    [Senate Hearing 118-655]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 118-655

                  ADVANCING NATIONAL SECURITY THROUGH EXPORT
                    CONTROLS, INVESTMENT SECURITY, AND
                    THE DEFENSE PRODUCTION ACT

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

                                    HEARING

                                   before the

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

                        ONE HUNDRED EIGHTEENTH CONGRESS

                                 SECOND SESSION

                                       ON

           EXAMINING HOW TO COORDINATE EXPORT CONTROLS AND INVESTMENT
             SECURITY POLICIES AND WHAT STEPS CONGRESS CAN TAKE
             TO STRENGTHEN THESE AUTHORITIES

                                   __________

                                 JULY 25, 2024

                                   __________

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

                    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                                  ______

                     U.S. GOVERNMENT PUBLISHING OFFICE

    60-409 PDF                WASHINGTON : 2026

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                           SHERROD BROWN, Ohio, Chair

    JACK REED, Rhode Island              TIM SCOTT, South Carolina
    ROBERT MENENDEZ, New Jersey          MIKE CRAPO, Idaho
    JON TESTER, Montana                  MIKE ROUNDS, South Dakota
    MARK R. WARNER, Virginia             THOM TILLIS, North Carolina
    ELIZABETH WARREN, Massachusetts      JOHN KENNEDY, Louisiana
    CHRIS VAN HOLLEN, Maryland           BILL HAGERTY, Tennessee
    CATHERINE CORTEZ MASTO, Nevada       CYNTHIA M. LUMMIS, Wyoming
    TINA SMITH, Minnesota                J.D. VANCE, Ohio
    RAPHAEL G. WARNOCK, Georgia          KATIE BOYD BRITT, Alabama
    JOHN FETTERMAN, Pennsylvania         KEVIN CRAMER, North Dakota
    LAPHONZA R. BUTLER, California       STEVE DAINES, Montana

                         Laura Swanson, Staff Director
                   Lila Nieves-Lee, Republican Staff Director

                           Elisha Tuku, Chief Counsel

                          Cameron Ricker, Chief Clerk
                          Shelvin Simmons, IT Director
                           Pat Lally, Assistant Clerk

                                      (ii)

                                C O N T E N T S

                                  ----------

                            THURSDAY, JULY 25, 2024

                                                                       Page

    Opening statement of Chair Brown.................................     1
            Prepared statement.......................................    28

    Opening statements, comments, or prepared statements of:
        Senator Scott................................................     3
            Prepared statement.......................................    29

                                   WITNESSES

    Thea Kendler, Assistant Secretary for Export Administration,
      Department of Commerce.........................................     5
        Prepared statement...........................................    30
        Responses to written questions of:
            Chair Brown..............................................    48
            Senator Scott............................................    50
    Paul Rosen, Assistant Secretary for Investment Security,
      Department of the Treasury.....................................     6
        Prepared statement...........................................    37
        Responses to written questions of:
            Senator Scott............................................    72
            Senator Warren...........................................    79
            Senator Fetterman........................................    80
    Grant Harris, Assistant Secretary for Industry and Analysis,
      Department of Commerce.........................................     8
        Prepared statement...........................................    39
        Responses to written questions of:
            Senator Scott............................................    82
            Senator Warren...........................................    85
            Senator Fetterman........................................    86
    Laura Taylor-Kale, Assistant Secretary for Industrial Base
      Policy, Department of Defense..................................     9
        Prepared statement...........................................    43
        Responses to written questions of:
            Senator Scott............................................    89

                  Additional Material Supplied for the Record

    U.S. Department of State denial document.........................    90
    Letter submitted by MGS..........................................    97

                                     (iii)

                      ADVANCING NATIONAL SECURITY THROUGH EXPORT
                        CONTROLS, INVESTMENT SECURITY, AND
                       THE DEFENSE PRODUCTION ACT

                                  ----------

                            THURSDAY, JULY 25, 2024

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

                OPENING STATEMENT OF CHAIR SHERROD BROWN

        Chair Brown. The Senate Committee on Banking, Housing, and
    Urban Affairs will come to order.
        Welcome to our witnesses. We face an uncertain world with
    many geopolitical challenges from Russia's continued brutal
    invasion of Ukraine to ongoing conflicts in the Middle East to
    an increasingly aggressive and capable Chinese military. We
    know that China has built that military capability with the
    help of some of America's biggest corporations and even
    American tax dollars.
        For too long, our Government was willfully blind to the
    threat China posed. Multinational corporations eager to move
    jobs wherever they could pay ever-lower wages lobbied this
    body--and Presidents of both parties failed us--for permanent
    normal trade relations with China. When corporations moved
    products overseas, they outsourced the technology and the trade
    secrets along with it. We did nothing to stop it, and now we
    are paying the price.
        We can't make the kinds of mistakes we have in the past. We
    have to be proactive about these threats and take action now to
    protect our national and economic security. And we need to be
    clear: those two issues are intimately connected. You can't
    separate the economy and our national security.
        Today hostile Governments work together more and more to
    challenge the interests and the securities and the values of
    the United States, our allies, and partners around the world.
    Increasingly, hostile Governments use our own technology to
    fuel their destructive efforts. We must lead efforts to stop
    it.
        It is the U.S. Government's job to police the flow of
    sensitive and so-called ``dual use technologies''--technologies
    that can be used for both military and civilian purposes. The
    Departments of Commerce and Treasury, along with DoD, State,
    and other agencies, try to restrict the flow of sensitive
    technologies to our adversaries. We can't allow U.S. innovation
    and investments to be used against us.
        Against that backdrop, NATO met earlier this month. They
    issued a statement addressing these threats. Specifically, NATO
    leaders called on China to ``cease all material and political
    support to Russia's war effort'' including ``the transfer of
    dual-use materials, such as weapons components, equipment, and
    raw materials that serve as inputs for Russia's defense
    sector.'' That was the NATO statement.
        That followed last month's G7 Summit in Italy where the
    United States and our allies reaffirmed our shared efforts to
    implement export controls to a risk--address risks to
    international security and ``to ensure the effectiveness of our
    respective foreign investment screening.'' The G7 leaders also
    noted that measures designed to address risks from outbound
    investments could be important to complement existing tools of
    targeted controls on exports and outbound investments.
        A core element of this Committee's work has been to
    establish and conduct oversight over our export controls,
    investment security, and Defense Production Act authorities.
    Treasury and Commerce have had active and growing caseloads
    since our hearing last year.
        They have expanded controls on semiconductors, equipment,
    and services that could support China's semiconductor
    ecosystem. They have taken steps to establish an outbound
    investment program that would enable us to better understand--
    and to stop--U.S. investments that buildup China's military.
        They have recently issued a proposed rule that would
    significantly expand the Committee on Foreign Investment in the
    U.S.'s ability to review foreign real estate investments near
    military bases, like Wright-Patterson Air Force Base in Ohio.
    It is the kind of action I and many from both parties have been
    pressing for. I hear from farmers in Ohio near our military
    installations who are very concerned about this.
        As we use our export control and investment security
    policies to restrict China's ability to use U.S. technology and
    investments to advance their military capabilities and human
    rights abuses, we must also bolster our own domestic
    capabilities. To that end, I was pleased to see Dr. Taylor-Kale
    and her colleagues--thank you--release the Defense Department's
    first ever National Defense Industrial Strategy earlier this
    year. As a critical economic security tool, this Committee has
    jurisdiction over the Defense Production Act, which must play a
    vital role in advancing that strategy.
        In Ohio, we know the potential here to harness the talents
    and patriotism of America's workers to protect our country. For
    decades, the Air Force Research Lab at Wright Patterson Air
    Force Base near Dayton has been the home of the DPA Title III
    program. Aside from the good work being done at AFRL, the
    Defense Production Act gives the Administration the authority
    to allocate and prioritize critical materials and to increase
    domestic productive capacity to address industrial shortfalls.
        In other words, the DPA allows the Defense Department and
    other agencies to invest in American manufacturing that can
    support U.S. national security as well as making us more
    prepared for emergencies. This work couldn't be more urgent.
        For decades, corporate offshoring and consolidation and
    restructuring--essentially just another elite business school
    term for finding new ways to screw workers to increase
    profits--all weakened our domestic manufacturing sector. Let me
    say that again. For decades, corporate offshoring,
    consolidation, and restructuring, all with the aid and
    assistance of too many members of this body, all weakened our
    domestic manufacturing sector.
        Ohioans know well what it has done to cities like where I
    grew up, Mansfield, our families, our economy. Increasingly,
    people in this town finally are waking up to how it has
    weakened our national security. We know when companies
    outsource jobs they outsource technologies capabilities with
    them.
        There has not been enough appreciation for how much
    innovation happens on the production floor by workers. Over the
    past few years, we have finally taken steps to reverse that
    course, passing CHIPS and Science Act, passing the Bipartisan
    Infrastructure Law. We have increased funding for strategic
    investments using the Defense Production Act. We can do more.
        As Congress prepares to reauthorize the Defense Production
    Act, we need to look at new ways the DPA can support American
    industrial capabilities and help us revitalize our domestic
    industrial base to meet current and future challenges.
        Today we will discuss how we are working with our partners
    to coordinate our export controls and investment security
    policies and what steps Congress can take to strengthen these
    authorities.
        We look forward to testimony from this panel, who can
    update the Committee on their important work.
        Senator Scott.

                 OPENING STATEMENT OF SENATOR TIM SCOTT

        Senator Scott. Thank you, Mr. Chairman. I would like to
    start by reminding this room and our witnesses of the important
    role they play in safeguarding our Nation's economic and
    national security priorities.
        President Reagan once rightly noted that we are in a
    different world, and our defenses must be based on recognition
    and awareness to combat our enemies of the modern day. While he
    was talking about the Soviets, unfortunately, many of our
    adversaries remain the same: Russia, China, Iran, and North
    Korea.
        But, thankfully, what also remains the same is the American
    spirit to innovate and to create the world's leading
    technologies. My own State of South Carolina is an excellent
    example. From F-16s to the world's best luxury airliners to
    leading automotive manufacturing to creating next-generation
    technologies, I would say South Carolina is simply our future.
        But to safeguard that future we must ensure that policies
    created here in Washington don't cutoff growth and stifle
    future innovation. We must have a global economy where America
    is the leader. After more than 3 years of President Biden's
    policies, we have seen soaring inflation that is crushing every
    day Americans, wars across our globe, and our enemies
    challenging us and our allies at every single turn. We can, and
    we must frankly, do better.
        So today as we discuss and evaluate some of our economic
    national security tools, our export controls, investment
    security, and the Defense Production Act, we must keep these
    principles in mind. At times, we must be willing to reassess
    our policies and retool our positions. And, frankly, let's
    consider our allies.
        One thing we certainly learned through COVID was depending
    on China is a really bad strategy. To be effective in
    countering China, we must work with our allies, so that China
    cannot easily find workarounds to our U.S. export controls by
    simply buying these same technologies and equipment from our
    friends.
        A failure to look holistically at our economic strategy can
    and will damage American security, competitiveness, and
    unfairly leave U.S.-led industry behind.
        In fact, a recent study by the New York Federal Reserve
    found that the Biden administration's export control policies
    on the semiconductor industry have led to decreased
    profitability, job losses, and $130 billion in financial loss
    across the industry. With new reports that these types of
    policies have directly led to thousands of layoffs in States
    ranging from Ohio to New York, we must scrutinize the actions
    leading to these results. But it doesn't stop there.
        In my home State of South Carolina, recent actions by the
    Commerce Department to revoke thousands of export licenses for
    gun manufacturers have resulted in millions of dollars in
    losses. I have sent three letters to the Commerce Department on
    this issue, and now reports suggest that we will see over $500
    million in annual losses across U.S. firearms manufacturers.
        Mr. Chairman, I have a letter here that I would like to
    submit for the record.
        Chair Brown. Without objection, so ordered.
        Senator Scott. Thank you, Mr. Chairman. In my home State of
    South Carolina, a small minority-owned firearms business had
    more than $71 million worth of export licenses revoked by the
    Biden Commerce Department. Unfortunately, this meant that the
    firm defaulted on multiple international contracts, and now
    those same contracts are being backfilled by China and others.
    And it is my understanding that these licenses were revoked for
    foreign policy reasons such as furtherance of world peace.
        So instead of supporting American companies, we just handed
    over the marketplace to China. Export controls, investment
    security, and important tools like the Defense Production Act,
    should be used in a responsible manner that maximizes growth
    here at home and economic pain for our adversaries. I strongly
    believe that when we have a better domestic environment, a
    better ability to innovate and manufacture, that means that
    America is winning.
        Thank you, and I look forward to discussing these important
    issues with our witnesses.
        Chair Brown. Thank you, Senator Scott.
        Our witnesses today, two of them have been in front of our
    Committee before. Two are new witnesses. Thank you for joining
    us.
        Thea Kendler is Assistant Secretary for Export
    Administration at the Commerce Department. Paul Rosen is
    Assistant Secretary for Investment Security, Department of the
    Treasury. Grant Harris, Assistant Secretary for Industry and
    Analysis, Department of Commerce. Dr. Laura Taylor-Kale is the
    Assistant Secretary for Industrial Base Police at Department of
    Defense.
        Thank you--all four of you--for your public service, and
    welcome, and you are recognized, Ms. Kendler.

       STATEMENT OF THEA KENDLER, ASSISTANT SECRETARY FOR EXPORT
                 ADMINISTRATION, DEPARTMENT OF COMMERCE

        Ms. Kendler. Thank you, Chairman Brown, Ranking Member
    Scott, distinguished Members of this Committee. Thank you for
    inviting me to testify about the Biden-Harris administration's
    ongoing efforts to administer export controls and protection of
    U.S. national security interests.
        I appreciate the opportunity to work together with you to
    ensure we are effectively countering China's military
    modernization and human rights abuses, degrading Russia's
    ability to wage war on Ukraine, identifying and controlling
    technologies that are critical to our national security, and
    collaborating with our allies and partners in these efforts.
        BIS does not take on these tasks alone. License
    applications and licensing policy are adjudicated and set
    together with the Departments of Commerce, Defense, Energy, and
    State. Our greatest priority is to effectively apply export
    controls to thwart China's military modernization efforts.
        We know that China is going to great lengths to obtain key
    U.S. advanced technologies with military potential, and we are
    responding accordingly as demonstrated by our October 2022 and
    2023 advanced computing controls. These restrictions aim to
    impede China's ability to develop artificial intelligence
    systems used for the development of advanced weapons systems,
    malicious cyber activity, and other military and intelligence
    applications.
        With our interagency partners, we closely scrutinize
    license applications to the PRC focusing on end users and end
    uses as well as risk of diversion to unauthorized activities.
    We are not afraid to take the time we need to carefully analyze
    applications involving PRC parties to assess any and all risks
    to U.S. national security and foreign policy.
        Just this morning we released new proposals to expand
    restrictions on exports and the provision of support to
    military intelligence and foreign security end users and end
    uses consistent with the fiscal year 2023 NDAA. This includes
    controls on U.S. person support to such activities in China.
        And last week we took action to ensure strong U.S.
    leadership in the development of standards for critical and
    emerging technologies. Through an export controls rulemaking,
    we enabled increased U.S. private sector participation in
    standard-setting organizations. This undercuts any advantage
    China could establish in the absence of U.S. industry
    participation.
        At the same time, our commitment to working with allies and
    partners on export controls has never been stronger. Export
    controls are more effective when used in concert with our
    partners and allies. We are in the process of finalizing
    controls now on new critical and emerging technologies,
    including quantum, and some of our allies and partners have
    already taken parallel action. We continue to surge forward in
    common controls against Russia with our 38 global export
    control coalition partners.
        Earlier this month I was in Brussels meeting with
    counterparts from the European Commission, Japan, and the
    United Kingdom, to discuss combined efforts to enhance the
    controls we imposed on Russia in response to its attacks on
    Ukraine. We have also coordinated outreach to third countries
    outside of our coalition to more forcefully combat illegal
    diversion.
        Alongside our tireless commitment to control the export of
    U.S. technologies, BIS is deeply dedicated to ensuring the
    health of our Defense Industrial Base. Through the critical
    tools provided by the Defense Production Act, we work alongside
    interagency partners to ensure that critical Department of
    Defense and emergency procurement needs are met.
        Our DPA authorities also enable us to issue highly
    confidential and bespoke surveys to industry participants
    informing our use of export controls and interagency approaches
    to national security issues. Reauthorization of the DPA is
    critical for BIS's support to our Defense Industrial Base.
        Dual-use export controls have never been more necessary to
    our national security. We, in Export Administration at the
    Commerce Department, are focused on aggressively contending
    with the national security threats facing our country and using
    all the tools at our disposal to ensure we maintain U.S.
    technological leadership in furtherance of national security.
        Finally, while I recognize that this is not an
    appropriations committee, I urge you to support additional
    funding for BIS. We are facing more sophisticated threats from
    China, Russia, and Iran, rapid advances in technology,
    increasing complexity of export license applications, and more
    and more critical and emerging technologies subject to our
    controls. To outpace these threats, we need to resource our
    mission appropriately.
        Thank you. I welcome your questions.
        Chair Brown. Thank you, Assistant Secretary Thea.
        Thank you, Secretary Rosen.

