[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE FLOW OF U.S. MONEY INTO
CHINA'S MILITARY MIGHT
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 17, 2024
__________
Serial No. 118-76
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Printed for the use of the Committee on Foreign Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available: http://www.foreignaffairs.house.gov/, http://
docs.house.gov,
or http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-922PDF WASHINGTON : 2024
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COMMITTEE ON FOREIGN AFFAIRS
MICHAEL T. McCAUL, Texas, Chairman
CHRISTOPHER H. SMITH, New Jersey GREGORY MEEKS, New York, Ranking
JOE WILSON, South Carolina Member
SCOTT PERRY, Pennsylvania BRAD SHERMAN, California
DARRELL ISSA, California GERALD E. CONNOLLY, Virginia
ANN WAGNER, Missouri WILLIAM KEATING, Massachusetts
BRIAN MAST, Florida AMI BERA, California
KEN BUCK, Colorado JOAQUIN CASTRO, Texas
TIM BURCHETT, Tennessee DINA TITUS, Nevada
MARK E. GREEN, Tennessee TED LIEU, California
ANDY BARR, Kentucky SUSAN WILD, Pennsylvania
RONNY JACKSON, Texas DEAN PHILLIPS, Minnesota
YOUNG KIM, California COLIN ALLRED, Texas
MARIA ELVIRA SALAZAR, Florida ANDY KIM, New Jersey
BILL HUIZENGA, Michigan SARA JACOBS, California
AUMUA AMATA COLEMAN RADEWAGEN, KATHY MANNING, North Carolina
American Samoa SHEILA CHERFILUS-McCORMICK,
FRENCH HILL, Arkansas Florida
WARREN DAVIDSON, Ohio GREG STANTON, Arizona
JIM BAIRD, Indiana MADELEINE DEAN, Pennsylvania
MICHAEL WALTZ, Florida JARED MOSKOWITZ, Florida
THOMAS KEAN, JR., New Jersey JONATHAN JACKSON, Illinois
MICHAEL LAWLER, New York SYDNEY KAMLAGER-DOVE, California
CORY MILLS, Florida JIM COSTA, California
RICH McCORMICK, Georgia JASON CROW, Colorado
NATHANIEL MORAN, Texas BRAD SCHNEIDER, Illinois
JOHN JAMES, Michigan GABRIEL AMO, Rhode Island
KEITH SELF, Texas
Brendan Shields, Staff Director
Sophia Lafargue, Staff Director
C O N T E N T S
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Page
WITNESSES
Pottinger, Hon. Matthew, Chairman of FDD China Program,
Foundation for Defense of Democracies.......................... 6
Harrell, Honorable Peter, Nonresident Fellow, Carnegie Endowment
for International Peace........................................ 15
APPENDIX
Hearing Notice................................................... 56
Hearing Minutes.................................................. 58
Hearing Attendance............................................... 59
STATEMENT SUBMITTED FOR THE RECORD FROM REPRESENTATIVE CONNOLLY
Statement submitted for the record from Representative Connolly.. 60
WITNESS TESTIMONY SUBMITED FOR THE RECORD FROM MR. MATHENY
Witness testimony submitted for the record from Mr. Matheny...... 62
RESPONSES TO QUESTIONS SUBMITTED FOR THE RECORD
Responses to questions submitted for the record.................. 67
EXAMINING THE FLOW OF U.S. MONEY INTO CHINA'S MILITARY MIGHT
Wednesday, January 17, 2024
House of Representatives,
Committee on Foreign Affairs,
Washington, DC.
The committee met, pursuant to notice, at 10:15 a.m., in
room 210, House Visitor Center, Hon. Michael McCaul (chairman
of the committee) presiding.
Chairman McCaul. The Committee on Foreign Affairs will come
to order. The purpose of this hearing is to examine the flow of
U.S. capital into China's military and technological
development.
I now recognize myself for an opening statement. I want to
thank the witnesses for being here as well. Unfortunately, one
of our top-tier witnesses who was going to testify, Mr.
Matheny, came down with COVID this morning, so I hope he gets
better. But we are delighted to have the two of you.
The Chinese Communist Party's goals and actions are a clear
and present danger to the security interests of the United
States and our allies. We are in a generational competition
with a determined adversary set on upending the global balance
of power. Technology is at the center of this competition, and
the CCP is using it as a weapon for its military and
surveillance state. These technologies can be used to advocate
and safeguard democracy, or they can be used for subversion and
oppression.
We must understand that whoever controls the best
technology will likely prevail in this great power competition.
And while we can restrict China's access to U.S. critical
technology through export controls, we cannot stop big
investors from using their money, know-how, and network to help
build highly advanced technology companies in China.
Regrettably, U.S. money is fueling the CCP war machine and
surveillance state. Look no further than the CCP's dystopian
oppression of the Uyghurs and the successful hypersonic missile
test which circled the globe and landed with precision. This
was built on the backbone of U.S. technology.
The ranking member and I were disturbed that we have no
effective tools to stop these key investments. They harm U.S.
national security and endanger our partners and allies like
Taiwan. And we also want to congratulate Taiwan on their recent
elections and to the DPP.
So, the ranking member and I acted. In November, this
committee, on a unanimous bipartisan basis, passed the
Preventing Adversaries from Developing Critical Capabilities
Act. This bill has been one of the most important steps this
committee has taken to protect U.S. national security and
counter the CCP. This bill may also be one of the most
bipartisan efforts that we have worked on.
This effort spans the past two Administrations. It was
then-Secretary Mike Pompeo who urged in 2020 to stop the flow
of U.S. money into national security sectors in China. The
Trump national security team supports this legislation, but so
too does the Biden Administration. More recently, the Biden
Administration took the idea and developed an executive order
targeting outbound rule.
While Ranking Member Meeks and I and a growing number of
members, as well as outside groups like Heritage, Hudson, and
American Compass, plan to get this bill signed into law. We
thought we had it done in the National Defense Authorization.
It got pulled. We need to get this new version that was
introduced by the ranking member and myself signed into law. We
cannot wait.
This hearing today plays an important role in that process.
The witnesses today were selected by both of us. This hearing
should help clear up a lot of misconceptions about the threat,
current situation, and examine tangible solutions.
It should come as no surprise that China's military and
surveillance state are exploiting loopholes in U.S. policy to
access billions of U.S. investment dollars and expertise. We
know that U.S. investment has not democratized China, and
companies which are controlled by the CCP have no power over
the applications of their technology. The CCP can direct it to
be used for military or surveillance purposes. And we know
China's military-civil fusion strategy undermines an entity-by-
entity sanctions approach and instead requires country-wide
prohibitions for key technologies.
Ranking Member Meeks and I requested that the Treasury
Department decide whether to sanction Hikvision, a CCP
surveillance company contributing to the Uyghur genocide, but
Treasury decided not to sanction the company. The weakness of
the sanction model, is that Treasury Department will not
sanction.
Our witnesses today can provide further evidence on these
points and articulate why an outbound, forward-looking, sector-
based regime is necessary. And we'll see, whether Republican or
Democrat, those that examine China objectively, analytically,
and realistically have reached the same conclusion. And while
existing tools, such as sanctions, have an important role, they
simply cannot be a substitute for an outbound investment regime
that is authorized by Congress.
And that is our goal: restricting key outbound investments.
And a whole-of-government approach ensures America's national
security comes first.
And with that, the chair now recognizes the ranking member.
Mr. Meeks. Thank you. Thank you, Chairman McCaul, for
organizing this important and timely hearing. I also want to
thank our distinguished witnesses for appearing before the
committee.
Our discussion today is critical for America's national
security and our strategic competition with China. But let me
also just say to the Chairman: I want to thank you for
working--we have worked very closely together to get this bill
passed in a bipartisan way. And I also want to thank our staffs
who worked very closely to jointly organize this hearing, which
we worked on collectively and together, which I hope advances
the joint work that we have done together to pass our
bipartisan bill, H.R. 6349, the Preventing Adversaries from
Developing Critical Capabilities Act, out of committee.
Today, what we are doing, we are demonstrating to the
United States, to the country, that when it comes to issues of
critical importance to American interests, Republicans and
Democrats can come together to solve big problems.
We know that Beijing is developing advanced technologies,
critical for military, intelligence, surveillance, and cyber-
enabled capabilities, with dangerous implications for our
security. We also know that Beijing is busy synergizing its
civilian and commercial sectors with its military and defense
industrial sectors. And we also know that Beijing is intent on
exploiting, stealing, and diverting the world's cutting-edge
technologies to fuel its military buildup. So, we should not be
making Beijing's job easier by having Americans fund the very
PRC companies that are developing these technologies.
Despite a bipartisan, bicameral desire to address this
significant national security challenge, for several years now,
Congress has not coalesced around a solution. But we are doing
so now. And that is why I want to give credit, in a bipartisan
way, to Mr. McCaul in what we are doing collectively together.
And that is why I want to give credit to the Biden
Administration for tackling this challenge.
On August 9th of 2023, President Biden issued a game-
changing executive order on outbound investment that calls for
prohibitions and notification requirements on specific types of
American investments in China, or in certain Chinese companies
that develop or produce semiconductors, quantum computers, and
artificial intelligence applications. As we speak, the Biden
Administration is busy establishing a process and crafting
regulations to implement the executive order.
But that does not mean that we, in the U.S. Congress, that
we are off the hook. We need to create a statutory framework
for the executive order, provide the Administration with the
resources and tools that are necessary to effectively implement
an outbound screening program, and provide certainty to our
allies in the private sector that Congress stands firmly behind
these carefully tailored restrictions. That is our
responsibility. We should not shrink from that.
An outbound regime that combines transparency with
prohibitions on investments in the most sensitive technology
sectors is the very best way to safeguard the United States'
national security while also maintaining open global capital
flows and the United States' preeminent position in global
financial markets. The only legislation that balances these
equities, the only one that I think has that true balance, is
H.R. 6349. It is the most effective and robust legislative
solution.
So, I look forward to the discussion today and hearing from
our witnesses about how best to address this challenge. Thanks
again for working so closely, Chairman McCaul, and our staffs.
And I yield back.
Chairman McCaul. I thank the ranking member. I always think
we're stronger as a nation and a Congress when we are united on
these issues and speak with one voice to our adversaries, like
communist China.
So, we have a distinguished panel here today. First, Mr.
Honorable Matt Pottinger is Chairman of the China Program at
the Foundation for Defense of Democracies and a distinguished
visiting fellow at the Hoover Institution. From 2019 to 2021,
he served as the U.S. Deputy National Security Advisor. Thank
you, sir, for being here today.
Mr. Peter Harrell is a nonresident fellow of the Carnegie
Endowment for International Peace. From January 2021 through
2022, he served at the White House as Senior Director for
International Economics. We are grateful for you being here
today.
The Chair now recognizes Mr. Pottinger for his opening
statement.
STATEMENT OF HON. MATTHEW POTTINGER, CHAIRMAN OF FDD CHINA
PROGRAM, FOUNDATION FOR DEFENSE OF DEMOCRACIES
Mr. Pottinger. Chairman McCaul, Ranking Member Meeks, and
distinguished members of the committee, I am grateful for the
opportunity to speak to you today.
We're at a juncture now where the scales of global power
are beginning to tip toward America's adversaries, in part
because of the leverage that we are providing them. American
know-how and capital are seeds and fertilizer that have helped
foster the growth of China's military might. U.S. companies and
investment funds have, sometimes inadvertently, sometimes
carelessly, helped to underwrite and expedite the modernization
of the People's Liberation Army and China's high-tech
surveillance and intelligence apparatus.
Americans do not typically invest with the intention of
harming U.S. national security, but that is often the result
when they put their capital into Chinese companies that are
working with dual-use technologies, those technologies that
have the potential for military as well as commercial
applications.
It is hard and increasingly meaningless to try to
distinguish between a Chinese enterprise with commercial aims
and one with military objectives, and it is hard because
Beijing actually designed it that way. Corporate independence
in today's China is an illusion. The truth is that the single-
party dictatorship that rules China has powerful authorities
and influence over all entities, whether private-or state-
owned, civilian or military, domestic or even foreign. Beijing
has built a business and regulatory ecosystem to facilitate and
mandate the transfer for dual-use technologies to military and
intelligence programs.
China's military-civil fusion strategy, for example, exists
for that very purpose. So does China's National Intelligence
Law of 2017, which compels ``all`` organizations and citizens
to secretly support, assist, and cooperate with China's
espionage activities. Chinese Communist Party organizational
cells, rather than entrepreneurial founders, call the shots now
from inside many of China's most famous technology companies.
Some American investors try to conduct due diligence to
reassure themselves about where their money and technology are
ultimately ending up inside China, but that, too, is an
increasingly fraught exercise. Beijing is running a
``rectification campaign'' to shut down or assert heavy
influence over research, consulting, and due diligence firms
operating in China. So no wonder that U.S. investors who are
seeking a return on their capital are often blind to the
strategic costs that they are incurring for America's national
security and prosperity. I have listed some concrete examples
of how that plays out in my written testimony, which I have
submitted for the record.
Allow me to close with just a handful of recommendations.
Congress has an opportunity to build on the initial steps taken
by the Trump and Biden Administrations to prevent U.S. capital
from fueling China's military and intelligence capabilities.
First, Washington should take a sectoral approach, rather
than merely an entity-based approach. The Treasury Department
has demonstrated since at least 2021 that it is disinterested
in using even its existing narrow authorities to limit
investment in Chinese military-linked companies.
