. Government 
must focus future restrictions. However, to date we have not seen the 
Secretary take steps to exercise the authority granted under that EO 
and associated rulemaking to review, prohibit, and unwind transactions. 
A new Executive order that authorizes reviews of outbound investment 
transactions, potentially in all sectors of the economy including ICTS, 
would similarly need to be narrow in application to make its 
enforcement manageable and to mitigate unintended adverse consequences 
for U.S. businesses and capital markets. That narrow and ideally 
iterative process of scoping an outbound investment framework should be 
based on an assessment by the IC, other parts of the U.S. Government, 
and relevant stakeholders. The analysis should take place before such a 
regime enters into force.
3. Consult With Industry Iteratively
    U.S. policymakers should consult with the technology industry as 
part of a structured process when shaping outbound investment review 
policies. The private sector has the best data and understanding of 
supply chains. It can share this understanding with the Government to 
design policies that achieve the goals the U.S. Government seeks, while 
minimizing costs to supply chains, innovation, and global competitive 
positioning for U.S. companies. Such consultations should occur both 
with respect to technologies covered and the types of investment 
transactions. This should not be a one-time consultation, but done 
iteratively as the Government proceeds incrementally with restrictions 
and seeks to refine policies. The U.S. Government should establish an 
advisory board with senior U.S. Government leadership and private 
sector executives that would make recommendations about technology that 
should be designated for outbound investment restrictions. ITI hopes 
that this is one of many opportunities to engage with the U.S. 
Government about outbound investment screening.
4. Develop Clear Lines and Avoid Ambiguity
    The private sector will support and adhere to regulatory direction 
provided by the U.S. Government designed to protect national security. 
To minimize the impact on business competitiveness, companies need as 
much certainty as possible to plan their supply chains, which in most 
cases take years to develop. The best way to provide that certainty is 
with clear lines about the investments that would be covered by 
regulatory restrictions. In an internationally competitive investment 
environment, a U.S. company could lose out to a foreign competitor 
seeking to make the same acquisition if the U.S. company must condition 
the transaction on Government regulatory review that may take many 
months or years.
    However a review regime is constructed, it should avoid ambiguity 
that may chill a broader range of investments and hurt the 
competitiveness of U.S. companies.
5. Seek To Build International Coalitions
    It is critically important that new regulatory mechanisms be 
coordinated with U.S. allies and partners to ensure any proposed 
reforms minimize the likelihood that unilateral U.S. actions will 
incentivize investment to leave the United States and be made from 
countries that do not have the restrictions imposed by the United 
States. We should not undermine U.S. competitiveness and technological 
leadership by making our allies and adversaries potentially more 
attractive destinations for investment.
    To achieve this coordination, it is essential the U.S. Government 
articulate its goals and objective criteria for the review of 
investments. The U.S. Government's experience educating partners about 
the risk from untrustworthy 5G telecommunications suppliers should be 
instructive. The Government was asked about the risks to telecom 
networks and why particular suppliers presented increased risks. Rather 
than only presenting bottom-line conclusions about the exclusion of 
untrustworthy suppliers from U.S. networks, the U.S. Government 
provided objective criteria that those countries could apply and helped 
them reach similar conclusions about network risks form those 
suppliers. Similar coordination based on objective, articulable 
criteria will help generate aligned approaches to international 
investment restrictions and avoid making the U.S. less competitive.
Conclusion
    The U.S. Government should take a comprehensive approach to 
understanding the complexity and challenges of outbound investment 
screening to ensure an effective regime to protect national security 
and American technological leadership. Technology companies rely on 
global supply chains to bring products to market and need the sales of 
global markets to fund R&D and further innovations. They face 
competition from companies in both allied and adversary countries that 
will continue to have access to markets that could be restricted for 
U.S. companies by outbound investment screening, unless these efforts 
are taken in concert with allies and global partners.
    Policymakers should identify the gaps in current authorities that 
restrict the transfer of technology and articulate the specific goals 
for a new authority involving investments. When that authority is 
employed, it is important for the U.S. Government to apply objective 
clearly defined rules to a narrow range of technologies and 
transactions. The private sector has the best information about supply 
chains and the development of transformative innovations so it should 
be consulted with regularly in scoping the policy. It is important for 
there to be coordination among other Governments to implement the same 
restrictions, so that U.S. companies are not disadvantaged in global 
markets.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                   FROM SARAH BAUERLE DANZMAN

Q.1. A few months ago, Congress passed the CHIPS and Science 
Act, including funding provisions I spearheaded to bolster and 
expand domestic semiconductor production. How, if at all, do 
you anticipate this funding might affect a firm's approach when 
considering outbound investment? Do you believe the level of 
Federal support is sufficient enough to convert some outbound 
investment into domestic investment?

A.1. The semiconductor industry is highly subsidized abroad and 
the CHIPS and Science Act is an important step in allowing U.S. 
semiconductor firms to operate on a level playing field with 
companies that receive subsidies in other jurisdictions. I do 
think that this funding will attract at least a handful of 
fabrication facilities. Already, we have seen over 20 
announcements of new investments in the U.S. in the 
semiconductor industry over the last 2 years. You can see a 
list here: https://semiengineering.com/where-all-the-
semiconductor-investments-are-going/.
    The relationship between domestic investment and outbound 
investment is complex. However, on balance, we should assume 
that the decision to build a fabrication facility in the U.S. 
means that the company in question chose not to build in 
another location. The safeguard provisions in the CHIPS and 
Science Act similarly will incentivize companies who receive 
subsidies from investing in advanced semiconductor activity in 
China.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                      FROM RICHARD ASHOOH

Q.1. A few months ago, Congress passed the CHIPS and Science 
Act, including funding provisions I spearheaded to bolster and 
expand domestic semiconductor production. How, if at all, do 
you anticipate this funding might affect a firm's approach when 
considering outbound investment? Do you believe the level of 
Federal support is sufficient enough to convert some outbound 
investment into domestic investment?

A.1. Response not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                       FROM THOMAS FEDDO

Q.1. A few months ago, Congress passed the CHIPS and Science 
Act, including funding provisions I spearheaded to bolster and 
expand domestic semiconductor production. How, if at all, do 
you anticipate this funding might affect a firm's approach when 
considering outbound investment? Do you believe the level of 
Federal support is sufficient enough to convert some outbound 
investment into domestic investment?

A.1. Response not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                      FROM ROBERT STRAYER

Q.1. A few months ago, Congress passed the CHIPS and Science 
Act, including funding provisions I spearheaded to bolster and 
expand domestic semiconductor production. How, if at all, do 
you anticipate this funding might affect a firm's approach when 
considering outbound investment? Do you believe the level of 
Federal support is sufficient enough to convert some outbound 
investment into domestic investment?

A.1. Response not received in time for publication.
              Additional Material Supplied for the Record


                   STATEMENT SUBMITTED BY THE AFL-CIO

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 STATEMENT SUBMITTED BY REPRESENTATIVE ROSA L. DELAURO OF CONNECTICUT 
          AND REPRESENTATIVE BILL PASCRELL, JR., OF NEW JERSEY

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           STATEMENT SUBMITTED BY BSA / THE SOFTWARE ALLIANCE

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