      STATEMENT OF PAUL ROSEN, ASSISTANT SECRETARY FOR INVESTMENT
                  SECURITY, DEPARTMENT OF THE TREASURY

        Mr. Rosen. Chairman Brown, good morning. Ranking Member
    Scott, good morning, and Members of the Committee. Thank you
    for the opportunity to provide an update on the work of the
    Department of the Treasury's Office of Investment Security and
    the Committee on Foreign Investment in the United States or
    CFIUS.
        I also want to thank Congress for the authorities and
    resources you have provided since the passage of the Foreign
    Investment Risk Review Modernization Act of 2018, or FIRRMA, as
    well as the constructive and bipartisan support you have
    provided to our national security mission, which has helped
    make possible many of the enhancements I will discuss here
    today.
        Last year I spoke to this Committee about our work and the
    progress we have made to safeguard national security, and today
    I would like to update you on these efforts, which have been
    extensive and ongoing. Over the past 18 months, we have
    strengthened our analytical and operational capabilities by
    building and implementing sophisticated tools, platforms, and
    methodologies for assessing and addressing national security
    risks, employing cutting edge information technology platforms
    to securely manage and facilitate novel aspects of CFIUS's work
    and expanding and deepening our human capital to build a team
    with diverse backgrounds.
        These improvements have enabled us to be more efficient and
    effective, even as we contend with two core challenges.
    Transactions are becoming more complex and sophisticated in
    their structures, and CFIUS is identifying and addressing more
    national security risks than in years past. We have paid
    particular attention to the role of limited partners in
    investment funds, as their access to, influence, and control
    over sensitive businesses can vary considerably.
        All while tackling these challenges, Treasury has
    successfully improved the efficiency of CFIUS's operations. As
    noted in the latest annual report, in 2023, CFIUS cleared 66
    percent of filed declarations or notices within the first 30 or
    45 days, respectively, compared to 58 percent in 2022.
        The rate at which parties withdrew and refiled their
    notices also declined from 23 percent to 18 percent, the first
    such decrease in 5 years. These changes are not incidental but
    reflect improved efficiencies, which is a cornerstone of our
    focus.
        Treasury has also transformed the way the Committee
    approaches compliance with mitigation agreements and
    enforcement thereof. We have expanded and devoted significant
    resources to the monitoring and enforcement mission, including
    by nearly doubling the size of Treasury's team over the last
    several years.
        We have also continued to enforce violations of mitigation
    agreements, where appropriate. In fact, in 2023, CFIUS imposed
    four civil monetary penalties for violations of material
    provisions of mitigation agreements, which was double the
    number of civil monetary penalties that CFIUS had previously
    imposed in nearly its 50-year history. CFIUS has also for the
    first time issued subpoenas pursuant to its authority to
    execute its national security mission.
        We have expanded our efforts to identify transactions that
    were not notified to the Committee voluntarily and that may
    pose a risk to national security. The Committee leverages
    multiple tools to identify and analyze such non-notified
    transactions. And Treasury's non-notified team screens
    thousands of potential covered transactions, ultimately putting
    forward to the Committee for consideration to request to file
    those transactions that may pose a national security risk or
    issues.
        The MineOne transaction that President Biden blocked
    earlier this year came to the Committee from--through the non-
    notified process in the form of a public tip. Treasury has also
    led a number of regulatory enhancements to CFIUS authorities
    over these years. Working with our partners at the Department
    of Defense, Treasury issued a proposed rule this month to
    significantly bolster CFIUS's jurisdiction over real estate
    transactions. We are also working to finalize the proposed rule
    to sharpen our investigation and enforcement tools.
        In many instances, our tools work best when we collaborate
    and act with our allies and partners. And, in 2023 and 2024,
    CFIUS had more than 300 engagements will allies and partners.
    And, since 2019, approximately 30 countries have proposed,
    enacted, or significantly expanded their foreign investment
    review regimes with our support.
        And, last, let me update you briefly on Treasury's efforts
    to implement President Biden's Outbound Investment Security
    Program. Treasury issued a proposed rule last month for this
    program, and my office is working closely with the interagency
    to review comments and prepare a final report.
        This important program's success ultimately will depend on
    the resources we receive, and to that end I would ask Congress
    to fully support Treasury's request in the President's 2025
    budget for this program at 16.7 million.
        Thank you, and I look forward to your questions.
        Chair Brown. Thank you, sir. Thank you, Secretary Rosen.
        Secretary Harris, welcome.

    STATEMENT OF GRANT HARRIS, ASSISTANT SECRETARY FOR INDUSTRY AND
                    ANALYSIS, DEPARTMENT OF COMMERCE

        Mr. Harris. Chairman Brown, Ranking Member Scott,
    distinguished Members of the Committee, thank you for inviting
    me to testify today.
        As Assistant Secretary of Commerce for Industry and
    Analysis, I lead a team of over 265 industry experts and
    economists. Our mission is to support the global
    competitiveness of U.S. industry. This unit, which sits in the
    International Trade Administration, is the analytical engine of
    U.S. competitiveness policy, because it is the broadest
    industry expertise available in any one place in the U.S.
    Government.
        We cover approximately 90 percent of the U.S. economy and
    work on everything from raw materials like critical minerals to
    vital components like semiconductors, to finished goods like
    autos and airplanes. The unit's singular industry expertise,
    our unique commercial perspective, and our advanced analytics
    capabilities are critical to advancing U.S. Government work on
    outbound investments, CFIUS, and supply chain resilience.
        With respect to outbound, Commerce plays a special role in
    supporting the program. Commerce is key to identifying and
    understanding the relevant technologies to be covered and how
    their requirements should be scoped. We have the technical
    fluency and industry relationships to help anticipate the
    national security risks that may be associated with cutting
    edge technologies.
        In addition, my team has spearheaded extensive industry
    engagement, consulting over 450 stakeholders, working with
    Treasury as the development of the program has progressed. This
    is important as we seek to craft an effective program while
    reducing the risks of unintended market effects.
        Commerce will also be key to successful implementation. Our
    sector-specific experts will be indispensable to interpreting
    and recommending action based on analysis of the data received
    through the program.
        Turning to CFIUS, the industry and analysis unit leads
    Commerce's participation in the Committee and analyzes issues
    related to the U.S. business and the market in which it
    operates, market trends, and the business rationales for
    transactions, among other issues. My team works closely with
    colleagues across the Department, especially in BIS.
        In 2022, President Biden directed CFIUS to consider supply
    chain resiliency in its national security reviews. Commerce
    analyzes issues such as the scale and types of supply
    relationships pertaining to a given U.S. company and the
    potential for supply chain disruptions or undue foreign
    influence over specific supply chains.
        More broadly on supply chains, the industry and analysis
    unit has long been central to U.S. supply chain work. We have
    had a supply chain services-focused office for over a decade,
    and for years before that a dedicated team.
        We focus on applied analysis and action. For instance, the
    industry and analysis unit was the first team in the U.S.
    Government to sound the alarm on competitiveness in the
    semiconductor supply chain and spring into action. The team
    mapped out chokepoints, created an early warning system, and
    connected industry leaders with suppliers to encourage
    solutions.
        The team also set to work supporting investments to
    strengthen the supply chain and was recognized for securing
    investments into the United States totaling $34 billion and
    supporting over 20,000 U.S. jobs.
        Last year we established what the White House called a
    first-of-its-kind supply chain center. We are pioneering new
    data-driven tools and creating playbooks to assess supply chain
    vulnerabilities in specific sectors, including for emerging
    technologies. Our supply chain exposure tool provides a common
    operating picture that enables evidence based actions with
    international partners.
        We are also building a diagnostic tool to assess supply
    chain risk across the U.S. economy with an emphasis on risks to
    national security and economic security most relevant to the
    U.S. Government.
        In conclusion, the industry and analysis unit's industry
    expertise is vital to investment security, U.S. technological
    leadership, supporting domestic manufacturing and job growth,
    and addressing unfair trade practices by the People's Republic
    of China.
        The President's fiscal year 2025 budget request for the
    International Trade Administration includes $5 million in new
    funding to support the Outbound Investment Security Program,
    and $12 million to support our supply chain work. In finalizing
    the fiscal year 2025 appropriation bills, we ask that you
    please consider how important it is for U.S. national security
    to support and fund these functions.
        Thank you, and I look forward to answering your questions.
        Chair Brown. Thank you, Mr. Secretary.
        Secretary Taylor-Kale, welcome.