And in fairness to the Treasury Department, tackling the
problem on a company-by-company basis would be a resource-
intensive and gargantuan task. Chinese firms commonly dodge
U.S. controls with shell companies and complex subsidiary
arrays, and it would be better, simpler, and less resource
intensive to apply new rules to entire sectors.
Second, the rules should cover all strategic and military
technologies. The Biden Administration's draft rules are a good
start. They are designed to impact semiconductors, artificial
intelligence, and quantum computing. Proposed bipartisan
legislation also seeks to strengthen outbound investment
screening in the field of hypersonics. Congress and the
Administration should consider adding other technologies listed
as ``critical and emerging technologies,'' as the White House
puts it, and as outlined by the National Science and Technology
Council. These include biotech, directed energy, space
technologies, advanced manufacturing, autonomous systems and
robotics, and even some green energy technologies.
Third, apply rules to all kinds of investments. The Biden
Administration rules, as currently written, would impact
venture capital, private equity, greenfield, joint ventures,
and certain debt financing transactions. And this is very
welcome. Congress should also seek to cover investments in
publicly listed companies.
Fourth, include existing transactions, not just future
ones, within the scope of legislation. And, finally, seek to
block investments and not merely review them. Mandating
transparency for U.S. investments in to China is a welcome step
to better understand the scope of the problem, but Congress
should also consider broadening transparency to full
prohibitions on investments in targeted sectors.
Thanks very much for inviting me to deliver this testimony.
[The statement of Mr. Pottinger follows:]
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Chairman McCaul. Thank you, Mr. Pottinger. The chair now
recognizes Mr. Harrell for his opening statement.
STATEMENT OF HON. PETER HARRELL, NONRESIDENT FELLOW, CARNEGIE
ENDOWMENT FOR INTERNATIONAL PEACE
Mr. Harrell. Chairman McCaul, Ranking Member Meeks,
honorable members of the Committee, it is an honor for me to
testify in front of the Committee today on one of the most
important aspects of America's strategic competition with
Beijing: managing the flow of American capital to China. I have
submitted a statement for the record and will confine my in-
person testimony to just several points.
In August of last year, with President Biden's issuance of
Executive Order 14105, the Administration took an important
step toward regulating U.S. investment in China's AI,
semiconductors, and quantum computing sectors. EO 14105 is
intended to begin addressing the risk that certain U.S.
investments can help China develop an edge over the U.S. and
our partners in key technologies.
Over the last decade, for example, we saw comparatively
early stage U.S. investment in a number of Chinese technology
firms that later engaged in problematic activities. An example
of this is Chinese surveillance technology firm SenseTime,
which attracted U.S. investment as early as 2017, but only in
2019 did the U.S. Government understand that SenseTime was
engaging in China's surveillance in Xinjiang, triggering export
controls on the company.
Unlike an outbound investment regime that focuses on
sanctions against specific Chinese companies--which would
require the U.S. Government to know up-front every Chinese firm
that is problematic, a virtually impossible task given the
scale of China's economy and the civil-military fusion doctrine
in China--a sectoral outbound investment regulation can limit
risky investment in early stage Chinese companies, as well as
direct U.S. investments in those sectors that pose long-term
risk to U.S. national security.
While Executive Order 14105 is an important authority to
address the risks posed by U.S. investments in strategic
technologies in China, it is still vital for Congress to act.
Legislation along the lines of H.R. 6349, the Preventing
Foreign Adversaries from Developing Critical Capabilities Act,
which Chairman McCaul, Ranking Member Meeks, you and other
Members of Congress have introduced and have pushed through
this committee, would put U.S. investment restrictions on a
permanent statutory foundation, signal Congress's agreement
that the U.S. needs a targeted regime to regulate U.S.
investment in a handful of high-tech sectors, and strengthen
and expand on the Administration's initial action.
As Congress acts, I urge you to do so in a way that
reinforces rather than undermines the regulatory processes that
are already underway, as H.R. 6349 would do, reinforcing and
expanding on already-existing regulatory processes.
While I understand the legitimate desire by some members of
this committee and many Members of Congress for a more
expansive approach than is in H.R. 6349, I am also cognizant
that regulating U.S. investment in specific Chinese sectors is
a new endeavor, and it is appropriate for the focus today to be
on the most important and most critical technology sectors.
There is going to be a learning curve, a need for agencies and
companies to build expertise, and a risk of unintended
consequences.
Legislation had a very different set of goals. For example,
it would cover a hugely different number of sectors, would risk
actually undermining progress by forcing a restart of
rulemaking, overtaxing agencies, and creating confusion for the
corporate sector and American allies. Congress should start
with a tailored and scoped approach, focused on appropriate
sectors where we know there are problems. And, of course,
Congress can later add to the program if circumstances dictate.
The final point I want to make is in response to arguments
that restricting U.S. investment in China somehow undermines
our own free market principles and will weaken U.S. influence
over China's corporate sector. The U.S. tried, going back to
the 1990's, to use economic engagement with China to make China
more like the U.S. and to pool Chinese companies and Chinese
society toward our direction.
What we have found is that, under President Xi Jinping,
that strategy simply does not work. The Chinese State, not
American investors, ultimately tells Chinese companies in
strategic sectors what to do. With respect to China, a
geopolitical and economic competitor, we need to accept that we
will have to more actively manage the economic relationship to
make sure that it serves American national security interests
and not simply the economic interests of American companies.
That does not mean cutting off all, or even most economic
ties, but it does mean that, where we see a pattern and
practice of U.S. investment helping China grow critical
technologies, the U.S. Government has a legitimate regulatory
interest.
Thank you, members of the Committee, for your focus on this
issue, and I look forward to your questions.
[The statement of Mr. Harrell follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman McCaul. Thank you, Mr. Harrell. Let me just say
first, you know, I have been studying this issue for quite some
time.
Mr. Pottinger, you were the architect of the Trump
Administration's China policy. I was in full agreement. In
fact, your team was the one that came to me, and Secretary
Pompeo, and National Security Advisor O'Brien regarding the
CHIPS Act that we were able to pass to get off the supply chain
that threatens our national security issue. But when I looked
at the way Treasury works with sanctions on the entity
approach, as you mentioned, versus the sector-based approach,
it seemed to make more and more sense to me.
I had a discussion with Undersecretary Estevez of the
Bureau of Industry and Security. And he said instead of just
providing a sanction on a company, and then China will turn
around and call it something else the next day or take it off
the books, the sanction has no effect. And they are very smart
about this.
So we started talking about this sector-based approach, and
the key sectors are the semiconductors, AI, quantum,
hypersonics, high-performance computing. And to your point, Mr.
Harrell, we know these are the sectors that go right into the
PLA's military war machine or civil-military fusion. So if we
have a prohibition based on the sector, to me, that seems to be
more effective than this entity-based approach that can change
overnight.
I want to get your thoughts on that.
Mr. Pottinger. Mr. Chairman, I agree with Peter's opening
remark on that very point. I think your point was that it is
much simpler. It is less confusing for American businesses. It
is less resource intensive.
That is not to say that I do not think that the Treasury
Department should have authorities to target specific entities,
but a sector-by-sector approach is just much more clear-cut. It
allows for the compliance teams at various American financial
institutions and investment funds to simply adjust and not to
get caught in this very complex web of subsidiaries and shell
companies.
The Treasury Department has had the authority to target
Chinese military-affiliated companies going all the way back to
late 2020. President Trump signed a couple of executive orders
that gave them that authority. President Biden reaffirmed with
some changes, his own executive order to that effect.
But since then, I think only 68 companies have been added
to the list of prohibited Chinese firms for American
investment, and I can tell you that the galaxy of Chinese
entities that are involved in China's military modernization is
many, many orders of magnitude greater than the number 68.
Chairman McCaul. That is very good. So when you look at
export controls, this committee has jurisdiction over that as
well, but it seems to me that alone is not going to solve this
problem, and that is dual-use technologies.
I remember prosecuting the Johnny Chung case of the money
that was coming from China, military intelligence, China air
space, funneled through his Hong Kong bank accounts to
influence the Presidential election. Why? Because they wanted
the satellite technology, aerospace. They also wanted to become
part of the WTO, and guess what? They got all of it. And that
was 1997. Where are they today?
So, I think using both the export control laws that we have
that Mr. Meeks and I worked on, but also the sector-based
approach on capital flows going into China, that combination
seems to be a powerful one, in my opinion.
Mr. Pottinger. I agree. And I commend the bipartisan spirit
reflected today in Congressman Meeks' remarks, as well.
Chairman McCaul. I do not know if you have noticed, it is a
little rare these days. Mr. Harrell, just one thing, you know,
defining technologies, like advanced semiconductors, AI, or
quantum, we did this with AI. In terms of the business
community understanding what we are talking about when we talk
about a sector, can you elaborate on that?
Mr. Harrell. Absolutely, Mr. Chairman. Obviously, in
implementing legislation like this or the Biden
Administration's executive order, you are going to need a
rulemaking process that is going to lay out in some detail
exactly what parts of the semiconductor ecosystem we are
talking about here, the most advanced, and what parts of the AI
ecosystem we are talking about here, not just kind of customer
service chatbots but the high-end models that we are actually
concerned about. But the thing is that we have that experience
in export controls where we have had to define a lot of
different kinds of semiconductor technology. The business
community understands that regime, and they will understand
that regime when, with appropriate tailoring, you move it over
to an investment, a complementary investment restriction
regime.
Chairman McCaul. Thank you. The chair recognizes Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman. I thank both of you for
your statements. I think that they were excellent and show the
bipartisan nature of both Administrations on this particular
issue, which I think is extremely important.
You know, in recent years, consecutive Administrations and
congresses have strengthened the United States' foreign
investment review and export control authorities to bolster
national security protection. But, Mr. Pottinger, I will start
with you, you know, because I hear some things come back and
forth to me about our existing CFIUS process, sanctions and
export controls. Can you tell us what are some of the critical
problems that an outbound regime should tackle that cannot be
addressed through CFIUS sanctions or export control regimes?
Mr. Pottinger. Thank you, Congressman. You know, it is
interesting that the money that is represented by, you know,
big name private equity and venture capital firms in the United
States represents more than just the dollar signs. It
represents know-how. It represents networks to talent and board
members and technologies that reside in the portfolios of these
venture capital firms that then work at the service of other
companies in their investment portfolios, including companies
in China.
So if we look at something like export controls are kind of
a lagging indicator. It takes a long time for us to even
recognize new technologies that are being developed in China,
for example, using U.S. capital and some U.S. know-how. By the
time those technologies mature and are ready to be harvested by
smart people scouting technology for the Chinese intelligence
agencies or for the Chinese military, the cat is already out of
the bag, the horse is out of the barn, whatever farm animal,
you know, analogy you like; it is too late.
And so I think the reason that we were focused,
particularly in 2020 during the Trump Administration and Peter
and colleagues who are currently and recently in the Biden
Administration have been focused on trying to close that
loophole to actually capture technologies before those seeds
are planted and before they can sprout into something that is
going to be weaponized against us.
Mr. Meeks. So let me just followup that up with Mr.
Harrell. So those gaps, can you tell us specifically how the
Biden Administration's outbound executive order addresses them?
Mr. Harrell. Absolutely, Congressman. And thank you for the
question. Let me give a hypothetical example that I think will
help illustrate the gap here that we are all trying to close.
So since October 2022, the Biden Administration, with
strong support from Congress, has imposed pretty tough export
controls on China in semiconductors where U.S. companies cannot
send tools and designs for high-end semiconductors to China.
How is China responding to this? Well, they are trying to build
an indigenous capability for those same tools and designs.
Export controls alone do not provide a tool to prevent an
American venture capitalist from saying, you know what, that is
an interesting opportunity. I might not be able to ship a tool
over to China, but I could invest $20 million in this upstart
Chinese firm that is trying to build that same tool or that
same design here in China. And then, as Matt says, helping that
Chinese firm recruit talent, helping that Chinese firm build
contacts in the industry to help them grow, because none of
that expertise is technology. The export control just focuses
on the technology, and what we are worried about is that the
capital can still go over there to help them innovate around
our export controls, which is why I think an approach like that
in your bill, sir, would be helpful in closing that gap.
Mr. Meeks. Thank you. And I will try to get this in real
quick because the Biden executive order identifies three
sectors that are critical for the military, intelligence, and
surveillance or cyber-enabled capabilities of the PRC that
could cause or pose a national security threat to the United
States: semiconductors, microelectronics, and quantum
information.
So either Mr. Pottinger or Mr. Harrell, in the short time
that I have or do not have, what are the benefits of utilizing
a sector-based approach for countries of concern instead of
having a case-by-case review or a company-by-company based
approach to address outbound investment?
Mr. Harrell. Just very briefly, Congressman. I actually
think there is a helpful lesson again from export controls. So
when Matt was in the White House, the Trump Administration took
very important actions against a couple of Chinese technology
firms, like Huawei Technologies, limiting exports from Huawei.
What we have seen since is that China, of course, sets up lots
of front companies and other companies to get that technology
that Huawei then couldn't get, which is why in October 2022,
with its export controls, the Biden Administration expanded
beyond this company-by-company approach to go after
semiconductors going to China as a whole, and I think that
lesson in how China evaded the export controls shows why, in
the investment regime, as well, we should have a sectoral and
not just a company-by-company approach.
Chairman McCaul. The gentleman yields. The chair recognizes
Mr. Smith.
Mr. Smith. Thank you very much, Mr. Chairman. Thank you for
your bill, 6349, you and Ranking Member Meeks, an excellent
piece of legislation, and I do hope it becomes law sooner
rather than later and then is faithfully implemented. So often
we get great bills passed, and I do not care who is in the
White House, implementation falls far short.
