[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
BETTER INVESTMENT BARRIERS: STRENGTHENING
CCP SANCTIONS AND EXPLORING
ALTERNATIVES TO BUREAUCRATIC REGIMES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON NATIONAL SECURITY,
ILLICIT FINANCE AND,
INTERNATIONAL FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 30, 2024
__________
Serial No. 118-71
Printed for the use of the Committee on Financial Services
[GRAPHICI NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
56-257 PDF WASHINGTON : 2025
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRENCH HILL, Arkansas, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
TOM EMMER, Minnesota EMANUEL CLEAVER, Missouri
BARRY LOUDERMILK, Georgia JAMES A. HIMES, Connecticut
ALEXANDER X. MOONEY, West Virginia BILL FOSTER, Illinois
WARREN DAVIDSON, Ohio JOYCE BEATTY, Ohio
JOHN W. ROSE, Tennessee JUAN VARGAS, California
BRYAN STEIL, Wisconsin JOSH GOTTHEIMER, New Jersey
WILLIAM R. TIMMONS, IV, South VICENTE GONZALEZ, Texas
Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DANIEL MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW R. GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MICHAEL LAWLER, New York
ZACHARY NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDREW OGLES, Tennessee
Matthew Hoffmann, Staff Director
------
SUBCOMMITTEE ON NATIONAL SECURITY, ILLICIT FINANCE, AND INTERNATIONAL
FINANCIAL INSTITUTIONS
BLAINE LUETKEMEYER, Missouri, Chairman
YOUNG KIM, California, Vice JOYCE BEATTY, Ohio, Ranking Member
Chairwoman BRITTANY PETTERSEN, Colorado, Vice
ANDY BARR, Kentucky Ranking Member
ROGER WILLIAMS, Texas VICENTE GONZALEZ, Texas
BARRY LOUDERMILK, Georgia WILEY NICKEL, North Carolina
DANIEL MEUSER, Pennsylvania BILL FOSTER, Illinois
ZACHARY NUNN, Iowa JUAN VARGAS, California
MONICA DE LA CRUZ, Texas JOSH GOTTHEIMER, New Jersey
ANDREW OGLES, Tennessee
C O N T E N T S
----------
Tuesday, January 30, 2024
OPENING STATEMENTS
Page
Hon. Blaine Luetkemeyer, Chairman of the Subcommittee on National
Security, Illicit Finance, and International Financial
Institutions, a U.S. Representative from Missouri.............. 1
Hon. Joyce Beatty, Ranking Member of the Subcommittee on National
Security, Illicit Finance, and International Financial
Institutions, a U.S. Representative from Ohio.................. 3
STATEMENTS
Hon. Patrick T. McHenry, Chairman of the Financial Services
Committee, a U.S. Representative from North Carolina........... 4
Hon. Maxine Waters, Ranking Member of the Financial Services
Committee, a U.S. Representative from California............... 31
WITNESSES
Hon. Richard Ashooh, Vice President of Global Trade and
Government Affairs, Lam Research Corporation................... 5
Prepared Statement........................................... 7
Hon. Thomas Feddo, Founder/Principal, The Rubicon Advisors LLC... 10
Prepared Statement........................................... 12
Ms. Emily Kilcrease, Senior Fellow and Director of the Energy,
Economics, and Security Program, Center for a New American
Security....................................................... 17
Prepared Statement........................................... 19
APPENDIX
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Hon. Maxine Waters:
Americans for financial Reform (AFR)......................... 60
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses for the record from Representative Maxine
Waters
Ms. Emily Kilcrease.......................................... 62
BETTER INVESTMENT BARRIERS:
STRENGTHENING CCP SANCTIONS AND
EXPLORING ALTERNATIVES TO BUREAUCRATIC REGIMES
----------
Tuesday, January 30, 2024
U.S. House of Representatives,
Subcommittee on National Security,
Illicit Finance, and International
Financial Institutions,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [Chairman of the Subcommittee] presiding.
Present: Representatives Luetkemeyer, McHenry, Barr,
Williams of Texas, Loudermilk, Meuser, Kim, Nunn, De La Cruz,
Beatty, Waters, Gonzalez, Nickel, Pettersen, Foster, Vargas,
and Gottheimer.
Also present: Representatives Himes, Sherman, and Meeks.
Chairman Luetkemeyer. Good morning, everyone. The
Subcommittee on National Security, Illicit Finance, and
International Financial Institutions will come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
This hearing is entitled, ``Better Investment Barriers:
Strengthening CCP Sanctions and Exploring Alternatives to
Bureaucratic Regimes.''
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the Chair for
inclusion in the record.
With that, I recognize myself for 4 minutes to give an
opening statement.
OPENING STATEMENT OF HON. BLAINE LUETKEMEYER, CHAIRMAN OF THE
SUBCOMMITTEE ON NATIONAL SECURITY, ILLICIT FINANCE, AND
INTERNATIONAL FINANCIAL INSTITUTIONS, A U.S. REPRESENTATIVE
FROM MISSOURI
First, I want to thank our impressive set of witnesses for
being here today. You each possess tremendous expertise on
global economic security measures like sanctions, export
controls, and the Committee on Foreign Investment in the United
States (CFIUS). We look forward to your insights. The national
Security Subcommittee has made exposing the threat posed by the
Chinese Communist Party to the United States our top priority.
Chairman McHenry shares this goal. The very first hearing this
committee held in the 118th Congress was a full committee
hearing tackling the economic competition with China, and our
first subcommittee hearing looked at the Chinese Communist
Party's (CCP's) business model that fuels the fentanyl crisis.
I also serve on the Select Committee on the Chinese Communist
Party, where these concerns are the focus of our work.
Two thousand twenty three was a pivotal year in United
States-Chinese economic relations, and one U.S. businesses and
investors should reflect upon carefully if they continue to do
business with the CCP. We saw Chinese security forces raid and
imprison local staff at U.S. consulting firms Capvision, Bain &
Company, and Mintz. They imposed sanctions on U.S. companies,
Lockheed Martin and Raytheon, banned U.S. chipmaker, Micron,
detained a senior executive of Japan's Astellas Pharma group,
and hit London-headquartered Deloitte with a record fine.
This behavior has not let up this year. Earlier this month,
the CCP announced sanctions on five U.S.-based companies,
causing them to lose any property they have in China and
prohibiting them from working with Chinese organizations and
individuals. These new sanctions came as a result of U.S. arms
sales in Taiwan. Top intelligence officials predict that China
will invade Taiwan this decade, in which case, more sanctions
will come, and you can bet all U.S. direct investment in China
would be nationalized. However, foreign companies continue to
make substantial investments into China, and U.S. business
executives continue to line up at the trough. Some even pay
$2,000 a plate for the privilege of having dinner with Xi
Jinping in San Francisco. We must make sure that those
investments do not harm the security of the United States and
our allies.
While this should serve as a major warning to U.S.
investors who have not yet gotten the message about the risks
of doing business with Chinese organizations, it should also be
a reminder to Congress that we need to get this right. We have
been debating outbound investment screening for multiple
Congresses and multiple White House Administrations. Last
August the Biden Administration released an executive order
that took a targeted approach toward restricting outbound
investment. Chairman McHenry and I agreed this took a step in
the right direction but could be improved through legislative
action, which is more permanent.
Others in Congress are working on this issue. Last year,
the Senate attempted to attach a provision to the National
Defense Authorization Act (NDAA), and the House Foreign Affairs
Committee introduced its own bill. I applaud the efforts of my
colleagues for continuing to think about how to address these
challenges. We all share the same concerns around American
investors feeding the beast that is the People's Republic of
China. However, the best approach that I have seen on this
front is the bill sponsored by my good friend, Mr. Andy Barr,
the Chairman of the Subcommittee on Financial Institutions and
Monetary Policy, as well as a member of this subcommittee. His
Chinese Military and Surveillance Company Sanctions Act passed
through our committee with full bipartisan support, and I was
proud to be an original cosponsor. He also sits on the China
Select Committee as a representative, like myself, from this
committee. His legislation would require the President to
impose sanctions on companies involved with China's defense or
surveillance technology sectors. In my opinion and the opinion
of many on this committee, it is the bill that takes the
toughest approach toward combatting the economic threat of the
CCP.
At the same time, we cannot undermine the importance of a
free market economy. When we discuss this topic, it is critical
to find the right balance between protecting Americans and our
allies from the threats posed by the Chinese Communist Party
and other adversaries, like Russia, while also promoting a
global market that allows our economy to thrive, without
creating a sprawling new bureaucracy. I hope today's hearing
will advance our productive conversations and help shape good
policy for the American people. Again, I look forward to
hearing from our witnesses and yield the balance of my time.
With that, the gentlelady from Ohio, the Ranking Member,
has joined us, and we recognize her for 4 minutes for an
opening statement.
OPENING STATEMENT OF HON. JOYCE BEATTY, RANKING MEMBER OF THE
SUBCOMMITTEE ON NATIONAL SECURITY, ILLICIT FINANCE, AND
INTERNATIONAL FINANCIAL INSTITUTIONS, A U.S. REPRESENTATIVE
FROM OHIO
Mrs. Beatty. Good morning, and thank you, Mr. Chairman, for
holding this hearing, and certainly thank you to all of our
witnesses for appearing here today to discuss the need for
outbound investment screening.
Since the enactment of the Foreign Investment Risk Review
Modernization Act of 2018, the latest law and review which
potentially prohibits foreign investments into the United
States that may pose a national threat, Congress has taken a
closer look at the reverse, meaning United States financial
investments in foreign countries and companies of concern. This
includes, for example, funds from the United States into the
People's Republic of China.
Several policy options have been proposed to screen
outbound investments, including sector-based and entity based
approaches. The Biden Administration took the first significant
step in issuing, as many of you may remember, Executive Order
14105 last August, which directed the Treasury Department to
establish a program to screen certain United States investments
in China that involve sensitive technologies and products that
pose an acute national security risk, specifically technology
sectors relevant to military intelligence, surveillance, or
cyber-related capabilities. I applaud President Biden's
actions, and now my colleagues and I, right here in Congress
and, more specifically, in this committee, must act to codify
and strengthen this effort to address tangible national
security threats to our Nation.
As we consider how to merge all of these proposals; there
are several additional areas of concern that I think I would be
remiss to exclude. The first is incorporating consideration of
supply chain resiliency, workers' interests, and climate risks,
all of which have had a significant impact on our Nation's
economy and security. The second would be to review and
potentially unwind existing investments in China's sectors of
concern, augmenting the review of future investments in those
same sectors. Finally, we need transparency into hidden funds,
like passive forms of investing, such as mutual funds, index
investing, that are not currently covered by many proposals. We
may also be able to get it by leveraging work already done by
the Securities and Exchange Commission and other agencies.
It is important to note that while there may be varying
approaches, there is a strong bipartisan, bicameral support for
outbound investment screening. I look forward to learning more
about the merits of the options presented as we explore the
best way to ensure the United States investments are not in any
way undermining our national security. Further, I would like to
point out that while outbound investment screening deserves our
time and attention, we can close critical national security
gaps in our legislative framework. It is also essential to our
national security that we urgently provide aid to our allies in
Ukraine and Israel. Talking about national security while the
President's supplemental request is left to languish is, at
best, disappointing, but once again, thank you for being here.
We always say how much we look forward to hearing from our
witnesses, but here is an opportunity for you to actually help
shape us and give us information because we do have bipartisan
support. Thank you, and I yield back.
Chairman Luetkemeyer. The gentlelady yields back. With
that, we recognize the Chairman of the full committee, Mr.
McHenry from North Carolina, for 1 minute.