        STATEMENT OF LAURA TAYLOR-KALE, ASSISTANT SECRETARY FOR
             INDUSTRIAL BASE POLICY, DEPARTMENT OF DEFENSE

        Ms. Taylor-Kale. Thank you. Good morning, Chairman Brown,
    Ranking Member Scott, and distinguished Members of the
    Committee. I am grateful for this opportunity to represent the
    Department of Defense today.
        As the first Senate-confirmed Assistant Secretary of
    Defense for Industrial Base Policy, issues of national security
    and issues of economic security interlink for us in the
    Department of Defense. Generally, I interact with the Armed
    Services Committee. However, this Committee has oversight over
    key areas of economic security that are of critical importance
    to DoD--CFIUS, antitrust reviews, and the Defense Production
    Act, in particular.
        Through DoD's role on CFIUS, we see how adversarial capital
    investments in the U.S. technological base attempt to weaken
    the United States by robbing us of our technological know-how.
    Our role in Hart-Scott-Rodino antitrust reviews allows the DoD
    to remain vigilant to adversaries using unfair trade and
    predatory acquisition and investment strategies to weaken the
    U.S. Defense Industrial Base. All of these remain very
    important priorities for the Department of Defense as
    underscored in the National Defense Industrial Strategy, in
    support of economic deterrence, and our warfighters.
        And while I welcome questions on any of these topics, today
    I will focus most of my comments on the Defense Production Act.
    The Defense Production Act expires in September 2025, and the
    Department of Defense strongly supports a 5-year
    reauthorization of DPA and believes that the reauthorization
    needs to happen this year in the NDAA or another means rather
    than risk a lapse of authorities by waiting until 2025.
        Why is that? Because in addition to timely, consistent
    appropriations and multiyear procurement authority, supporting
    the Defense Production Act may be one of the most important
    actions that Congress can take to ensure that the U.S.
    Industrial Base is ready to preserve our military advantage and
    support the warfighter.
        I would also like to take this opportunity to thank
    Congress for expanding the definition of ``domestic source'' in
    the Defense Production Act to include Australia and the United
    Kingdom. This allows us to, in addition to working with Canada,
    to support and work with our allies and partners to strengthen
    our own industrial base as well.
        DoD's primary aim in the use of the Defense Production Act
    is to increase the readiness and resilience of the Defense
    Industrial Base in support of defense critical needs and the
    warfighter.
        Since Congress enacted the DPA in 1950, the Executive
    branch has invoked DPA authorities to manage the Nation's
    defense-related production capacity, our critical supply
    chains, and to protect and strengthen the U.S. industrial base
    in times of war, peace, and national emergencies. And today it
    remains an essential national defense tool.
        Make no mistake, our adversaries attempt to use supply
    chain vulnerabilities to weaken the U.S. economy and our
    military, and the DPA remains one of the most effective tools
    to bolster our domestic industrial production.
        We use the DPA Title I prioritize components for defense
    systems and ensure availability of components does not preclude
    industry from delivering warfighter needs in a timely and
    costly--cost effective manner. We use Title III to alleviate
    pain points in supply chains and expand domestic manufacturing
    of critical technologies and processing and production of
    critical minerals and strategic materials.
        Since the last reauthorization in 2018, DoD appropriations
    for DPA Title III have increased dramatically from an average
    of $70 million a year to about $750 million a year.
        Last fiscal year, we executed over $733 million of DPA
    Title III awards in micro-electronics, strategic and critical
    minerals, kinetic capabilities, energy storage, and batteries.
    Going forward, we need to do more. And, yes, Senator Scott, we
    also need to do so responsibly.
        We recently announced a Defense Industrial Base Other
    Transaction Authorities, a consortium that will allow DoD to
    expand execution of DPA awards more timely and offer more small
    businesses and companies that are not traditionally part of the
    Defense Industrial Base to compete for awards.
        We continue to want to work with allies and partners
    through security of supply arrangements, and of course now that
    we can work with Australia and--Australian and U.K. companies
    as well in support of AUKUS and other secure--in order to
    secure defense critical supply chains.
        As Congress considers reauthorization, we recommend a few
    changes to the DPA law, including raising the DPA fund balance
    to allow that annual fund balance to increase, so that
    appropriations won't be penalized, and we would like to create
    more executive offices in addition to our great partnership
    with the good people of Ohio who work for AFRL.
        We also support increasing the period of availability of
    funds, which will allow the Department to support advance
    procurement of material for defense critical components.
        Again, I am absolutely honored to be here today
    representing the Department of Defense, and ultimately I hope
    that our joint efforts will continue to ensure the necessary
    resources for our warfighters and secure our Nation's economic
    future.
        Thank you again.
        Chair Brown. Thank you, Secretary Taylor-Kale.
        I will begin the questioning with Senator Cortez Masto of
    Nevada.
        Senator Cortez Masto. Thank you, Mr. Chairman. And thank
    you to the Ranking Member for the hearing today.
        Assistant Secretary Taylor-Kale, let me start with you, and
    thank you very much for your comments. I want to commend you
    for the work you have been doing to develop our National
    Defense Industrial Strategy. It has been really a whole-of-
    Government effort, and I thank you for that.
        One question I have, though, is--that concerns me, and I am
    seeing it across the board, is the decline of the defense
    workforce. Right? So there were 3 million people working U.S.
    defense industries in 1985. Today it is only about 1.1 million.
    And I--as we look to strengthen the Defense Industrial Base,
    that includes the workforce.
        So can you talk a little bit about what we should be
    considering, what DoD is doing, how--what are we looking and
    what tools and resources are we utilizing to collaborate with
    Federal agencies, with the private sector, in strengthening
    that workforce.
        Ms. Taylor-Kale. Thank you, ma'am. Glad you asked that
    question. Indeed, the decline of the defense workforce is a key
    area of risk. It is a risk for production in general, certainly
    for production in defense critical supply chains. As part of
    the National Defense Industrial Strategy, we made workforce
    readiness one of the four strategic priorities for that very
    reason.
        The Department of Defense is, in implementing this strategy
    and developing an implementation plan, workforce will remain a
    very important issue, and I would also like to note it is not
    just the Defense Industrial Base workforce but it is also the
    organic industrial base workforce, as well as our acquisitions
    workforce.
        So we need all of them to be able to work in concert to be
    able to, again, bring the capabilities that our warfighters
    need at speed and at scale. We have a number of programs that
    we are developing. We have been focused on the submarine
    industrial base workforce.
        I was just in Michigan on Monday with Secretary of the Navy
    Del Toro as we were unveiling a new initiative in Michigan to
    help reskill and upskill the workforce there, particularly
    automotive workers who may want to work in the submarine
    industrial base workforce, so creating an additional workforce
    in Michigan.
        We continued to promote manufacturing and advance trade
    skills as well. Again, workforce remains a priority and will
    continue to be a priority for us as we continue to want to
    build out the resiliency of the industrial base.
        Senator Cortez Masto. I appreciate that. Thank you.
        Let me jump to Assistant Secretary Rosen. I want to talk a
    little bit about CFIUS. I welcome your proposed rulemaking,
    which adds the Hawthorne Army Depot in Nevada to CFIUS. A
    couple of questions. I guess--I know you are adding 50
    additional facilities as well. What factors contributed
    specifically to adding--if you can tell me, adding the
    Hawthorne Army Depot to the list?
        Mr. Rosen. Senator, thank you for the question and for your
    leadership on these issues. Of course, you mentioned Hawthorne,
    but there is a host of other facilities in your State that are
    on the list, importantly so, Nellis and others.
        So back in--when Congress enacted FIRRMA, it gave us this
    new real estate jurisdiction. And, at the time, we worked
    closely with our colleagues at the Department of Defense to
    develop the initial list. And when we--when we came in, when I
    came in a couple of years ago, we looked at cases and we
    decided working closely with our colleagues at DoD to take
    another look. And, in 2023, we added eight additional bases,
    and as you point out, we are in the process of adding 59 more
    bases.
        And I would defer to my colleague, Dr. Taylor-Kale, for
    some details on this. But as a general matter, what we look to
    is the sophistication of what's going on at these facilities,
    the possibility for potential espionage, how much of it is core
    national security, how much of it is training. That goes into
    whether something should be on a list and what the range should
    be.
        And I should note that this update is the result of a broad
    strategic review led by my colleagues at the Department of
    Defense to really take a holistic view to make sure we are not
    leaving anything on the table in terms of plugging gaps to make
    sure the list is full and complete.
        Senator Cortez Masto. No. I appreciate that, and I--and you
    mentioned FIRRMA 2018, and I supported it, and obviously was
    looking at that as the security of our installations that you
    just mentioned in Nevada and throughout Nevada. So the
    collaboration is key, and it is nice to see that happening, so
    I thank you very much.
        I only have so much time left. One final thing I just want
    to touch on, and, Assistant Secretary Kendler, you mentioned
    this, is more funds. More funds for the Department. My
    understanding is you haven't received funding--an increase
    since 2010.
        And based on that, I would imagine it is challenging now,
    because of the increased capacity of your jurisdiction and
    oversight, to cover some of the coverage that you need with
    less resources. Is that one of the reasons why you are seeking
    an increasing? I guess talk a little bit about that, if you
    would.
        Ms. Kendler. Senator, thank you very much for the question.
    That is right. Taking inflation into account, our budget has
    essentially been flat for quite some time. Basically, the last
    decade it has barely kept up with inflation.
        We do support the President's budget for fiscal year 2025,
    which is a downpayment on what we need in the Bureau of
    Industry and Security. If I had one ask, it would be for funds
    for IT modernization. We need roughly $100 million to take
    antiquated systems and turn them into useful, productive data
    and analytic support.
        We have had issues in providing answers to the Hill in a
    timely way because we don't have an updated modernization
    system, and we are not taking advantage of the data
    capabilities we have to the best of our ability.
        With more funds, we would enhance our technical expertise,
    we would work on data and analytic capability, and then
    certainly our enforcement capacity as well.
        Senator Cortez Masto. Thank you.
        Thank you, Mr. Chairman.
        Chair Brown. Thank you, Senator.
        Senator Scott, the Ranking Member from South Carolina.
        Senator Scott. Thank you, Mr. Chairman.
        Ms. Kendler, I am glad you are here. My colleagues and I
    have written several letters calling for your testimony and on
    Commerce Department's firearm export licensing policies and
    regulations, because unfortunately your policies appear to have
    all the signs of political targeting, costing the industry an
    estimate $500 million per year and generating no national
    security benefits.
        Case in point is the company I mentioned during my opening
    testimony, M.G. Suber & Associates. I am looking at some of the
    denials on these licenses, and the recent, fascinating foreign
    policy pursuant to 22 CFR 120.18(a)(1) and (2) of the ITAR, the
    Department of State may deny a license or other approval when
    the Department deems such action to be in furtherance of world
    peace, denying a company the opportunity to sell firearms to
    Ecuadorian police.
        Next one, same verbiage, deems such action necessary to
    further world peace, denying, again, another license to sell to
    the Ecuadorian military. This minority business owner is
    Ecuadorian, cares a lot about safety in a country where his
    mother born and raised,
        Another one, furtherance of world peace. It is not only
    frustrating and exacerbating, but challenging to see this over
    and over and over and over again. Your firearm policy has
    resulted in over $71 million in licenses canceled for this
    company, meaning they have lost their contracts, and they have
    lost the ability to support the police and the military across
    the Western hemisphere.
        That does not mean that the Ecuadorian police did not find
    another channel. Of course, they went to Brazil, Czech
    Republic, and China to get these orders backfilled. You haven't
    prevented the sale of firearms. You have merely used a
    political tactic to harm an American business.
        What is even worse is that it to me appears to be political
    targeting. The International Trade Association, under your
    leadership, has stopped this company but allowed competitors in
    some of our Nation's poorest areas to not be able to
    effectively create jobs, not be able to effectively produce a
    world-class competitive product and have a market to sell it to
    because you are trying to further world peace.
        Thoughts?
        Ms. Kendler. Senator, I really appreciate you bringing up
    this topic, and I----
        Senator Scott. I am not sure you do, but I think this is an
    important topic that reinforces this Administration's
    philosophical approach to trying to shut down or cutoff gun
    manufacturing in our own country.
        Ms. Kendler. I do appreciate you bringing it up, because I
    think there is a lot of misunderstanding about what we are
    trying to accomplish and what our rules have actually done. Our
    focus is on protecting national security. Full stop. We
    tailored the rule. Our presumption of denial in this rule is
    tailored to ensure that U.S. lawfully exported firearms don't
    end up in the hands of criminals, gangs, cartels, or
    terrorists.
        Senator Scott. May I ask you a question there? Is there
    evidence that his company's firearms sold to the military and
    to the police have not been received by the military or police?
    Is there--is there something specific about this transaction or
    the other three that were denied?
        Ms. Kendler. Senator, I am not in a position to speak to a
    specific company's situation, but I certainly feel sorry for
    your constituent, and I would like to follow up with you in an
    environment where we can talk about a specific company. But let
    me be clear: our presumption of denial, it only applies to non-
    Government entities in the 36 countries designated by State as
    high risk.
        So if these transactions are with Government entities, that
    is not the subject of our presumption of denial.
        Senator Scott. Thank you. Let me just say, I think words
    mean things--Ecuadorian police, Ecuadorian police, Ecuadorian
    military, Colombian military.
        Chair Brown. Thank you, Senator Scott.
        Secretary Taylor-Kale, the current DPA reauthorization
    expires next year, as you know. Senator Ranking Member Scott
    and I filed an NDAA amendment that would extend the DPA.
    Describe if you would why it is a critical tool that needs to
    be reauthorized and how DoD uses its authorities.
        Ms. Taylor-Kale. Thank you, sir. Again, as you noted, DPA
    reauthorization is a priority for the Department of Defense. We
    use the DPA--all three titles--daily. A lapse would ultimately
    impact our warfighter needs and the ability of our--
    particularly our industrial base to address some of the long
    lead items, the long lead times, for critical defense
    components, and would ultimately, again, impact our warfighter.
        You know, annually, we use Title I over 300,000 times to
    prioritize and allocate some of these urgent defense critical
    components and resolve supply chain issues. Without
    reauthorization, by next year we wouldn't be able to do that.
    We also, you know, use Title I really at no cost to the
    taxpayer.
        A lapse would impact our prioritizations not just for us
    but also with our allies and partners. We have over 20 security
    supply arrangements with key partners and allies across the
    globe. Those security supply arrangements have been used with
    Israel, they have been used for Ukraine.
        With Title III, it would also impact industry. It would
    impact small businesses. Forty percent of our Title III DPA
    awards go to small businesses and nontraditional defense
    suppliers. We are using the Defense Production Act Title III to
    expand and bring more nontraditional companies into the defense
    ecosystem. Without Title III awards in the--in the
    reauthorization of DPA title in general, we wouldn't be able to
    do that very important work.
        Chair Brown. Thank you. Secretary Rosen, 2018 Congress gave
    CFIUS the authority to require mandatory filings of foreign
    investments in critical technologies, as you know, since, and
    we have seen increasing attempts by malign actors to target
    U.S. critical infrastructure. That is why I am pushing to give
    CFIUS the ability to require mandatory filings. We need to know
    about these investments. It should not be optional. We file an
    amendment to NDAA to do this.
        Would CFIUS--talk through whether CFIUS would be able to
    better protect the U.S. from dangerous foreign investment if it
    had the ability to require these mandatory filings for
    transactions related to infrastructure.
        Mr. Rosen. Senator, Chairman, thank you for that question
    and for your leadership on these issues throughout. You bring
    up critical infrastructure. It is a core component of what
    FIRRMA was all about. It is also a core component of what CFIUS
    reviews and looks at on a regular basis.
        It is true that certain filings of critical infrastructure
    investments are mandatory, and I think the more, as a general
    matter, we want to make sure that we are seeing investments
    into places like critical infrastructure that raise national
    security risk.
        I think the challenge is figuring out, how do you do that
    in a way that mandatorily requires what we need to see, what we
    want to see, but sort of weeds out some of the broader noise.
    And I think there is ways that we can do that through
    regulations and otherwise. And so we are committed to working
    with you on that effort, and we appreciate you spearheading
    that.
        Chair Brown. Thank you. Secretary Harris, the
    Administration has taken steps to establish a targeted program
    to ensure outbound U.S. investment doesn't strengthen China's
    ability to develop certain critical technologies. Describe--
    and, as you know, Senators Casey and Cornyn have led a
    bipartisan effort to codify an outbound investment program.
    Why--talk to us about the--talk to us, if you would describe
    why the Administration has taken a sector-based approach in its
    outbound investment program.
        Mr. Harris. Thank you, Chairman, for that question. We are
    trying to take a very deliberate and narrow and tailored
    approach to address the national security risk, and that is
    certain outbound investments supporting the development of
    certain sensitive technologies in a country of concern. That is
    U.S. venture capital or private equity supporting the
    development of, say, sensitive semiconductor technology or AI-
    related applications in a Chinese startup.
        We have been consulting very broadly with hundreds of
    stakeholders throughout the development of this program, and
    our belief is that with this sectorial approach, as we define
    it, it can be most administrable and most impactful, but also
    most narrow. Our goal here is to address that tailored threat
    while minimizing broader unintended impacts.
        Chair Brown. Thank you. Senator Van Hollen is recognized
    from Maryland. Are you ready?
        Senator Van Hollen. Thank you, Mr. Chairman. I appreciate
    it. We have an Appropriations Subcommittee hearing markup going
    on.
        Thank all of you for what you are doing, both to strengthen
    our economy but also protect our national security at the same
    time. And I do want to just pick up on a couple of the
    questions that the Chairman asked, first with regard to the
    outbound investment screening.
        And I applaud the Administration's leadership on this
    issue, working with our G7 partners and trying to design this
    in a way that you just said, Mr. Harris, was well tailored. I
    returned from a trip last week to a number of countries,
    including Saudi Arabia and UAE. There is a voracious appetite
    for U.S. technology, especially in AI, but also other sectors.
        But if we are going to be successful in terms of targeted
    outbound investment screening, starting with the notification
    provisions, we obviously need our allies who are also in strong
    positions to, you know, provide investment in technology to
    cooperate fully. Right? Otherwise, we can shut the front door
    of the barn but leave the back one open.
        Can you talk about the progress we are making getting some
    of our partners, whether it is the EU or other--others in East
    Asia, Japan, South Korea, to adopt similar measures with
    respect to outbound investment?
        Mr. Harris. Thank you for that question, Senator, and I
    will quickly pull in Assistant Secretary Rosen as well for
    Treasury's role in leading the program.
        I would say from a Commerce perspective, though, we have
    been with Treasury and the State Department very focused on
    working with allies and partners. We are in a situation where
    we have identified the threat, and we need to take action, and
    we are doing so. But we want this to be as inclusive and as
    broad as possible and have as many partners and allies share
    our perspective and take their own actions.
        Senator Van Hollen. I appreciate that. No. I was going to
    ask you, Mr. Rosen, as well. I know this is your portfolio at
    Treasury.
        Mr. Rosen. Thank you.
        Senator Van Hollen. If you could just speak specifically,
    not to the goals of enlisting support from our allies, but
    whether we are making substantial progress on that front and
    what more needs to be done.
        Mr. Rosen. Senator, you have hit the nail on the head in
    terms of the--sort of the backfill thing that we are focused
    on. I would say we are making progress. We are engaged, and we
    are committed to continuing that engagement.
        I do think that a number of allies and partners are
    studying the issue to assess whether within their own economies
    they are similarly worried about the export of their dollars,
    of their--and their know-how in the same way we are. So I think
    we are getting different responses as a result, but I am
    encouraged by some of the statements that you alluded to, and
    it is an effort we are not going to give up on.
        Senator Van Hollen. I appreciate it. I just think we need
    to really, really push here. Otherwise, we will be in some ways
    putting restrictions, handcuffs, on our own company's
    investment when others are free to do so.
        Under the jurisdiction of the Department of Commerce, Ms.
    Kendler, and specifically related to some of the machines that
    are used to manufacture very high-end chips for semiconductors,
    the United States has been very clear that we want to provide
    what we call the small garden, our crown jewels, but high
    walls. This also requires our partner's engagement.
        So, for example, when it comes to some of the machines to
    help manufacture high-end semiconductors, we have worked with
    ASML and Tokyo Electron, but, you know, my understanding is
    that there may not be the progress that we had anticipated
    earlier.
        So my question to you is, when and if would the United
    States want to apply the foreign direct product rule in order
    to ensure compliance with our goals? I don't know which of the
    two of--OK.
        Ms. Kendler. I will take that, Senator. Thank you.
        Senator Van Hollen. Thank you.
        Ms. Kendler. From the view of industry and security at the
    Commerce Department, multilateral coordination is crucial to
    export controls. Full stop. We are constantly building export
    control coalitions around the world on different critical and
    emerging technologies, like semiconductors.
        The Dutch and the Japanese, as you alluded to, they impose
    their independent controls on semiconductor manufacturing
    tools. They are comparable to ours that--what we picked up last
    October in our amended controls. And that is a critical part of
    our work, ensuring that our allies and partners writ large
    understand the threat, that they understand what it means if we
    don't have controls in place, that it is fundamental to the
    coalition we built to respond to Russia's invasion of Ukraine.
        It is a fundamental of how we are approaching quantum and
    other issues, as I alluded to in my opening statement. It is
    critical to us to keep that going.
        Senator Van Hollen. If you could--I asked specifically when
    and if we would apply the foreign direct product rule, which is
    obviously an escalatory measure, but one that may help get
    people's attention to secure their cooperation. Can you speak
    to that?
        Ms. Kendler. We have increasingly applied the foreign
    direct product rule, which captures certain foreign-produced
    equipment under our regulations. We have increasingly used that
    as a tool. It is a heavy measure. Happy to talk to you about
    when and what circumstances might be appropriate.
        Senator Van Hollen. I would appreciate following up on
    that.
        Thank you, Mr. Chairman.
        Chair Brown. Thanks for those. Senator Kennedy of Louisiana
    is recognized.
        Senator Kennedy. Thank you, Mr. Chairman. Mr. Rosen--and
    thanks to all of you for being here. Mr. Rosen, Nvidia makes
    probably the most advanced artificial intelligence chips, does
    it not?
        Mr. Rosen. Nvidia does produce advanced chips, yes,
    Senator.
        Senator Kennedy. And those chips are highly coveted,
    because they can perform the massive computations needed to
    train AI systems; don't they?
        Mr. Rosen. I believe so. Yes, Senator.
        Senator Kennedy. Yeah. And we have export controls on those
    chips; do we not?
        Mr. Rosen. We do, and that is a process led by my
    colleague, Ms. Kendler.
        Senator Kennedy. And we prohibit those chips from being
    sold to China; is that correct?
        Mr. Rosen. I don't know exactly what chips are prohibited.
    I am going to defer to Ms. Kendler, but I know there are
    controls on the export of----
        Senator Kennedy. You don't know whether the advanced Nvidia
    artificial intelligence chips are prohibited from being sold to
    China?
        Mr. Rosen. So, Senator, my understanding is that they are,
    but that is export controls. It lies with my colleague at the
    Department of Commerce.
        Senator Kennedy. OK. So how come we are selling them, we
    are allowing them to be sold to China?
        Mr. Rosen. Senator, I would respectfully defer. I don't--I
    don't oversee export controls. I oversee inbound investment
    into the United States.
        Senator Kennedy. Well, you control investment security;
    don't you?
        Mr. Rosen. I do. And as----
        Senator Kennedy. All right. Let me ask Ms. Kendler. How
    come we are--how come we are being--we are allowing them to be
    sold to China?
        Ms. Kendler. Senator, our advanced computing controls from
    last October and the October before, they are absolutely
    targeted at the most advanced chips as you noted. We are
    controlling them for export to China, and we look, together
    with Departments of Defense, Energy, and State, at where they
    are going.
        Senator Kennedy. Yes, ma'am. But if you go on the internet,
    you will find 70 distributors, not seven, 70 distributors,
    which will sell Nvidia's supposedly restricted chips to China.
    And, in fact, some of them will sell to China the entire
    servers. They cost about $300,000 apiece. They have got eight
    chips in them. Isn't that a fact?
        Ms. Kendler. Senator, I am not familiar with the website
    that you are referring to. But what I can tell you----
        Senator Kennedy. I am referring to 70. Do you read The Wall
    Street Journal?
        Ms. Kendler. On occasion, yes.
        Senator Kennedy. You should read this article. They have
    identified at least 70 distributors, and they have confirmed
    that these chips are being sold to China.
        Ms. Kendler. Senator----
        Senator Kennedy. And, I mean, this is very disturbing. One
    estimate, not according to the Center for a New American
    Security, it estimates that the median number of A-1 chips
    being sold already to China at 12,500. Isn't that correct?
        Ms. Kendler. Senator, any diversion of our controls would
    be a matter for export enforcement, and we are tracking that
    very closely.
        Senator Kennedy. But you are not aware that 12,500 have
    been sold?
        Ms. Kendler. Senator, we track all sorts of data through
    our analytic capabilities to understand illicit procurement
    networks. That is very important to our work.
        Senator Kennedy. But you don't----
        Ms. Kendler. It is something we are cracking down on.
        Senator Kennedy. ----know about this 12,500?
        Ms. Kendler. I can't speak to the specific report that you
    are referring to, sir.
        Senator Kennedy. Well, you need to read the paper. No
    disrespect. These chips have been sold--and it has been
    confirmed--to China's most elite universities. They have been
    sold to the State research powerhouse, Chinese Academy of
    Science; haven't they? You don't know--do you know anything
    about that?
        Ms. Kendler. Senator, we look at license applications and
    determine whether they are consistent with national security.
    If it is not consistent with national security, we do not
    approve it.
        Senator Kennedy. Well, all you have got to do is go on--get
    your computer out and go on Google and search, and you will
    find 70 distributors that are selling these restricted chips
    that you are not shutting down. And The Wall Street Journal has
    confirmed all of this.
        Ms. Kendler. Sir, we would add entities like that to our
    entity list as a regulatory action. We would also----
        Senator Kennedy. But you haven't done it yet.
        Ms. Kendler. We would also have our enforcement colleagues
    investigate these kinds of allegations.
        Senator Kennedy. Were you aware of this before I raised it
    today?
        Ms. Kendler. Senator, I certainly am aware that when our
    laws are effective, illicit procurements networks stand up to--
    --
        Senator Kennedy. Were you aware of these----
        Ms. Kendler. ----violate them.
        Senator Kennedy. ----70 distributors and the thousands and
    thousands that have been sold right there on the internet in
    front of God and country, bigger than Dallas? Was your agency
    in charge of enforcing this aware of that?
        Ms. Kendler. Senator, I would be happy to connect you with
    our enforcement team to talk about this in more detail.
        Senator Kennedy. Do you talk to your enforcement team?
        Ms. Kendler. Yes, sir.
        Senator Kennedy. I mean, who is on first? What is on
    second? We have got export controls here, and all you have got
    to do is go on the internet and China buys them.
        Ms. Kendler. The export----
        Senator Kennedy. Are you aware--let me--were you aware of
    this before I raised it today?
        Chair Brown. Senator Kennedy, you have made your point
    clear. I share your concerns. I think this is one reason why
    BIS needs more funds.
        Senator Smith from Minnesota is recognized.
        Senator Kennedy. Well, I--can I just say one more point?
        Chair Brown. You certainly may.
        Senator Kennedy. I don't think they need more money.
        Chair Brown. Well----
        Senator Kennedy. I think they need people that talk to each
    other and know how to use an internet and know how to read
    articles in The Wall Street Journal. This is not--you don't
    have to be an astrophysicist here.
        Chair Brown. Senator Smith.
        Senator Smith. Thank you, Chair Brown, and thanks to all of
    you for being here. I really appreciate it.
        I would like to direct my first question to Assistant
    Secretary Taylor-Kale, if I may. The recent disastrous
    CrowdStrike incident I think exposed the alarming
    vulnerabilities that can result when too many critical systems
    and capabilities are dependent on a single source component,
    and that faulty software update crash--it apparently crashed
    over 8 million Windows devices, and airlines were crippled,
    banking systems, hospitals. It was a mess. A lot of people paid
    the price for that.
        My question is, the DoD's industrial base strategy includes
    efforts to reduce the risks associated with overdependence on a
    single or potentially adversarial source for national critical
    capabilities. I am wondering, how is the DoD thinking about the
    national security risks that can stem from instances like the
    CrowdStrike outage where there is vulnerability from a single
    source product that can crash critical systems?
        Ms. Taylor-Kale. Ma'am, thank you for that question. Single
    sources of--in our supply chains, and particularly our defense
    critical supply chains, remains a huge and incredible risk for
    our industrial base, and for the Department of Defense in
    general, for us being able to provide our warfighters with the
    capabilities that they need at speed and at scale.
        An issue like the one that you raise with CrowdStrike is
    one that obviously we all experienced. I experienced it myself
    personally on Monday trying to leave Michigan. But, in general,
    we address sort of our supply chain issues, you know, looking
    at--broadly looking across the board. We also, through our
    Chief Information Officer, look at cyberthreats in particular.
        And I want to emphasize the importance of cyber as part of
    the sources of risk to our industrial base, particularly to
    manufacturers, as well as part of the umbrella of the National
    Defense Industrial Strategy. CIO also issued the cyber--the DoD
    Defense Individual Base Cyber Strategy as well.
        So we continue to look very closely at these and look at
    ways in which they affect particularly the Defense Industrial
    Base and how we can intervene.
        Senator Smith. Thank you. I appreciate your response. I
    think it was just sort of impossible for most Americans to
    believe that everything could just be so screwed up because of
    one software update gone awry. And I think when you think about
    what that might mean for other, you know, highly important
    systems that we rely on for so many other things, it is really
    concerning.
        I want to ask you another question. This one has to do with
    drug onshoring. So the FDA tells us that nearly 70 percent of
    the ingredients that--the ingredients in medications that
    Americans take are sourced overseas, mostly India and China,
    and the finished drug supply is already heavily reliant on
    overseas supply chains, again, mostly from India and China.
        So could you talk about what the risks are that are posed
    by this reliance on foreign manufactured drugs, especially
    medications like antibiotics, what impact that has on military
    readiness and civilian health? And what tools does the
    Department of Defense have to promote domestic manufacturing of
    these critical medical products?
        Ms. Taylor-Kale. Ma'am, I want to underline the concerns
    that you raise, particularly with pharmaceuticals and the
    effect that they have on our supply chains and ultimately to
    our warfighters. I don't, in my purview, handle these issues
    within the Department of Defense, but I also want to note that
    Mr. Harris also does within the Commerce Department. He may
    have something to add to this.
        Senator Smith. Thank you. Mr. Harris.
        Mr. Harris. Thank you, Senator. We absolutely share your
    concern that we need to be focused on where there are
    dependencies, where there are single sources of supply, and we
    have an urgent need to be more proactive and strategic in our
    approach to supply chains. We all collectively learned lessons
    in the pandemic, but it is not just about where the market
    might not function or where the supply might be----
        Senator Smith. Right.
        Mr. Harris. ----too brittle of a supply chain. There are
    also national and economic security risks in these supply
    chains. You noted a perfect example. Americans expect every day
    that they would have what they need in the medicine cabinet or
    on the kitchen table, and the supply chains are what gets those
    products to point.
        My team in the Commerce Department and in the new supply
    chain center that we have created, we have been working with
    the Health and Human Services Agency and others to try to
    assess the data and identify what is of greatest concern and
    who do we need to work with to try to improve resiliency in
    that supply chain.
        Senator Smith. Thank you. Thank you very much.
        Mr. Chair, I would just note that I have two bipartisan
    bills to address this issue, one with Senator Cassidy, which
    would provide fundings to antibiotics manufacturers to bring
    those factories back to the United States, and the second with
    Senator Cotton would provide incentives to drug manufacturers
    to produce finished drugs here in the United States by
    providing higher reimbursement for those products.
        I look forward to working on those proposals with any of my
    colleagues who are interested.
        Chair Brown. Thank you, Senator Smith.
        Senator Britt from Alabama is recognized.
        Senator Britt. Thank you, Chairman, and thank each of you
    for being here today. We appreciate it.
        Look, we all know the ever-growing threat that is posed by
    the Chinese Communist Party, and whether the CCP--no matter
    what they are doing, undermining the American worker, stealing
    intellectual property, buying up our farmland, they have
    demonstrated a disregard for international rules.
        So when we are looking at that, it seriously doesn't matter
    if it is trade, if it is intellectual property, anything
    standing in their way, they are willing to just bulldoze
    straight through that. And American companies across every
    single sector of our economy are under pressure as a result.
        So I am looking at AI, computing, energy, robotics, just
    influence or attempts to influence our institutions, the buying
    up of farmland. We could go on and on and on. The Chinese
    Communist Party is going to stop at nothing until they achieve
    their ultimate goal and they upend international order.
        So using the tools at our disposal, whether it is export
    controls, CFIUS, or sanctions, we must pursue a strategy that
    strikes the right balance between protecting U.S. industry and
    businesses and hardworking Americans from the threats that are
    imposed by the Chinese Communist Party and other adversaries,
    while also allowing our economy and capital markets to thrive
    and to remain dominant.
        On this, a recent New York Fed report raised questions
    about the effect of unilateral export control policies. The
    report highlights the unintended consequences, like lost
    revenue to U.S. firms, loss of start market capitalization for
    U.S. companies, and, worse yet, unintentionally propelling
    Chinese firms to innovate and develop and advance technologies
    in-house. In that end, the American consumer is the one that
    pays the price, and that is who I am concerned about.
        Ms. Kendler, how do you think we strike the balance between
    cutting off China's access to our critical technologies while
    also ensuring American consumers don't pay the ultimate price?
        Ms. Kendler. Thank you, Senator. This is a question that we
    struggle with every day. Our focus is on maintaining national
    security. That comes before all.
        Senator Britt. Good.
        Ms. Kendler. But part of national security is U.S.
    technological leadership. And so I think the first thing I
    would point you to is the multilateral approach to export
    controls and the calibrated approach to export controls. So
    such as in our semiconductor controls where we have targeted
    the most advanced chips, we are not trying to unduly interfere
    with business that doesn't cause a national security risk. We
    are trying to target our controls and create them in a way,
    together with our interagency partners, that attacks the most
    important need.
        The danger of not using multilateral controls is that we
    may fail. We are damming half the river, if it is only the
    United States imposing controls and not our partners and allies
    or other supply countries. We are also potentially
    incentivizing foreign companies to design out U.S. components
    as they manufacture goods. So this is something we pay a great
    deal of attention to as we don't take our eye off the national
    security ball.
        Senator Britt. Well, and in that vein, unfortunately, since
    it was reauthorized last--in 2018, the Defense Production Act
    has become increasingly used. You have seen President Biden and
    Vice President Harris again acting out of the bounds of
    Congressional intent, this time using it to further the Green
    New Deal agenda and by boasting productions of things like
    solar panel parts.
        Using the Defense Production Act for partisan priorities
    that have little to do with national security undermines the
    critical use of that tool and the way that it was intended to
    essentially give our Nation the ability to defend ourselves and
    our allies.
        We are considering reauthorization ahead of 2025, and we
    need to ensure that it is actually being appropriately
    utilized. And so, Ms. Taylor-Kale, I understand you recently
    released the first National Defense Industrial Strategy. Can
    you share with us the status of implementation? And, more
    broadly, what is the state of the industrial base and ensuring
    that our warfighters are properly equipped?
        Ms. Taylor-Kale. Thank you, ma'am. I want to emphasize
    again that the Department of Defense strongly supports the
    reauthorization of the Defense Production Act. The Defense we
    use the Defense Production Act daily, all three titles, to make
    sure that our supply chains, our defense critical supply
    chains, are secure.
        Last year, fiscal year 2023 alone, we invested $733 million
    in critical minerals, microelectronics, and other areas where
    there are gaps in our supply chains. We very strongly see the
    importance of this with respect to some of the investments that
    you mentioned. I can, again, only speak to Department of
    Defense investments that I oversee, and I refer you to other
    agencies and particularly Department of Energy or HHS.
        Senator Britt. Right. But the warfighters specifically.
        Ms. Taylor-Kale. And that is how we use the Defense
    Production Act within the Department of Defense. Again, it is
    to address long lead times of critical materials, for instance,
    materials that go into rare earth elements, that go into the F-
    35 for instance. We use the Defense Production Act daily to
    support the warfighter.
        Senator Britt. Thank you.
        Chair Brown. Senator Warnock of Georgia is recognized.
        Senator Warnock. Thank you so very much, Chair Brown.
        I don't believe that giant American corporations should get
    richer by selling their technologies to authoritarian regimes
    or human rights abusers. And that is why I was glad to see the
    Biden-Harris administration take steps in 2021 to further
    center human rights in U.S. foreign policy through the Export
    Controls and Human Rights Initiative, an effort aimed at
    curbing the misuse of American technology by repressive
    Governments and regimes whose human rights record we rightly
    deplore.
        Twenty-five Nations have signed on to the initiative's code
    of conduct leading to more of our allies considering human
    rights when reviewing their exports of technologies that can
    perpetuate human rights abuses. We don't want to make the
    trampling of human rights efficient.
        Ms. Kendler, can you highlight some successes from the
    Export Controls and Human Rights Initiative and how they
    contribute to efforts to combat authoritarian regimes?
        Ms. Kendler. Senator, thank you for this question. Human
    rights are front and center in how we consider export controls.
    The ECHRI, as we know it, the Export Controls and Human Rights
    Initiative, has been very helpful in bringing together
    countries that share values, even when they don't have export
    control systems of their own. And it has enabled a dialog that
    is desperately needed for our national security and foreign
    policy.
        Just today, the Commerce Department released a proposed
    rule that is connected to ECHRI. We are looking at foreign
    security end users in countries of concern, authoritarian
    countries like you note, to ensure that U.S. persons are not
    supporting jail operators, foreign police, and that sort of
    thing. And that is a proposed rule. We are seeking industry
    comment, but it is connected to ECHRI in the sense that it
    moves our human rights protections forward.
        We have also been very active at the Commerce Department in
    adding entities to our entity list requiring specific licenses
    for companies and other organizations that may be involved in
    human rights abuses, contrary to U.S. national security and
    foreign policy.
        Senator Warnock. So it is important in terms of the
    advancing of our own values and our commitment to human rights.
    But could you say more about why it is important that the
    United States of America lead in this space. My sense and core
    belief is that there is no replacement for American leadership
    in the world. It is indispensable. And can you say more about
    the geopolitical implications of us leading in this space?
        Ms. Kendler. U.S. technology is the best in the world. We
    need to take a leadership role to ensure that it is not used in
    a way that is contrary to our values. And by taking that stance
    and working with our allies through multilateral regimes,
    plurilateral regimes, bilateral relationships, we can bring
    others into that fold.
        And there are many countries around the world who do share
    our values and who are looking at things like facial
    recognition systems and saying that may be appropriate in an--I
    don't know, an airport context. It is not appropriate when you
    are surveilling minority populations in Xinjiang or Tibet.
        Senator Warnock. So you would say that the United States is
    uniquely positioned to lead in this space. And would you also
    say that it has national security implications for us?
        Ms. Kendler. Yes, Senator, I would.
        Senator Warnock. Are additional Congressional authorities
    necessary to expand and improve the efficacy of these
    initiatives?
        Ms. Kendler. Senator, there are several ways where we could
    bring in technical expertise into the Bureau of Industry and
    Security. One thing that comes to mind is a highly qualified
    experts program that we are seeking authority for.
        We could bring in experts on a temporary basis into the
    Bureau of Industry and Security who know these technologies
    well. That is an area where we welcome an opportunity to obtain
    additional authorization and resources.
        We would also look at some provisions in our regulations
    like remote access and the opportunity to control access to
    data centers and other high-end advanced technology. That is an
    area where expansion of our authorities under ECHRI would be
    helpful.
        Senator Warnock. Well, thank you so much. There are more
    questions that I could ask, but maybe we can follow up later.
    But I am grateful that the Biden-Harris administration
    understands that export controls can be an effective tool to
    combat authoritarian regimes. This is important in this moment
    especially when you look at the geopolitical situation, the
    effort by some to advance a kind of authoritarian approach both
    internationally and I would say domestically.
        So thank you for your work. As surveillance technology
    continues to improve, we must ensure American corporations are
    not making money from authoritarian regimes and human rights
    abusers. All of us have a stake in that project.
        Thank you very much.
        Chair Brown. Thank you, Senator Warnock. Senator Warren
    from Massachusetts is recognized.
        Senator Warren. Thank you. Thank you, Mr. Chairman.
        So the Committee on Foreign Investment in the United
    States, or CFIUS, reviews foreign investments in our country to
    make sure they don't pose risk to national security.
    Increasingly, foreign companies are building crypto mining
    facilities on U.S. soil. These mines are actually warehouses
    stuffed with computers that process crypto transactions and
    produce new crypto tokens.
        They are loud, they are hot, and they suck up a ton of
    electricity, which can crash the power grid. And that is why
    many countries have banned crypto mining, leading more foreign
    companies to set up shop here in the United States.
        According to a blockchain analytics firm, today one third
    of crypto mining facilities in the U.S. are owned by citizens
    of the People's Republic of China, including people with direct
    ties to the Chinese Government. Now, crypto mining is a
    disaster for the environment, and it can pose national security
    risks as well.
        In May, at CFIUS's recommendation, President Biden issued
    an order requiring the Chinese national owners of a crypto
    mining facility in Wyoming called MineOne, to divest their
    ownership and remove the crypto mining equipment from the
    premises.
        Assistant Secretary Rosen, you are the head of CFIUS, so
    you oversaw the investigation into MineOne and told the
    President that the divestment was essential. The divestment
    order cited two primary factors. One, the technology inside
    MineOne could be used for surveillance; and, two, MineOne was
    located one mile from a strategic missile base housing
    intercontinental ballistic missiles.
        So I want to ask you, could the equipment inside that
    crypto mine have been used to spy on our military operations
    and our nuclear weapons system?
        Mr. Rosen. Senator, thank you for the question, and I think
    pointing out this case in particular, I am limited in terms of
    what I can say about this particular transaction. But to answer
    your question, there is a generalized concern that
    sophisticated equipment in proximity to sensitive facilities
    can be used for espionage.
        Senator Warren. OK. So can be used for espionage. Foreign
    adversaries are using crypto mines to spy on U.S. military
    operations. That is an obvious national security risk, but it
    isn't the only risk. Foreign-owned crypto mines also threaten
    our energy grid.
        According to an analysis by The New York Times, bitcoin
    mines in U.S. owned by Chinese nationals use enough energy to
    power 1.5 million homes. National security experts have warned
    that foreign-owned crypto mining facilities' connection to our
    energy grid could leave the U.S. vulnerable to targeted
    blackouts and cyberattacks.
        Assistant Secretary Rosen, if China or another foreign
    country had the power to crash a significant portion of our
    country's power infrastructure, could that threaten our
    national security?
        Mr. Rosen. Senator, of course an impact on our energy
    sector, our energy resources, our energy supply chain, could
    very much have a national security impact.
        Senator Warren. All right. There is yet another risk as
    well. Foreign nationals have been able to buy up crypto mines
    in the United States in secret. How? By paying in crypto.
    Crypto allows them to bypass our traditional banking system and
    the anti-money laundering rules that are supposed to prevent
    any anonymous foreign money from coming into the United States.
        In fact, that is exactly how a Chinese investor was able to
    secretly buy a $6 million crypto mine in Texas. It is also how
    U.S.-based crypto mines have been able to secretly send
    millions of dollars back to China.
        Assistant Secretary Rosen, do you agree that we need to
    plug the holes in our anti-money laundering rules that have
    allowed foreign nationals to secretly buy U.S. crypto mining
    facilities or make other kinds of investments in the U.S.
    without our knowing about it?
        Mr. Rosen. Senator, I certainly share your concern about
    ultimate beneficial ownership and making sure that we know who
    is doing the buying. I can speak for the CFIUS context. When we
    look at a transaction or try to find a transaction, that is a
    critical component to our diligence.
        Senator Warren. All right. Crypto mines could be used by
    our adversaries to spy on our military bases or to bring down
    our power grid or to move money in and out of the country in
    secret. Last year, the Treasury Department requested additional
    tools from Congress to prevent China, Iran, Russia, and other
    foreign countries from using crypto to evade sanctions and
    launder dirty money. It is time for us to pass the laws that
    Treasury needs.
        Thank you, Mr. Chairman.
        Chair Brown. Thank you, Senator Warren.
        Not unrelated to our comments yesterday, I introduced the
    CAR Act to be proactive and stay ahead of the threat that
    China--Chinese connected vehicles pose to our national security
    and to American privacy--to Americans' privacy, another threat
    that we have the chance to meet now early before it--before
    there are more Chinese connected vehicles on our streets.
        Ms. Kendler, I hope you and your colleagues will work with
    me on that effort.
        Thank you to the witnesses today.
        For Senators who wish to submit questions for the record,
    those questions are due 1 week from today, Thursday, August 1.
        To the witnesses, you have 40 days to--45 days to respond
    to any questions.
        Thank you again. The Committee is adjourned.
        [Whereupon, at 11:30 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIR SHERROD BROWN
        We face an uncertain world with many geopolitical challenges--from
    Russia's continued brutal invasion of Ukraine, to ongoing conflicts in
    the Middle East, to an increasingly aggressive and capable Chinese
    military.
        And we know that China has built that military capability with the
    help of American corporations, and even American tax dollars.
        For too long, our Government was willfully blind to the threat
    China posed. Multinational corporations eager to move jobs wherever
    they could pay ever-lower wages, lobbied for permanent normal trade
    relations with China.
        And when corporations moved production overseas, they outsourced
    the technology and trade secrets along with it. We did nothing to stop
    it, and now we're paying the price.
        We cannot make the kinds of mistakes we have in the past. We have
    to be proactive about these threats, and take action now to protect our
    national and economic security. And we need to be clear--those two
    issues are intimately connected. You can't separate the economy and our
    national security.
        Today, hostile Governments are working together more and more to
    challenge the interests, security, and values of the United States, and
    our allies and partners around the world.
        Increasingly, hostile Governments use our own technology to fuel
    their destructive efforts.
        We must lead efforts to stop it.
        It is the U.S. Government's job to police the flow of sensitive and
    so-called ``dual use technologies''--technologies that can be used for
    both military and civilian purposes. The Departments of Commerce and
    Treasury--along with DOD, State, and other agencies--try to restrict
    the flow of sensitive technologies to our adversaries.
        We cannot allow U.S. innovation and investments to be used against
    us.
        Against that backdrop, NATO met earlier this month and issued a
    statement addressing these threats.
        Specifically, NATO leaders called on China to ``cease all material
    and political support to Russia's war effort'' including ``the transfer
    of dual-use materials, such as weapons components, equipment, and raw
    materials that serve as inputs for Russia's defense sector.''
        That followed last month's G7 Summit in Italy, where the United
    States and our allies reaffirmed our shared efforts to ``implement
    export controls to address risks to international security'' and
    ``ensure the effectiveness of our respective foreign investment
    screening.''
        The G7 leaders also noted that ``measures designed to address risks
    from outbound investments could be important to complement existing
    tools of targeted controls on exports and inbound investments.''
        A core element of this Committee's work has been to establish and
    conduct oversight over our export controls, investment security, and
    Defense Production Act authorities.
        The Treasury and Commerce Departments have had active and growing
    caseloads since our hearing last year.
        They have expanded controls on semiconductors, equipment, and
    services that could support China's semiconductor ecosystem.
        They have taken steps to establish an outbound investment program
    that would enable us to better understand--and stop--U.S. investments
    that build up China's military.
        And they have recently issued a proposed rule that would
    significantly expand the Committee on Foreign Investment in the U.S.'s
    ability to review foreign real estate investments near military bases,
    like Wright-Patterson in Dayton.
        This is the kind of action that I and many from both parties have
    been pressing for. I hear from farmers in Ohio near our military
    installations who are very concerned about this.
        As we use our export control and investment security policies to
    restrict China's ability to use U.S. technology and investments to
    advance their military capabilities and human rights abuses, we also
    must bolster our own domestic capabilities.
        To that end, I was pleased to see Dr. Taylor-Kale and her
    colleagues release the Defense Department's first ever National Defense
    Industrial Strategy earlier this year.
        As a critical economic security tool, this Committee has
    jurisdiction over the Defense Production Act, which must play a vital
    role in advancing that strategy.
        In Ohio, we know the potential here to harness the talents and
    patriotism of American workers to protect our country.
        For decades, the Air Force Research Lab at Wright-Patterson Air
    Force Base in Dayton has been the home of the DPA Title III program.
        Aside from the good work being done at AFRL, the Defense Production
    Act gives the Administration the authority to allocate and prioritize
    critical materials and to increase domestic productive capacity to
    address industrial shortfalls.
        In other words, the DPA allows the Defense Department and other
    agencies to invest in American manufacturing that can support U.S.
    national security, as well as making us more prepared for emergencies.
        This work could not be more urgent.
        For decades, corporate offshoring and consolidation and
    restructuring--really just another elite business-school term for
    finding new ways to screw workers to increase profits--all weakened our
    domestic manufacturing sector.
        Ohioans know what that has done to our towns, our families, our
    economy. And increasingly, people in this town are finally waking up to
    how it's weakened our national security.
        We know that when companies outsource jobs, they outsource
    technological capabilities along with them.
        There has not been enough appreciation for how much innovation
    happens on the production floor, by workers.
        Over the past few years, we have finally taken steps to reverse
    that course--passing the CHIPS and Science Act and the Bipartisan
    Infrastructure Law.
        And we have increased funding for strategic investments using the
    Defense Production Act.
        But we must do more.
        As Congress prepares to reauthorize the Defense Production Act, we
    need to look at new ways the DPA can support American industrial
    capabilities and help us revitalize our domestic industrial base to
    meet current and future challenges.
        Today we will also discuss how we are working with our partners to
    coordinate our export controls and investment security policies, and
    what steps Congress can take to strengthen these authorities.
        We look forward to testimony from this panel of witnesses, who can
    update the Committee on their important work.
                                     ______