But let me just say, you know, often we quote the fact
that, you know, there was a famous quote that came out of the
Soviet Union: we'll hang the West and they'll sell us the rope.
That has never applied to the Soviet Union. It applies to
China, especially under Xi Jinping. I was one of those who led
the effort against MFN delinking of human rights. I believe
when Clinton delinked MFN from human rights on May 26, 1994,
that was a catastrophic game-changer for the dictatorship, and
ever since they have believed, and maybe rightfully, with some
exceptions, that they can do whatever they want and no
sanctions will be forthcoming that are meaningful.
I held hearings on not allowing China in the WTO, believing
that they would change the WTO and not the other way around.
And it is my sense that that has been somewhat vindicated, that
view. And we have had hearings over the years, many of them. I
have chaired 97 hearings on human rights abuse in China; we
just counted them up. I am shocked that we still have not
learned, and that is why this bill is so important, we still
have not learned that they will do everything they can to take
anything we sell, particularly in the area of electronics and
really high tech, and use it dual use, use it for the military.
They have been doing that for decades. We do not learn. We
think somehow, if you trade more, they will matriculate from
dictatorship to a democracy. Not going to happen under Xi
Jinping and the CCP.
Outbound investment is a very, very good concept that needs
to be further backed up through law, and I would also add
outbound enabling. You know, I got a bill passed almost a year
ago, and it was totally bipartisan, two votes against it on the
floor of the House, to try to end, certainly expose and end the
egregious practice of forced organ harvesting. Tens of
thousands of young people, average age 28, are killed to get
two or three of their organs each and every year. The problem
is not only a gross human rights abuse, but it is absolutely
being enabled by the PLA. And there is even a hospital, a 301
military hospital in Beijing where, you know, if Xi Jinping
wants a new liver, he will probably get it from a Falun Gong
practitioner who is 28 years old. I mean, how perverse is that?
So I would like, you know, from our panel, and I thank you
both for your expertise, are you aware of the PLA's role in
this terrible practice? And, again, what are they doing is,
they do it with all kinds of pharmaceuticals, they try to get a
monopoly on just about everything. But in this case, it is a
huge moneymaker for the PLA. It is also a way of regenerative
medicine for their elite and for their military. Your thoughts.
Mr. Pottinger. Congressman, thanks for your leadership over
the years on China human rights. I wish we had all listened
when you had the foresight 30 years ago on most favored nation
status. That really was, you know, the snowball that led to an
avalanche.
China's human rights abuses are so grotesque and the scope
is so big now with what is happening in the northwest of the
country, in Xinjiang, whole ethnic groups which are being--
well, in the words of both then Secretary of State Pompeo and
current Secretary of State Tony Blinken, it is a genocide. I
have heard over the years about and partly thanks to what you
have uncovered with witnesses that you have spoken to over the
years, the forced organ transplant business, I would not be
shocked to learn the full scale of that industry, but I do not
have particular insight right now into the scale of it.
Mr. Harrell. Yes, I just want to echo Matt in thanking you,
Congressman, for your leadership on the human rights issue over
many, many years, a really important set of issues with respect
to China. Unfortunately, like Matt, I do not have specific
insight into what the PLA is doing on organ harvesting.
Mr. Smith. I appreciate that. Well, our bill, it has been
languishing in the Senate for months, would, in addition to
sanctioning those who are, with knowledge, procuring these
organs, it would do a serious work within the U.S. Department
of State to investigate and to expose. That is the beginning of
trying to bring an end to this horrible abuse. But, again, the
PLA is benefiting usually from it. I yield back.
Chairman McCaul. The gentleman yields. The chair recognizes
Mr. Sherman.
Mr. Sherman. Mr. Chairman, thank you for holding these
hearings. I would like to put in the record a list of nine
hearings of the Financial Services Committee that are relevant
to this hearing.
Chairman McCaul. Without objection, so ordered.
Mr. Sherman. And, in particular, we have dealt in the
Financial Services Committee on making sure that American
investors do not get phony financial statements and that
Chinese companies are not able to raise money from American
investors with phony financial statements, and Senator Kennedy
and I have passed the Holding Foreign Companies Accountable Act
and the Accelerating Holding Foreign Companies Accountable Act
to at least deal with that issue. We also had a hearing earlier
last year on combating the economic threat from China.
There are two aspects to this. There is the macroeconomics:
does China have enough capital to build its economy; and the
micro: can a particular company get its hands on an idea, a
technology, an introduction? What is not polite to mention is
the enormous trade deficit. We are running a trade deficit of a
third of a trillion dollars with China, so every 10 years they
have $3 trillion of capital decade after decade that they can
deploy where pretty much wherever they want. Why this trade
deficit? Well, both our countries are mercantilist to some
degree. We want to export more, import less, we want more
investment in the United States, less investment elsewhere. But
China has two ways to achieve this. First, they could have
tariffs. Second, they can orally tell their companies just do
not buy the American stuff. I cannot imagine a Member of
Congress calling a company in our district and telling them do
not buy the Chinese stuff, do not buy the German cars.
But China has higher tariffs on our goods than we have on
theirs. So we have only one device and, even as to that device,
they are using it better. We, therefore, have a situation where
China has $1.2 trillion of our bonds. We need that capital
because we have to finance our trade deficit. Now that as to
debt equity. As to stocks and other equity investments, the
flows are roughly equal.
Now, one of our witnesses mentioned that venture capital
situation. A company needs $20 million. I do not think we are
going to be able to stop that because, if it is a good
investment, the Chinese have $20 million. They have, as I say,
a third of a trillion every year just from their trade surplus.
But we can deal with the technology. We saw an example a
decade and a half ago where American satellites were being put
into space on Chinese rockets. What happened? Our satellite
companies and their insurers found it in their interests to
make sure the rockets did not blow up. So they provided good
technical advice to China, and now China has better rockets.
When we have a situation where Americans have it in their
interest to transfer technology to China, it will be
transferred. And it may not be a patent; we can outlaw that.
But unless we outlaw the kind of investment where you have a
controlling interest, when you are a consulting company, when
you are a venture capitalist, and prevent the flow of
technology there, we will continue to provide advice and
contacts and know-how to Chinese companies.
I commend the chairman and the ranking member for their
bill. There is more to be done. I am working on legislation to
make sure that we do not see--that every American company
disclose to its shareholders its China risk and what it is
doing to prevent its China risk for two reasons. First, so that
the investors will know. Second, so the company will start
working, as they have not sufficiently, on derisking themselves
from China. Second, we have got to prevent index funds from
investing in China because this is not paint by the numbers. It
is too complex to figure out how and which companies in China
to invest in. Third, on the human rights side, we have to
prohibit American investment in sanctioned companies,
particularly those sanctioned for the activities that Chris
Smith recounted for us. It may not deprive those companies of
capital, but it will at least prevent us from being involved.
And fourth and most importantly, we need to prevent a capital
gains allowance for investing in Chinese companies. This costs
our Treasury many tens of billions of dollars. And I will ask
our witnesses: does it make any sense for us to be providing an
investor with a low tax rate on profits they make by investing
in Chinese companies? Do either of you think that is a good
idea?
Mr. Pottinger. I do not like that idea. That is to say that
we are giving tax incentives to invest in our chief adversary.
Mr. Sherman. And I will point out China has incentives for
investment that are only applied to investing in China. So it
is both unfair and stupid for us to be providing a capital
gains allowance, and I look forward to working with members on
this committee to make sure that the capital gains allowance,
which is designed to get people to invest in building an
economy, is not an incentive to build a Chinese economy. And I
yield back.
Chairman McCaul. Excellent point. The chair recognizes Mr.
Wilson.
Mr. Wilson. Thank you, Chairman Mike McCaul, and I also
want to thank Ranking Member Greg Meeks for the bipartisan
dedication to exposing the single-party dictatorship of the
Chinese Communist Party. And it is also very revealing that,
amazingly enough, I agree with everything that Congressman Brad
Sherman just said. And I do not want to ruin his reputation
back home, but, hey, I even agreed frequently with Kathy
Manning, too. So I am going to, I will brand several of you.
Hey, we are working together in a bipartisan manner on this.
It is sad to me that the people of China are impressed by
the Chinese Communist Party. I appreciate firsthand the people
of China. My father, First Lieutenant Hugh Wilson, served in
the Flying Tigers, the 14th Air Force, in Kunming, Shantou, and
Xinjiang. Our family has great affection for the people of
China. We are inspired by the people of Taiwan in this week's
elections. Courageously, the Taiwanese have voted for democracy
and freedom. Taiwan is a beacon of success for a free market
democracy.
With that in mind, Mr. Pottinger, since the murderous
October 7th terrorist attacks by Iran puppets of Hamas into
Israel, the Chinese Communist Party has stepped up their
outreach to the gulf allies of America and partners, hoping to
capitalize on destabilization caused by the Iranian regime's
terrorist networks and is working together with war criminal
Putin to gain a foothold in the region. There is a significant
increase in media by the Chinese Communist Party and by war
criminal Putin across the region in Arabic.
The question: how do you see the CCP working to increase
its influence interview he Middle East and what can be done to
counter the increased role in the region and how is the threat
to U.S. interests, as we, sadly, are in a conflict we did not
choose, of dictators with rule of gun invading democracies with
rule of law?
Mr. Pottinger. Congressman, thank you for those comments.
And I would love to see photos of your father in Kunming with
the P-40 Flying Tiger. Fantastic legacy. Brilliant.
Look, I think you are exactly right that these conflicts
that are beginning to spread us thin are, in fact, related. I
believe the incoming Chinese foreign minister was here recently
and made a remark to a U.S. audience when he was in the U.S.
specifically that they are not related. Of course he would say
that. They are very much related. China is the number-one
backer economically for Russia, certainly diplomatically for
Russia. According to a State Department report that came out
last year from the Global Engagement Center, China is spending
more money on pro-Russian propaganda worldwide than Russia is
spending on pro-Russian propaganda worldwide.
China is a key backer for Iran. It is no coincidence, I
liked the way that you put it, that they are trying to
capitalize on this situation. I have noticed that Chinese
shipping is not affected in the Red Sea the same way that
everyone else's shipping is. That is not by accident. That is
being engineered by virtue of the fact that China is one of the
main buyers of Iranian oil. These things are related.
And I will paraphrase Xi Jinping, who has said something
frequently, going back at least to 2021. He has given internal
speeches where he has said the lead word to describe the global
situation today is chaos. Chaos. And he has gone on in those
speeches to make clear that he views that as a favorable
condition for China achieving its ambitions worldwide.
So here we are. Chaos is something that is part of the
design of China's global ambitions and of its foreign policy,
and we, at our peril, fail to connect those dots. Those dots
are very much connected, sir.
Mr. Wilson. Indeed they are. And I really appreciate, one
of the great achievements of President Donald Trump were the
Abraham Accords to provide stability and success for our Middle
Eastern allies. And then, sadly, I really believe one of the
reasons that Iran, through their puppets of Hamas, attacked
murderously and conducted the mass murder in Israel was to
disrupt the ability of Saudi Arabia to join in, which would
have been so beneficial to Saudi Arabia and to the Middle East
region.
And so with that, I thank both of you for being here, but I
really want to thank again the chairman and ranking member. All
of this needs to be exposed. I yield back.
Chairman McCaul. The gentleman yields, and I appreciate
the, you know, you mention Abraham Accords. The security
agreement with the Saudis, it is going to be so important
between Israel and the United States and Saudi Arabia. It could
truly bring peace to that region. So thanks for bringing that
up.
The chair recognizes Mr. Bera.
Mr. Bera. Thank you, Mr. Chairman. And for the millions of
viewers on C-SPAN that are watching this, the media does not
cover the bipartisan nature of how Democrats and Republicans
work on policy. I commend the chairman and the ranking member
and the members of this committee to work on a challenge that
addresses our vulnerabilities as a nation but also strengthens
America's security.
If we were to go back a decade, two decades, three decades
ago, you know, there was a hope that, you know, as China built
a middle class, an entrepreneurial class, that they would
become responsible partners in a global economy. Obviously,
that isn't where we are today. We clearly understand what Xi
Jinping's policy objectives are, what Beijing's policy
objectives are, and we have to address the reality that we face
today.
I think, Mr. Pottinger, I would use the term the panda has
left the zoo. The panda has left the zoo, so I think we have
got to address that.
Mr. Harrell, you used a statement, I think, is important
for us to understand. I think the term you used was a civil-
military fusion doctrine. And if you could just take a minute
to expand on that doctrine.
Mr. Harrell. Absolutely. So this has been one of the
defining societal doctrines in China, particularly under Xi
Jinping, where, under Xi Jinping thought, if you will, and,
certainly, he calls it Xi Jinping thought, there is an idea of
mobilizing all of China's society behind China's ultimately
military aims. And so what we have seen over the last, well,
going back many years but particularly over the last decade is
increased efforts, not only through sort of official spending
and subsidies but through a variety of regulatory mechanisms,
as well as informal mechanisms, to galvanize China's technology
sector, universities, major SOEs behind building China's
military might, such that, sort of to come back to today's
hearing, I think really only a sectoral approach that says we
are going to limit investment in these key sectors is going to
work to prevent Americans from supporting the development of
those key technologies in China because, if you just go after
one or two firms, China's response is we're just galvanizing
all the other firms in this sector to do what that firm can no
longer do.
Mr. Bera. So super important for American and Western
industry and investors to really understand the root of that
doctrine and the foundation. These may be patriotic companies
that are profit-driven, that are just looking for good
investment opportunities; but if they do not truly have an
understanding of how those investments potentially could be
used to undermine our own national security.