STATEMENT OF HON. PATRICK T. MCHENRY, CHAIRMAN OF THE FINANCIAL
SERVICES COMMITTEE, A U.S. REPRESENTATIVE FROM NORTH CAROLINA
Chairman McHenry. Thank you, Chairman Luetkemeyer, and
thanks for holding this hearing. We agree that we must cut off
revenue to the CCP's military industrial complex and other bad
actors, that is for sure, and it is critical we pursue
solutions that do not kneecap one of our greatest strategic
assets, which is our capital markets. I think it is important
that as we work with House colleagues to build consensus on the
right approach, using export controls and what has been
traditional statecraft and economic statecraft that the United
States has had, we get the mechanics right so that regulators
can implement these programs, so the private sector can abide
by them, so we can actually have strength.
Independent of hawks and doves and that debate, I think it
comes down to whether you understand the issue. For example, a
CtrlF search for artificial intelligence, or AI, in recent
corporate disclosures will yield thousands of results from
every Fortune 500 company, so the Fortune 500 could be
considered AI, all of them, if we get the regulations wrong, if
we legislate inappropriately, and if we have a dumb approach.
Let us have a smart approach, let us be effective, and let us
do it together. I yield back.
Chairman Luetkemeyer. The Chairman yields back. With that,
we will introduce our panel for today. We are excited about the
witnesses. We have Hon. Rich Ashooh: Mr. Ashooh is Corporate
Vice President for Global Trade and Government Affairs for the
Lam Research Corporation, welcome. Honorable Thomas Feddo: Mr.
Feddo runs the Rubicon Advisors, LLC, welcome. Emily Kilcrease:
Ms. Kilcrease is a Senior Fellow and Director of the Energy,
Economics and Security Program at the Center for a New American
Security, welcome. Thank each of you for taking time to be here
today. Each of you recognize for 5 minutes to give an oral
presentation of your testimony. Without objection, each of your
written statements will be part of the record, and with that,
Mr. Ashooh, you get to start. You are recognized for 5 minutes
for your oral remarks.
STATEMENT OF HON. RICHARD ASHOOH, VICE PRESIDENT OF GLOBAL
TRADE AND GOVERNMENT AFFAIRS FOR LAM RESEARCH CORPORATION
Mr. Ashooh. Thank you, Mr. Chairman, Ranking Member Beatty,
and also Chairman McHenry, and the rest of the members of the
committee. It is great to be here. I appreciate the
opportunity. Having served as Assistant Secretary of Commerce
for Export Administration at the Bureau of Industry and
Security, I had both the honor and challenge of confronting
many of the issues you all just described, and I am happy to
share my perspective on this.
The concerns at the heart of this hearing are well founded,
and they derive from the oft-stated objective of the People's
Republic of China to unseat U.S. technology leadership in the
world. It is important to stress at the outset that U.S.
technology leadership remains strong globally and that the
American culture of innovation is the envy of the world. I say
that because it is essential for policymakers, as you consider
the challenge of promoting U.S. technology advancement while
regulating it in the face of potential threats, to cause no
harm to the very thing you are trying to promote and protect.
The progress that has been made in shoring up those
protections by Congress is the result of legislation this
committee has had a key role in enacting: the Export Control
Reform Act and the Foreign Investment Risk Reduction Act, also
known as ECRA and FIRRMA, which were enacted in 2018. There are
lessons from that debate which remain relevant, and I will
confine my comments today to three recommendations drawn from
those lessons.
First, I urge you to leverage existing authorities. The
temptation to address a broad panoply of legitimate interests,
which do not necessarily rise to the level of a national
security threat, is alluring. There is also a persistent
temptation to regulate technologies that are important but may
not constitute a threat to national security if shared beyond
our borders. It is job number one for policymakers to clearly
define and be specific in targeting legitimate security
threats.
One of the most crucial updates to FIRRMA and ECRA was to
dovetail their definitions and authorities. Establishing a
unified definition of ``critical technology'' and grounding
that definition in well-defined export control lists, such as
the Commerce Control List and the United States Munitions List,
created clear, specific, updateable mechanisms for regulators
to target specific threats. Prior to FIRRMA and ECRA being
enacted, agencies all worked under differing and competing
ideas of what technology matters, wasting valuable time and
effort on debates instead of action. This synchronization of
definitions created a powerful alignment of authorities and
should be the basis for any additional remedies being
contemplated.
Secondly, I urge you to act multilaterally. National
security threats are rarely stove piped. Solutions to address
them should not be either. Therefore, just as multiple agencies
must collaborate within the United States, it is essential that
the United States seek multilateral collaboration with relevant
allies. Many like-minded countries have in place national
security reviews similar to those of the United States, such as
foreign direct investment screening and export controls, and we
should work with them. Finally, we need to address the gaps.
For all the measures in recent years to protect U.S.
technology, gaps do remain. It is currently possible that
export-controlled technology could be the beneficiary of U.S.
financing.
Before implementing a complex new regime, though,
enhancements to current authorities should be considered first.
For example, a recent amendment to the export administration
regulations defines the word ``support'' by ``U.S. persons'' to
include, among other things, financing. While further study
must be conducted, Congress and the executive branch should
consider clearly defining this newly expanded definition to
address the concerns around illicit financing of controlled,
and therefore critical, technology. This feature of the law
creates a regulatory hook to limit financial activities already
tied to restrictions based on export controls.
Another opportunity for improvement exists in the
multilateral space. The need for alignment among specific
technology-leading countries is recurring and should not be ad
hoc. Quantum computing, artificial intelligence, and
semiconductor development are examples of technologies where
the most advanced capabilities reside in a small handful of
countries. A coordinated agreement and circling key
technologies, including the financing of them, is best done
among the countries that control the development.
The United States, along with key allies, should consider a
new method for multilateral controls in targeting technology
areas that can work with, but is separate from, the existing
multilateral regimes, such as the Wassenaar Arrangement that
have served the United States and partner nations well but are
ill-suited for the complex technology supply chains work
confronting today. Without such alignment, unilateral policy
will ultimately fail in combating both the national security
and economic threats coming from China.
U.S. global leadership is indisputable, but it is
perishable. Efforts, such as the work of this committee is
doing today, are essential to maintaining it. Thank you, and I
look forward to your questions.
[Prepared statement of Hon. Ashooh follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Luetkemeyer. The gentleman yields back. With that,
Mr. Feddo, you are recognized for 5 minutes.
STATEMENT OF HON. THOMAS FEDDO, FOUNDER/PRINCIPAL, THE RUBICON
ADVISORS LLC
Mr. Feddo. Thank you. Chairman Luetkemeyer, Ranking Member
Beatty, and distinguished members of the subcommittee, Chairman
McHenry, almost exactly a year ago, I participated in the full
committee's first substantive hearing of the 118th Congress,
where we talked about the economic threat from China. I am
honored to appear before you today and continue that
discussion. I do not think I will get my spoken testimony done
in 5 minutes, so I will summarize. This conversation is about
using existing authorities to combat that threat and to
leverage those to protect U.S. national security interests and
mitigate risks posed by certain U.S. private sector investments
into the People's Republic of China. As you will see from my
testimony, I am convinced that an economic sanctions program
administered by Treasury's Office of Foreign Assets Control
(OFAC) would be the most immediate, effective, and impactful
way to address these risks.
I previously served as the first Assistant Secretary of the
Treasury for Investment Security and oversaw the implementation
of FIRRMA at CFIUS. I have also spent 7 years in senior
positions at the Office of Foreign Assets Control,
administering enforcement of economic sanctions. That is what I
bring to this discussion.
As I have emphasized in prior testimony, the dangers posed
by the People's Republic of China (PRC) are real and present
and not over the horizon. In the midst of an accelerating tech
industrial revolution, the goal of maintaining tech superiority
necessitates reinvigorating the defense industrial base,
fostering research and development, strong partnerships with
the private sector, and it also means careful and calibrated
deployment of our economic might and related authorities
through things such as economic sanctions, export controls, and
CFIUS, what today is often referred to as economic statecraft.
In recent years, some policymakers have urged the
government to screen and regulate outbound capital flows
through the creation of yet another regulatory authority, what
has sometimes been referred to as outbound CFIUS, to regulate
something called smart money. The scope of this ostensible
national security gap has not been precisely defined, but, in
general, is described as arising from a U.S. person, venture
capital, or private equity investment into Chinese startups
working in high-tech fields that could impact U.S. national
security; and because, of course, money is fungible and could
be replaced by other investors in Europe or Asia or the Chinese
Government itself, the focus has been on what comes in addition
to that money: the intangibles, the management experience, the
relationships, and likewise.
The data regarding venture capital investment into startups
into China is very limited, and that is among the reasons I
remain skeptical of the effectiveness of a new CFIUS-like
regime to screen where and how Americans invest their funds and
their capital. It would be regulation and resource intensive
and slow and bureaucratic. In my view also, Congress should
lead on an issue of this complexity and potential impact,
legislating a policy approach. As you mentioned, the President
issued Executive Order 14105 last summer, establishing a new
regulatory regime. The Treasury Secretary has been directed to
lead a notice and comment and the promulgation of rules. There
has been notice and comment, and a final rule is anticipated at
some point this year.
14105 is not a screening mechanism but rather a series of
investment prohibitions or notifications regarding
semiconductors, quantum computing, and artificial intelligence.
There are additional legislative proposals to expand that to
other high-tech sectors. As I point out in my testimony, this
will mean new bureaucracy, new resources, new processes, and
new regulations with yet another set of complications and
unique set of costs. The limitations should be apparent. The
responses to the proposed rule that Treasury issued were
extensive, and they asked for answers from the public to more
than 83 questions regarding scoping that new regime. There were
more than 60 comments of substance to that process. Many of
them complained about the vagueness, the broadness, and the
complexity of the potential regime.
I am running out of time, but as you can see from my
testimony, what I am proposing is to use a time-tested economic
sanctions regime to do exactly the same thing because what the
policymakers are concerned about is the intangibles that go
with an investment flow, and that is inherently something that
sanctions are well suited for. Thank you.
[Prepared statement of Hon. Feddo follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Luetkemeyer. The gentleman yields back. With that,
Ms. Kilcrease, you are recognized for 5 minutes.
STATEMENT OF MS. KILCREASE, SENIOR FELLOW AND DIRECTOR OF THE
ENERGY, ECONOMICS, AND SECURITY PROGRAM, CENTER FOR A NEW
AMERICAN SECURITY
Ms. Kilcrease. Thank you. Chairman, Ranking Member Beatty,
members of the subcommittee, and Chairman McHenry of the full
committee, it is an honor to be here to testify before you
today, and thank you for your important attention to this issue
of outbound investment. Please let me note I am speaking in my
personal capacity.
My comments draw from a large body of research that I have
conducted on sanctions, export controls, and investment
security at the Center for New American Security, as well as
prior experience serving the U.S. public in roles at the
Department of Commerce, National Security Council, and U.S.
Trade Representative. I have spent my career in national
security roles but always from the perspective of an economic
agency, and this has ingrained in me a deep appreciation for
the strategic advantage that open markets and open capital
flows provide the United States, as well as the need to proceed
with care and thoughtful deliberation when imposing national
security guardrails that are necessary to prevent exploitation
of our open market. With that in mind, I offer a set of
principles that should guide the development of any future
controls on U.S. investments in China, as well as concrete
policy options for your consideration.
On principles, any new outbound investment controls should
be tightly targeted to investment transactions that present
high national security risk arising from the transfer of non-
technical industrial expertise that can fuel the indigenous
development of critical technologies in China. Controls should
be clearly defined and understandable to private sector
entities who are always the first line of compliance. They
should be nonduplicative in reinforcing of existing tools,
particularly export controls. They should be scoped
proportionately to the administrative capacity available to
effectively administer a new mechanism while avoiding
unnecessary process and bureaucracy, and they should be
designed to enable meaningful conversations with allies about
adopting similar regimes as a unilateral approach to outbound
investments will hurt U.S. competitiveness without having any
meaningful impact on Chinese tech companies.