                    PREPARED STATEMENT OF SENATOR TIM SCOTT
        Thank you, Mr. Chairman.
        I would like to start by reminding this room and our witnesses of
    the important role they play in safeguarding our Nation's economic and
    national security priorities.
        President Reagan once rightly noted that we are in ``a different
    world, and our defenses must be based on recognition and awareness'' to
    combat our enemies of the modern day.
        While he was talking about the Soviets, unfortunately, many of our
    adversaries remain the same.
        Russia, China, Iran, and North Korea.
        But thankfully, what also remains the same is the American spirit
    to innovate and to create the world's leading technologies.
        My home State of South Carolina is an excellent example.
        From F-16s to the world's best luxury airliners to leading
    automotive manufacturing to creating next generation technologies--I'd
    say South Carolina is simply our future.
        But to safeguard that future, we must ensure that policies created
    here in Washington don't cut off growth and stifle future innovation.
        We must have a global economy where America is the leader.
        After more than 3 years of President Biden's policies we have seen
    soaring inflation that is crushing everyday Americans, wars across our
    globe, and our enemies challenging us and our allies at every single
    turn. We can, and we must frankly, do better.
        So today, as we discuss and evaluate some of our economic national
    security tools--our export controls, investment security, and the
    Defense Production Act, we must keep these principles in mind.
        At times, we must be willing to reassess our policies and re-tool
    our positions.
        And, frankly, let's consider our allies.
        One thing we certainly learned through COVID, was depending on
    China is a really bad strategy.
        To be effective in countering China, we must work with our allies
    so that China can't easily find work arounds to U.S. export controls,
    by simply buying these same technologies and equipment from our
    friends.
        A failure to look holistically at our economic strategy can and
    will damage American security, competitiveness, and unfairly, leave
    U.S.-led industry behind.
        In fact, a recent study by the New York Federal Reserve found that
    the Biden administration's export control policies on the semiconductor
    industry have led to decreased profitability, job losses, and $130
    billion in financial loss across the industry.
        With new reports that these types of policies have directly led to
    thousands of layoffs in States ranging from Ohio to New York--we must
    scrutinize the actions leading to these results.
        But it doesn't stop there.
        In my home State of South Carolina, recent actions by the Commerce
    Department to revoke thousands of export licenses for gun manufacturers
    have resulted in millions of dollars in losses.
        I've sent three letters to the Commerce Department on this issue.
    And now reports suggest that we will see over $500 million in annual
    losses across U.S. firearms manufacturers.
        Mr. Chairman, I have a letter here that I would like to submit for
    the record. In my home State of South Carolina, a small, minority-owned
    firearms business had more than $71 million worth of export licenses
    revoked by the Biden Commerce Department.
        Unfortunately, this meant that the firm defaulted on multiple
    international contracts.
        And now those same contracts are being backfilled by China and
    others. And it's my understanding that these licenses were revoked for
    ``foreign policy'' reasons such as the ``furtherance of world peace.''
        So instead of supporting American companies, we just handed over
    this marketplace to China.
        Export controls, investment security, and important tools like the
    Defense Production Act, should be used in a responsible manner that
    maximizes growth here at home and economic pain for our adversaries.
        I strongly believe that when we have a better domestic environment,
    a better ability to innovate and manufacture--that means that America
    is winning.
        Thank you and I look forward to discussing these important issues
    with our witnesses.
                                     ______