Mr. Pottinger, let me ask you a question that touches on
that. International coalitions are going to be important. And,
again, I commend the chairman for his work on the CHIPS Act, an
incredibly important piece of legislation. You know, Micron has
a presence in my community, and we saw some economic
retaliation from China on Micron. I do think we were successful
in keeping, you know, international companies from seeing a
market opportunity and saying, OK, well, we will go and
undermine that. But I think it will be really important for us
to have these international Western coalitions of like-valued
countries that understand this. It won't be easy, but I think
it is important.
Mr. Pottinger. Congressman, I agree with you. And I found
that, over the years, when the U.S. leads, our allies tend to
eventually follow, sometimes very quickly. In the case of
sanctions on Russia, I mean, it would have been even better if
we had credibly threatened them in advance of an invasion by
Putin, war criminal Putin, as Congressman Wilson, put it, which
is a great title for Vladimir Putin. It would have been better
to have had that advance, but, once that invasion began, the G7
and other allies began to coalesce very quickly. So I think it
is incumbent upon the United States to lead and others will
follow.
You made a comment a moment ago just about how private
equity firms and others, you know, often need to be told or,
actually, in some cases, want to be given those guardrails. I
have had conversations with investment funds that have said,
look, we have a compliance shop. If Congress will tell us where
those guardrails are, we will abide. And in some cases, they
want those guardrails to come in more tightly because that
means that they are not missing out on opportunities that, you
know, less scrupulous competitors could take advantage of. And
then, over time, it is not just American competitors but others
in Europe and Japan and elsewhere that will follow with similar
types of rules and regulations.
Mr. Bera. Great. Again, I commend the chairman and the
ranking member for their work and leadership on this topic.
Chairman McCaul. Thank you, Mr. Bera. The chair recognizes
Mr. Mast.
Mr. Mast. Thank you, Mr. Chairman. I appreciate the
expertise you both bring today, the work that you all have
done. I am over here, Mr. Pottinger. I know you were looking
for where we are at. I have read work from both of you over the
years. I want to start with you, Mr. Pottinger. How many times
can you recall in speeches Xi Jinping talking about preparing
for war?
Mr. Pottinger. Well, Congressman, last March, so less than
a year ago, China held its annual two meetings, what they call
the lianghui, two meetings. It means the National People's
Congress and another gathering called the Chinese People's
Political Consultative Conference.
Mr. Mast. Simultaneously.
Mr. Pottinger. Simultaneously. Xi Jinping gave four
addresses to delegates to those two meetings. All four of them
had the common theme of the need for China to prepare for war.
And in the lead-up, there were changes that were being made to
laws, for example, on making it easier to put the military in
charge of Chinese society in the event of war; new rules to
retain reserve military personnel for longer periods of time,
particularly if they have key skills; new mobilization,
military mobilization offices that have popped up in most of
the provinces around China; building air raid shelters right
across from Taiwan, as well as starting to create authorities
for building military hospitals that can do combat care. I do
not take comfort in any of those signals, any one of them, much
less the constellation that is painted by all of them combined.
So I think that war is on Xi Jinping's mind. He has told us
as much.
Mr. Mast. Anybody preparing for war, obviously they are
looking at a number of different facets of where they could
weaken their enemy. And whether that is through their military
might, whether that is economically, whether that is in any
place domestically, there could be a host of places that they
try. What worries you most out of any of those areas that you
see them working to weaken the United States of America as they
prepare for war?
Mr. Pottinger. Well, I think that all of the things that
add up to deterrence are built on one factor in particular, and
that is hard military might, the credible availability of
decisive military force. I worry that if we do not keep pace
with the crises that Beijing, in some cases, is adding fuel to,
we will not have sufficient capacity, munitions, whether it is
torpedoes or anti-ship missiles or the ability to build more of
those things relatively quickly. It is not like the days of
World War II with Rosie the Riveter where you can build bombs
on what the day before was an auto factory quickly. These are
very sophisticated munitions that take sometimes years for
those supply chains to add up.
So my biggest concern is we do not meet this moment that Xi
Jinping is talking about as a moment where he can take
advantage of what he calls an opportunity of a hundred years.
Mr. Mast. We quite often in this body talk about the Belt
and Road Initiative and largely focus on these developing
countries where they can put a road in, extract something that
they need for their supply chain. To that effect, I do not
think we look enough internally about where does the U.S.
investor, the U.S. investment into China, how is that making us
subservient to that Belt and Road Initiative as Americans and
where does that advance their preparation or where could it
pull their preparation back were that U.S. investment to
decrease?
Mr. Pottinger. Well, the Belt and Road Initiative is really
a vehicle for corruption. It is a means to expand China's
influence around the world through co-opting elites and
governing elites in foreign countries. There is a reason why
most of the Belt and Road agreements that China signs with
foreign governments are not available to the light of day. They
are secret. Some of them have been leaked over the years, and
they have these common patterns to them. They involve countries
pledging sovereign assets, I mean, things that belong to the
people of those countries, whether it is a port or it is
telecommunications and rail infrastructure. And so China is
weakening the ability really of those countries' people to
maintain something like a democratic--in some cases they are
democracies and that democracy is at risk or they aspire to be
democracies and are undermined by the enormous debt and
corruption that these agreements saddle on them. So that hurts
our interests. When corruption and co-optation of elites is the
mode for advancing power in the world, that is terrible for our
values and our influence.
Mr. Mast. Thank you, Mr. Chairman.
Chairman McCaul. The chair recognizes Ms. Manning.
Ms. Manning. Thank you, Chairman McCaul and Ranking Member
Meeks, for holding this hearing. And I do appreciate the
bipartisan nature of the hearing on this critically important
issue. And thank you to our witnesses for being here today.
I want to get into some of the details that are involved in
this issue. So, Mr. Harrell, in your view, which Chinese State
activities or industrial policies, including the forced or
coerced transfer of technology, IP theft, data localization, or
others, which pose the greatest risks to our national security
and how can greater scrutiny of our outbound investments help
combat these practices?
Mr. Harrell. I think there are many things, obviously, the
Chinese do that pose a threat to U.S. national security, but I
want to focus on two in response to your question. I think,
fundamentally, we need to keep an edge in a number of critical
high-technology areas that are going to be hugely important to
both military and economic and societal goals over the next
decade. And here I am thinking semiconductors, AI, quantum,
certain parts of the green technology revolution, that are
coming where we need to both be innovating more here at home
and then we need to make sure that our technology and our
expertise is not helping them catch up and indeed overcome. And
that is why I really think that on those kind of key
technologies, making sure we have both an export control regime
so we do not give those technologies, semiconductors, green
technologies, AI, a couple of other sort of high-end military
dual-use technologies, both we are not giving them the
technologies and also our capital and kind of business know-how
expertises and helping them catch up and ultimately overcoming
us.
Separately a little bit from the focus of today's hearing
but I do think is important is making sure we are not dependent
on China for key supply chain inputs, things like critical
minerals, things where, if we got to that situation where there
is a conflict, they would have leverage over us. A little
separate from today's hearing, but I know the committee has
done important work on those supply chain vulnerabilities and
would urge the committee to continue that work, as well as the
focus on technology and investment we are talking about today.
Ms. Manning. Great. Thank you. And I want to focus in a
little bit on the AI issue. While the Biden executive order on
outbound investment pertains to AI, not all applications and
investments in AI technology are equally risky to our national
security. You mentioned in your testimony the need for greater
scrutiny into high-level AI research lab owned and run by a
U.S. company in China. How should our outbound investment
regime treat different types of research or applications within
a sector like AI?
Mr. Harrell. So when I was in the Administration working on
the Biden Administration's executive order, which came out
after I left, this definitional issue was one of the most
complicated ones because the goal, at least from the
Administration's perspective, is not to sort of prevent a
Chinese hotel from having a chatbot, you know, for basic
customer service. I think what we have seen is a need to focus
on a couple of different types of AI. One is obvious, which is
specific applications of AI that have clear military or other
harmful impacts, like facial recognition and other kinds of AI-
enabled surveillance technologies. We clearly need to focus on
that.
I also think we need to focus on the underlying development
of advanced high-end models like we have seen here in the U.S.
with ChatGPT-3, ChatGPT-4, because the reality is, if China
develops those models, they can then develop the applications
of them. So I focus on both a set of applications and then also
higher-end large-language models and other large-application
models generally.
Ms. Manning. So one of the areas that I focus on where I
think we continue to miss the boat in this country is the need
to reform and update our immigration laws. They have not kept
up with the economic needs of our country. So I think, in your
testimony, you welcome State Department and DHS efforts to
expand visas for top AI and other technical scientists and
researchers to come to the U.S. to help us innovate here. Can
you talk about how we can leverage visa and immigration
policies in ways that best serve our interests?
Mr. Harrell. I very much appreciate that question and your
focus and leadership on this issue. As part of the Biden
Administration's AI executive order a couple of months ago, a
little-noticed provision in there directed the State
Department, DHS, to set up a program to speed visas for top AI
researchers, including in China, so that we can actually get
them to come here and innovate and help do research here. Now,
of course, there are security risks. You need to think through,
you know, the vetting process. But, ultimately, I think we want
to have a country where we continue to bring the best AI talent
from around the world and have them come here and develop those
innovations here. The Administration is doing what it can under
existing authorities, but, obviously, immigration requires
statutory change, including in this area. And so I do urge the
committee to look at that important issue.
Ms. Manning. Amen I meant to say. My time is expired. Mr.
Pottinger, I have some questions for you that I will submit in
writing, but thank you and I yield back.
Chairman McCaul. The gentlelady yields. The chair
recognizes Mr. Barr.
Mr. Barr. Well, let me first thank and commend Chairman
McCaul and Ranking Member Meeks for their work and certainly
very well intended to protect our national security by
restricting U.S. investors for unwittingly financing certain
sectors in China that threaten our national security, and I
share their goal. But I do want to unpack this discussion about
an entity-based approach versus a sector-based approach, and,
first of all, the chairman and I have had many discussions on
this in working through this with other colleagues on both this
committee and the Financial Services Committee. I do not think
the two are necessarily incompatible, and we are working on
potentially marrying both approaches. But I also would disagree
with the suggestion, respectfully, that a sector-based approach
is, quote, stronger than an entity-based sanctions approach
when, in some cases, in some cases, the exact opposite is true.
So let's unpack that for a minute here, Mr. Pottinger. Does
a sector-based outbound investment restriction block Beijing-
directed subsidies at a state-owned enterprise?
Mr. Pottinger. Not necessarily. Right? If these are
Chinese-invested companies----
Mr. Barr. Right. So if we are restricting Americans from
investing in a Chinese military company but it is subsidized by
Beijing, that regime does not affect the funding of that
entity.
Mr. Pottinger. Right.
Mr. Barr. And then revenue generated by the sales of goods
and services, if the Chinese military or surveillance or
technology company is selling goods and services globally,
restricting U.S. investment does not impact that, correct?
Mr. Pottinger. That is true.
Mr. Barr. Also, investment from non-U.S. investors, does a
restriction on U.S. investment, outbound investment, does that
impede investment from non-U.S. investors into that Chinese
entity?
Mr. Pottinger. No, not unless we build a coalition to
support that goal.
Mr. Barr. And, Mr. Harrell, would the Biden executive
order, does that, in any way, that is the CMIC companies, the
Chinese military industrial complex companies, are investors in
other countries in any way affected by that executive order?
Mr. Harrell. They are not directly affected by it, though
they cannot use a U.S. bank to facilitate that investment. So
it probably makes it a little harder for----
Mr. Barr. So here is the point I am trying to make: would
full-blocking SDN sanctions, if Treasury actually did it, would
full-blocking SDN sanctions have a multilateral
extraterritorial effect that these restrictions that only apply
to U.S. investors have? Would a full-blocking SDN sanction have
a multilateral extrajurisdictional effect?
Mr. Pottinger. Yes.
Mr. Barr. So this is why I think we ought to not just
dismiss this entity-based approach. And, certainly, the
chairman is right and you all are right that China changes
names and whatnot, but OFAC is particularly equipped in
conjunction with the intelligence community to continue to
adjust those sanctions.
I want to also mention the fact that the Financial Services
Committee bill that we have marked up, the Chinese Military
Surveillance Companies Sanctions Act, would require Treasury.
And I think this letter that Treasury sent back to the chairman
and ranking member on Hikvision is troubling, but that is
exactly why the Financial Services Committee bill would require
Treasury to not just send a perfunctory letter back to the
chairman but require Treasury to do much more than that and
inform the chairman of this committee, the Financial Services
Committee, the Senate counterparts, on an annual basis why the
Treasury Department is not imposing full-blocking sanctions on
Hikvision and continually update the sanctions list, the Entity
List at Commerce, the CMIC list, the DoD military list on an
annual basis to keep up with the changes with China.
Last point and it is a question about the bill before us
today. What I am worried about, and it is a good bill, but on
page 20 and 21, it specifically talks about exceptions, covered
activity. Covered activity does not include an investment in
publicly traded security or an index fund or a mutual fund or a
venture capital fund. In other words, we might be restricting
the funding, U.S. funding, but Americans, under this bill,
because there is not full SDN-blocking sanctions, would still
be able to trade in those securities, whereas if we sanctioned,
full-blocking sanctions, on these entities, there could be no
trading of these securities at all. There could be no
contracts, and it would not just apply to U.S. but also non-
U.S. citizens.