With these core principles in mind, the committee may wish
to consider a targeted set of policy options in addition to
leveraging existing tools, and I offer this set of options
today as a package, as each addresses a particular area of risk
associated with outbound investment, and these include enhanced
transparency, targeted technology-based prohibitions, and
entity-based prohibitions.
The United States does need more transparency around U.S.
investments in China, and Congress could consider a tailored
set of mandatory notifications for certain U.S. investments
made into Chinese companies that make high-risk technologies,
and these notifications, of course, should be subject to strict
confidentiality protections. Both when I was in government and
now as an independent researcher, I can confirm that it is
exceedingly difficult to gain detailed information on specific
investment transactions made in China, particularly in the
startup space. Having said that, there are a set of investments
that would inarguably, in my view, present national security
risks and should be prohibited. These include investments in
Chinese companies that make technologies that would be subject
to the U.S. arms embargo if originating in the United States or
otherwise subject to high levels of dual-use export controls.
There is a commonsense logic to using investment controls
to ensure that U.S. financing is not eroding the efficacy of
our export control programs, particularly as it relates to the
transfer of nontechnical industrial expertise that can occur
through an investment. Sectors included in the prohibition
should include advanced semiconductors and related equipment
and software in alignment with the government's efforts ongoing
to keep the United States as far ahead as possible in this
critical technology area that enables U.S. military, national
security, and economic functions. There is also emerging
consensus on the need to set controls on frontier AI systems
based on the computing power of these systems, and my written
statement provides additional information and technical
resources on that point.
In addition to targeted sectoral restrictions, Congress may
wish to consider entity-based restrictions. Expansion of the
(non-Specially Designated Nationals) non-SDN Chinese Military
Industrial Complex Program, or CMIC program, to prohibit
investments of all types, not just publicly traded securities,
can provide a well-calibrated entity-based tool. Entity-based
approaches alone will not be sufficient as they are inherently
reactive in nature, and each listing requires lengthy in-depth
analysis, but they can provide an important complement to
tailored technology-based prohibitions where the government has
knowledge that a particular entity is acting in a manner
contrary to U.S. national security and foreign policy
interests.
Finally, the ongoing debate on outbound investment controls
reflects how novel this type of program would be for the United
States. It is critical that there be a regular process to
evaluate the effectiveness of any new outbound program.
Evaluation is an area where the United States unfortunately
usually falls short, but it is critical to ensure that any
novel economic security tools are meeting Congress' national
and economic security objectives. It is essential that Congress
act. Doing so can ensure the durability and appropriate scoping
of any new outbound program and the alignment of resources for
effective implementation and enforcement, as Congress so wisely
did during the 2018 CFIUS reform process.
Let me end by noting that while today we are focused on a
particular set of economic restrictions, it is equally critical
that the United States not lose sight of the need for an
affirmative strategy to engage in the global economy and set
the terms of trade to us advantage. Thank you again for the
opportunity to be here, and I look forward to your questions.
[Prepared statement of Ms. Kilcrease follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Luetkemeyer. The gentlelady yields back. With
that, Ranking Member of the full committee has arrived, and we
will recognize the gentlelady from California for 1 minute.
STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE
FINANCIAL SERVICES COMMITTEE, A U.S. REPRESENTATIVE FROM
CALIFORNIA
Ms. Waters. Thank you very much, Chairman Luetkemeyer and
Ranking Member Beatty. In August, President Biden issued an
executive order to initiate America's first program to screen
U.S. investments overseas, particularly those funding China-
based firms, to prevent U.S. dollars from being used to develop
the Chinese military. I support the legislative effort to
codify and strengthen Biden's order and urge my colleagues to
go further by extending the screening to existing investment
contracts and not just future investments, ensuring
transparency into private equity and venture capital funds,
which represent billions of opaque dollars, and screening
investments for their impact on environmental and social
concerns, like human rights, because they can harm our national
security. We have an opportunity here to ensure that none of
America's resources are used to undermine our country or
support our adversaries. Thank you, and I yield back.
Chairman Luetkemeyer. The gentlelady yields back. Now we
turn to member questions. The Chair recognizes himself for 5
minutes for questioning.
Mr. Barr has got a bill that deals with outbound
investments, which I think is probably the best answer to what
we are talking about here this morning, and I am going to try
and set the stage for him. He is very eloquent and a whole lot
smarter than I am, so I am going to set the stage for him this
morning with regard to some of my questions. This morning each
of you made the comment with regard to emphasizing the fact
that we need to have a strategy. We need to understand how we
can curtail investment in China in a way that protects the
United States as well as hurts the Chinese as much as possible.
Mr. Feddo, in your illustrious career here, you have been
working with different sanctions and export controls. It would
appear to me that we need to be able to work with our allies to
make those sanctions and export controls effective. Can you
explain to me how that can happen? Is it happening? Do we have
a plan?
Mr. Feddo. I do not know whether it is happening, or we
have a plan, but, of course, any of these economic statecraft
tools, in my opinion, are better and more effective if there is
a multilateral approach. For example, in the course of
implementation of FIRRMA and the expansion of CFIUS
authorities, we spent a great deal of time encouraging other
countries to develop similar screening mechanisms for inbound
capital that could pose national security risks, and so that is
something that I think makes these sorts of economic statecraft
tools more effective.
Chairman Luetkemeyer. It appears to me, and I say this all
the time, that the more you enhance the China economy, the
better you are feeding the beast that is going to eat us at
some point. To me, this is really, really important that we get
this right, that we understand that we need to minimize our
investment there and find a way to slowly decouple ourselves
from Chinese investment and Chinese trade, but doing that is
the trick. One of the things that came up this morning in our
Chinese Select Committee was the fact that Chinese economy is
slowing. Yesterday or the day before, the court in Hong Kong
told Evergrande, one of the largest real estate companies in
China, to start liquidating.
The whole Chinese economy is teetering right now from the
standpoint, demographically, they are in trouble. The real
estate market is collapsing, and a lot of trade with the rest
of the world is going down, other than the automobile industry
that we saw yesterday with a meeting that we had that is going
up. The question, I guess, is, how dangerous is China if we
weaken them? Does that entice them into reacting more
aggressively against China, against Taiwan, or continuing to
build up relationships with Iran and Russia, or is it because
they can get fat and happy, so to speak? Does that enable them
to sort of sit back and be more predictive whenever they are
trying to do something else? Mr. Ashooh, would you like to
answer that question?
Mr. Ashooh. That is certainly the risk that should be
contemplated in whatever strategy we pursue. It is important to
know that China has definitive red lines that they will not
veer from Taiwan, for example. My sense is, from a U.S.
strategy point of view, a desired outcome would be a China that
is, in many ways, dependent on the United States. In some ways,
they are. There are technologies that they do not have, and we
do. We should seek to grow that dependency. It allows for
commerce to occur, but it also ensures that it is not a level
playing field. That is, to me, the sort of balance that could
strike, if you will, a compromise between pushing China too far
in either direction.
Chairman Luetkemeyer. One of the things that came out of
the meeting this morning is Secretary Burnetta made a comment
that not only do we want to try and deter and sort of hit the
Chinese economy, but we have to make sure our economy is strong
as well, and you kind of hit on that a little bit. If we make
them dependent on us, it helps us to be stronger as well, and
he also made a comment with regards to whether we either
provide leadership, or we govern by crisis. That is a pretty
interesting comment. It means we got to start leading instead
of following. We have to provide leadership, especially in
something like this. We need to set parameters. Mr. Feddo,
would you comment just for a second with regard to the regime
and sanctions that are in Mr. Barr's bill? Do you like those?
Do you think it is going to work?
Mr. Feddo. I do. Most of my written testimony is about the
benefits of using economic sanctions to tackle this problem
because, fundamentally, it is about modifying the conduct of
U.S. persons, right? It is not about the fungible money. It is
about what comes with it, and so what we are trying to do is
modify or deter or change behavior of U.S. persons to eliminate
what comes with that money, the services, essentially, all of
the experience and the like that comes with those funds.
Chairman Luetkemeyer. Thank you. My time has expired. With
that, we go to the gentlelady from Ohio, the Ranking Member,
Mrs. Beatty for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and, again, thank you
to the witnesses. There has been a lot of language that all
three of you said we need to tackle this problem, transparency.
I would like to also share that one of my colleagues,
Congressman Greg Meeks, who serves on the full Financial
Services Committee, is not on this subcommittee, but he is also
the past Chair of Foreign affairs and serves with my other
colleague, Mr. McCaul. They, too, have come up with a piece of
legislation that looks at transparency and looks at outbound
investments, which I think is a good thing that we have
multiple ways we can look at this, and so I do not know if you
are familiar with it, but I think it is another option for us
as well. I would like to go first to you, Ms. Kilcrease.
There are a number of different ways that the U.S.
Government can track and review and restrict certain United
States' outbound investments, and we have seen many of the
proposals presented in Congress, which vary by approach, the
countries of concern, the sectors, and the structures of
investment targeted. Can you kind of help enlighten us on what
are the primary United States' concerns that must be addressed
in a screening regime and what would be the most effective ways
to address them?
Ms. Kilcrease. Thank you for that question, and, again, it
is good to see so many good ideas coming out of Congress on
this. Ultimately, there are three elements of what I think
would be an effective outbound process. There is a strong need
to increase transparency and having visibility into the types
of investments that are being made and the types of rights that
convey with those investments, and how those particular
investments may be supporting China's indigenous critical
technology developments in a way that is contrary to U.S.
national security interests. We just do not have that
visibility across the full range of investment flows and
transactions that would be necessary to make me feel
comfortable as someone who cares about national security.
Having said that I do think that the entity-based
approaches that have been discussed as well have some benefits.
There is certainly benefit to changing behaviors of targeted
actors, as Mr. Feddo noted, but there is also a benefit in the
technology-based restrictions. Again, thinking about how we can
align these tools with existing mechanisms like export
controls, we can think about investment controls as another leg
to support the export control system, which itself has a
variety of tools encompassed within it. It has end user
controls, end use controls, list controls. We can think of
investment controls as another way to reinforce and bootstrap
those sorts of mechanisms.
Mrs. Beatty. Okay. Thank you very much. Let me just kind of
go a little deeper on that. What do you think is the best
approach for defining which activities or sectors should be
subject to notification, review, restrictions or waivers? Any
thoughts on that?
Ms. Kilcrease. Yes. Thank you for the question. Here again,
I come back to leveraging the existing lists that we have in
the export control system. The U.S. Government, through the
U.S. Munitions List and through the Commerce Control List, has
already identified a wide range of technologies that are
critical for U.S. national security interests. As we think
about scoping investment controls, we should be thinking about
how to target our transparency as well as our prohibition
efforts on those exact sets of technologies as well, which,
again, have already been identified. I do not think we want to
create new lists or create a new bureaucratic structure that
has to come up with new lists. We have them, and we could
leverage those existing systems.
Mrs. Beatty. Mr. Feddo, you also referenced President
Biden's executive order in what it did. In another piece of
legislation that I referenced earlier with Mr. McCaul and Mr.
Meeks, they also talk about that transparency and taking it a
step further. I do not know if you have had any opportunity to
review or see their legislation, but I will be interested in
any comments on that.
Mr. Feddo. I have seen it. I think it, essentially, as you
suggest, reinforces Executive Order 14105. As my written
testimony articulates, my concern with that approach is that it
is very time intensive. It is sort of reinventing the wheel and
creating a new set of restrictions and regulations and
requirements, and, in fact, what I propose with respect to my
approach is a combination of both. It is essentially a
sanctions-related approach that leverages export controls, as
my two co-panelists have suggested, which I think has benefits,
but focusing on broad sectors and then trying to define those
sectors, it is going to take a great deal of time, and it has
already taken----
Mrs. Beatty. I know my time is up, but it sounds like we
may get a third approach to that as well. Thank you, and I
yield back.