                       PREPARED STATEMENT OF THEA KENDLER
     Assistant Secretary for Export Administration, Department of Commerce
                                 July 25, 2024
        Chairman Brown, Ranking Member Scott, distinguished Members of the
    Senate Banking Committee, thank you for inviting me to testify about
    the ongoing efforts of the Commerce Department, Bureau of Industry and
    Security's (BIS's) Export Administration to administer U.S. export
    controls to protect U.S. national security and foreign policy
    interests. We remain laser-focused on addressing the challenges posed
    by the People's Republic of China (PRC's) Government's military
    modernization and human rights abuses and the Russian Federation's
    (Russia's) efforts to obtain dual-use technologies to further its
    illegal, unjust, and unprovoked aggression against Ukraine. We have
    been navigating these immense challenges by reinvigorating our
    multilateral efforts and by employing export controls in new ways. Now
    more than ever, our work hinges on deep collaboration with allies and
    partners. We are also making every effort to ensure that BIS's Export
    Administration (EA) is positioned to successfully counter the national
    security challenges of the future, starting with those related to
    misuse of artificial intelligence (AI).
        BIS is responsible, along with interagency partners, for protecting
    U.S. national security and foreign policy interests by ensuring that
    U.S. technology is not obtained by foreign countries and entities of
    concern to harm the United States. The bureau also works to promote
    American technological leadership. This responsibility stems from BIS's
    authorizing statute, the Export Control Reform Act of 2018 (ECRA),
    which describes the policy goals for BIS's administration and
    enforcement of its export control system. While I lead the regulatory
    and licensing functions of BIS, my colleague in Export Enforcement
    (EE), Assistant Secretary for Export Enforcement Matthew S. Axelrod,
    leads the bureau's law enforcement agents and analysts in the exercise
    of administrative and criminal enforcement authorities for alleged
    violations of our export controls.
        Through the Export Administration arm of BIS, which I lead, we
    identify sensitive U.S. technologies of national security and foreign
    policy concern, develop policies and strategies for protecting these
    technologies, and review licenses applications submitted by exporters
    to determine whether specific transactions are consistent with U.S.
    national security and foreign policy interests. We also analyze data,
    industry information, and classified reporting to assess the
    effectiveness of our controls, the availability of foreign technology
    (including identifying sensitive technologies developed by ally and
    partner countries), and foreign end users that require extra scrutiny
    before receiving U.S. technology. In administering U.S. export controls
    in close coordination with the Departments of State, Defense, and
    Energy, we endeavor to take a multilateral approach. To be sure, there
    are times where unilateral export controls are necessary, however, as
    ECRA notes, ``[e]xport controls that are multilateral are most
    effective [ . . . ]''. Accordingly, coordinating with our allies and
    partners on export controls is a longstanding BIS priority.
        In today's testimony, I will discuss the long-standing controls we
    have in place for the PRC, enhanced controls adopted under the Biden-
    Harris administration, the targeting of PRC entities of concern, the
    efforts we have taken to support our closest allies and partners, and
    the need for increased funding to support our mission.
    PRC Dual-Use Export Controls and Licensing
        BIS maintains comprehensive controls on the exports of
    sophisticated technologies to the PRC. BIS also controls low level
    technologies to preclude exports to untrusted end users, PRC military
    activities, and weapons of mass destruction (WMD) programs. This
    includes the imposition of license requirements for:

        All military and spacecraft items under BIS jurisdiction
            (which are subject to a statutory policy of denial);

        All multilaterally controlled dual-use items;

        A large number of dual-use items with extensive commercial
            applications if the item is knowingly intended, entirely or in
            part, for a military end use or military end user in the PRC;

        All items under our jurisdiction if the item is exported
            knowing it will be used in certain WMD programs;

        All items under our jurisdiction if the item is exported
            knowing it is intended, entirely or in part, for military-
            intelligence end uses or end users in the PRC; and

        All items under our jurisdiction if the item is destined
            for a party on BIS's Entity List.

        In addition, BIS prohibits certain U.S. person activities that
    would support WMD-related activities or military-intelligence end use
    or end users in the PRC, even if no items subject to our jurisdiction
    are involved, absent authorization.
        With our interagency partners, we review all of the license
    applications for the PRC to determine a risk of diversion to military
    end uses or end users, WMD end uses, or abuses of human rights. We
    evaluate license applications--taking into account open source and
    intelligence information--based on the technology at issue, the country
    at issue, the entity using the item, other parties involved in the
    transaction, and how the item will be used. One of the primary factors
    we consider is the risk of diversion of the technology from the
    transaction details articulated in the license application instead to a
    country, end user, or end use of concern. License applications are
    reviewed with a presumption of denial where there is evidence of a
    substantial risk of diversion.
        As Secretary Raimondo has stated: ``China today poses a set of
    growing challenges to our national security. It is deploying its
    military in ways that undermine the security of our allies and partners
    and the free flow of global trade . . . .'' The Chinese Communist Party
    (CCP) under President Xi Jinping has set a goal to develop the People's
    Liberation Army (PLA) into a ``world class military'' and overtake the
    United States and its allies and partners by dominating certain
    advancing technology sectors such as AI; autonomous systems; advanced
    computing, semiconductors and microelectronics; quantum information
    sciences; biotechnology; space systems; and advanced materials and
    manufacturing.
        To fulfill this vision, the PRC Government is going to great
    lengths to obtain key advanced technologies with military potential.
    Export controls generally operate by trying to control military uses
    while allowing civilian uses of technology. The PRC Government's
    military-civil fusion (MCF) strategy deliberately blurs lines between
    commercial sectors and the PRC's defense industrial base. This strategy
    is even more concerning where the PRC's Government structure gives
    leadership the power to coerce information and assistance from
    companies that have little choice but to comply. Accordingly, the goals
    of the PRC's MCF strategy, situated within the PRC's Government system,
    have necessitated stronger export controls by the U.S. that target
    predominantly commercial items that can be used in military
    applications.
        In the face of the PRC's challenges to global peace and security,
    the United States and our allies and partners must safeguard our core
    technologies by continuously and proactively reviewing and updating our
    export control policies.
        BIS has long restricted access by PRC entities to dual-use items of
    national security and foreign policy concern, including emerging
    technologies. Together with our interagency partners in the Defense
    Department's Defense Technology Security Administration, the Energy
    Department's National Nuclear Security Administration, and the State
    Department's Bureau of International Security and Nonproliferation, we
    work to address national security threats and foreign policy concerns
    posed by the PRC Government. These efforts include U.S. control list
    proposals to the appropriate multilateral export control regimes,
    amendments to the Export Administration Regulations (EAR), review of
    export license applications, and identifying specific end users of
    concern. Because each agency brings different considerations and
    understanding, BIS relies on the interagency for its varied
    perspectives to ensure decisions that best protect U.S. national
    security and foreign policy interests.
        License applications submitted by exporters and reexporters to send
    items to the PRC receive close scrutiny by BIS and our interagency
    partners. In calendar year (CY) 2023, license applications for the PRC
    had an average processing time (APT) of approximately 92 days. This APT
    is significantly longer than the CY 2023 APT for non-PRC cases of
    approximately 31 days. Compared to CY 2021 APT for PRC cases of
    approximately 76 days, we see a 21 percent increase in just 2 years. As
    evidenced by this data, BIS with its interagency colleagues, is taking
    the time to ensure that PRC licenses are carefully reviewed. We
    prioritize comprehensive review of relevant open source and
    intelligence information over speed.
        In CY 2023, licenses reviewed for the PRC comprised approximately
    11 percent of all applications reviewed by BIS. For items, including
    commodities, software, and technology (including domestic technology
    transfers, known as deemed exports), BIS and our interagency partners
    reviewed approximately 4,494 export and reexport license applications.
    Of these, approximately 30 percent were denied or returned without
    action.
        In general, statistics regarding the interagency licensing process
    must be considered in light of the inherent restraint exercised by U.S.
    companies that generally do not waste time or resources applying for
    licenses they know will be denied or subject to lengthy interagency
    review. U.S. exporters should, before filing license applications know
    the parties in their transactions, including intermediaries and the end
    user, as well as the end user's intended use of the item. Exporters who
    do not do this risk either a return of rejection or return without
    action of their license application. After reviewing BIS's extensive
    know-your-customer and red flags guidance, many U.S. exporters do not
    submit license applications for transactions they contemplate are
    likely to be rejected. In fact, applications for exports to the PRC
    dropped by 10.7 percent between CY 2022 and CY 2023 (although volumes
    are still higher than during the height of the pandemic).
        BIS's approach to the PRC is calibrated and targeted. Using a
    scalpel approach, we seek to restrict the PRC's military modernization
    efforts by restricting key, sensitive technologies without undercutting
    U.S. technology leadership and unduly interfering with commercial trade
    that doesn't undermine our national security and foreign policy.
        We remain focused on aggressively and appropriately using our tools
    to contend with the long-term strategic competition with the PRC. Since
    the last time I was before this Committee in May 2023, we have
    strengthened the U.S. dual-use export controls policy toward the PRC:
    Artificial Intelligence Item Controls
        In October 2023, \1\ we updated the advanced computing and
            the semiconductor manufacturing equipment rule, which was
            published in October 2022. A core component of imposing export
            controls is continually assessing their overall effectiveness
            and keeping pace with technological changes. The October 2023
            update revised the control parameters for advanced integrated
            circuits, and broadened the destination-based controls to cover
            additional destinations of concern. We also imposed worldwide
            license requirements for certain advanced integrated circuits
            and related specified end-uses when done for entities
            headquartered in, or with an ultimate parent company
            headquartered in Macau or a destination subject to an arms
            embargo such as China.
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    newsroom/press-releases/3355-2023-10-17-bis-press-release-acs-and-sme-
    rules-final-js/file

        Many of the updates were done to address the PRC's vast and
            aggressive efforts to undercut our controls through
            sophisticated evasion and circumvention tactics. Our policy
            intent remained the same. We sought to target the PRC's ability
            to acquire or produce the most advanced chips with direct AI
            applications for the development of advanced weapons systems,
            malicious cyber activity, and other military and intelligence
            applications. At the same time, we sought to minimize
            unintended impact on trade flows and on the economies of our
            partners and allies.
    U.S. Participation in International Standards Setting Bodies
        Last week, to ensure robust U.S. participation and
            leadership in international standard-setting bodies, we amended
            the EAR to ensure that export controls and associated
            compliance concerns do not continue to impede and jeopardize
            U.S. participation and leadership in legitimate standards-
            related activities. Certain export control-related factors in
            the standards-making process led to an environment of
            regulatory uncertainty and decreased participation of U.S.
            companies in critical standards-related activities. This
            decrease in participation is a national security concern as it
            not only limits U.S. leadership in standards development, but
            also leads to the PRC racing to replace U.S. participation with
            their own leadership and standards. This uncertainty
            contributes to the potential of a global standards environment
            that works in opposition to U.S. technological leadership and
            broader interests. The changes made by last week's rule help
            ensure that U.S. participation and leadership in the
            development of critical and emerging technology standards with
            our allies and partners remains strong.