My time is expired, but if you could comment on the
strength of sanctions versus a non-sanctions approach.
Mr. Pottinger. Congressman, I agree that sanctions, when
applied, really come at a company from more angles than just an
export control or even just an investment restriction for sure.
I think the challenge are ones that we have talked about,
simply how do you incentivize the Department of Treasury to
really apply those? You mentioned just a moment ago, I think,
the idea of an annual requirement and so forth. I mean, I think
that would be welcome.
Mr. Barr. Thank you. I yield.
Chairman McCaul. The gentleman yields, and we will have
further discussion. I know we are meeting with the majority
leader. It seems to me you could take the provisions of this
bill--I am not opposed to sanctions. It is just that we have to
have a compromise, and I think that is the bottom line.
So the chair now recognizes Ms. Dean.
Ms. Dean. Thank you, Mr. Chairman. I thank you and Ranking
Member Meeks for this legislation, for working together so well
and guiding this committee in a bipartisan way. I want to go
back to something that Mr. Bera was talking about, and I wanted
to ask you, Mr. Pottinger, you, too, spoke of and wrote in your
testimony about the military-civil fusion. For those who are in
far into that, you know, in a democratic society we do not
fully appreciate that strategy, the depth and breadth of it,
would you want to add anything to what Mr. Harrell spoke of
also?
Mr. Pottinger. Congresswoman, thank you. I think that,
under Xi Jinping in particular, he has really reoriented the
State around his personal goals, which have now become the
goals of ruling party that he leads. And those tools are
sometimes laid out explicitly, for example in things like this
military-civil fusion strategy and some of the laws. One that I
mentioned was this national intelligence law that mandates that
anybody must serve the Chinese intelligence apparatus and do so
in secret when asked.
There are also a lot of intangible ways that the party
forces business, irrespective of whether it is nominally
private or State owned, to align itself with the interests of
the party. And one of the ways that Xi Jinping has done that
has been to establish committees, Communist Party committees
and cells at multiple levels within existing companies. So a
very good example would be if you look at something like
Alibaba where Jack Ma, who, by the way, is a party member
according to Chinese public accounts, but was really an
entrepreneur at heart who founded this incredible company, and
it was an incredible success within China and beyond. He was
eased out of, you know, away from the steering wheel of that
company shortly after he made remarks criticizing China's
regulatory environment under Xi Jinping. That was back in 2020.
And so there is a Communist Party secretary of ByteDance,
which is the controlling shareholder of TikTok. He also, the
Communist Party secretary of ByteDance is also the editor-in-
chief of all the applications under ByteDance, presumably
including TikTok. So those are a couple of examples of things
that are hard to see but are going on.
Ms. Dean. Thank you for those explanations. Mr. Harrell, I
was thinking you are both coming from such important background
in two Administrations on this issue. Can you speak to this
bill and in what important ways does H.R. 6349 go farther than
the executive order issued by the president in August either by
sector or by investor?
Mr. Harrell. Thank you very much for the question,
Congresswoman. And as I said in my opening remarks, I do think
it is very important for Congress to act here. I think what the
Administration has done, while an important start, is not
sufficient to meet the challenge.
And I think the bill does a couple of important things.
First, it does expand the technology, the covered technology
sectors to focus on some high-performance hypersonics in a
couple of areas that are important to China's defense
industrial base that I think are valuable additions. It also
adds a permanent statutory footing to the Biden Administration
approach, which I think is important both for signaling
purposes, that there is bipartisan support on this issue. We,
as a country, are united on this. I also just think, over time,
you know, Administrations come and go. And I think having a
permanent feature in American law, just as we do under CFIUS,
which also got started in the 1980's by executive branch action
but which Congress later came in and codified and expanded on,
really important to have that statutory basis here.
Ms. Dean. And we, as Members of Congress, agree with you on
that. It is better to have a statutory basis in something that
is quite clear. Mr. Harrell, do we have any calculation, does
anybody have any calculation of outbound investments that have
really ultimately done harm either to our national security or
global security?
Mr. Harrell. So I am not aware of public sort of top-line
figures of here are the investments that have caused national
security harm. When I was in the Administration and, obviously,
I am still under confidentiality provisions, the Administration
did do a very lengthy detailed analysis cataloging many
different investments that we determined the Administration did
think later caused harm, one of which I talked about in my
opening statement on SenseTime. That is one that is now public
and sort of easy to talk about. But I think what we have seen
is a wide range of investments over many years have later
caused harm, but I am not aware of any public kind of top-line
number of the dollar value of those.
Ms. Dean. Again, I thank you both, and I thank the
chairman. I yield back.
Chairman McCaul. The gentlelady yields. The chair
recognizes Ms. Kim.
Mrs. Kim of California. Thank you, Chairman McCaul and
Ranking Member Meeks for holding today's hearing on outbound
investment regulations. So I am hearing that there are
generally two approaches to addressing outbound investment
concerns. One is, you know, the broad investment restriction in
technology sectors where there are national security concerns;
and the second one is the Entity List-based sanctions approach
focused on specific foreign companies that are linked to CCP
military or intelligence agencies. As you know, this is a
debate we are having right now and trying to decide which of
these approaches is best.
So in your view, is there a way to reconcile these two
different policy approaches; and, if so, can you describe how
Congress can go about doing that?
Mr. Harrell. Maybe if I could just offer a minute of
remarks and then see if Matt has anything to add. I do think a
sanctions approach with respect to China has value.
Clearly where there are Chinese companies that are engaged
in human rights abuses, in truly nefarious kinds of activities,
we should sanction them. I also think the Biden Administration
should be more aggressive, as Matt said in his opening remarks,
on using the existing executive order first signed under
President Trump that limits U.S. investment in the publicly
traded securities of big Chinese companies that are linked to
the Chinese military. I think the Administration should be more
aggressive in prohibiting American investment in these publicly
traded securities.
I think there are a couple of notes of caution on SDN
sanctions though when it comes to big Chinese companies.
And, again, I think there are times when it is appropriate.
But if I look at, for example, the Defense Department list
of Chinese companies linked to the Chinese military, all of
China's major mobile telecommunications providers are on that
list, understandably. They are all, I am sure, providing
telecommunications to the Chinese military.
On the other hand if we sanctioned all of China's mobile
telecommunications providers, you would effectively prohibit
all American companies from doing business in China because
none of their employees in China could use the telephone.
So I do think there is a place for SDN sanctions, but I
think we also have to be careful in our application to not, you
know, kind of inadvertently do something like preventing
American companies in China from using the telephone.
Mrs. Kim of California. Sure. Mr. Pottinger, do you want to
add to that and hopefully quickly?
Mr. Pottinger. Sure, Congresswoman. I agree with what Peter
just laid out. SDN, to Congressman Barr's point, is a more
powerful tool. But sometimes it can be overkill or
inappropriate if it is applied in ways that the example that
Peter just laid out sort of illustrated.
This sector approach, I think the importance of that is the
simplicity. It is less resource intensive for the Treasury
Department. It is easier for companies to understand what is
off limits and not to cross those barriers.
So I wouldn't know how to describe the way to meld those
together. But it would have to have enough flexibility built in
so that it did not mandate, for example, that you would have to
use both simultaneously necessarily.
Mrs. Kim of California. I appreciate both of your
perspectives on that. Hopefully, we can come together and
hopefully reconcile but find a way that we can really make this
work because both options do present its pros and some concerns
as well.
But resourcing will be important as Congress moves to
establish an outbound investment regime. But I am interested in
hearing from you about where these new resources would be best
suited. Yes.
Mr. Harrell. I do think to manage effectively an outbound
investment regime, it is important for the executive branch to
have adequate resourcing. These are complicated issues.
I think fundamentally probably in three places you need
resources. One is at the Treasury Department, just it manages
investment. It needs some resources.
One is probably in the Commerce Department where they need
some additional technical expertise, which they are already
staffing up because of export controls, but they need that
there.
The third, of course, is in the intelligence community to
kind of better understand what's going on within China and the
dynamics there.
Mrs. Kim of California. Do you think that establishing an
outbound investment regime requires the creation of a new
office, or agency for that matter?
Mr. Pottinger. I think that--I have asked myself that at
times when I was in office and thought it might be easier if it
was put into some other entity. But I think it really
ultimately boils down to leadership, that Congress has the
ability to hold accountable leaders of the departments and
agencies that currently have those authorities.
I think that is the fastest way to exert the authorities
and intention that you were legislating.
Mrs. Kim of California. OK. I think my time is up. Thank
you. I yield back.
Chairman McCaul. The gentlelady yields. I just want to make
a point that the two witnesses have made. You know, the
executive order just applies to China. This bill, it's not only
China, but it's Iran, Russia, and North Korea as well as China.
As we see the current unholy alliance forming between these
four countries against the West, the United States, our
interest, and our NATO allies, I think that's a very important
point.
The Chair recognizes Mr. Schneider.
Mr. Schneider. Thank you, Mr. Chairman. And I want to
associate myself with your remarks. As you said, it is more
than just China. And it is immediate, mid-term and long-term.
And that is one of the things I want to touch on.
I also would like to associate myself with the comments
earlier of my colleague, Mrs. Manning, on immigration. But in
particular, as everyone has said, thank the witnesses here
today but also the chair and the ranking member for bringing
this legislation forward.
I join with colleagues on both sides in commending the
Biden Administration executive order on outbound investment,
and I want to thank the committee for having this hearing today
on this legislation. I am proud to join in co-sponsoring it.
A thoughtful outbound investment regime is necessary to
building on the work of CFIUS and making sure that U.S.
investment is used to uplift communities around the world
rather than strengthening our strategic adversaries and
empowering totalitarians.
We have already had an impressive conversation about the
technical aspects of this legislation and specific concerns
regarding the People's Republic of China semiconductors,
microelectronics, quantum information technologies, artificial
intelligence, and other technologies of the future. And it is
our job here in Congress to make sure that we keep the United
States, U.S. interests, U.S. population, U.S. citizens safe and
prosperous.
I want to start, and I will go back to something we were
talking about earlier with Mr. Barr, the idea of sector versus
company specific.
The sanctions approach led by Treasury, Mr. Pottinger, I
will ask you, would it catch a startup, for example, AI
company, that is in its earlier stages just beginning to
develop its technology may not even be on the radar other than
with venture capital, would it catch and prevent them from
developing civilian military technology?
Mr. Pottinger. Congressman, it could easily miss that. It
is very difficult to map China's AI ecosystem. Oftentimes, it
takes sometimes years before the importance of a particular
entity really makes itself apparent.
Mr. Schneider. Mr. Harrell?
Mr. Harrell. I completely agree with what Matt said. Now it
very likely would not capture that simply because Treasury does
not know all of the millions of companies in China that are out
there.
Mr. Schneider. Conversely would the sectoral approach
likely catch such a startup?
Mr. Harrell. Not only would it likely catch such a startup,
but it might actually require the investor, if the investment
wasn't prohibited, if it was sort of outside of prohibited, to
come in and tell the U.S. Government about that that startup so
the U.S. Government could begin better understanding it.
Mr. Schneider. Mr. Pottinger, do you agree?
Mr. Pottinger. I agree with Peter's remark.
Mr. Schneider. Thank you. Let me shift gears. H.R. 6349
adds hypersonic technology to the list of covered technologies.
We have seen hypersonic missiles as a priority for Tehran,
Moscow, Pyongyang. In fact in the Ukraine War, in Putin's War
against Ukraine, we have seen for the first time the Kh-47M2
Kinzhal or Dagger in action.
My question for whichever one of you wants to answer this,
now looking at the immediate term where they are currently
being used but long-term threat to the United States, how will
this prospective outbound investment regime affect the short-
term application of hypersonic technology like what Russia is
using against Ukraine, Iran, or North Korea and what do you
think the long-term impact would be?
Mr. Pottinger. Hypersonics is one of those that I think the
United States was hemorrhaging our technology early on before
there was a consensus like what we've heard in this room today
about the nature of the threat that China poses to our
interests.
And I know stories of conferences that China held where
American scientists showed up to talk about their latest
findings with respect to hypersonics. And in some cases, China
ended up putting that theory to practice before the United
States did.
If we had had outbound export controls earlier on that,
that would have helped. Outbound investment restrictions might
have helped with that as well.
Mr. Schneider. Thank you. And just to wrap up, with my
colleague, Mr. Wilson, he and I have been pushing to curb the
export of high end machine tools, especially CNC machines, to
Russia.
Treasury did sanction 130 entities related to this effort,
and we are grateful to see that. But with respect to China and
this policy, can you talk about how it might affect machine
tools, if at all? Either one?
Mr. Pottinger. I do not have a specific answer on that, but
I will say I recently met someone after I had given a talk out
in Arizona who told me about how much damage our transfer of
our machine tooling capabilities, particularly to China, have
been to some of the problems that we're trying to solve for
now, for example building up our own defensive capabilities,
munitions, things that are wholly civilian, commercial
capabilities as well. Machine tooling was really one of the
things that allowed us to win World War II.
Mr. Schneider. Thank you. And it is critically important
today. And I know we will continue to focus on that in this
committee. But again, I thank the chair and the ranking member
for this legislation, and I yield back.
Mr. Schneider. The gentleman yields. The chairman
recognizes Mr. Davidson.
Mr. Davidson. I thank the chairman for holding this
hearing, and I thank the body for paying attention to an
important issue.
Back in 2018, we passed the bill called the Foreign
Investment Risk Reduction Modernization Act. Part of the reason
we are here today is presumably that bill is not adequately.
Why not?