Chairman Luetkemeyer. The gentlelady yields back. With
that, we go with the gentleman from Kentucky, Mr. Barr, who is
Chairman of the Financial Institution Subcommittee on Banking.
Mr. Barr is recognized for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman. I appreciate the
important hearing. Let us, Mr. Feddo, cut to the chase on the
three major legislative proposals before us in Congress. One,
my bill, a bill that this committee has marked up, the Chinese
Military and Surveillance Company Sanctions Act, that is an
entity-based approach that uses OFAC to impose sanctions on
Chinese entities of concern. Then there is the McCaul-Meeks
bill, a sector-based approach to Preventing Adversaries from
Developing Critical Capabilities Act. That bill was marked up
out of the House Foreign Affairs Committee, and then there is
the Casey-Cornyn approach in the Senate, the Outbound
Investment Transparency Act, which is basically an investment
notification regime. Mr. Feddo, which of these three approaches
would hit Chinese military and intelligence companies or the
CMIC entities harder?
Mr. Feddo. In my view, it is clearly your bill, Mr. Barr,
because it immediately identifies those entities of concern
which are on various lists with various levels of restrictions,
immediately making them blocked persons, which under economic
sanctions regimes, a blocked person, virtually any dealing is
prohibited with that person who is blocked. If we are trying to
eliminate, the smart, the intangibles that go with money, those
are immediately eliminated, not just for investors, but for any
U.S. person that might be aiding or supporting one of those
entities.
Mr. Barr. I appreciate you pointing that out. I do want to
compliment and applaud my colleagues and friends, Chairman
McCaul, Ranking Member Meeks, Senators Casey and Cornyn, for
their well-intentioned and patriotic efforts here to get at
this problem of financing entities of concern. Mr. Feddo, the
argument in favor of this sector-based outbound investment
regime is that it is forward looking as opposed to backward
looking. That is the criticism of my bill, principally, that an
entity-based sanctions approach would be underinclusive,
perhaps, and would fail to get at these venture-stage Chinese
entities of concern. What is wrong with that analysis, in your
view?
Mr. Feddo. I personally think that there are a couple of
things that are wrong. One is if we have already identified
entities of concern that are affiliated with civil military
fusion, then we ought to attack that problem right away. That
is sort of an 80/20 attack of a problem. Furthermore, as I
referenced in my opening statement, we are in the midst of a
tech industrial revolution that is moving so fast, even a
sector approach is going to be chasing its tail to some extent
and reactive as well because the technology, ostensibly, that
we want to control, is constantly moving forward and changing,
and so we will be chasing that as well.
Mr. Barr. Do these non-sanctions approaches, these sector-
based approaches, do they have multilateral effect in the same
way that a sanctions approach does?
Mr. Feddo. Certainly not, I do not think so. I mean,
especially not with a blocking, an SDN listing, because that is
the most powerful type of sanction we have, but even with a
more tailored prohibition, the U.S. financial system becomes
off limits for dealing with those named entities. It is
immediate.
Mr. Barr. Yes, I think that is an important point, is that
the executive order and these other approaches, Casey-Cornyn/
McCaul-Meeks, they are only restrictions on U.S. investment,
and these Chinese entities of concern can get subsidies from
the central government of China. Money is fungible. They can
get non-U.S. investment funds, and it is the know-how that they
want. Mr. Ashooh, you made the important point that we should
leverage existing authorities, and you point out the need for
specific, clear, targeted, and well-defined action against
these entities of concern in China. Does a sector-based
approach place the enforcement responsibility on the private
sector or the government?
Mr. Ashooh. Thank you, Mr. Barr. I am not sure where it
places the responsibility and that is the problem with such a
broad-based approach. I think a sectoral approach expresses
maybe a shared concern, but as far as an implementation of
authorities with effect, it is very challenging to do so. I
congratulate you on your approach because the tests that I laid
out in my testimony about using existing authorities being
multilateral and addressing the gaps, your bill marks all
three.
Mr. Barr. Clarity and targeted and defined is very, very
important, and a sanctions approach does that. It is red light,
green light. There is no ambiguous yellow light, and that is
what I am concerned about a sector-approach: a big yellow light
and a lot of confusion by the private sector whether the
investment is okay or impermissible. With that, I yield.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentlelady from California. The Ranking
Member of the full committee, Ms. Waters, is recognized for 5
minutes.
Ms. Waters. Thank you very much. I am going to direct this
question to Ms. Kilcrease. I am pleased that we are hosting
this hearing today and that we all agree that there is a need
for review and, in some cases maybe, prohibitions on American
investments in companies and technology that present a national
security threat to the United States and its interests. I fully
support President Biden's bold efforts to establish a formal
outbound investment screening mechanism, which is limited to a
narrow set of sectors where U.S. funds, such as those from
pensions and savings of teachers, construction workers, and
government workers, could end up fueling the Chinese military.
For most Democrats and Republicans in Congress, it is clear
that American investments should not prop up our adversaries'
development of artificial intelligence, surveillance, and other
technologies that could be used against us. There are a number
of bills that aim to codify the President's actions in some
form on many national security issues. This Congress,
especially the GOP-led majority in the House, have talked a lot
but acted little. This is an area that I think we have to pay
special attention to. However, I want to make sure that we are
not in any way crippling American investments and
misidentifying them or basically understanding what they do and
what they do not do. This should be based on facts and good
information about what kind of American investments we are
talking about, but we have to be concerned about our national
security.
What do you think about it, Ms. Kilcrease? In light of
Chinese military ambitions on the growing threats from climate
change, why do we need to act now on expanding outbound
investment screening to protect American national security?
Ms. Kilcrease. Thank you for the question. It is quite
clear that we are in the middle of a generational challenge
with China, and it is a challenge unlike one we have ever seen
before because of the interconnected nature of our technology,
ecosystems, and our economies, and it is, I think, a growing
shared concern, including amongst my panelists here, that
investments are part of that problem. The debate now is how to
fix that in a way that maintains the U.S. advantage in open
markets while getting at those investment transactions and
flows in the most effective way, the most proactive way that
sheds light and transparency into dark pools of money in areas
where we do not have great visibility as the U.S. Government,
to enable us to take action in a strong yet targeted way
against those high-risk investment transactions.
Ms. Waters. As you know, there are a number of thoughtful
approaches that you have mentioned and that you have talked
about, including President Biden's bold executive order from
last August that aimed to review and potentially prohibit
investments from the United States into countries and sectors
that could pose a threat to our national security. For example,
we do not want American capital funding the development of
Chinese surveillance tools that will be used to spy on
Americans. We do not want U.S. money to help the Chinese
Communist Party to develop artificial intelligence that will be
used to breach our defenses or undermine our elections.
Most Democrats and Republicans in the House and the Senate
agree these proposals will be further strengthened by adding a
review of rescinding existing investments, some private equity
in investments that, made last year, extend for another 5 to 10
years and will continue to transfer America know-how. I am
worried about this, and I want us to spend some time with
private equity and venture capitalists to not only warn and
educate them about what we are trying to do and see how much
cooperation we can get before we make certain conclusions, but
I think it is important for us to pay attention to them and
interact with them so that we absolutely accomplish our mission
of protecting this country from the Chinese type surveillance,
et cetera, but at the same time do not undermine what they are
attempting to do that we think is good for America in terms of
venture capital and even private equity. Thank you. I yield
back.
Chairman Luetkemeyer. The gentlelady yields back. With that
go, I will go to the from Georgia. Mr. Loudermilk is recognized
for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman. I would like to
yield a few moments to my good friend from Kentucky, Mr. Barr.
Mr. Barr. I thank the gentleman. One quick question, a
follow up to Mr. Ashooh. U.S. foreign direct investment in
China rose rapidly in the 2000s and 2010s, but according to a
recent report by a Goldman Sachs research arm citing U.S.
Department of Treasury data, suggests that foreign investors
have reduced exposure to China bonds and equities over the past
3 years. Why is that?
Mr. Ashooh. I think there are multiple factors but let me
take one recent historical factor that I think matters: Hong
Kong. Hong Kong had a very separate trading system with the
United States from China, and we saw what happened there. In
fact, in the middle of my term at the U.S. Department of
Commerce's Bureau of Industry and Security (BIS), we had to
change drastically how we treated Hong Kong as an entity, and I
think that the risks that were presented by that are present
within mainland China itself, and that is one example of why it
is become so risky.
Mr. Barr. Investors are starting to figure out that China
is a bad investment, so what you are saying is free market
capitalism works?
Mr. Ashooh. It sure does.
Mr. Barr. I yield.
Mr. Loudermilk. I think it is indisputable that a rising
China is a threat to the United States, both for our economy
and our national security. I think most of us would agree that
the threat is immediate and real. That said, I think America's
free market ideals are more compelling. They are a more
compelling alternative for a business than the heavy-handed
approach taken by the Chinese Communist Party. Instead of
crafting a brand-new outbound investment screening regime, we
should continue to empower American investors and improve the
tools necessary to surgically target bad actors and cut them
off from our financial system.
Mr. Ashooh, in your testimony, you mentioned that the
American culture of innovation remains the envy of the world.
What are some of the specific traits and characteristics that
American business leaders bring to the boards of foreign
companies?
Mr. Ashooh. That Americans bring to the board of foreign?
Mr. Loudermilk. Yes. What are some of those ideas, and
innovations that we do bring?
Mr. Ashooh. I think that the key to American innovation,
which is hard to export, is openness. As a country, we are a
welcoming environment to the best ideas wherever they reside,
and then we use an export control system to manage those ideas
so they do not happen in the wrong place. I think that is what
any American technology executive could bring, which is this
idea of openness within limits.
Mr. Loudermilk. Basically, taking the culture of freedom
and liberty that we have here in America and implanting it, per
se, in Chinese companies. Is that----
Mr. Ashooh. I think it is part of the reason why we want to
be globally expansive as a country with our economic
principles. We want others to share those, not always
successfully, but I think the effort needs to be there.
Mr. Loudermilk [continuing]. I think you may have touched
on this, but are Americans currently permitted to serve on the
board of Chinese companies, and if so, are there laws and
regulations in place that make it difficult for an American to
serve on a board?
Mr. Ashooh. I think there are absolutely restrictions in
some countries. I think we are probably talking about China
here----
Mr. Loudermilk. Yes.
Mr. Ashooh [continuing.] which is very, very mindful of the
role Americans play in the Chinese business establishment.
Mr. Loudermilk. Legally, they can serve in certain
countries.
Mr. Ashooh. I know of no law. That does not mean there is
not one, but I----
Mr. Loudermilk. Okay.
Mr. Ashooh. Yes. That is nothing I am aware of.
Mr. Loudermilk [continuing]. Can you explain why it may be
beneficial for the United States to have Americans serving on
the boards of foreign companies, specifically China, which you
have touched on, but does having American executives serving on
foreign boards have a strategic benefit for the United States?
I mean, a long range benefit?
Mr. Ashooh. It does, and it refers back to something I said
earlier, which is one possible strategic goal for the United
States is creating a dependency, a leverage over China. That
can be technology but can also be in the form of individuals. I
think it is always good for us to be in a position of
superiority relative to economics, technology, and so on.
Mr. Loudermilk. For a lack of better term, maybe gaining
some intelligence on the direction that certain companies that
may be competitive to American companies would be taking.
Mr. Ashooh. Again, back to my days at BIS, one of the
things we were always concerned about when we took an action,
like a particular sanction or restriction, was that we would
then lose information.
Mr. Loudermilk. Right.
Mr. Ashooh. That does not mean it was not the right thing
to do, but there is a cost to it, and having the information,
having an understanding of Chinese technology development, is
key to exceeding it.
Mr. Loudermilk. All right. Thank you. I see my time has
expired, and I yield back.