        In addition to its technology-based controls, BIS increasingly has
    used entity-specific restrictions, primarily through the Entity List,
    to restrict trade to actors of concern in the PRC. Through the
    interagency End User Review Committee (ERC), BIS and our interagency
    partners review PRC companies, both State-owned and commercial, to
    determine if they are reliable recipients of U.S. technology.
        Currently, we have over 800 PRC parties (i.e., businesses, research
    institutions, Government and private organizations, individuals, and
    other types of legal persons) on our Entity List and are therefore
    subject to restrictions on the items they can receive. Over 300 of
    those were added during the Biden-Harris administration, which has
    added more PRC parties to the Entity List than any prior
    Administration. They have been added for reasons including supporting
    the PRC's military modernization and WMD programs, supporting Iran's
    WMD and military programs, facilitating human rights abuses in
    Xinjiang, and providing restricted items to Russia. These parties
    include those involved in AI, surveillance, biotechnology,
    microelectronics, and quantum computing.
    Engaging International Partners
        The United States has relied on and acted in close cooperation with
    its allies and partners to bring together the international community
    to address military aggression, threats to sovereignty, and human
    rights abuses around the world. These last few years, we have doubled
    down on efforts to invigorate our international partnerships and taken
    broad efforts to liberalize controls for our allies and partners.
        While we address the challenges posed by the PRC, Russia's brutal
    invasion of Ukraine has reinvigorated our close and continuing
    international partnerships. Technology supply chains span across
    borders, and technological expertise is dispersed throughout the world.
    The best way to truly keep potentially dangerous technologies and know-
    how out of the hands of bad actors is to work together. Coordinated
    controls reduce instances of evasion or backfill by other suppliers
    from other countries, ensuring that our controls remain effective over
    the long term.
    Global Export Control Coalition
        This is the approach we have adopted in building the Global Export
    Control Coalition, focused on using all aspects of export controls to
    degrade Russia's military capabilities, as well as those of enablers
    such as Belarus and Iran. This coalition--led by the European
    Commission, Japan, the United Kingdom and the United States--enabled us
    to drive new approaches to lower-level commodity controls on Russia and
    its partners, using Harmonized Systems codes to parse EAR99 items
    (i.e., low technology consumer goods). Further, through this
    partnership we have coordinated outreach to other countries in order to
    more forcefully combat illegal diversion. We have worked together to
    track data, identify priorities, and provide a unified message against
    Russia's unlawful war.
        To date, the Biden-Harris administration has added 925 entities in
    Russia, Belarus, and numerous third countries for reasons related to
    Russia's war on Ukraine. \2\ Of those, over 200 parties have been added
    in the last year, including dozens of parties in China. BIS has
    virtually cut off these entities from U.S. trade, shutting down
    established Russian diversion routes and making it easier for law-
    abiding industry to avoid selling their commodities into high-risk
    diversion markets.
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    announces-additional-export-restrictions-counter-russian#:text=
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        In addition, we have imposed Entity List restrictions on all
    Specially Designated Nationals (SDNs) that have been identified by the
    Department of the Treasury in certain Russia-related programs to ensure
    that U.S. items are not sent to SDNs by foreign parties acting outside
    the scope of Treasury controls. In addition, we have added new export
    controls to combat circumvention, such as by adding addresses used by
    the industry supporting offshore transshipment in Hong Kong to the
    Entity List, thereby incentivizing the corporate services industries to
    better scrutinize their offshore clients. We have expanded controls on
    previously uncontrolled business software for design and management. We
    have calibrated our controls to achieve our stated objectives--by
    narrowing a license exception used to facilitate civil
    telecommunication so that it is harder to abuse, or by adding a new
    License Exception for medical device exports serving humanitarian
    needs. We have simplified and harmonized our expanding Russia-related
    regulations so that they are easier to find and understand. We now
    require a license for most trade going to Russia, with export controls
    on thousands of classes of items, including all items described in 22
    entire chapters of the harmonized tariff code. We have also reached out
    repeatedly to industry to better understand their supply chains and the
    challenges of export compliance.
    Facilitating Exports and Reexports to Close Allies and Partners
        In recognition of key allies' and partners' support of our efforts
    against Russia, along with their leadership in the areas of chemical
    and biological weapons nonproliferation and the promotion of human
    rights, EA removed license requirements for certain items going to
    close partners and allies, making it easier to facilitate exports and
    reexports involving these countries, and allowing BIS to apply its
    resources toward reviewing and monitoring more sensitive exports and
    higher-risk transactions. Related to that, we expect to publish a final
    rule streamlining license exception Strategic Trade Authorization (STA)
    in the coming months to realize the original goal of Export Control
    Reform in making STA a key facilitator of secure technology transfer
    and interoperability with allies and partners. This will build off the
    proposed rule published last year. \3\ These rules will also free up
    licensing resources to focus on higher-risk transactions.
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    26681/proposed-enhancements-and-simplification-of-license-exception-
    strategic-trade-authorization-sta
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        To complement the State and Defense Department's ongoing work to
    implement a broad defense trade exemption to advance the goals of the
    Australia-U.K.-U.S. Enhanced Trilateral Security Partnership, or
    ``AUKUS'', we have already incorporated the premise of AUKUS into our
    export controls. We recognize the importance of the enhanced export
    control and technology protection measures enshrined in the United
    Kingdom's National Security Act of 2023 and Australia's Defence Trade
    Controls Amendment and Securing Australia's Military Secrets Acts of
    2024. Accordingly, effective April 19, 2024, \4\ we amended our export
    controls to remove nearly all remaining list-based license requirements
    for exports to Australia and the United Kingdom, expanded the
    availability of license exceptions, and eliminated certain end-use and
    end-user controls. These reforms will facilitate defense trade and
    technology cooperation with two of our closest allies and reduce
    burdens associated with licenses valued at up to $7.5 billion per year.
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    streamlines-export-controls-australia-and-united-kingdom
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    Defense Priorities and Allocations System Title I of the Defense
            Production Act (DPA)
        In addition to its export control functions, the Commerce
    Department has several responsibilities in implementing nonpermanent
    provisions of the Defense Production Act (DPA).
        First, under Title I, the Commerce Department administers the
    Defense Priorities and Allocations System (DPAS). Second, under Title
    VII, the Commerce Department analyzes the health of U.S. industrial
    base sectors. Finally, also under Title VII, BIS submits an annual
    report to Congress on offsets in defense trade. All three DPA
    authorities will expire if not reauthorized before September 30, 2025.
        The DPAS establishes procedures for the placement, acceptance, and
    performance of priority rated contracts and orders for industrial
    resources, and for the allocation of materials, services, and
    facilities in support of approved national defense programs. The DPAS
    is regularly used to support the acquisition of industrial resources
    needed to support U.S. national defense requirements, especially by the
    Department of Defense.
        The Commerce Department works closely with the Department of
    Defense to support the U.S. Armed Forces through the DPAS to ensure the
    timely delivery of industrial resources needed to support critical
    operational requirements and ensure our national security goals are
    met. We are very proud of the role we play to support our
    servicemembers through the DPAS. The Commerce Department may also
    authorize other Government agencies, foreign Governments, owners and
    operators of critical infrastructure, or U.S. or foreign companies to
    place priority ratings on contracts or orders on a case-by-case basis
    upon request. In response to these challenges, the Commerce Department,
    in coordination with the appropriate interagency partners, has
    responded to a significant increase in requests for assistance under
    the DPAS regulation.
        For example, in 2023, the Commerce Department undertook 59 official
    actions in response to DPAS assistance requests, which is the highest
    number of official actions undertaken by the Department in the last 34
    years. Fifteen of these rating authorizations were issued in support of
    U.S. Government Agencies, including three in support of Department of
    Defense programs and one in support of U.S. Government support to
    Ukraine. An additional 12 rating authorizations were issued in support
    of Commerce's memorandum of understanding with Canada to provide
    reciprocal military priorities support, eight of which were in support
    of Canadian defense procurements and four of which were in indirect
    support of Department of Defense programs. Within these 2023
    activities, the Commerce Department, in coordination with the
    Department of Defense, also issued two rating authorizations in support
    of NATO and 26 rating authorizations in support of our foreign military
    partners, including 24 rating authorizations in support of Department
    of Defense's Security of Supply Arrangement partners, such as Israel,
    Italy, and the Republic of Korea. One of the rating authorizations
    issued to a Department of Defense Security of Supply Arrangement
    partner was ultimately in support of defense systems that would be
    transferred to the Ukrainian Ministry of Defense.
        If the DPA's Title I authority were to lapse, the Commerce
    Department would no longer be able to support procurement on behalf of
    an entity other than the U.S. Armed Forces. Without DPA Title I,
    Commerce would rely only on the limited priority authority delegated to
    it under the Selective Service Act of 1948 to administer the DPAS.
        The DPAS continues to facilitate the timely delivery of industrial
    resources to support U.S. national defense needs, including military
    and emergency preparedness programs, coalition partners, and
    increasingly, our Federal interagency partners. The Department of
    Commerce is eager to work with Congress to reauthorize the nonpermanent
    provisions of the Defense Production Act.
    A Modern Export Administration
        BIS is now at the center of strategic competition with the PRC over
    technologies that are critical to military advances. It plays a pivotal
    role in preventing foreign countries and entities of concern from
    leveraging American technology to develop items that can be used for
    strategic overmatch against the United States. There are more U.S.
    exports generally, more U.S. exports requiring a BIS license, and more
    export license applications submitted to BIS to be reviewed by the
    bureau and its interagency partners.
        The emergence of adversaries with vastly more sophisticated tactics
    for evading or circumventing U.S. export controls has necessitated
    further calibration of export controls, which has further expanded the
    scope of BIS's work.
        Accordingly, we have repositioned ourselves organizationally to
    match our substantially growing responsibilities. We implemented a new
    EA leadership framework to ensure we continue to effectively protect
    national security and appropriately manage policy engagement and
    implementation. Our internal review recognized two main channels of
    activity: strategic trade, which includes our licensing functions, as
    well as our outreach and training mission; and technology security,
    including our defense industrial base and Section 232 responsibilities,
    and all of the analytic work we do on licensing and trade data,
    industry research, and intelligence. Accordingly, we formally created a
    Principal Deputy Assistant Secretary (PDAS) to oversee all of this work
    and two Deputy Assistant Secretaries (DAS)--one for Strategic Trade
    (ST) and one for Technology Security (TS).
        In office organizational terms, the DAS/ST oversees the Offices of:
    Exporter Services, National Security Controls, and Non-proliferation
    and Foreign Policy Controls. The DAS/TS is responsible for EA's Offices
    of: Strategic Industries and Economic Security; and Technology
    Evaluation (OTE).
        ECRA Section 1758 charges us with identifying and implementing
    appropriate controls on emerging and foundational technologies
    essential to national security. This critical part of our mission that
    demands dedicated resources and attention. This work, as well as
    foreign technology analysis and other research efforts designed to help
    assess the effectiveness of our export controls is being formalized
    under the DAS/TS. OTE leads EA's Section 1758 work, including through
    proactive research, analysis, collaboration and consultation with
    interagency partners and key industry and academic stakeholders, as
    well as supporting engagements with allies and partners at the regimes.
    Our nonproliferation experts, notably in the Chemical and Biological
    Controls Division have provided critical leadership in this space,
    through proposed rules on new technologies like peptide synthesizers.
    Formalizing a Technology Security branch of EA is essential for moving
    BIS from its historic focus on export control regulations towards a
    holistic approach of assessing the intersection of technology
    ecosystems, export control authorities, and national security and
    foreign policy goals.
        Further enhancing this approach, under our new PDAS, we have formed
    an International Policy Office (IPO). Our vision for EA requires
    consistent and proactive engagement with our allies and partners to
    achieve mutual goals, as well as increased focus on the activities and
    plans of Nations that challenge global peace and security. IPO leads
    EA's increasing focus on engaging on a plurilateral and bilateral basis
    to address evolving threats. This Office is furthering and deepening
    BIS's many plurilateral and bilateral relationships, and enabling
    country-specific analysis not necessarily tied to a specific technology
    or multilateral regime.
        BIS's national security mission is more important than ever in an
    era of dynamic strategic competition with the PRC and rapid
    technological advancement. However, funds appropriated by Congress for
    the bureau have remained flat--$191 million--over fiscal years 2023 and
    2024 despite the following challenges:

        From 2013 to 2023, total U.S. exports were up approximately
            28 percent, and exports under BIS licenses are up approximately
            222 percent.

        BIS license applications have also nearly doubled in the
            last decade; in recent years, BIS is processing more than
            42,000 licenses per year, in contrast to just under 26,000
            licenses annually in 2013.

        Our staff are relying on foundational systems for both
            license adjudication and enforcement work that were put in
            service in 2006 and 2008, respectively.

        License review timelines continue to increase, particularly
            to the PRC, as licenses become more complex, particularly for
            exports of electronic components.

        BIS's law enforcement arm, the Office of Export
            Enforcement, employs only 150 agents to counter the threat
            posed by Nation State actors, which means an increase in sworn
            law enforcement officers and analysts is overdue.

        With the support of additional resources, BIS would be better able
    to meet the needs of the current geopolitical environment by enhancing
    these two channels of effort. Specifically, BIS has identified areas
    that would most benefit from additional resources, including:

        Information Technology (IT) systems and security
            modernization to secure and enhance BIS's infrastructure
            (including modernized digital management systems).
         IT modernization would augment EA's ability to factor in all-
            source data during license application, including data
            generated by U.S. Government and the private sector. These
            updates would bolster the capabilities, capacity, and security
            of BIS data servers, facilitating comprehensive improvements to
            all aspects of BIS work that involve data intake and analysis--
            from evaluating the effectiveness of U.S. export controls to
            deploying supply chain analytic software to proactively
            identify and trace downstream supply chain diversion.

        Data and analytics, such as proprietary datasets and a
            modern data analytics system, to broaden BIS's understanding of
            how critical supply chains interact and the intricacies of
            entity-business relationships.
         Access to more fulsome data would improve BIS's ability to analyze
            how trade flows, assess control efficacy and impact, and
            identify new technologies at their inception. Improving EA's
            analytic capabilities in OTE and IPO, in particular, would
            strengthen and streamline impact across all bureau equities.

        Specialized, in-house expertise, including experts across
            critical fields and contracts with national labs and other
            relevant entities, to ensure that BIS stays up-to-date with
            cutting-edge technology and markets, as well as economics and
            supply chain management.

        Domestic and international policy engagement, including
            more cohesive interagency policy coordination and a new
            international engagement focus to continue building upon the
            multilateral partnerships that arose in the wake of Russia's
            full-scale invasion of Ukraine and that also support
            coordinated actions related to the PRC's semiconductor
            industry.
         The need for new bilateral and multilateral partnerships will
            continue for the foreseeable future as the PLA aims to
            reinforce and consolidate its influence in critical global
            supply chains that span the Middle East, the African continent,
            Southeast Asia, and beyond. In order to sufficiently counter
            the threats posed by the PRC, BIS requires a significant and
            sustained increase in resources to further support
            accomplishing its critical national security mission. Such an
            investment by Congress in BIS is, fundamentally, an investment
            in U.S. national security. This investment will yield tangible
            results, and, in terms of importance, should be regarded in the
            same vein as the military and other traditional tools of power.

        The status quo has shifted, as demonstrated by the unparalleled
    technological advances that have dramatically increased the need for
    national security and foreign policy controls and enforcement of
    violations. Agencies across the U.S. Government have ramped up capacity
    to tackle the concerns regarding China, and BIS needs additional
    resources and authorities to follow suit. With additional funding and
    authorities over the next 5 years, BIS could more effectively execute
    its mission and keep critical technologies out of the hands of foreign
    countries and entities of concern.
    Conclusion
        Dual-use export controls have never been more relevant or more
    effective at protecting our national security. We are focused on
    aggressively and appropriate contending with the strategic technology
    threat posed by the PRC and will continue to appropriately and
    aggressively use the tools at our disposal to counter PRC efforts to
    outpace the United States and our allies.
        Thank you for inviting me to appear today. I look forward to
    continuing to work with you, and I am happy to answer your questions.
                                     ______