Mr. Harrell. Thank you very much, Congressman, for that
question. I think that the steps that Congress took back in
2018 with FIRRMA were really important in expanding the limits
on Chinese investment in the U.S. There was a pattern that we
were seeing at the time, Congress certainly saw at the time,
where Chinese companies were investing in a whole range of
technology----
Mr. Davidson. Specific to outbound investment. I mean, we,
of course, dealt with Chinese investment in CFIUS. But there is
still the export control portion.
And frankly, we had lots of companies that were concerned
even as we had done the research and development tax credit. We
have done things to incentivize investing and doing your
research and development in America. But they were concerned
that if I am going to do research and development in America,
do I own the intellectual property or does America own it?
And if at the end of the day, they cannot export the
technology, they just simply invest elsewhere. So is that a
flawed approach or is there some other thing that we are
looking to capture here that isn't captured by FIRRMA?
Mr. Harrell. Well, Congressman, I would just say that
because FIRRMA to my knowledge is only for inbound investment
into the United States, that this in some ways is almost a
mirror image of FIRRMA. So it is trying to achieve some of the
things that FIRRMA was trying to solve for but whereas FIRRMA
is trying to prevent----
Mr. Davidson. But we stopped too short on FIRRMA. We did
not get an adequate way to address the outbound controls.
Obviously, Mr. Barr and Mr. McCaul have different approaches.
I will tell you as a private sector business guy, I go back
to the days of conflict minerals. You know, so there was this
idea, you know, that certain minerals in countries, primarily
in Africa, that are involved in conflicts, we do not want those
things to show up in American products. And so the solution was
that you have every company that uses metal report on it.
I had at the time a small business in Western Ohio, and I
am signing off on a statement that the metal I am using
contains no conflict minerals. Now that is essentially Mr.
McCaul's approach. You go all the way down to the small
business level, and you hold every business in America
accountable for something.
Frankly they are, like, why am I signing this? I have no
idea. I certainly do not have a way to trace all the origin of
the tin that is in the steel here to where in Africa the tin
was cut. Why do not you ask U.S. Steel on that?
And frankly that is Mr. Barr's approach. Mr. Barr's
approach says, let's use OFAC. And, you know, we use OFAC just
short of conflict, right? We go with a sanctions regime as a
tool short of going to war. Is that a more serious toolkit than
just regular laws that apply to small businesses?
Mr. Harrell. Sir, I very much understand and sympathize
with the challenges of supply chain sourcing that your business
faced in Ohio.
I guess I see things a little differently where you have an
American company, whether it is a big company or whether it is
a small company investing in China. Presumably that company
knows that it is investing in China and is making a decision to
invest and knows what sector in China it is investing in.
So I think that if you are a company that wants to make a--
an American who wants to make an investment in AI sector in
China, you probably do know what you are doing and could make a
decision on the sector about whether or not to invest there.
Mr. Davidson. I guess speaking of conflicts, maybe we could
just go, like, who else do you guys represent? Do you represent
big tech? You know, because it seems to me as a small business
guy, just like we did this business, you know, beneficial
ownership disclosure.
Originally, every business in America was going to have to
report all of this and essentially negotiated it down to where
the smallest of the small businesses, businesses under 20, now
have some reporting requirement because apparently that is how
all the bad stuff happens, not the big companies. It couldn't
be those guys.
So all the lobbying stopped because the small companies do
not have enough lobbying power to do it. So either of you guys
represent big tech companies?
Mr. Pottinger. I am a small business owner. I am not
representing any company's interest here today. I have no
financial interest in the outcome of any of the bills that you
are talking about. I am representing myself. I am representing
the think tank that I work for as well, Foundation for Defense
of Democracies, sir.
Mr. Davidson. All right.
Mr. Harrell. I just want to say the same. I am here
representing myself. I have no financial interest in the
outcome of this or in the sanctions approach.
Mr. Davidson. This is the challenge. The biggest of the big
companies get lobbied and represented. And you pass this off,
and Congress will hold up the shiny object and say we did
something. It does not solve the problem.
The sanctions regime works pretty well. I am highly biased.
And frankly it is the committee of jurisdiction. I am on both.
I think that's the right way to solve the problem. And I yield
back.
Chairman McCaul. The gentleman yields. I just want to say
first that the witnesses filled out a truth in testimony form
regarding any motivation to impugn your character before this
committee is not well served in my judgment. Perhaps for Mr.
Davison, since he missed your testimony, Mr. Pottinger, why do
not you describe the difference between a sector-based approach
and an entity-based approach.
Mr. Pottinger. Congressman, if you are looking at an
entity-based approach, that requires the U.S. Government,
probably the Department of Treasury, to look at each specific
company that it wants to prohibit Americans from investing in.
So they actually have that authority from the executive
orders that emerged from the late Trump Administration and the
early Biden Administration, but only 68 companies to my
knowledge were ever actually designated for prohibition on U.S.
investment into Chinese military-affiliated companies.
So a sector approach, the idea is that you do not have a
barn full of analysts, God bless them, over at Treasury. They
are often having to divide different problem sets as well.
I mean, I have been over there when I was in office. You
know, if North Korea is testing a nuke or a missile, that team
has to really shift to start targeting North Korean entities.
And by the way, you know, Iran is creating problems. Russia has
now launched the biggest war in Europe since World War II. That
Treasury team is getting spread very, very thin. I know how
hard they work.
If you have a sectoral approach that just says, look,
Americans, U.S. persons, are not allowed to invest in these
particular sectors that are relevant to China's military and
surveillance state as well as Russia's, North Korea's, and
Iran's, it makes it simpler, and it is less resource intensive
for the U.S. Government.
Chairman McCaul. So it in fact provides more clarity to the
private sector and businesses, correct?
Mr. Pottinger. I would argue it provides more clarity, yes.
Chairman McCaul. And an entity can be changed overnight in
China, correct?
Mr. Pottinger. Sure.
Chairman McCaul. And so a sector-based approach would get
around that?
Mr. Pottinger. One of the things I mentioned earlier is
that China has systematically shut down the research enterprise
in China so that it is harder for foreign companies to acquire
real-time information about ownership structures, supply chain
flows, and the like. Those companies are being systematically
rolled up and dismantled or co-opted to serve and align
themselves with the Chinese Communist parties.
Mr. Davidson. Will the gentleman yield for a question?
Chairman McCaul. I am not finished yet. We attempted to
sanction under Treasury, Hikvision, which is a State
surveillance company on the Uyghur Muslims, and guess what the
Treasury Department said? In a letter to me and the ranking
member, it cannot be done.
So I guess it depends on who is at the Treasury Department.
But, yes, I will yield.
Mr. Davidson. Is it the gentleman's contention then that
OFAC and the current sanctions regime is inadequate to the task
of preventing sanctions of Asia?
Chairman McCaul. I think the question is what is most
effective? And I think the sector-based approach is going to be
a more effective way to capture capital flow and investment
into these five sectors that we know are responsible for the
buildup of the PLA and their war machine.
An entity-based approach can be manipulated by the CCP as
the former deputy national security advisor to President Trump
has just told this committee and testified to.
I am not saying that sanctions aren't an effective tool. In
fact, Mr. Barr and I have had many discussions trying to come
to some sort of rational, you know, conclusion of this, but it
has to be in good faith.
And I think you can take the best of both perhaps and
that's precisely what we are working on.
Mr. Davidson. Hopefully, we will wind up with good
amendments. I yield back.
Chairman McCaul. All I really care about, sir, is we have
got to stop selling China the technology. We have got to stop
investing in their war machine, particularly at this dangerous
time that we find ourselves in as we look at Taiwan and the
Taiwan Straits. And you look at TSMC and semiconductors and the
whole thing. So I appreciate your spirited debate. The chair
now recognizes Mr. Mills.
Mr. Mills. Thank you, Mr. Chairman. I think we can all
realize the significant importance of strengthening not only
our supply chain and industrial capabilities but also limiting
our adversarial reliance upon China.
You know, for far too long we have listened to many people
on the other side of the aisle talk about the competition with
China as opposed to what they really are is an adversarial
nation.
We have seen where China continues with their Belt and Road
initiatives that has expanded out their Eurasian borders,
attempted to take Africa, Oceania, in an effort to essentially
cutoff Western Hemisphere supply chain and further impact
America economically while simultaneously utilizing propaganda
and misinformation warfare campaigns in developing nations to
try and create doubt in American currency value to try and
prevent that from being utilized as the U.S. global currency.
Now this is all in an effort, as we know, and the chairman
had pointed out with the Russia, China, Iran, and North Korea
geopolitical alignment, this is an effort to try and attack the
West in many different facets. But we have to understand that
we cannot help to continue to propagate that for them.
I think that's where I actually agree that the outbound
investment into China and critical sectors actually does
provide our competition and our adversaries with the invaluable
information, skills, and innovation that poses potential harm
to America's national security interests.
Dating back to the 1990's and potentially even earlier,
there are obvious instances in which U.S. investments on the
ground floor of Chinese tech startups have been instrumental in
developing China's current surveillance, defense, and other
technological capabilities that threaten the U.S. interests at
home and around the world and also advancing their alliances.
So my question is if a U.S. investor supports the
development or acquisition of a critical technology by a
Chinese company, can intellectual property protections or U.S.
export controls effectively stop that Chinese company from
transferring it to China's military surveillance state?
Mr. Pottinger. So the question, could we know in advance if
we are investing in a Chinese company whether we could prohibit
it from transferring its----
Mr. Mills. I know you said right now almost every company
is State controlled. And I do acknowledge that Chairman Xi's
role in The CCP is to take over everything. But I am just
curious, what would be an effective tool that we could utilize
that would help to prevent this and kind of get a bit of a
heads up on it?
Mr. Pottinger. Yes, you know, China uses these what they
call force technology transfer. In other words, it is sort of
the price of admission for a lot of companies to have access to
the Chinese market.
I think, I mean, on the top of my head you could require
that they would have to report to their shareholders, which I
think would be good practice anyway if they were planning on
transferring, you know, hard won, hard researched, and
developed technologies as a price of admission for getting into
that market. But it is----
Mr. Mills. And, Mr. Harrell, some argue that China has
sufficient resources, domestically and abroad, to invest in the
high tech companies. In addition to money, what value do U.S.
investors bring supporting China technologies and ambitions?
Mr. Harrell. I think that is a great question, Congressman.
Because when a U.S. venture capital company, whether it is like
a VC company or whether it is a venture arm of a big AI or
semiconductor company goes into China, it is not just putting
that cash in that Chinese company. It is providing expertise to
that Chinese company on how to go to market. It is probably
doing some door opening and introductions to potential
customers. It is providing expertise on how to run that company
effectively. There is really a lot that goes alongside that
investment that is value in addition to the cold hard cash
itself.
Mr. Mills. I think we can all agree that one of the things
that America needs to do is invest in building up our
industrial base, ensuring that we have more capacity here at
home, stopping our reliance upon China, looking at things like
eliminating the double taxation of Taiwan, which will allow the
nearly 92 percent of global semiconductor manufacturing to
actually be brought to the United States and other areas. But
critical sectors of technology, research and innovations
represent the next generation of information. And I think that
opens up Pandora's Box as we continue to support that.
I am not trying to be hyperbolic, but the potential
applications of AI, machine learning, quantum mechanics,
hypersonics, and others are difficult to underState.
The U.S. should absolutely seek to mitigate the threats
from our adversaries who are actively seeking to beat the U.S.
in these research races. And I think that is why it is so
critical for us to start focusing in on the quantum data
computing as well as for the quantum entanglement capabilities
for AI autonomous drone sets.
So for that, I yield back. Thank you so much.
Chairman McCaul. The gentleman yields. The chair recognizes
Mr. Self.
Mr. Self. Thank you, Mr. Chairman, and thank you for--I
think our ground has been well plowed so I want to go a little
bit further afield.
First of all, I appreciated Mr. Barr's comments about the
total integration of the Chinese private sector in military.
Money is fungible. I think we need to expand our view here.
Dual use capability in precursor chemicals, the supply chain
rare earths, I have not heard the rare earth minerals mentioned
here at all. And we could go on.
So this is not just technology. And I think we ought to
move beyond technology. I realize we may be addressing
technology here. But the broader picture to me is well beyond
technology.
So I want to go to the WTO and the PNTR. The WTO, the first
question for you gentlemen, is are they still meeting the
policies that China had to agree to in order to get most
favored nation? That's one question.
And then when we go to the U.S. PNTR, I understand the
concern with repealing that. The tariffs would be larger. But I
would like for you to comment on is this the standard CVO
static scoring, if you will, as opposed to the dynamic scoring
because U.S. manufacturing would pick up the slack?
So I would like for you to address both the WTO, are they
still meeting it and is there anything we can do about it if
they are not meeting those policies?
And second when we talk about our PNTR, would you address
my question on static versus dynamic scoring? Thank you.
Mr. Pottinger. Congressman, thanks for those remarks and
questions. With the WTO, I mean, I'm not a trade expert, but I
remember because I had been working as a journalist at the time
in China writing for the Wall Street Journal when China came
into the WTO.
China made all sorts of promises about market access and
the like in exchange for us bringing them into the WTO and
giving them market access. I am confident that if you were to
ask folks over at the U.S. Trade rep's office, they would tick
off a long list of promises that were not kept by Beijing. And
it is very hard to enforce because in cases that we brought in
the WTO Beijing has been able to run out the clock and sort of
game the system in those ways.
The WTO has worked, I think, a lot better for trade between
countries that enjoy the rule of law.
Mr. Self. Of course.
Mr. Pottinger. So it is not to knock what we created with
that system, but by bringing in a single party dictatorship
that was intent on not holding and keeping up its obligations.