Chairman Luetkemeyer. The gentlemen yields back. With that,
we go to the gentleman from Texas. Mr. Gonzalez is recognized
for 5 minutes.
Mr. Gonzalez. Thank you, Mr. Chairman and Ranking Member,
and thank you to the panel for participating today. My question
is to Ms. Kilcrease. Ms. Kilcrease, I am pleased that President
Biden initiated the Outbound Investment Screening Program that
I am looking forward to seeing what Treasury produces as it
does its part to complete the rulemaking process. No doubt,
U.S. money should not be going to Chinese or Russian firms that
use these funds to build technology to support current or
future acts of aggression against the United States and our
allies. I agree, too, with Ranking Member Waters' proposal that
we need transparency in existing investments in those same
sectors of concern, that we may not need to consider if and how
to unwind those hidden fees that are not currently covered by
the bills that we are discussing today.
I will add another angle and would like your feedback.
Where I am in Texas, my constituents see Chinese money flooding
into Mexico across the border from us, where manufacturing
facilities are developed south of the border so goods can be
shipped into the United States as Mexican goods instead of
Chinese. I worry that if we consider only the direct U.S.
investment into Chinese or Russian factories that produce
technology of concern, those investments may be directed
instead to overseas factories and Chinese-owned companies in
third nations. Would it be useful for congressional proposals
to consider these sorts of nonlinear investments that aim to
evade the goals of the President's outbound investment
screening program? If not this mechanism, by what capacity
could we prevent U.S. investments from funding, for example, a
semiconductor factory in Mexico that is owned by Chinese
entities?
Ms. Kilcrease. Thank you. These are excellent sets of
questions, and perhaps I will start with the last one. When we
look at the question of third party markets and investments
made outside of China, there is a question about how much we
try to expand the extraterritorial reach of U.S. tools and what
the balance is with trying to work with partners so that they
are strengthening their own legal mechanisms to get at these
sorts of risks. Ultimately over the long term, while Congress
should always look at evasion routes and circumvention,
particularly for the cases that you just outlined very well we
also need to be working with partners like Mexico, with whom we
have a free trade agreement (FTA), to make sure that we are
encouraging them to put in place their own protections for
their own investors and domestic manufacturing capabilities as
well. It is not going to be that one tool fixes all of these
problems.
Mr. Gonzalez. Yes.
Ms. Kilcrease. We need to think about multiple tools,
including the international engagement part, to think about how
we can get at this issue holistically because you are
absolutely right. If we shut down one particular bilateral
flow, it will shift. There will be adaptation. That is what we
always see after a heavy sanctions regime is put into place.
To the question on unwinding transactions or worrying about
legacy stock of investments, I do think that is worthy of
attention. It is, of course, more complicated as you think
about looking back at the transactions that may have been made
legally at the time but nonetheless, still present a risk. I
think that Ranking Member Waters talked about the need to work
with the private sector to do additional study on these sorts
of ongoing risks arising from legacy investments, and I think
that would certainly be worthy of additional congressional
action.
Mr. Gonzalez. Thank you. Yes, I think I agree with you. As
you know, private equity funds and other private funds that
raise capital in the United States almost exclusively use
methods and certain exemptions under the securities laws that
were meant for privately held operating companies. These
capital-raising activities are unregistered and unregulated,
and this committee has had difficulty ascertaining the extent
of these activities. As far as we know, the administration,
too, is unable to accurately assess the scope of capital-
raising activities in the United States by private funds that
are directed to China. In your opinion, what are some of the
risks associated with this opaque and often untraceable
capital, and what do you think we should be doing in Congress
to address this?
Ms. Kilcrease. Yes. Thank you for the question. In the
context of a historically large number of sanctions programs
and sanctions programs that are increasingly targeted at larger
economies, there will be massive amounts of evasion attempts,
and we should anticipate that. Dark pools of money where we do
not have visibility and transparency, of course, should be of
high national security concern because that is exactly where
these illicit actors will try to funnel money to get around our
sanctions enforcement efforts. Congress should continue to look
at how we can, again, bring transparency to enable us to think
about additional legislative solutions and enforcement
mechanisms to address those dark pools.
Mr. Gonzalez. Thank you. Thank you so much, and I yield
back.
Chairman Luetkemeyer. The gentleman yields back. Now we
will go to the gentleman from Pennsylvania, Mr. Meuser,
recognized for 5 minutes.
Mr. Meuser. Thank you very much, Mr. Chairman. Thank you to
our witnesses. I thank Chairman Luetkemeyer for holding today's
hearing, a pretty critical issue the approach we take in
regulating the flow of capital into China. I do support the
approach taken by Mr. Barr's bill, H.R. 760, which employs a
scaffold-like approach in addressing the complex issue of
sanctions. I do think focusing on clearly defined areas of
risk, H.R. 760 ensures that investments to U.S. investors are
not inadvertently hindered and does not give Europeans, or the
rest of the world for that matter, a free pass.
Mr. Feddo, you led CFIUS effectively during your time in
the Trump Administration. Can you elaborate why setting up a
type of NewBound investment plan would create--a new regime
would create more bureaucracy than using the tools of the
Office of Foreign Asset Control as described in Mr. Barr's
bill?
Mr. Feddo. Thank you, Mr. Meuser. Let me just say, whatever
Congress legislates, there will be resource costs associated
with it. My view, articulated in my written testimony, is that
in creating yet another regulatory regime instead of relying on
existing regimes, existing definitions, existing
infrastructure, a huge wealth of institutional knowledge and
experience at OFAC and other parts of the U.S. Government that
have been implementing and administering sanctions for a very
long time, instead of leveraging that and having an efficiency
factor and an immediacy to what the Congress does, drafting new
regulations, redefining terms, explaining and scoping what a
sector-like artificial intelligence is, it is incredibly
difficult, and it will take more resources and more time than I
think the administration or the Congress expects. If we really
want to attack this problem as quickly as possible, a bill like
Mr. Barr's bill does that right away and leverages work that
the government has already done identifying entities of
concern.
Furthermore, sanctions have this ripple effect that we
talked about. One that is really important, I did not get to
mention from my testimony, is this idea of the 50 percent rule.
If a party is blocked, any entity or joint venture (JV) that
has 50 percent or more ownership interest in is also blocked by
operation of law. That has a huge effect on affiliates and
subsidiaries of the named entity, whereas, for example, in the
CMIC sanctions, there is no 50 percent rule, and it has little
effect. There are ways to do this without reinventing the wheel
and spending an immense amount of time drafting regulations
that will inherently be confusing for the private sector.
Mr. Meuser. Thank you. Mr. Ashooh, the private sector has
been reacting. What are your thoughts on the so-called de-
risking, as we put it, as opposed to decoupling, as well as
investors' attitudes the last couple years toward China as far
as foreign investment goes?
Mr. Ashooh. Sure. We have seen the de-risking happening. It
is happening because it is apparent to anybody investing in
China that the risks have gone up. I mentioned Hong Kong as a
very sobering example of how the Chinese approach to economics
has changed. We see human rights violations without peer in the
Xinjiang Province, and the United States took action to deal
with that, but those infractions still continue, so it is not
getting any better. I think that in the case of, in particular,
private industry, on whom the U.S. Government relies for U.S.
policy to be effective, remember, in the case of financials or
technology, those two areas are so broad and vast, the U.S.
Government cannot possibly implement the policy on its own. It
needs the cooperation of industry, and in the case of de-
risking, there are many ways serving U.S. policy for us.
Mr. Meuser. Okay. It looks like China is certainly lacking
in capital investment. Do you feel that they will be able to
make up for it, or do you see a downward trend in China
manufacturing as well as their economic viability?
Mr. Ashooh. Obviously, their system is not a capitalist
one, and it is difficult to predict, but I will say this. The
answer has a lot to do with what the United States does.
Mr. Meuser. I am sorry. I am over time. We will talk later.
Mr. Ashooh. Sure.
Mr. Meuser. I yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentlemen's time has expired.
With that, we will go to the gentleman from North Carolina. Mr.
Nickel is recognized for 5 minutes.
Mr. Nickel. Yes. Thank you, Chair Luetkemeyer and Ranking
Member Beatty. We are holding this hearing in the name of
national security while simultaneously jeopardizing our
national security by failing to provide needed aid to our
allies in Ukraine and in Israel. We should be talking about
Ukraine and the urgent need to stand with our allies. Listen, I
believe that a majority of my colleagues in the Republican
conference support aid to Israel and Ukraine, yet we continue
to fail to act, and it is a shame because a bipartisan majority
in Congress supports doing these things for our national
security, yet a minority of the Republican conference seems to
have the power to block action.
Ukraine is running out of bullets in their war for
democracy against Putin, and our ally, Israel, faced the
deadliest attack on the Jewish people since the Holocaust. The
time for action is now. Every day we fail to act is a gift to
Vladimir Putin, and if we gift wrap Ukraine and hand it over to
Russia, it will be among the greatest failures of American
foreign policy in our Nation's history. Russia will not stop
with Ukraine. While the costs of standing with Ukraine are
high, we will spend a hundred times more money containing an
emboldened Russia around the globe if we fail to act.
On today's hearing on outbound investment in China, it is
certainly important as China's growing role in the
international economic landscape generates legitimate questions
and concerns. Competing effectively with the Chinese Communist
Party is essential for our national interest. The Chinese
Communist Party's military-civil fusion policy, which demands
that all Chinese firms support military needs upon request,
poses a direct challenge to our national security and economic
integrity. We should work together across party lines to
develop a strategic and transparent approach to outbound
investment that safeguards our national interests without
stifling economic growth. We do not want U.S. capital
inadvertently bolstering China's military capabilities. I would
also like to note that we should also be screening outbound
investments to places like Russia, Iran, and North Korea.
First question to you, Ms. Kilcrease. To what extent is the
U.S. Government currently in a position to effectively
understand, monitor, or control outbound investment activities?
Ms. Kilcrease. Thank you for the question, sir, and it is
worth noting, across the range of adversaries that you just
noted, there are certainly restrictions, particularly in the
Russia case, related to outbound investments under existing
sanction regimes, so I would hope that investment flow has
dried up at this point given the existing sanctions. On the
broader issue of transparency and disclosure this has been a
common theme that has come up where we know that there is a
concern, but it is difficult to get precision around exactly
the types of risks that can present and the types of
transactions that are actually happening in the wild,
particularly as we think about evasion and circumvention of
convention of increasingly sophisticated actors, so there is
certainly a need for increased transparency.
Mr. Nickel. Thanks, and again to you. Considering the
Chinese Communist Party's military-civil fusion policy, could
you explain how the Chinese Government might use this strategy
to encourage foreign investments into China, specifically to
facilitate technology and capital transfer to Chinese firms?
Ms. Kilcrease. Absolutely. It is one of the challenges in
trying to craft a targeted regime, whether it is under export
controls or investment controls, where you are trying to
distinguish civilian and military end uses in the China market.
Military-civil fusion makes that an increasingly complicated
effort to do, and I think what we are starting to see in
government policymaking, including through the administration's
October 7 export controls, is a movement toward a countrywide
approach where we are just setting clear technical parameters
for what sorts of technology are most relevant to national
security and saying that no export can go beyond that technical
parameter that is clearly defined in regulation.
That is why in this conversation, I keep coming back to the
technology approach in addition to an entity approach because
we have these clear definitions in the export control context,
and we can leverage those to get at this countrywide approach
in response to those exact concerns you just mentioned about
the military-civil fusion
Mr. Nickel. Ms. Kilcrease, what is the most effective way
to decide which sectors or activities need screening
notifications, reviews, restrictions? What do you think?
Ms. Kilcrease. I do think here is where we can leverage the
great work that has already been done by our export control
agencies. We have the U.S. Munitions List. We have the U.S.