                        PREPARED STATEMENT OF PAUL ROSEN
    Assistant Secretary for Investment Security, Department of the Treasury
                                 July 25, 2024
        Good morning, Chairman Brown, Ranking Member Scott, and Members of
    the Committee. Thank you for the opportunity to provide an update on
    the work of the Treasury Department's Office of Investment Security
    (OIS) and the Committee on Foreign Investment in the United States, or
    CFIUS. I also want to thank Congress for the authorities and resources
    you have provided since the passage of the Foreign Investment Risk
    Review Modernization Act of 2018 (FIRRMA), as well as for the
    constructive and bipartisan support to our national security mission,
    which has helped make possible many of the enhancements that I will
    discuss.
        CFIUS is a critical national security tool that enables thorough
    reviews of foreign investments in the United States for national
    security risks. The Committee--comprised of the heads of several
    Executive branch departments and offices and which I help lead as head
    of OIS in support of the Secretary of the Treasury's role as Chair--
    carefully reviews foreign investments in the United States for national
    security risks. When necessary, the Committee takes action to address
    any such risks while seeking to maintain an open investment environment
    and the status of the United States as the world's top destination for
    foreign direct investment.
        Last year, I spoke to this Committee about our work. Among other
    things, I outlined how Treasury has implemented the FIRRMA reforms that
    overhauled CFIUS, and President Biden's September 2022 Executive order
    on Ensuring Robust Consideration of Evolving National Security by
    CFIUS. I spoke about how we have hired dedicated professionals to carry
    out this work, how we monitor compliance and enforce CFIUS
    requirements, and how we engage with our allies and partners. I also
    previewed our thinking in how we planned to address risks associated
    with certain ``outbound'' investment from U.S. persons to countries of
    concern, such as the People's Republic of China (PRC).
        The progress and good work of Treasury and CFIUS continues, and
    this year, I want to further update the Committee on the status of this
    work as well as additional areas of progress. Let me start with an area
    that does not get as much public attention but is critical to our
    mission--our analytical and operational capabilities. Over the past 18
    months, we have vastly improved our competencies in these areas. We
    have built and implemented sophisticated tools, platforms, and
    methodologies for assessing and addressing national security risks. We
    have employed cutting-edge information technology platforms to securely
    manage and facilitate novel aspects of CFIUS's work. We have expanded
    and deepened our human capital, and today have a Treasury team with
    widely diverse backgrounds, from lawyers to science Ph.D.'s to
    intelligence professionals to bankers to compliance professionals and
    former prosecutors.
        Many of the investments we are making benefit not just Treasury,
    but all of the Committee's member agencies. For example, through our
    dedicated CFIUS funding established by Congress in FIRRMA, we are
    working with the interagency to enhance the Committee's capabilities.
    This includes investments in modern information technology systems,
    data accesses, analytical tools, technical and industry studies, and
    staff training, to name just a few examples. These investments should
    pay national security dividends for many years to come.
        Working to stay at the cutting edge in all of these areas has
    enabled us to be more efficient and effective even as we contend with
    two core challenges: transactions are becoming ever more complex in
    their structures and CFIUS is identifying and addressing more national
    security risks than in years past. Accordingly, CFIUS staff thoroughly
    scrutinize each notified transaction, peeling back the layers of the
    onion in pursuit of all the relevant facts regarding the foreign
    acquirers and U.S. targets all within statutory deadlines. We have paid
    particular attention to the role of limited partners in investment
    funds, as their access to, and influence and control over, sensitive
    businesses can vary considerably.
        All while tackling these challenges, Treasury has successfully
    improved the efficiency of CFIUS's operations. As noted in the latest
    CFIUS Annual Report, in 2023, CFIUS cleared 66 percent of filed
    declarations or notices within the first 30 or 45 days, respectively,
    compared to 58 percent in 2022. Another indicator of efficiency-the
    rate at which parties withdraw and refile their notices, also has
    fallen, declining from 23 percent of notices in 2022 to 18 percent in
    2023, the first such decrease in 5 years. These changes are not
    incidental but instead reflect improved efficiencies, a cornerstone of
    our focus.
        While efficiency is important, our core mission continues to be to
    identify national security risks arising from covered transactions and
    address them through enforceable orders, entering into mitigation
    agreements, or leveraging the President's statutory authority to block
    or unwind a transaction. Our work does not stop after a mitigation
    agreement is signed--we work with the parties to ensure they comply
    with the agreement's terms, and hold them accountable when they don't.
        Over the last 2 years, Treasury has transformed the way the
    Committee approaches compliance with mitigation agreements, and
    enforcement thereof. We have expanded and devoted significant resources
    to the monitoring and enforcement mission, including by nearly doubling
    the size of Treasury's team over the last several years. Since 2022,
    Treasury and other CFIUS monitoring agencies have paid particular
    attention to compliance, including conducting in-person and virtual
    site visits here in the United States and abroad to probe and test
    compliance, and quickly refer matters for enforcement investigations
    where appropriate.
        While our work to ensure compliance is critical, so too is making
    certain that companies know that CFIUS will enforce violations of
    mitigation agreements where appropriate. Treasury has led the
    Committee's reinvigorated efforts to broaden, sharpen, and deploy
    CFIUS's enforcement authority. In October 2022, Treasury issued CFIUS's
    first ever enforcement and penalty guidelines. The guidelines are aimed
    at ensuring that transaction parties understand the Committee's
    considerations and are held accountable for failing to comply with our
    laws and regulations, or for not upholding their obligations to address
    national security risk as part of mitigation agreements or orders, or
    other CFIUS regulatory requirements. In fact, in 2023, CFIUS assessed
    or imposed four civil monetary penalties for violations of material
    provisions of mitigation agreements, double the number of civil
    monetary penalties that CFIUS had previously issued across its nearly
    50-year history. CFIUS has also, for the first time, issued subpoenas
    pursuant to its authorities to execute its national security mission.
        While the Committee's authorities are extensive, ultimately the
    power to prohibit or unwind a transaction lies with the President.
    Earlier this year, President Biden ordered a Chinese cryptocurrency
    mining company, MineOne, to divest itself of a parcel of land in
    Wyoming that was in proximity to a military installation. This matter
    serves well to highlight the importance of CFIUS's efforts to identify
    transactions that were not notified to the Committee voluntarily and
    that may pose a risk to national security. The Committee leverages
    multiple tools to identify and analyze such non-notified transactions.
    Treasury's non-notified team screens thousands of potential covered
    transactions, ultimately putting forward to the Committee for
    consideration to request a filing those that may raise national
    security issues. The MineOne transaction came to the Committee's
    attention through our non-notified process in the form of a public tip.
        Treasury also has led a number of regulatory enhancements to
    CFIUS's authorities. Over the last year, we have significantly
    bolstered CFIUS's jurisdiction over real estate transactions. As you
    know, CFIUS has the authority to review acquisitions of real estate in
    or around ports, or within a certain proximity to military
    installations and other sensitive Government facilities identified on a
    list maintained in the CFIUS regulations. Working with our Department
    of Defense counterparts, in July, OIS issued a proposed rule to amend
    the list to add 59 installations, building off the eight installations
    we added in August 2023. These additions are the first since the
    regulations implementing FIRRMA, and they represent a significant
    expansion of our jurisdiction.
        In addition to these real estate enhancements, in April, to better
    effectuate many of the enhancements discussed above, we published a
    proposed rule to sharpen our investigation and enforcement tools. Among
    other things, the proposed rule substantially increases the maximum
    civil monetary penalty for certain violations and expands the types of
    information CFIUS can require parties to submit when engaging with them
    on non-notified transactions. Once finalized, the updated regulations
    will help us more effectively deter violations, promote compliance, and
    swiftly act to address risks to national security.
        In many instances, our tools work best when we collaborate and act
    with allies and partners. For example, if CFIUS indicates that it will
    not approve an investment in a sensitive technology, the investor may
    try to ``get around'' CFIUS by making a similar investment in an allied
    country. In 2023 and 2024, CFIUS has had more than 300 engagements with
    allies and partners, and since 2019, approximately 30 countries have
    proposed, enacted, or significantly revised their foreign investment
    review regimes with our support. Last year, we worked with the
    Government of Mexico to sign a Memorandum of Intent to establish a
    bilateral working group on investment screening with Treasury.
        Lastly, I want to turn from CFIUS to update you briefly on
    Treasury's efforts to address risks associated with certain outbound
    investments from the United States into other countries. Secretary
    Yellen tasked my office with implementing the President's new Outbound
    Investment Security Program pursuant to Executive Order (E.O.) 14105.
    The E.O. directed Treasury to issue regulations on outbound U.S.
    investment into certain sensitive technologies and products in
    identified sectors within countries of concern.
        Treasury issued an Advance Notice of Proposed Rulemaking in August
    2023 and received 60 public comments from a variety of stakeholders
    implicated by the E.O. We also have encouraged our partners and allies
    to consider taking similar action, as a multilateral effort will
    increase the effectiveness of stemming the flow of support to sensitive
    technology sectors in countries of concern.
        Based on the feedback on the ANPRM, Treasury issued a proposed rule
    last month. My office will closely review the comments and prepare a
    final rule for publication. The program's success ultimately will
    depend on the resources we receive, and, to that end, I ask Congress to
    fully support Treasury's request for $16.7 million in the President's
    FY25 budget for this program.
        We are proud of Treasury and the Committee's efforts over the last
    2 years, but our work remains unfinished. We remain focused on
    promoting and enforcing compliance with our regulations and agreements,
    improving our efficiency, and honing our authorities. I look forward to
    answering any questions you may have.
                                     ______

                       PREPARED STATEMENT OF GRANT HARRIS
     Assistant Secretary for Industry and Analysis, Department of Commerce
                                 July 25, 2024
        Chairman Brown, Ranking Member Scott, distinguished Members of the
    Committee, thank you for inviting me to testify today. As stated by
    Secretary Raimondo, every day at the Commerce Department, we are
    tackling our Nation's most pressing economic and national security
    priorities, and I welcome the opportunity to discuss how we are
    advancing this work.
        As Assistant Secretary of Commerce for Industry and Analysis, I
    lead a team of more than 265 industry experts and economists. Our
    mission is to support the global competitiveness of U.S. industry. We
    provide critical sectoral expertise to proactively help U.S. industries
    compete abroad; strengthen supply chains vital to U.S. national
    security and economic competitiveness; advance U.S. exports and support
    job creation; and analyze investments to protect U.S. national
    security. The Industry and Analysis unit's work supports $170 billion
    in U.S. exports and inward investment and over 595,000 American jobs
    (in FY23) and influences policy decisions affecting trillions of
    dollars of economic activity.
        The Industry and Analysis business unit, which sits in the
    International Trade Administration, is the analytical engine of U.S.
    competitiveness policy because it has the broadest industry expertise
    and connectivity available in any one place in the U.S. Government,
    covering approximately 90 percent of the U.S. economy. We work on
    everything from raw materials like critical minerals, to vital
    components like semiconductors, to finished goods like autos and
    airplanes.
        Understanding sectors and the ties between them is crucial to our
    Nation's economic competitiveness and national security priorities.
    This is why the Industry and Analysis unit's deep industry expertise,
    our unique commercial and national security perspective, and our
    advanced analytics capabilities are critical to advancing U.S.
    Government work on outbound investments, the Committee on Foreign
    Investment in the United States (CFIUS), and supply chain resilience.
    Outbound Investment Security Program
        The Outbound Investment Security Program addresses a crucial gap in
    existing national security authorities. Already, Commerce Department
    colleagues at the Bureau of Industry and Security (BIS) use export
    controls to regulate the transfer of commodities, software, and
    technology that threaten our national security. We also have sanctions
    programs administered by the Treasury Department that restrict the flow
    of U.S. capital, technology, and services to designated persons. Now,
    through the President's actions, we will soon have the Outbound
    Investment Security Program to prevent U.S. private capital from
    supporting advances in countries of concern in critical sectors that
    undermine U.S. national security.
        The Commerce Department, and the Industry and Analysis unit in
    particular, plays a vital role in supporting the Outbound Investment
    Security Program called for by Executive Order 14105, ``Addressing
    United States Investments in Certain National Security Technologies and
    Products in Countries of Concern'', in August 2023. The Outbound
    Investment Security Program--like the CFIUS review process, which I
    will discuss subsequently--will be administered by the Treasury
    Department, but Commerce plays a significant role in each, leveraging
    our deep understanding of industries and supply chains.
        In fact, from the start, the Administration's development of an
    Outbound Investment Security Program has relied on Commerce's core
    commercial and sector-specific technical expertise and, as recognized
    in the President's Executive order, Commerce plays a special role in
    supporting the program.
        I would like to briefly describe three dimensions of our work on
    this program in more detail.
        First, Commerce is key to identifying and understanding the
    relevant technologies that ought to be covered and how the requirements
    should be scoped. My team in Industry and Analysis has experts leading
    efforts to advance the global competitiveness of digital, information,
    communication, and other emerging technologies. We also have the
    technical fluency and industry relationships to help understand and
    anticipate national security risks associated with cutting-edge
    technologies--both those currently covered and those that may need to
    be recommended to the President for future inclusion. This includes,
    for instance, having the skillsets to understand the semiconductor and
    other critical supply chains to identify the full range of investments
    that could boost the military, intelligence, surveillance, or cyber-
    enabled capabilities of countries of concern while trying to prevent
    unnecessary economic disruptions.
        Second, Commerce brings a unique commercial perspective and
    expansive industry connectivity. We have regular touchpoints with
    companies and business associations operating in sectors directly
    impacted by the regulations. In addition, my team spearheaded industry
    engagement on the Outbound Investment Security Program and, in
    coordination with Treasury, consulted over 450 stakeholders in multiple
    rounds of outreach designed to solicit feedback as the development of
    the program progressed. We sought out perspectives from companies and
    investors on how they anticipate the program will impact their work,
    which is key as we seek to craft an effective program while reducing
    the risks of unintended market effects.
        Third, Commerce will be key to successful implementation of the
    program. Our sector-specific experts will be indispensable to
    interpreting and recommending actions based on analysis of the influx
    of data that the private sector will be providing to the U.S.
    Government regarding outbound investments and associated supply chains.
    Going forward, we will play an important role in assessing whether to
    add or remove technologies and products covered by the program. In
    addition, we will help anticipate and propose policy adaptations if
    countries of concern seek to develop new mechanisms to evade scrutiny
    and access U.S. investment to advance technologies in a way that
    threatens our national security.
        At Commerce, we understand that there is significant work ahead in
    the implementation of this program. We are focused on narrowly scoping
    the program to avoid unintended consequences and minimize negative
    impacts to the broader economy. We will continue to support the program
    to address national security concerns in a targeted and proactive way.
    CFIUS
        Industry and Analysis is the policy lead for the Department of
    Commerce's participation in CFIUS national security reviews. We provide
    indispensable sectoral and supply chain expertise that guide U.S.
    Government decisions in reviewing hundreds of billions of dollars of
    foreign investment, all while enhancing investor confidence in our
    Nation's longstanding open investment policy.
        Since Congress enacted the Foreign Investment Risk Review
    Modernization Act of 2018 (FIRRMA), the Industry and Analysis unit
    expanded its CFIUS team and established an Office of Investment
    Security. Our team has a wide range of experience in the public and
    private sectors, and we especially value these diverse backgrounds and
    skillsets as we work on increasingly complex CFIUS national security
    reviews. At the same time, we have taken on a greater leadership role
    on the Committee. As one example, since FIRRMA, Commerce has acted as a
    CFIUS lead agency on a significant number of CFIUS filings.
        Overall, Commerce takes a broad approach to reviewing CFIUS cases.
    The Industry and Analysis unit provides analysis of issues related to
    the U.S. business and the market in which it operates, market trends,
    supply chain impacts, and the business rationales for transactions,
    among other issues. We also draw on inputs from across all of
    Commerce's bureaus and offices. In particular, my team works very
    closely with our colleagues in BIS, which reviews transactions with a
    focus on export control, technology transfer, and defense industrial
    base issues.
        In Executive Order 14083, ``Ensuring Robust Consideration of
    Evolving National Security Risks by CFIUS'', issued in September 2022,
    President Biden directed CFIUS to consider supply chain resiliency in
    our national security analysis. Consistent with this direction, the
    Industry and Analysis unit examines a range of factors when considering
    whether a transaction may impact the resilience of certain critical
    U.S. supply chains, which may have national security implications. We
    consider issues such as the scale and types of supply relationships
    pertaining to a given U.S. company and the potential for supply chain
    disruption or undue foreign influence over specific supply chains.
    Analysis of supply chain risk in the context of investment reviews is
    part of a broader initiative by Industry and Analysis to advance the
    resiliency of U.S. supply chains, which I would like to briefly turn to
    next.
    Supply Chains
        The Industry and Analysis unit has long been central to U.S. supply
    chain work because of its breadth of sectoral expertise; its unique
    understanding of the opportunities and challenges facing U.S.
    companies; its daily connectivity to U.S. industry; and its economic
    analysis and modeling capabilities. In fact, we have had a supply chain
    services-focused office for over a decade and, for years before that, a
    dedicated team. We also have had an Advisory Committee on Supply Chain
    Competitiveness since 2011. Yet the criticality of this work has
    increased further still in recent years.
        At its core, the Industry and Analysis unit focuses on applied
    analysis and action. For instance, the Industry and Analysis unit was
    the first team in the U.S. Government to sound the alarm on
    competitiveness in the semiconductor supply chain and spring into
    action. The team subsequently mapped out chokepoints, created an early
    warning system for industry to provide alerts of potential disruptions,
    and, in the face of severe shortages, connected industry leaders with
    semiconductor suppliers to encourage solutions. The team also set to
    work supporting investment to strengthen the supply chain and helped
    secure critical U.S. investments, such as those by Taiwan semiconductor
    companies totaling $34 billion and supporting more than 20,000 U.S.
    jobs. And those investments in semiconductors have only grown, thanks
    to the CHIPS and Science Act.
        Last year, we established what the White House called a ``first-of-
    its-kind'' Supply Chain Center to integrate industry expertise and data
    analytics to develop innovative supply chain risk assessment tools,
    coordinate deep-dive analyses on select critical supply chains, and
    drive targeted actions to increase resilience and address foreign
    dependency vulnerabilities. We aim to be the analytic engine for supply
    chain resilience policy by helping the U.S. Government be more
    proactive in getting ahead of supply chain challenges and strategic in
    setting priorities for action based on data-driven risk analysis. We
    also provide strategic and technical advice to other departments and
    agencies related to industry- and sector-specific competitiveness
    issues as they disburse billions of dollars in U.S. Government
    investments related to supply chains.
        As part of this work, we are pioneering new data-driven tools and
    creating playbooks to assess supply chain vulnerabilities in specific
    sectors, including for emerging technologies. Our Supply Chain Exposure
    Tool provides a common operating picture of risks that enables focused,
    evidence-based conversations and actions with international partners.
    We are also building a tool that utilizes a comprehensive set of
    indicators to assess current or prospective supply chain risk across
    the U.S. economy, with an emphasis on risks to national security and
    economic security most relevant to the U.S. Government.
        Additionally, we are providing action-oriented analyses on a wide
    variety of trade and supply chain related issues, including the impact
    of global supply chain disruptions, tariff actions, and unfair trade
    practices by the People's Republic of China. We are supporting industry
    resilience to supply chain or geopolitical shocks and working with
    foreign Governments to mitigate international supply chain challenges.
    We are also supporting work targeting tens of billions of dollars of
    export opportunities for U.S. industry and inward investment to the
    United States as part of strengthening high-priority supply chains.
        These efforts, which leverage the critical FY23 funding provided by
    Congress, are central to U.S. Government efforts to be more strategic
    and proactive in strengthening supply chains and securing our national
    interests. This work supports U.S. economic competitiveness and
    domestic job growth while supporting U.S. businesses in leading the
    industries of the future. At the same time, it is vital to improve our
    ability to counter efforts by adversaries to gain or exercise strategic
    leverage over key supply chains.
    Conclusion
        I appreciate the opportunity to update the Committee on Commerce's
    efforts to safeguard U.S. national security and economic
    competitiveness through our work on outbound investment, CFIUS, and
    advancing supply chain resilience.
        If I have sought to convey one thing, it is this: I believe that
    industry expertise, and the ability to look across sectors, is vital to
    investment security, protecting and promoting U.S. technological
    advantages, supporting domestic manufacturing and job growth, and
    addressing attempts by adversaries to weaponize supply chains. For
    these reasons, the singular industry depth and connectivity of the
    Industry and Analysis business unit at Commerce has never been more
    central--or more needed--to protecting and advancing U.S. economic
    competitiveness and national security.
        To meet these growing demands and, more frankly, to meet U.S.
    economic and national security needs, these efforts require resources.
    The President's FY25 Budget Request for the International Trade
    Administration is $645.5 million. This includes $5 million in new
    funding to support the Outbound Investment Security Program so that we
    can provide the sectoral and commercial expertise, industry
    connectivity, and actionable recommendations to ensure that the U.S.
    Government can understand and act on information received from covered
    transactions while also minimizing the risk of unintended disruptions
    to U.S. business. The President's Budget Request also includes $12
    million to sustain and support our supply chain resiliency efforts.
    This support is needed to improve crisis response and anticipate future
    constraints in key sectors so that the U.S. Government can proactively
    strengthen critical supply chains. Unfortunately, the House FY25 mark
    only provides the International Trade Administration $558 million,
    which is $53 million (9 Percent) below the FY24 enacted level and $87.5
    million below the President's Budget Request.
        As Congress works to finalize the FY25 appropriation bills in the
    coming months, we ask that you please consider how important it is for
    U.S. national security to support and fully fund these functions. Thank
    you for having me here today. I look forward to answering your
    questions.
                                     ______

