[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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
_________
U.S. GOVERNMENT PUBLISHING OFFICE
53-682 PDF WASHINGTON : 2023
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
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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
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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.
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\1\ Foroorhar, Rana, ``Why Manufacturing Matters to Economic
Superpowers'', Financial Times (April 11, 2021) https://www.ft.com/
content/22dd4058-c283-45c3-8877-8c2507ec7d6b.
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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/.
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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\
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\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.
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\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
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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\
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\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/
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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.
---------------------------------------------------------------------------
\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.
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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.
---------------------------------------------------------------------------
\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.
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\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/.
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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.
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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\
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\3\ See https://home.treasury.gov/policy-issues/financial-
sanctions/consolidated-sanctions-list/ns-cmic-list.
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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.
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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.
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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.
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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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY REPRESENTATIVE ROSA L. DELAURO OF CONNECTICUT
AND REPRESENTATIVE BILL PASCRELL, JR., OF NEW JERSEY
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY BSA / THE SOFTWARE ALLIANCE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]