Commerce Control List. There has already been a great deal of
work to define, with great technical detail and published in a
public way, specific technologies that are controlled, and I
think that is exactly the kind of work that we can build on
when we think of outbound investment controls. We cannot just
say AI. We need to get very specific about what we are talking
about.
Mr. Nickel. Thanks so much, and I yield back.
Chairman Luetkemeyer. The gentleman yields back. With that,
we go to the gentleman from Texas, Mr. Williams, Chairman of
the Small Business Committee, recognized for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman. The
People's Republic of China has an extensive history of
withholding, falsifying, and manipulating data for purposes to
benefit themselves, avoid international financial law, and
conceal their dealings with hostile actors. We know that the
CCP has developed partnerships with other dangerous actors,
like the Russians, North Koreans, as well as aiding South
American drug cartels through the money laundering operations,
and as a supplier of chemicals. These affiliations are
extremely concerning and highlight the need for the United
States intervention in demanding more transparency of the
Chinese financial system, and the bill that I co-lead, the
China Financial Threat Mitigation Act, which passed the House,
is a positive step in the right direction of examining these
threats and further understanding of China's financial
capacity.
Mr. Feddo, how can the United States achieve greater
transparency into the Chinese financial system, and what are
the Chinese so afraid of us finding?
Mr. Feddo. I do not know how we necessarily force
transparency. I am not familiar with the bill, but in the
context with which you just set it up, I have no disagreement
that we need greater transparency and to demand an
understanding of their financial system. I am happy to come
back to you with----
Mr. Williams of Texas. What are they concerned about us
finding, do you think?
Mr. Feddo [continuing]. They are a closed financial system.
Mr. Williams of Texas. Right.
Mr. Feddo. They are a communist country, and they want to
withhold that kind of information.
Mr. Williams of Texas. Okay. The rate of Chinese
advancement in the field of semiconductors is another threat to
U.S. national security, and we are now in a global race to
dominate the chip industry and must explore all options to curb
Chinese dominance in semiconductor development. Despite
restrictions put in place by the United States, reports show
that the Chinese Government and military are still purchasing
chips through an underground market. These chips have enormous
military applications in weapons systems and cybersecurity and
reconnaissance, and they also play a fundamental role in
artificial intelligence technology, which has begun to change
the way military and cyber operations are conducted. In order
to protect U.S. national security interests, we must get
Chinese application of this technology under control. Mr.
Ashooh, could you elaborate on China's efforts to obtain
semiconductor manufacturing equipment and their ability to
develop artificial intelligence technologies and military
applications with this equipment?
Mr. Ashooh. Thank you, Mr. Williams, because I actually
work for one of the leading global equipment providers. Let me
reinforce that I am speaking on my own behalf today, but the
issue you raise is key. The equipment is the enabling
capability. It is well sought after, and it is another case
where muscular use of export controls has worked, and it has
worked. During my time at BIS, one of the number one complaint
any Chinese bilateral conversation the U.S. had, the number one
complaint was over U.S. export controls, which is a good sign
that the system is working.
Mr. Williams of Texas. In recent years, the Biden
Administration has increased regulations on American
businesses, which is allowing our adversaries to gain
competitive disadvantages or advantages. Decisions like
restricting access to political capital through Basel III
endgame proposal, halting us exports of liquefied natural gas
(LNG), and increased burdensome regulations and reporting
requirements will all come down to U.S. companies becoming
unable to operate in a way that bolsters our economy, and it is
important that we return policies to put the United States
first and continue to establish a competitive advantage
globally. We have to be the strongest. Mr. Ashooh, can you
expand on the need for pro-U.S. policy and how increased
regulations can hurt our competitiveness on the world stage and
open the door for China to establish global dominance?
Mr. Ashooh. Absolutely. Sir, the United States cannot out-
China China in being overly restrictive, in picking and
choosing winners, in having a system that is determined from
the top down. The United States magic of our system has been we
inspire innovation and then turn that into business success.
That has to be a global proposition, and it has to be one where
we have friends and allies globally. China is not one of them
right now. We need to work with those that are, and those two
combinations--our innovation, our execution, and working with
partners globally--is what will keep us ahead.
Mr. Williams of Texas. Yes. America first.
Mr. Ashooh. You said it.
Mr. Williams of Texas. Thank you. I yield my time back.
Chairman Luetkemeyer. The gentleman yields, and with that,
we go to the gentlelady from Colorado. Ms. Pettersen is
recognized for 5 minutes.
Ms. Pettersen. Thank you, Mr. Chairman, and thank you all
for being with us today. Since I am usually almost last, being
a freshman, most of my questions have been answered, and so I
want to go beyond the scope of what we have talked about so
far. When I think about my 4-year-old son in the world that he
is going to grow up in and whether or not the United States is
going to continue to lead, there are a few things that are
deeply concerning for me with what we are facing now in
Congress.
Something that we know that is detrimental to the future
success of China is their demographics. They simply do not have
the population to meet the future economic needs. We know that
they recognize this, and that is why they have updated their
immigration system to make sure that they are bringing in the
people to fill that void. Unfortunately, in the United States,
we have rhetoric and the inability to come together on
addressing our failed immigration system. We have cutoff for
decades the ability to bring people to the United States to
meet our current needs, let alone we are not going to be able
to meet the future needs.
You talked about, Mr. Ashooh, the need to have the
competitive advantage around technology and also people. Can
you talk about what we should consider here in Congress? In
Colorado, we have two jobs open for every person that is
looking, and every single business leader that I talk to is
begging for people to come here to have legal pathways, and
they say they come here and they come to get the best
education, they want to work in the United States, and then we
send them away to work for our competitors. Our inability to
actually address the human capital needs of our country, are
you worried about the future of the United States if we do not
come together to address this?
Mr. Ashooh. What a thoughtful question, and I am going to
take it back to a point I made earlier about the U.S. system of
innovation being the envy of the world. It is because of the
dynamics you just mentioned, not only in our open society, when
we welcome those from other countries into our Nation we
benefit from what they know, but in many ways, and certainly in
the case of adversaries, which is why we actually allow
immigrants from Iran, from Russia, from China, because we want
to take what they know and we want to deny it to others. The
U.S. system is one that allows people, properly regulated, to
flourish, and we benefit as a Nation, and I believe the world
benefits from those priorities that the United States is able
to implement.
Ms. Pettersen. Thank you for that. I have heard from many
companies that the benefit that we have in the United States is
people actually want to be here, but we have a huge gap in
actually creating those opportunities and pathways. The other
concern I have, being a freshman, as I mentioned, in Congress,
seems like we create chaos here unnecessary. We shoot ourselves
in the foot, really, when it comes to our economy and the
predictability here in the United States and the faith of the
Federal Government when we cannot even come together on whether
or not we are going to fund critical services. I am very
concerned about the long-term impact of people pulling out from
investments already with what has happened over the last year.
We estimate that over a billion dollars of investment is going
to go elsewhere. Are you concerned with our ability just to
function and what the long-term impacts are on our economy?
Mr. Ashooh. The thing that I am concerned about is one that
is a subject of proverb after proverb. ``History is the best
teacher. Those who cannot remember the past are condemned to
repeat it.'' There are lessons, history is rife with them, that
we need to be paying attention to, and that is my concern. My
concern is we are often in a rush to perhaps take action when
we really should take the time, as the Ranking Member of the
full committee said, get the facts, and that is something that
does seem to be spare these days. Look, the fact that this
hearing is occurring is an example where it is not happening in
this committee right now, but it is in other places, and we
absolutely need to adhere to the lessons that have already been
learned.
Ms. Pettersen. The advantage that we have had in the United
States is that people believe when they invest here, that this
is a country that they will be able to prosper in, and we need
to make sure that continues. I really appreciate the
conversation, and I yield back.
Chairman Luetkemeyer. The gentlelady yields back. With
that, we will go to the gentlelady from California. Mrs. Kim is
recognized for 5 minutes.
Mrs. Kim. Thank you, Chairman. I want to thank the
witnesses for being here today.
There is no question that Xi Jinping is looking to harness
the power of emerging technologies deployed by the private
sector to integrate with the People's Liberation Army's
military weapons. Now, the question is how we can curb the flow
of capital into China to help in the development of emerging
technologies like AI and quantum computing. We need to
implement a time-tested approach that includes our partners and
allies because our country cannot unilaterally reduce capital
flow into the CCP. We need a clear strategy. Earlier there was
a discussion, and I want to ask you for clarification. Does
Representative Barr's bill using the existing list we have been
discussing in the hearing, is that the approach? I am asking
you, Mr. Ashooh.
Mr. Ashooh. Okay. Thank you. It does. No, I think the
strength of the bill is that it leverages a time-tested and
effective already-existing tool that the United States has.
Mrs. Kim. Both Mr. Ashooh and Mr. Feddo, in your view, how
can we incentivize a multilateral approach to curbing the
financing of emerging technologies in China? Do you believe
imposing targeted sanctions can help? Mr. Feddo, you can go
first.
Mr. Feddo. I do think a multilateral approach can help. I
do think that the targeted approach is important. As I
suggested in my testimony, I think it is probably a combination
of types of sanctions that would be most effective in this
context. I agree with my colleagues that using targeted export
controls, a sanctions-like regime that also involves export
controls, would be important, but the entity-focused approach
is immediate and very efficient. I will also just quickly say
that it appears that venture capital investment and private
equity investment into startups from the United States or from
foreign investors, writ large, is incredibly down over the last
few years.
It is hard to say how much of that is actually smart money
that is bringing something along with the investment that would
be of benefit, and that executive order, for example, 14105,
focuses on those intangibles. The importance of doing an entity
approach or a sanctions approach is there is a huge ecosystem
of consultants and advisors and others from the United States
who provide those exact same intangibles--managerial
experience, an understanding of relationships and networks, and
other types of guidance--that would be prohibited by an entity-
based or sanctions-based approach.
Mrs. Kim. Would allies and partners be more willing to work
with the United States to screen investments or to impose
targeted sections?
Mr. Feddo. I think the jury is out on that. Just a few days
ago, the European Commission released a white paper on whether
or not it is going to create outbound investment controls
similar to the United States, and, essentially, it said, we are
going to take 2 years to collect data and decide if we even
need to do this 2 years from now. There is a lot of work to be
done on a sort of screening approach or the new outbound
investment approach. Personally, I think given that so many
countries around the world, allies and partners of the United
States, are familiar with economic sanctions and we have done
them in a multilateral way, and export controls, by the way, in
a multilateral way, that I think there would be much more
momentum in that regard.
Mrs. Kim. I think we all believe a key to ensuring emerging
technologies do not fall into the hands of our adversaries,
like China, is to get our partners and allies on board with
similar protective measures. I think we agree on that. Let me
ask you, Mr. Ashooh, are sanctions a time-tested and effective
national security tool, and what would be the advantage of
placing any regime into companies of concern under jurisdiction
of Treasury's OFAC?
Mr. Ashooh. Because it is time tested and effective. Again,
the number one problem with a new regime is that it would
automatically start by not being multilateral because we would
be the only ones doing it, and that would be a disadvantage to
the United States. The SDN List, while it is not necessarily
the product of a multilateral approach, it is well known and
well regarded by our allies and friends, and that gives it
strength. We cannot go it alone on this. In the U.S. export
control system, if you are worried about a particular
technology, such as artificial intelligence or any other
emerging technology, that is already the subject of a
multilateral process. That process can then be leveraged into
the financing. Working with time-tested, effective tools should
be the place where we start.
Mrs. Kim. Thank you. My time is up. I yield back.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, we go to the gentleman from Illinois. Mr. Foster is
recognized for 5 minutes.