When I was working at the White House, I kept a list that
my staff compiled for me of all of the agreements China had
signed with the United States that they had abrogated. It was a
long list. It was several pages. And trade was only the
beginning of it.
Mr. Harrell. OK. Let me just associate myself with Matt's
remarks on whether China has lived up to its WTO obligations,
sir. Of course not. I mean, it has been very, very clear for
many years now that they have not lived up to their obligations
under the WTO. As Matt says, that is only one of many sort of
agreements they have made that they have not lived up to.
On your question about tariffs, I do think tariffs can be a
valuable tool to help reduce our dependencies on China. As you
note, we are dependent on China for certain things like
critical minerals that are not sort of high technology kind of
things but instead go into lots of products, including high
technology products.
And I do think it would be valuable for the Administration
to really take a hard look at the important tariffs that the
previous Administration started, but to look at kind of what
isn't working and where are we still dependent, and maybe
critical minerals is a good example. We actually do not tariff
our imports of critical minerals from China.
And I understand why we do not want to hike prices on
critical minerals. On the other hand, if we are letting them
come in tariff free, it is really hard to build a vibrant U.S.
ecosystem for critical minerals. So I think we do need to look
at tariffs through that supply chain lens on how can we wean
ourselves off of Chinese supply chains.
Mr. Self. Well, rare earths, critical minerals, as you call
them, we do not mine because of our own environmental laws, not
because of tariffs on China. With that, I yield back. Thank
you.
Chairman McCaul. The gentleman yields. The chair recognizes
Mr. Stanton.
Mr. Stanton. Thank you very much, Mr. Chairman. I want to
thank you and Ranking Member Meeks for holding this important
hearing today and for your leadership on H.R. 6349. It is much
appreciated and much needed.
The United States and U.S. companies are strong in large
part because of our commitment to open capital markets, and a
belief that free flowing capital and knowledge will lead to
innovation. But spending that capital on critical technology
innovation in China can lead to serious problems, specifically
as it relates to national security.
For example, prior to President Biden's August 9 executive
order, U.S. entities were able to invest in China's
Semiconductor Manufacturing International Corporation, also
known as SMIC.
The first question is for Mr. Harrell. Could you tell us
why SMIC's technology might worry the United States of America?
Mr. Harrell. So SMIC is one of China's major semiconductor
development firms. And one thing we have seen over the last
year and a half, particularly as the U.S. has put pressure on
China to deny them access to tooling, is we have seen SMIC and
other Chinese companies double down on trying to develop things
indigenously in China to overcome the restrictions we have put
on their semiconductor sector.
And I think the fact we are seeing China double down makes
it all the more important to make sure the wall that we have in
those key high end semiconductors is even higher, which is why
I think it's so important to focus on investment in that sector
as well as export controls.
Mr. Stanton. The same question--or another question for
you, Mr. Harrell. When American companies or venture capital
firms invest in a business, including in China, they also
provide know-how, technical transfers, and legitimacy to those
businesses. Can you tell me why sharing this with China's
critical technology sector will hurt U.S. interests?
Mr. Harrell. We clearly want to keep our edge here in the
U.S. in these critical technologies, AI, semiconductors,
quantum, things like that.
And as you say, Congressman when an American venture
capitalist goes over to China to invest over there, it's not
just the money that he or she takes with them. It is opening
doors to customers. It is putting board members who help manage
the company on the board. It is providing them kind of
expertise on how to grow and how to expand.
And those are all really important aspects to that company
and whether that company is going to be able to actually
succeed in developing that technology over in China, which we
do not want them to do.
Mr. Stanton. This is a question for both Mr. Pottinger and
Mr. Harrell. What if we do not do it? What are the
ramifications of not using an outbound investment regime to
address concerns about the PRC's critical technology sector?
Please touch upon both human rights concerns and the impact on
U.S. global leadership.
Mr. Pottinger. Peter mentioned earlier the example of Sense
Time, which had come on my radar when I was in office. On the
human rights front, these are cutting edge technologies that
are applied specifically for the purpose of monitoring the
thoughts, the actions, the communications.
I mean, this is George Orwell's thought police in action,
building systems for identifying people based on their ethnic
or racial background from a distance so that they can then be
put under surveillance or segregated or even sent to a re-
education camp.
So on the military side we're seeing--you know, you take a
company like DJI, for example, right? This is the Chinese heavy
weight drone manufacturer that has got something like 70
percent of the consumer drone market. Well, they are supplying
drones that are being used for military use on both sides of
the conflict in Europe. And that was a company that was--it got
its lead early investment from Americans.
Mr. Stanton. That is great. Mr. Harrell, anything to add to
that?
Mr. Harrell. No, I think Matt put it very well.
Mr. Stanton. I will be very brief. My last question, we are
investing historic amounts in U.S. critical technology through
the CHIPS and Science Act. It is so important for the United
States to be a leader in a semiconductor production and not to
undercut our investment by also giving a leg up to China in
this crucial sector.
The U.S. Chamber of Commerce supports the Biden
Administration's efforts to develop a thoughtful regime that
safeguards American national security and economic leadership
without unnecessarily restricting beneficial U.S. business
activity.
Mr. Harrell, can you describe how the Biden
Administration's tiered approach in the August 9 executive
order tries to balance national security and be beneficial to
business activity?
Mr. Harrell. I think the Biden Administration, and I think
legislation this committee is looking at, really provides an
important highly tailored approach, right? We are not talking
about all sectors. We are not talking about all or even most
investment. We are talking about a set of investment in sectors
that we know are critical to our technological and national
security edge.
The Biden Administration, I think the legislation would
accomplish the same goal, also plans to provide clear guidance
on what are the investments that are prohibited to make it
reasonably straightforward for companies to know what they and
cannot do so they aren't just going to have to hire, you know,
armies of lawyers to advise them on it.
So I think we do want, and I think we are expecting, very
clear guidance on definitions and what kinds of investments are
off limits
Mr. Stanton. Thank you so much. I yield back.
Chairman McCaul. The gentleman yields. The chair recognizes
Mr. Hill.
Mr. Hill. I thank the chairman. Thank you, gentlemen, for
sharing your views with us today. And I think it is important
to note that all members on both sides of aisle and in all the
committees and certainly our China task force want to get to
the sweet spot on this topic for an effective regime that has a
reasonable cost-benefit metrics in order to screen and block
where appropriate outbound investments to China. I just think
that's where we are.
We are going a bit around and around on how this would sit
in the menu of what we have today from all the lists that we
have, export controls, tariffs in some instances. And so I want
to thank you for trying to add clarity to it.
Mr. Harrell, you, in your testimony, you praise President
Biden's investment prohibitions on publicly traded securities
issued by Chinese military industrial complex companies, the
CMIC designation. However, since being put on that list,
Hikvision's revenues are up by 30 percent. SINOCAM's revenues
are up 60 percent. China Mobile's stock price is up 67 percent,
Huawei and SMIC went on to develop an advanced 5G chip.
So that does not seem like this system is working. How do
you expect, you know, an additional layer on that to be more
successful?
Mr. Harrell. So I think--Congressman, thank you for the
question. I think it is important to think through different
kinds of goals we have with respect to limiting investment in
China. So I think the goal of the Biden Administration's
executive order from last year is really to go after investment
in these kind of early stage companies that are developing
technologies.
I think that the CMIC list, which President Trump stood up
in late 2020 and which President Biden has continued, is really
to take an approach of where we know there is a Chinese company
that is linked to the military, we are going to say Americans
cannot invest in that.
Now maybe those companies can raise money domestically or
that sort of thing, but we think it's important that Americans
aren't raising money in those big Chinese companies that are
linked to the military.
It is not to say that limiting investment is the only tool
we should take. I think where you have a Chinese company that
is linked to the military, it is engaged in some activity, like
SMIC and semiconductors, you also have to have an export
controls approach, right? Make sure they cannot get the
capital. They also cannot get the technology.
And if we find that that isn't working, maybe at that point
we need to look at additional measures. But I think that the--I
will leave it at that.
Mr. Hill. Let me followup on that and say so that is U.S.
only. But if we want to maximize the impact to remove the
fungibility aspect of this and everybody trying to make a
living, wouldn't having whatever decision we take here being
put on the OFAC list and governed by the Treasury gives us some
G7 clout on enforcing like a sanctions regime.
So if you wanted to have maximum pressure campaign here, to
use a phrase, you might have--they would be on the list. They
would have export controls over the certain technologies. They
would have a prohibition on investment, and they would be
sanctioned so that our G7 colleagues would actually put them on
the list and not actually go or--pick a country. Wouldn't that
be the strongest possible menu?
Mr. Harrell. So I certainly agree we want a multilateral
approach to investment restriction.
Mr. Hill. So if we just do something here, do we get a
multilateral approach?
Mr. Harrell. I think it is important for America to lead on
this. And I think having an approach that limits investment and
then making sure the rest of the G7 comes along, building that
diplomatic coalition is important.
Mr. Hill. Thank you. Let me slip in one question for my
good friend, Mr. Pottinger, and thank you for your fantastic
work in the National Security Council.
The sector approach, I got it. I think every bill we are
talking about has identified the sectors now, but some of them
having really broad listings. You are proposing, or I heard
maybe Mr. Harrell say, might leave that to regulatory
definitions. But AI for example, I cannot think of anything
more broad. It is integrated in every single thing every single
person does. Won't that require an army of lawyers to figure
out? What is your thought there, Matt?
Mr. Pottinger. Yes. Congressman, it is good to see you.
Look, no question, I mean, AI is tricky. What Peter was laying
out earlier was sort of a nexus for looking at where there is a
reasonable use case for military and intelligence uses, so the
application on the one hand. And the other is the power of the
actual model that is making possible all those applications and
looking at that.
I think that it is not clear-cut, I would agree. AI, it is
a big deal. But I would say this though. AI is already being
weaponized against us----
Mr. Hill. Oh, yes.
Mr. Pottinger [continuing]. By a company that Americans
invested in, ByteDance. It is a TikTok platform.
Mr. Hill. I will yield back, Mr. Chairman. That is an
example of where naming that company is better than saying we
want to cutoff investment to AI. I will yield back to the
chair.
Chairman McCaul. Well, I appreciate the gentleman's
diplomacy. I think there is a sweet spot here as you said.
Hopefully, we will get some of this resolved tomorrow. The
chair now recognizes Mr. McCormick.
Mr. McCormick. Thank you, Mr. Chair. U.S. investors in 58
investment deals related to China's semiconductor industry over
the last 3 years represented 17 percent roughly of all
investments into the Chinese artificial intelligence industry.
I am a big pre-market guy. And I know we have some bills on
the table to talk about investing with the conversations going
on today. But, Mr. Pottinger, specifically, given your
experience in the Trump Administration, how would you compare
the Biden Administration versus the Trump Administration's
limitations and direction as far as what can we do to keep us
from investing?
I know we talked about this kind of ad nauseam today. But
specifically, how would you compare the Administrations and the
way they are facing down this specific problem? And obviously
we in Congress have some ability to affect this, and we want
to. But if you could compare side-by-side the most recent
Administrations, what is the difference?
Mr. Pottinger. Yes. I think it might actually be a good
test case for how you eventually find that sweet spot because
there were some things that the Biden Administration did that I
wish that we had done in the Trump Administration. And then
there were a couple places where the Trump Administration was
stronger on this specific area.
For example, when President Trump signed those two
executive orders prohibiting U.S. investment into Chinese
companies, he included subsidiaries of those companies. So even
those there was 40 some odd companies that the Department of
Defense put on the list, that immediately accordioned out to
about 1,100 companies.
The Biden Administration, I was disappointed that they got
rid of the subsidiary requirement. But on the other hand, they
expanded the authority to cover not only Chinese military
affiliated companies, but also Chinese companies that are
involved in egregious human rights violations, the surveillance
state stuff that we have been talking about. That was a good
move.
So I think if you put these things together, you end up
with a stronger whole.
Mr. McCormick. OK. Great. And so that does not necessary
increase--our proposed bills do not necessarily increase
executive permission. It is basically an overall blanket to
help us direct money away from these Chinese----
Mr. Pottinger. I think one of the things it does, I mean,
if you have got a law to support, in essence, the Trump and
Biden executive orders, you give them--you give it much more
credibility. You give spine to executive branch officials who
might be afraid that they are going to get sued by the
companies that end up in the cross hairs.
But if you have got a law behind that, a court in the
United States is going to give that a lot more weight than a
mere pen stroke from a President.
Mr. McCormick. Excellent. Mr. Matheny, do you believe that
had the United States banned outbound investments to Chinese
about 15 years ago or so would have made a different in the
ultimate outcome of the advancement of AI and other
technologies that are possibly harmful in the competition and
strategic outcome with what we have done?
Mr. Harrell. It is obviously hard to know the
counterfactual history. But I think there are many cases over
the last 15 years where we have seen a U.S. investor come in to
a Chinese high tech company. We talked earlier about Sense
Time. Matt talked about ByteDance, the owner of TikTok where
that early U.S. investment was absolutely essential to that
Chinese company being able to thrive and grow both domestically
and in China and then ultimately around the world.
And so I do think just looking at the history of these
kinds of cases that had we had a tailored investment
restriction regime 10, 15 years ago, we probably would see a
less well-developed Chinese high tech industry in some of these
key technologies. And that would be very much in our interest.
Mr. McCormick. I think in some ways it is kind of a
rhetorical question. It takes investment to make R&D, and it
takes investment to make a company grow. That is exactly what
happened. We were a big part of that, almost 20 percent.