Mr. Foster. Thank you, Mr. Chair, and thanks to our
witnesses. A number of you have mentioned on the collapse of
foreign direct investment into China has actually gone negative
in recent times, and I think the canary in the coal mine here
were the Korean shipbuilders who tried to, after multibillion
dollars invested, concluded they were never really going to be
profitable, tried to get their money out and just had to walk
away from it, and this happened years ago. I have been a little
bit unhappy with the fact that even though this is very obvious
to many observers the mainstream financial media, I think, did
not present a fair view of what the dangers were. I think a
large part of it is that a lot of the interest groups that make
their careers dealing with China were not willing to
acknowledge the problem as quickly as it was obvious to a lot
of observers. Do you think I am correct in that? Has there been
a lag in getting the problem, in getting your money out of
China recognized, or is that just something? My wife is Korean,
so she, like, gave me early warning a few years ago that
certainly the Korean press, they understood the difficulty in
getting money out. I was just wondering if you share my
impression there.
Mr. Ashooh. I am not a student of the dynamic you are
referring to, but it sure makes a lot of sense to me.
Mr. Foster. Okay. Now the big story this week is the
collapse of Evergrande which is referred to by some of the wags
as the largest of the endemic real estate firms, which is an
interesting adjective, and they have something like $300
billion in debt and $20 billion in foreign debt. Do we have any
reading on whether the foreign investors are going to be
treated fairly in that liquidation or not, or do you have a
guess?
Mr. Ashooh. I would be worried.
Mr. Feddo. I am not aware of any indication.
Mr. Foster. Any indication, yes, because I think that is
something we all have to look at because the reason you invest
in places like China is, at some point, you expect to get your
profits out. It is unclear to me, for example, whether Tesla
investors are ever going to get their money out. When they are
faced with a level of subsidy where there are gigantic--I think
you look on Bloomberg, and they have these videos of gigantic
graveyards of electric vehicles that were manufactured not to
be used but to capture their subsidies. You can look at the
Chinese success in capturing the solar panel market, but they
have done this, and they have just lost their shirt on that
investment. You can make the argument that our best play there
is to simply say, okay, you are going to subsidize your solar
panels to that extent. Let us just buy everything cheaper than
the cost of production from them, decarbonize our economy, and
then slowly convert to a U.S. manufacturing base for next-
generation solar panels.
I think we have to be strategic in this, and I think that
the Biden Administration, for example, in solar panels, their
pragmatic approach to say, look; to decarbonize our economy, we
are going to have to continue buying over-subsidized Chinese
panels and let them lose money manufacturing them. We will
decarbonize our economy and then concentrate on next-
generation. That seems like a very good strategic management of
this.
Now, Ms. Kilcrease, you have mentioned the importance of
thoughtful collaboration with our allies, and this is another
thing that sort of gives me heartburn about what the
administration is doing and a lot of the rhetoric on Capitol
Hill, that it seems to me that if we are going to draw a fence
around our economy, that fence should not be drawn at the
borders of the United States but around the free economies of
the world, the free democracies of the world. I am not worried
that, for example, if key components in the semiconductor
supply chain go through Japan, for example, or Korea, and the
only reason to be worried about Taiwan, frankly, is the
military threat there. How do we best handle that, and do you
have any comments on what the administration might be able to
do better?
Ms. Kilcrease. Thank you for the question. It is so
important, as we have all noted, to the importance of working
with our allies, and it is absolutely right. I mean, we need to
be thinking about techno-democracies and how we can work
together to identify those technologies that will be critical
and make sure that our institutions are fit for purpose. There
is an ongoing conversation, for example, about the Wassenaar
Arrangement, which is one of our key export control regimes
that includes Russia and does not enable the same sort of
robust country-specific concerns as we might want in the China
context. There is a lot of analytic and diplomatic work that
the United States needs to push forward to make sure that we
have the structures in place to, again, identify these areas of
strategic technologies of shared concern with our key allies,
and then make sure we have our domestic authorities aligned and
make sure we have cooperation mechanisms so that we can align
foreign direct investment (FDI) screening and export controls
and whatever additional tools that may be coming down the line.
Mr. Foster. Yes, thank you, and when you figure that out,
please let us know.
Ms. Kilcrease. Will do.
[Laughter.]
Mr. Foster. Thank you. My time is up.
Chairman Luetkemeyer. The gentlemen's time has expired.
With that, we go to the gentlelady from Texas, Ms. De La Cruz,
for 5 minutes.
Ms. De La Cruz. Thank you, Mr. Chairman, for holding this
hearing today, and thank you to the witnesses for appearing
before us.
Decades of trade has enriched China, while D.C. bureaucrats
believed that including them in the U.S.-led global system
would make China open up and become a cooperative part of that
system. Unfortunately, this was not the case. China has greatly
profited from trading with us, while at the same time
challenging our interests around the globe, supporting
undemocratic countries that invade our neighbors, like Russia,
and sending deadly fentanyl to our country, resulting in the
deaths of tens of thousands of Americans. As we look toward the
future of our relationship with China, we must acknowledge that
we live in an extraordinary time, rapidly transforming
technology that will redefine the 21st century and the country
that gets to lead it. As the most innovative country in the
world, it is in our national interest to protect our technology
and not let it get into the hands of adversarial nations like
China.
Mr. Ashooh and Mr. Feddo, can you explain how the Chinese
military industrial complex has relied on U.S. technology and
expertise to boost their own industry?
Mr. Ashooh. Your question gets to the heart of why export
controls matter and why we talk so much about both those tools
being specific and multilateral so that we can control the flow
of technology. It has worked well for the United States to
consider China a market, but it has also worked well for the
United States to significantly and impactfully restrict
commerce, when it is in our national security interests, which
it has been. There is a great deal that we allow to go to
China, and there is also a great deal that we do not. The
challenge is, as we are discussing today, it is not just about
technology in the form of commodities or technology in the form
of information. It is also in the form of dollars, and that is
why we need to evolve and deal with the threats as they emerge,
and this is one we are talking about today.
Ms. De La Cruz. Thank you.
Mr. Feddo. I will just add to that. It is my understanding
that the PRC takes a whole-of-government approach to this
situation that you have described. Civil military fusion is
real, and that is why I believe that the U.S. Government has to
have a whole-of-government approach as well, whether it is
export controls, the Committee on Foreign Investment in the
United States, the Federal Bureau of Investigation (FBI) and
the Justice Department prosecuting the commercial espionage and
the theft of intellectual property in the United States. All of
that has to be fully resourced and prosecuted aggressively to
protect and defend against those attempts by the military
industrial complex in China.
Ms. De La Cruz. Thank you, and how much growth is the
United States losing to China when they steal our technology or
build high-tech industries on the back of U.S. technology?
Mr. Ashooh. It is a difficult thing to put a dollar figure
on, but it is significant. That said, the challenge for the
United States is to stay current with Chinese efforts to poach
U.S. technology, and as has already been mentioned is this
concept of military-civil fusion, which was an unrealized goal
for many, many years until President Xi forced it into reality
and made, quite frankly, the U.S.'s export control regime's job
harder ensuring that technology did not end up in the wrong
place. Again, that is part of the reason why we need to talk
about the funding of such technologies because it is a
potential gap.
Ms. De La Cruz. One last question. How much of that do you
know is from espionage as opposed from cooperative business
relationships?
Mr. Ashooh. Personally, I could not put a figure on that.
It is a great question, though.
Mr. Feddo. I do not have the number either, but I know the
FBI director has repeatedly testified before Congress about
opening up investigations related to Chinese commercial
espionage, 1 every 12 hours. I do not know if those numbers
still stick, but it is a significant effort by the Chinese
Government.
Ms. De La Cruz. Thank you. Thank you, I yield back.
Chairman Luetkemeyer. The gentlelady yields back. With
that, we go to the gentleman from Connecticut. Mr. Himes is
recognized for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman, and thanks very much
for this really interesting conversation. I want to drill in a
little bit. I used to work in capital markets, and I am
actually Ranking Member of the Intelligence Committee right
now, so I have a pretty good feel for the propagation of
technology and what works and what does not. I understand the
instinct very much that if there is a rogue or a company that
is serving the People's Liberation Army's (PLA's) interest in
some nefarious way that we might want to bring a whole-of-
government against it, but I hear constantly this idea that why
should we fund our own demise. I am in politics, so I
understand the attraction of that statement, but I think it is
worthy of some scrutiny.
Here is a thought experiment I would love to have you
answer. It is, I think, a real-world example. Let us pick a
really scary technology that we do not want the Chinese to beat
us to. Let us just pick cryptographically relevant quantum
computing, right? This is important. Now, there is a Chinese
company that is doing cryptographically relevant computing.
They have done qubits in a scalable way. We really care about
this. Door A: in a hundred-million-dollar early round, they
invite U.S. venture capital in. With that comes 4 weeks of due
diligence, regular updates on the progress of the company,
maybe a board seat, U.S. venture capitalist. Door B is a
Belarusian shady investor in that early round, no due diligence
for U.S. companies, no board seat for U.S. companies. Do we
walk through Door A or Door B? Quickly. We do not need to talk
about it a lot, but do you have strong preferences about Door A
versus Door B?
Mr. Feddo. I would pick Door A.
Mr. Himes. Door A. Anybody picking Door B here?
[No response.]
Mr. Himes. Nobody is picking Door B.
Mr. Ashooh. No, and what Door A does offer is something we
talked about earlier, which is insight.
Mr. Himes. Insight.
Mr. Ashooh. Insight.
Mr. Himes. I am Ranking Member of the Intelligence
Committee. We spend $85 billion-ish a year trying to collect
information on this sort of thing, and again, nobody is saying
Door B here. Everybody is saying let us do the 4 weeks of due
diligence, let us do the site visits, let us get the board
seats because we want that information. We do not want the
Belarusian angel investor to get that information. One of you
worked on CFIUS. Okay. Two of you. Philosophy of CFIUS, as I
understand it from 1968 onward, was that we perceive
antagonistic adversarial companies' investments in our
economies as a risk, as providing benefit to potentially China
and risk to us. As we talk about restricting investment into
Chinese innovative companies, are we not implementing a Chinese
CFIUS program which adds risk to us and benefit to them? Help
me understand why we are not implementing a reverse CFIUS in
assistance of China. Help me understand that.
Mr. Feddo. It is a little bit of logic jiu jitsu there. I
mean, I get your point.
Mr. Himes. It is not jiu jitsu. I think it is called the
converse.
Mr. Feddo. CFIUS is created to prevent exactly what you
described behind, for example, Door A, right? I am not
advocating for a CFIUS-like structure with respect to outbound
investment. My position is there are clearly entities in China
that are affiliated with the Chinese military and should be off
limits for services and intangible support that Americans could
provide to the advancement of those high-tech companies.
Mr. Himes. Yes, I got it. I got it, and do not get me
wrong. Again, I spend a lot of my time on national security, so
when there is cutting-edge research being done, innovations
being done that could pose a threat, I want us to know about
them. I want us to be there first. I want us to know about
them. I think the idea of foreclosing the opportunity for
friendly capital to go there is precisely counterproductive to
that. Sanctions, I think, are a powerful tool. Multilateral
action is a tool. There are a lot of sources of money out
there. Do you think the United States is ever going to succeed
in cutting off all of the sources of capital to roguish,
dangerous companies? Does anybody believe that?
[No response.]
Mr. Himes. Okay. I also have concerns, by the way, about
effectiveness. In 2022, the Biden Administration forbids the
sale of 14 nanometer technology, semiconductor technology to
China. Last year, Huawei came out with a Mate 60 Pro phone.
What is the semiconductor in a Mate 60 Huawei phone? Anybody
know?
Ms. Kilcrease. I believe it is 7 nanometers.
Mr. Himes. Seven nanometers. Thank you. I yield back.
Chairman Luetkemeyer. The gentleman yields back. Now we go
to the gentleman from New York. Mr. Meeks is recognized for 5
minutes.
Mr. Meeks. Thank you, Chairman Luetkemeyer and Ranking
Member Beatty, for holding this important hearing and
permitting me to participate in it. Today's topic is crucial.
The People's Republic of China is America's foremost strategic
competitor. It has 1.4 billion people, and it is the second
largest economy in the world. In crucial technology sectors,
the PRC has shown that not only can it copy American tech, but
it can compete and innovate. The balance of power between the
United States and China depends on which country can create and
harness the technology that will power both the economies and
the militaries of tomorrow.
Outbound legislation addressing PRC technological
development should comprehensively, in my belief, limit
American investments in crucial technologies, but also should
do so in a targeted way without shooting ourselves in the foot.
In my view, the legislation that balances these equities, of
course, is H.R. 6349. We have done this bill in a bipartisan
way. I have co-led it as the Ranking Member of the House
Foreign Affairs Committee, along with Chairman Michael McCaul.
An outbound regime that combines transparency and prohibitions
on investments in the most sensitive technology sectors is the
best way to safeguard United States' national security, while
at the same time maintaining open global capital flows and the
United States' preeminent position in the global markets.
With that, I wanted to just ask a few questions about what
would help delineate between the different approaches to
address the outbound issue, and so I will start with Ms.
Kilcrease. Mr. Himes talked about CFIUS, so I was wondering if
you could tell us what are some of the critical problems that
an outbound regime should tackle that cannot be addressed
through our existing CFIUS sanctions and export control
regimes?
Ms. Kilcrease. Yes. Thank you for the important question. I
do think that we can leverage existing tools to a good extent
to get at these issues, but, of course, there is a gap. CFIUS
deals with investment in our U.S. market, not outbound
investments, so that is not the appropriate tool. Export
controls can do a lot of heavy lifting here, but they are not
designed to get at the financing that can flow along with a
technology transfer. As we think about constructing a new set
of tools or strengthening our existing tools, I think there are
a lot of synergies, for lack of a better word, between the
various proposals that have been put on the table. I actually
do not see a technology-based approach that leverages existing
export control lists as mutually exclusive with an entity-based
approach. I think those can work in tandem, so long as we make
sure that we are not setting up an intensive screening process
and that we are creating very clear technical rules that the
private sector can comply with. I think we can leverage the
best of some of the ideas that have been coming out of this
debate on that.
Mr. Meeks. On that, can you tell me what are the benefits
of utilizing, say, a sector-based approach of countries of
concern instead of having a case-by-case or a review or a
company-by-company-based review?
Ms. Kilcrease. Mm-hmm.
Mr. Meeks. What are the differences, and what do you see
the pros and the cons are? I will start with Ms. Kilcrease, and
if someone else wants to jump in on that, that is fine.
Ms. Kilcrease. Yes. I think the benefit of a technology-
based approach is that first of all, it aligns with where the
U.S. Government is headed on export controls anyways. The novel
thing in the October 7 export controls released by the
administration was they set a cut line, a pretty clear
technical cut line, that said above this threshold you cannot
do a technology export to China because, whether it is civilian
or for military purposes, it is a de facto national security
risk. I think there is a lot of logic in applying that sort of
countrywide bright-line test using clear technical
specifications in your sort of sector-based approach. I think
there is a lot of logic to that, and it gets to some of these
concerns we have heard about military-civil fusion and the
process for listing entities. I personally believe that having
a technology-based approach, again, leveraging what we are
doing in the export control context, makes a lot of sense.
Mr. Meeks. I want to get one thing in because I know Mr.
Ashooh is working for a leading American semiconductor tool
company that creates some of the most complicated machinery in
the world. Most of those firms that lead in this space are
American, but several are also Japanese and European. Can you
talk about the importance of the multilateral approach that
someone was talking about for any American policy?
Mr. Ashooh. I do not think we can stress enough the
importance of any approach being multilateral, especially in
advanced technology. There is this alluring thought that just
because the United States is the most innovative country in the
world, that we have a lock on all the emerging and critical
technologies. We do not. Many other countries will speed ahead
of us if we restrict without that kind of collaboration. I
credit you for asking the question because it is something that
cannot be stressed enough.
Mr. Barr [presiding]. The gentlemen's time has expired. The
gentleman from California, Mr. Sherman, is recognized.
Mr. Sherman. I thank the subcommittee for allowing me to
participate. As I think the gentlewoman from Texas pointed out,
we have an enormous trade deficit with China because we granted
the most favored nation status. We, therefore, have a trade
deficit of over a third of a trillion dollars every year. That
means they have built up, every decade, $3 trillion that they
can spend or invest. The idea that we can prevent them from
being able to fund this $20 million project or this $60 million
project is kind of silly. If Americans cannot invest in a
particular company on the Shanghai exchange, its price may drop
a little bit. Chinese investors will see that is a buying
opportunity, and the stock will go back up.
While we cannot prevent China from funding $20 million
here, $50 million there, we can discourage the export of
American technology. It is one thing to say, oh, here is a
fully drafted plan, and somebody is going to sell it for $40
million, and we are going to prevent the export of that
technology, but often, technology is know-how. It is a
connection, it is an idea, and when an American company has an
incentive to provide that to a Chinese partner, it will be
provided. The best example of this was we had American
companies contract with China to put their satellites in orbit,
so what did our companies do? They told the Chinese how to do a
better job with their rockets, and so did our insurance
companies who are insuring those launches. We want to
discourage joint ventures, major venture capital investments by
people in the United States who have ideas and have knowledge
and contacts that they could pass on.
Now, while we cannot starve China for investment capital,
we do not need to incentivize it. We have a capital gains
allowance in our tax system. The thinking is that we should
forego tens, maybe hundreds of billions of dollars of tax
revenue to encourage people to buy stock, which builds the
economy. When they buy stock in a Chinese company, they are
building the economy of China. Ms. Kilcrease, can you think of
a reason why we should provide enormous tax incentives for
people to invest in Chinese companies?
Ms. Kilcrease. I cannot, sir. That does sound interesting.
Mr. Sherman. Does any of our other witnesses think it is a
good idea to provide the capital gains allowance and the step
up in basis upon death as investment incentives when you are
investing in Chinese companies? One-word answer?
[No response.]
Mr. Sherman. I think both of you are shaking your head no?
Yes. For the record, we have one oral no and two nonverbal
noes. Now, if it was my preference, we would not have American
capital flowing to China at all, except we have a certain
vulnerability. Because we have this huge trade deficit, they
have a lot of money, and we need them to invest it in the
United States. While stock investments and equity investments
are roughly equal going in both directions, they have more than
a trillion dollars more of debt capital that they provide the
United States. Now, debt capital is not as valuable to our
economy as equity capital, but it is a trillion dollars; so, it
is very hard to say we are going to cut the flow of capital in
one direction.
I will point out as that capital gains allowance, China has
investment incentives for its own people to invest in Chinese
stocks. They do not provide those incentives to invest in the
United States stocks, so there is certain fairness there.
Finally, I will point out as to the trade deficit, we have
tariffs on China. Their tariffs on our goods, higher, and they
can orally instruct their companies not to buy American goods.
We cannot prove it, we cannot know about it, they just do not
buy, and that is why we have a huge trade deficit. That is why
we need much higher tariffs on Chinese goods to make up for
their non-tariff and nondisclosed barriers, and I look forward
to working with my colleagues on all these matters. I yield
back.
Mr. Barr. The gentlemen yields. The gentleman from Iowa,
Mr. Nunn, is recognized.
Mr. Nunn. Thank you, Mr. Chairman. Thanks for the panel for
being here today. I am very happy to see that Chairman Barr is
leading out this bill to really protect U.S. consumers, the
American-based industry, and, ultimately, combat what we have
seen: a very aggressive buyout by China of U.S. technology
that, ultimately, is going to come back to roost right here in
the United States from a national security perspective.
I want to start here with this conversation on Emily, we
served on the National Security Council together, before your
time, but really talking about from a counterintelligence
threat here, building up a foundation to be successful here. We
talked about the entity-based list. I think we can all agree,
but I want to ask you from your perspective here. The entity-
based list provides us with a foundation. As I understand,
really only the Barr bill is doing that at this point. I think
there are other bills that could come in here, the EL. Talk to
us about the advantages of the entity-based list.
Ms. Kilcrease. Yes. Thank you for the question. Look, I
think where the government has knowledge that there is a
particular entity that is acting against our national security
interests, we should list them, whether it is a full blocking
sanction or other sorts of sanctions. We have a varied toolbox,
and we should think about a range of escalation options within
that toolbox, including the full blocking, but perhaps not
always the full blocking sanction. The private sector, they
want clarity, and one way that you can provide clarity is by
listing those specific entities that the U.S. Government knows
is a problem. While, again, I do not think this is the only way
to tackle the problem, I do think it is an important part of
the overall solution.
Mr. Nunn. I would agree with you. In fact, speaking of
clarity, we were proud to lead the CLARITY Act, which said
specifically what the U.S. Government had to do. One of the
things we tackled on the National Security Council (NSC) was
Huawei and what they were bringing into the system. This
provided a clear safeguard, a red light/green light option
really, for the Federal Government to know what technology they
could invest in, and then which ones were going to be
potentially dangerous.
I want to speak quickly with you, Mr. Ashooh, here. On the
artificial intelligence piece, you have a background in
electronic warfare. I would like to talk about the critical
role that AI is going to play on that. Could you share with us,
as an example, where this would be very important, that this
technology is something we need to keep home at roost here?
Mr. Ashooh. My specific area of electronic warfare was in
the countermeasures space, and it is all about speed of
reaction and understanding threats from non-threats. AI is
going to be a game changer in many ways, but that is the one
that I am particularly paying attention to because we are
talking about human lives in planes and other platforms that
are going to be dependent on our ability to stay ahead.
Mr. Nunn. As an RC-135 guy myself, I really appreciate your
leadership.
Mr. Ashooh. Thank you for your service.
Mr. Nunn. Same to you. I think we recognize that. With
that, Mr. Chair, I would actually like to yield my time to
Chairman Barr here for a follow up.
Mr. Barr. I thank my friend from Iowa for yielding time
because his questions are always so provocative and helpful to
us understanding what is going on here.
Mr. Feddo, let me just conclude our hearing here today by
asking you a question about a criticism of the OFAC sanctions
approach. Those who have advocated for this sector-based
approach have made the argument that Treasury just simply does
not do it. Treasury does not do the job they need to do in
restricting capital flows to Chinese entities of national
security concern, and, specifically, what they say is that an
OFAC sanctions approach or a full blocking SDN sanctions
approach is so powerful that Treasury is reluctant to actually
use it, and Treasury will not designate entities in that
scenario because it is so powerful. They have cited, and this
is a legitimate point, they have cited Treasury's decision to
not designate Hikvision, for example. Tell us why that should
not be a concern.
First of all, being a Treasury alum, I will defend Treasury
a little bit in this respect. As anyone who is plugged into the
national security apparatus and government functions, Treasury
is the implementer, administrator, and enforcer of economic
sanctions. It does not act in a vacuum and makes decisions
about who to designate or to sanction; the State Department,
Treasury, the NSC, the White House, they all make that
decision. If there have not been additions to the list, that is
because the White House and the executive branch as a whole
have made that decision.
One advantage of your bill, and this is why I have been
advocating for any solution in this respect regarding outbound
investment restrictions, is that it be done legislatively. You
can put safeguards in and hold the government accountable and
justify to the Congress why X or Y has not been named to a
list.
Mr. Barr. The gentleman's time has expired, and I thank our
witnesses for all of their testimony.
Without objection, all members will have 5 legislative days
within which to submit additional written questions for the
witnesses to the Chair, which will be forwarded to the witness
for their response. I ask our witnesses to please respond as
promptly as you are able.
[The information referred to follows:]
Mr. Barr. This hearing is now adjourned.
[Whereupon, at 12:04 p.m., the subcommittee was adjourned.]
A P P E N D I X
January 30, 2024
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[all]