Mr. Pottinger, do you think any of our partner nations and
allies have adopted restrictions to their citizens investing in
Chinese defense sectors?
Mr. Pottinger. Not that I am aware of. I think that there
is sort window guidance in some countries where, you know, we
have seen investment drop off from Japan, for example, into
certain Chinese sectors. But, again, I think this is one of
these areas where we lead and eventually others follow.
The United States, President Trump was the first official
anywhere to put human rights sanctions on Chinese officials who
were involved in the Uyghur genocide. It wasn't Europeans. It
wasn't anyone anywhere else. But eventually Parliaments in
Europe began to follow suit. Canada and others followed the
lead of the United States.
Mr. McCormick. And I know I am out of time. But just a yes
or no question. Does the PRC limit their citizens and private
industry from investing in our industries?
Mr. Pottinger. They heavily regulate depending on where
they want to see strategic gains. So there is a constant give
and take in terms of the instructions that industry receives in
China for coming into the U.S.
Mr. McCormick. So with that comment, just that it is an
unfair system. I yield. Thank you, Mr. Chair.
Chairman McCaul. That is an excellent point. Thank you for
bringing that up. The chair now recognizes Mr. Moran.
Mr. Moran. Thank you, Mr. Chairman, and thank you to the
witnesses today. A very important topic we are talking about
today.
I first want to, though, thank the chair and Representative
Barr for working to reconcile these two approaches that have
been talked about so much, the entity-based approach, the
sector-based approach are really reflected in the different
bills that are going through this committee and the Financial
Services Committee.
I agree with the chairman that there is going to be a way,
and we must find a way, to reconcile these because both have
some issues that we need to deal with. Both do not actually get
us completely to the end that we are all after, and that is
frankly to quit assisting and helping China build its
technology to the point where it is harmful to the United
States national security interest and our economic interest.
That is certainly not the end that any of us want.
So I applaud both the chair and Representative Barr for
their work on this matter. And I just wanted to say I am
encouraged by the discussion today because it tells me we are
going to get somewhere eventually.
Now other countries have developed and implemented formal
outbound investment restrictions, South Korea, Taiwan, and even
China themselves have done that. I would like to direct my
first question to Mr. Harrell.
What has been the economic outcome for countries like South
Korea and Taiwan by imposing outbound investment restrictions?
Mr. Harrell. Thank you very much for the question. I know
that when the Biden Administration was looking at this issue,
they looked at both South Korea and Taiwan which have, frankly,
fairly narrow, but I think nonetheless important, limits on
semiconductor investment by their companies in China.
Obviously, both Korea and Taiwan have very advanced
semiconductor companies. And a number of years ago, those
countries restricted or imposed a regime to make sure that
their companies weren't putting the most advanced technologies
in China.
Now that was a really pretty narrow only going after really
the very, very bleeding edge of the technology. I think we need
something broader than that. What the Biden Administration
would do is broader than that.
But the reality, looking at those cases, is the costs were
quite limited. I mean, South Korea and Taiwan have the world's
most successful, or are among the world's most successful,
semiconductor companies. We obviously have some here too.
And so I think what that experience shows is that you very
much can impose a tailored and scoped restriction on investment
in China and have very much a global leading company here at
home.
Mr. Moran. Thank you, Mr. Pottinger. Do you have anything
to add to that?
Mr. Pottinger. I think that covered it pretty well.
Mr. Moran. Good. I also want to ask you guys about the fact
that China openly seems to want to overthrow the U.S. dollar as
a global currency. They have partnered with countries to create
BRICS. We have seen the BRICS conference. There is an argument
that something such as BRICs would offset U.S. financial
leadership and that a concept like outbound investment will
expedite that shift.
On the contrary though, if the U.S. develops an outbound
regime we would, in my opinion, be able to garner support from
allies like Japan and the UK to develop their own.
Mr. Pottinger, I will start with you this time. How
impactful would that be for the U.S. national security for us
to do that?
Mr. Pottinger. Well, I do think that there is an argument
that can be made. And I have heard it made by Treasury
officials that if we overuse our SDN sanctions authority, it
creates an incentive for other governments, particularly
adversarial governments, to try to find work-arounds to the
U.S. dollar. So that might be a consideration as well in this
debate.
But if I understood correctly, your broader point is what
is China doing to try to undermine?
Mr. Moran. That is correct.
Mr. Pottinger. Yes, they are, on the one hand, asking their
trade partners increasingly to settle trade in Chinese
currency. They have launched a Central Bank digital currency,
which I certainly wouldn't want my savings denominated in
Chinese digital currency, which could just evaporate from your
account at any moment. But that is another tool they are using.
Perhaps the most important one is they are trying to build
new plumbing for settling transactions worldwide, sort of like
our Swift banking system. They are trying to come up with
successor systems to that that bypass U.S. dollar and
Treasury----
Mr. Moran. Before my time is up, I want to ask you about
one more thing that Mr. Barr had mentioned because one of the
holes that we are trying to fix here is that if we go at this
alone, we still have the problem that many of our allies around
the world can still invest in China, and they will not feel
hardly the impact of what we need them to feel to be able to
change their behavior.
So what are we doing to work with other nations to ensure
that whatever we do here, they are joining us in that effort
against China?
Mr. Pottinger. I think in part it is pointing to the
example of what happened with Ukraine where companies still
wanted to get in there and open shops or buy oil or what have
you from Russia. And people convinced themselves that commerce
would mitigate against something as crazy as invading your
neighbor and getting hundreds of thousands of people killed.
But that is exactly what Vladimir Putin did.
I think it is simply leading our allies to see the long-
term benefits of tackling this problem. I think many of them
will.
Mr. Moran. Thank you to both of you guys. Mr. Chairman, I
yield back.
Chairman McCaul. The gentleman yields. We have two more
members if the two witnesses have the time. Mr. Huizenga.
Mr. Huizenga. Thank you, Mr. Chairman. And let me first
start by saying I know this is an issue that is near and dear
to you. It is certainly an issue that is near and dear to me
and Mr. Barr and others. We have got a number of folks on the
Foreign Affairs Committee who also serve on the Financial
Services Committee, which has been sort of the epicenter of a
lot of the sanctions regimes that have gone on.
And, you know, my own experience goes back to my third term
where I was named chair of the Monetary Policy and Trade
Subcommittee and was brought in for a SCIF review regarding a
CFIUS review of A123 Battery, a company that was sold to a
Chinese company. Michigan has been sort of the epicenter of a
lot of the debate surrounding batteries and Gotion, for
example. But really a lot of it is centered around automotive.
And so we have been dealing with this collectively for
many, many years because this is a real issue. It is a problem.
And COVID, I think, just underscored this in ways that nobody
really expected, everything from paper masks to ventilators,
and, you know, having the Defense Production Act, the DPA being
invoked to bring about medical equipment, not to mention
pharmaceuticals, not to mention, you know, the myriad of food
items and all the things that we have become, in my opinion,
overly dependent on China.
So Congress has maybe been collectively maybe--well, maybe
I will put it this way. Because I think the conversation has
been happening within Congress, but maybe society as a whole
has kind of come late to the game a bit with the dangers and
the overdependence on China.
And so we have--my whole point in this is we have many
common goals, which is to limit the economic and military
influence that China has certainly over the United States and,
I would argue, in the Indo-Pacific region.
So what we are having the discussion about is the methods.
All right? And what I personally am looking for is making sure
that we have an effective and real way of curbing and bending
that influence that China has had.
We have done a lot of work on that with the Financial
Services Committee over the years, the work that has been here
on the Foreign Affairs Committee is important, the China Select
Committee. I have been working with Mr. Barr for a long time on
these issues. And in my mind, Treasury is still sort of that
main thrust of where the most effective sanctions can be.
But as we know with a lot of other things here in
Washington, DC, whether it is the border, whether--you pick the
issue, if you are not willing to enforce the rules and the laws
that are already on the books in the systems that are in place,
just adding a new system isn't necessarily the solution on
that. And I just want to be very careful that we are doing
that.
So I do have some concerns about the authority being turned
over to an agency that may not have the experience in that. I
have little confidence in the Commerce Committee for example
or, you know, some other committee, State Department, I mean,
that sort of to me does not make a whole lot of sense. The
State Department, that is not their bailiwick.
So I have a quick question for both of you. If you can let
me know, are you aware of any U.S. companies that have invested
in Chinese companies that have gone into partnership with the
PLA? Go ahead.
Mr. Pottinger. Sure. One that I was looking at as I was
crafting the testimony was a company called 4Paradigm.
4Paradigm is, you know, an AI firm in China that has reportedly
sold software to China's military for what they called, quote,
battalion command decisionmaking and human machine learning.
That company was seeded by Goldman Sachs, Sequoia Capital, and
probably some others as well.
Another would be Biren Technology, B-I-R-E-N. That is an
advanced semiconductor designer that wants to compete with
Nvidia in China. In fact it is already on the Commerce
Department's entity list for potential ties to, quote, weapons
of mass destruction, advanced weapon systems, and high tech
surveillance. And that one was invested by a couple of American
venture capital firms.
Mr. Huizenga. OK. I know my time has expired. I do not
know, Mr. Harrell, if the chairman will indulge. Otherwise, we
can do this in writing. So I appreciate that. Mr. Chairman, I
yield back. Thank you.
Chairman McCaul. Thank you. The Chair now recognizes Mr.
Lawler.
Mr. Lawler. Thank you, Mr. Chairman. Last year Chairman
McCaul and I sent a letter to BIS Secretary Estevez with
questions about how commerce is implementing U.S. export
control laws in response to China exporting goods to designated
State sponsors of terrorism, Cuba, North Korea, Iran, and
Syria.
The indirect resourcing of State sponsors of terrorism from
U.S. entities is a serious concern and should be met with
strict reform. It took the Biden Administration 6 months to
respond to our inquiry, and they seemed to share our commitment
for preventing U.S. tech from being illicitly acquired by our
adversaries. But actions certainly speak louder than words. So
we will see what they do on that front.
Just as concerning though as using U.S. tech for nefarious
purposes is U.S. investment in nefarious technology. Not only
should we not be providing resources to terror, but we should
not be providing their funding. It is past time to establish
outbound investment restrictions to ensure U.S. dollars are not
funding the development of tech that will be used counter to
our national security interests.
Is it possible to utilize or expand existing export
controls to restrict U.S. capital investment into China?
Mr. Harrell. So my understanding, and I know there has been
a bit of debate on this, but my understanding is that even with
the important reforms to U.S. export controls that Congress
enacted in 2018, the Export Control Reform Act, it remains
really technology focused and is just not well suited through
ECRA and through the export controls to go after dollars where
there is not a technology flow alongside that.
Mr. Lawler. So are you of the mindset that we need to
develop a different vehicle or regime by which to do this?
Mr. Harrell. I am. I think it is very important to develop
what I would view as different but also complementary. I mean,
it should be done in parallel, a complementary regime to go
after the dollars so that Congressman, as you say, not only are
we not giving the Chinese technology, we are not investing in
their ability to develop the technology.
Mr. Lawler. Are you aware currently of any instances in
which U.S. Government tools, such as export controls, were
unable or insufficient to mitigate the risk presented by U.S.
investments into China and any specific examples?
Mr. Pottinger. Well, earlier, Peter was talking about the
example of Huawei where President Trump took action to prevent
Huawei from being able to acquire high end semiconductors that
had been made with American technology.
That approach bought time. It slowed down Huawei, but
ultimately they were able to fashion a work-around using new
companies that they had established, bringing in equipment that
hadn't really been geared for sale to Huawei but ended up in
service of Huawei's goals.
So I think with investment, it is sort of a similar
principle at work except it is the capital flows as opposed to
the technology. By limiting the capital flow, you are able to
go after early stage things that you wouldn't see in time to
apply necessarily an export control restriction.
Mr. Lawler. This past May, leaders of the G7 countries
issued a joint statement recognizing that outbound investment
could be important in complementing existing export controls
and inbound investment controls as well.
When President Biden issued Executive Order 14105, which
focused on outbound investment in August, to your knowledge did
he consult further with our G7 partners?
Mr. Harrell. My understanding is the Administration has
been in a very active discussion with G7 partners, that
American diplomacy was instrumental in getting that statement
that you alluded to in May.
I think ultimately the way the U.S. is going to get our
partners to come along is the way we always have, which is a
combination of us acting and us engaging in diplomacy.
I think it is going to take the European Union and some of
these others a bit of time. But I am optimistic that with us
acting and strong diplomacy by the executive branch, but also
by Congress, we will pull them along with us.
Mr. Lawler. Are you aware of any similar executive actions
being taken by any of our allies and partners?
Mr. Harrell. So the European Union has begun a regulatory
process to look at this. Obviously, we are going to have to
keep up the pressure on them to get it over the finish line,
but they have begun a regulatory process on this.
Mr. Lawler. Great. Thank you. I yield back.
Chairman McCaul. The gentleman yields. I want to thank the
witnesses for their valuable testimony. Additional questions
may be submitted by members of the committee that we will ask
you to respond to in writing.
Pursuant to committee rules, all members may have 5 days to
submit statements and questions for the record. Without
objection, the committee stands adjourned.
[Whereupon, at 12:42 p.m., the committee was adjourned.]
APPENDIX
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STATEMENT FOR THE RECORD FROM REPRESENTATIVE CONNOLLY
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WITNESS TESTIMONY SUBMITED FOR THE RECORD FROM MR. MATHENY
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RESPONSES TO QUESTIONS SUBMITTED FOR THE RECORD
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