                    PREPARED STATEMENT OF LAURA TAYLOR-KALE
     Assistant Secretary for Industrial Base Policy, Department of Defense
                                 July 25, 2024
        Good morning, Chairman Brown, Ranking Member Scott, and Members of
    the Committee. Thank you for the opportunity to testify today on the
    state of the defense industrial base, and the ways in which the Defense
    Production Act (DPA) can be used to address shortfalls and adversarial
    capital investments in the defense industrial base. I look forward to
    highlighting today how DoD links systemic and emerging economic threats
    to the defense industrial base with DPA investments in capacity-
    building and defense supply chain resilience. To ensure that we are
    protecting and expanding our defense industrial base, the DoD strongly
    supports the reauthorization of the Defense Production Act. Supporting
    the Defense Production Act is one of the most important actions that
    the Congress can do to ensure that the U.S. industrial base is ready to
    support defense needs and the Warfighter in addition to timely,
    consistent appropriations and multiyear procurement authority.
    State of the Defense Industrial Base
        Today we face geoeconomic and technological competition with peer
    and near peer adversaries that impact our economy and military posture.
    Defense production--undergirded by a strong industrial and innovation
    ecosystem--deters our adversaries. Since Congress enacted the DPA in
    1950, the Executive branch has invoked DPA authorities to manage the
    Nation's defense-related production capacity, defense critical supply
    chains, and to protect and strengthen the U.S. industrial base in war,
    peace, and during national emergencies. The DoD uses the DPA every day
    in its mission to safeguard vital U.S. national interests. Fully
    executing DPA authorities is a priority for defense industrial policy.
    In January of this year, the DoD published the first ever National
    Defense Industrial Strategy, which highlights four strategic priorities
    for building a modernized, resilient industrial ecosystem that can
    support national defense: (1) resilient supply chains, (2) workforce
    readiness, (3) flexible acquisition strategies, and (4) economic
    deterrence. The DPA is a critical tool for national defense and the
    successful implementation of the National Security Strategy, the
    National Defense Strategy, and the National Defense Industrial
    Strategy.
        As the first Senate-Confirmed Assistant Secretary of Defense for
    Industrial Base Policy, some of my top priorities includes overseeing
    DoD's participation in the Committee on Foreign Investment in the
    United States (CFIUS), addressing the impacts of malign economic
    activity on the defense industrial base, and the effective management
    and execution of DPA authorities and appropriations. I would like to
    thank the Congress for adding the United Kingdom and Australia to the
    definition of domestic sources for Title III awards in the FY 2024
    National Defense Authorization Act. Allowing the DoD to enter
    agreements with companies the U.S., Canada, U.K., and Australia
    reinforce important alliances and the short- and long-term development
    of secure defense critical supply chains. Going forward, the DPA will
    remain a critical national defense tool to mitigate supply chain risk
    vulnerabilities in our key weapons and defense systems, and for
    building capabilities with close global allies and partners.
    Addressing Supply Chain Shortfalls and Adversarial Capital Investments
            in the Defense Industrial Base
        Our adversaries attempt to exploit supply chain vulnerabilities to
    weaken the U.S. economy and military. These systemic, ongoing threats
    take many forms, including economic statecraft, coercion and predatory
    investments and acquisitions by malign actors who seek to undermine our
    national security and defense, weaken the defense industrial base, and
    erode our military advantage. My office often identifies these risks
    through our review of CFIUS transactions, Hart-Scott-Rodino mergers,
    and other economic-focused matters. Through these authorities, we
    catalogue actions that must be taken to ensure that adversarial capital
    investments do not rob the U.S. industrial base of technology and
    capability leadership.
        As a key pillar of the National Defense Industrial Strategy,
    economic deterrence is the DoD's strategic focus approach to economic
    security that promotes defense industrial resiliency and capacity.
    Economic deterrence efficiently integrates policies, investments,
    countermeasures, and other risk mitigation activities inside and
    outside the DoD to prevent adversaries from weakening the defense
    industrial base by exploiting vulnerabilities and our open market
    economy. Our objective is to quickly identify and counter malign
    economic activities that threaten U.S. national security.
        The DoD frequently uses DPA VII authorities to combat adversarial
    investments and predatory acquisitions in the U.S. industrial base. DoD
    is one of the most active members of CFIUS. While reviewing investment
    transactions, DoD is particularly concerned with protecting military
    installations, supply chains, and technology from foreign ownership and
    influence. CFIUS caseloads have reached all-time highs in recent years.
    The DoD has dedicated significant time and resources to the successful
    execution of CFIUS authorities, and DoD is co-lead agency on a large
    proportion of all CFIUS cases. Additionally, DoD actively evaluates
    ``non-notified cases''--transactions that were not submitted to CFIUS
    for a review or assessment. My team evaluates many such transactions
    and refers non-notified transactions to Treasury every year.
        My team's due diligence in investment and acquisition reviews
    includes intelligence, open-source information, cyber security
    analysis, counterintelligence, and business analytics to gather
    information on systematic vulnerabilities in defense-critical supply
    chains. By layering multiple sources of information, the DoD builds a
    holistic understanding of targets for adversarial investments,
    identifies defense sectors and technology capabilities that are most
    at-risk, develops mitigation strategies, and seeks to identify
    investment opportunities for DPA investments.
        Leveraging analytics and intelligence from economic security
    reviews enables our decision-making for investments in industrial
    capacity-building. This integrated approach to assessment, analysis,
    strategy, and mitigation informs DoD's primary use of the DPA--to
    increase the readiness and resilience of defense industrial base in
    support of defense critical needs and the Warfighter. Through informed
    investments and mitigation activities, DoD continues to ensure our
    Nation's industrial base is dynamic, state of the art, resilient, and
    able to provide our Warfighters the capabilities needed to counter new
    and emerging threats and to prevail in conflicts.
    Prioritizing Industrial Resources for National Defense: DOD Use of DPA
            Title I Authorities
        The DoD utilizes DPA Title I authority through the Commerce-
    administered Defense Priorities & Allocations System (DPAS) to
    prioritize contracts and orders in support of DoD's needs within
    industrial supply chains and to allocate scarce components to spur
    production and support allies and partners. This prioritization ensures
    that defense programs do not experience supply chain disruptions that
    inhibit meeting their program objectives in day-to-day operations and
    national emergencies. The DoD places DPAS priority rated contracts and
    orders for industrial resources over 300,000 times a year at no cost to
    the taxpayer to help ensure DoD procurements meet cost, schedule, and
    performance parameters by proactively mitigating supply chain risks.
        Since the last DPA reauthorization in 2018, the DoD has leveraged
    Title I authority to directly contribute to national defense and
    prioritize the delivery of weapons and materiel to allies and partners.
    The DoD has signed 17 Security of Supply Arrangements (SOSAs)--
    nonbinding, reciprocal agreements to provide mutual support for
    industrial resources, including seven new SOSAs in 2023 with Japan,
    Israel, Latvia, Denmark, Lithuania, Estonia, and Singapore. The DoD has
    also endorsed Special Priorities Assistance requests for DPAS rating
    authority to Commerce to expedite delivery of military supplies at any
    level of the supply chain to allies. For example, in 2023, DoD endorsed
    the use of DPAS priority rating Title I authority to formally resolve
    37 requests for Special Priorities Assistance. Two of these requests
    were in support of Ukraine-related efforts, including cases which
    supported the National Security and Defense Council of Ukraine's
    cybersecurity infrastructure, prioritized the delivery of tanks, and
    expedited the manufacturing and transfer of more than 20,000 radios and
    other communications capabilities.
    Expanding Production and Enabling Resilient Supply Chains: DOD Use of
            DPA Title III Authorities
        Sufficient investment in the defense industrial base is critical to
    ensuring that the defense industrial ecosystem can produce at speed and
    scale. The DoD's DPA Title III program is a key investment tool to
    build capacity and strengthen the defense industrial base. Single
    source and no source risk exists in nearly every supply chain and at
    all levels of the defense industrial base. It is a national security
    priority to sustain essential single source defense component
    manufacturers as well as mitigate sourcing risk upstream in supply
    chains. Through the use of Title III, DoD alleviates pain points in
    supply chains and expand domestic capacity in manufacturing, critical
    technologies, critical minerals and strategic materials, and vital
    defense capabilities. Industry demand is high for Title III support.
    Since the start of 2021, my office has received hundreds of proposals
    and favorably evaluated more than 50 projects (valued at $5.74
    billion). This fiscal year alone, DPA Title III has received over 140
    industry white papers requesting a total of $1.26 billion in Government
    funding, an increase from 15 white papers in FY21. Continued support of
    the U.S. industrial and technological base ensures that the United
    States has a resilient industrial ecosystem that serves as a deterrent
    to our adversaries. We will continue to work to ensure that taxpayer
    resources fund the best value for defense needs.
    Title III Execution Since 2018
        Congress has markedly increased DPA Title III appropriations in
    recent years. In FY 2018 and FY 2019, the DoD's DPA Title III
    appropriations, including Congressional adds, totaled $67.4 and $53.6
    million respectively. Since FY 2020, DoD Title III appropriations have
    averaged over $783 million which includes supplemental funding. The key
    factors driving increased DoD Title III budget has been the
    Government's response to COVID and DoD's urgent focus on shoring
    defense critical supply chains and expansion of domestic manufacturing
    capacity.
    COVID Response
        In March 2020, the Coronavirus Aid, Relief, and Economic Security
    (CARES) Act appropriated $1 billion to the DoD DPA program to prepare
    for, prevent, and respond to coronavirus. In coordination with Health
    and Human Services (HHS), $900 million of the $1 billion in CARES Act
    funding was used to expand or maintain capacity in medical resources
    and the defense industrial base. DoD obligated a total of $740.6
    million (or 82 percent of the $900 million) within the first 6 months
    and obligated much of the remaining funding over the next fiscal year.
    By FY 2022, appropriations totaled nearly $1.4 billion as Congress and
    the Biden administration increased DPA appropriations to expand
    domestic manufacturing capacity, protect defense-critical supply chains
    from adversaries, and counter predatory investment and acquisition
    strategies.
    Focus on Defense Supply Chain Resiliency in FY 2023 and FY 2024
        Improving prioritization and execution of Title III programs has
    been an Administration priority and DoD has aligned Title III execution
    to Executive Order 13806 (Assessing and Strengthening the Manufacturing
    and Defense Industrial Base and Supply Chain Resiliency of the United
    States), Executive Order 14017 (America's Supply Chains), and the
    National Defense Industrial Strategy. The DoD has prioritized using
    Title III to expand domestic capacity in the most sensitive materials
    and critical minerals vital to national security, thereby reducing
    reliance on adversarial foreign sources, and tackling the long lead
    times of critical materials that inhibit industry's rapid production of
    key weapons systems. For example, DoD has obligated approximately $20
    billion to replace U.S. stocks and services drawn down for Ukraine,
    including Guided Multiple Launch Rocket Systems (GMLRS), Stinger,
    Javelin, and 155mm ammunition.
        It is important to underscore that the DoD cannot exercise Title
    III authorities unless the President has issued a formal determination
    or waiver that an industrial resource, material, or critical technology
    item is essential to the national defense. Since the 2018 DPA
    reauthorization, the President has issued 22 determinations and three
    waivers. President Biden's February 2023 Supply Chain Waiver has been
    the most far-reaching in allowing DoD to swiftly act to avert
    shortfalls in defense-critical supply chains and quickly execute Title
    III awards.
        As a result of the 2023 Presidential Supply Chain waiver, in FY23
    the DoD executed $733 million in DPA Title III awards that helped to
    strengthen supply chain resilience across sectors, including:

        Microelectronics ($22 million): Investments were made to
            sustain and/or expand manufacturing capabilities and establish
            a robust domestic microelectronics ecosystem in support of
            radiation-hardened microelectronics, printed circuit boards,
            advanced packaging, discrete components, and other electronics.

        Strategic and Critical Minerals and Materials ($329
            million): Established and expanded domestic industrial mining,
            refining, processing, and manufacturing capabilities required
            to field weapon systems, including rare earth elements required
            for magnets, energetic materials required for munitions,
            structural materials for aircrafts, and upstream battery
            materials.

        Kinetic Capabilities ($351 million): Expanded existing
            production and onshore capabilities for critical chemicals
            required for DoD missiles and munitions; increase capacity for
            ball bearings and solid rocket motors for missiles and
            munitions.

        Energy Storage and Batteries ($31 million): Invested in
            domestic battery cell manufacturing capabilities to enable the
            Department to have a stable, qualified, and secure supply.

        In FY 2024, the DoD is on-track to execute over $1 billion in DPA
    Title III awards and continues to remain postured to execute the
    authorities provided under the DPA to support the Warfighter. DoD
    announced $192.5 million in DPA Title III awards in February 2024 to
    establish, expand, and modernize capability to manufacture 22 defense-
    critical chemicals and reduce reliance on foreign sources, particularly
    the PRC. These awards will result in production of several chemicals
    deemed critical for the proper functioning of defense and weapon
    systems. Many of these chemicals are also used in numerous commercial
    applications (including but not limited to pharmaceuticals, consumer
    products, agriculture, automotive, and energy), resulting in products
    that will be competitive in the marketplace and increase resiliency of
    domestic critical chemical supply chains.
    Improving Title III Execution by Launching Defense Industrial Base
            Consortium Other Transaction Authority
        The rapid scaling of DPA appropriations following the COVID supply
    chain crisis and Russia's invasion of Ukraine strained DoD's internal
    capacity to swiftly execute Title III awards. It has been my priority
    to quickly improve execution and align the Department's use of the
    authorities to the implementation of the National Defense Industrial
    Strategy. To that end, in January 2024, the DoD announced the
    establishment of the Defense Industrial Base Consortium (DIBC) Other
    Transaction Authority (OTA).
        Along with the Air Force Executive Agent, DoD's launch of the DIBC
    OTA positions the DoD to shorten the time of execution of DPA awards
    and lessen bureaucratic hurdles. The OTA directly aligns with the NDIS
    four strategic priorities by providing a vehicle to rapidly research,
    prototype, and manufacture commercial solutions for defense
    requirements and innovations from private industry, academia, and firms
    not traditionally part of defense contracting systems. The OTA will
    spur competition and attract nontraditional defense contractors,
    nonprofit research institutes, and small businesses that will in turn
    lead to an expansion of the defense industrial ecosystem, increase
    innovation, and improve the transition of new technologies into
    production. Additionally, the OTA can execute interagency requirements
    aimed at enhancing critical domestic supply chains.
    Fully Executing DPA Title III Authorities: Reauthorization Priorities
            for DOD
        DPA strongly supports the reauthorization of the DPA as the
    Department continues to use DPA authorities to advance national
    security and mitigate to the defense industrial base and the U.S.
    technological innovation ecosystem. DPA Title III authorizes the use of
    direct purchases (grants), purchase commitments, guarantees of
    purchases or leases of advanced manufacturing equipment, and loans or
    loan guarantees. Currently DoD only has the capacity to issue Title III
    grants for direct purchases. Essentially DoD only uses one of the four
    Title III authorities. However, we need to fully use DPA Title III to
    mitigate systemic and emerging threats to national defense. To support
    fully executing the potential of DPA authorities, the DoD requests two
    key changes to the existing DPA law to respond to increasing
    requirements. We submitted these legislative proposals to Congress.
    Specifically, the DoD supports legislative amendments that would raise
    the DPA annual fund balance and remove designation of the Secretary of
    the Air Force as the sole and exclusive executive agent.
        First, raising the DPA Fund annual fund balance ensures that the
    DPA Title III Program will not be penalized for increased and
    supplemental appropriations. DoD increasingly leverages DPA authorities
    to respond to critical national defense requirements, the balance of
    the DPA Fund is anticipated to rise accordingly. While the DPA Title
    III Program always pursues the most expedient path to execution, some
    acquisition or mitigation strategies cannot be completed in the span of
    a year. As such, DoD requests amending the law to allow for a higher
    DPA Fund balance so that monies that are appropriated or transferred
    into the DPA Fund are not returned to the Treasury.
        The second change that the DoD supports is the elimination of the
    sole and exclusive Executive Agent in favor of access to multiple
    execution offices. The designation of the Secretary of the Air Force as
    the sole and exclusive DoD executive agent for the DPA Title III
    program unnecessarily constrains the ability of the program to execute
    efforts in support of national security requirements. While we will
    continue fully utilizing the Air Force resources devoted to DPA
    execution, the increased appropriations to the program require DoD to
    use all available contracting mechanisms to expediently obligate funds.
    Amending the designation of the Secretary of the Air Force as ``the
    sole and exclusive Department of Defense Executive Agent'' to ``an
    execution office for the Department of Defense'' would allow seamless
    access to additional execution offices for the DPA Title III program,
    enabling the Department to leverage additional contracting resources
    when necessary.
        Finally, DoD supports increasing the period of availability of
    Title III funds. Currently, DoD only issues direct purchase grants due
    to the recent change in period of availability for appropriations from
    non-expiring to 5 years in the last Appropriations Acts. If Congress
    appropriates non-expiring funds in the future, DoD can issue purchase
    commitments, loans, and loan guarantees through DPA authorities.
    Purchase commitments would particularly improve defense supply chains
    by helping to spur advanced procurement of critical materials and make
    DOD demand more predictable.
    Closing
        In closing, DPA is critical to ensuring that America is ready to
    address shortfalls and counter adversarial capital investments in the
    defense industrial base. The DoD will continue to focus on increasing
    execution of DPA Title III funding and look for opportunities to
    utilize more of the authorities to include purchase commitments, loans,
    and loan guarantees. I cannot over-emphasize how important the DPA is
    to ensure that the DoD can protect and strengthen the U.S. industrial
    base, and work with our closest allies and partners to secure defense-
    critical supply chains. We look forward to working with Congress and
    the interagency on the successful reauthorization of the DPA and
    support for DoD legislative proposals to fully align DPA execution with
    the defense critical needs.
             RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                           FROM THEA KENDLER

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            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                           FROM THEA KENDLER

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            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                            FROM PAUL ROSEN

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            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                            FROM PAUL ROSEN

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                   RESPONSES TO WRITTEN QUESTIONS OF
                   SENATOR FETTERMAN FROM PAUL ROSEN

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            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                           FROM GRANT HARRIS

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            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                           FROM GRANT HARRIS

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                  SENATOR FETTERMAN FROM GRANT HARRIS

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            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                         FROM LAURA TAYLOR-KALE

    Q.1. Dr. Taylor-Kale, in your opinion, what are the most
    pressing areas in our defense industrial base that must be
    addressed? Please be extensive and specific.
        Could you provide a rough estimate of the cost to ensure
    resiliency for each of your listed areas?

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

    Q.2. In the FY24 NDAA, Congress provided you with the authority
    to access industrial base improvement projects with Australia
    and the U.K. in the case that a U.S. alternative did not exist.
    Could you provide me with an update on your utilization of that
    authority?

    A.2. Response not received in time for publication.

    Q.3. Under the Biden administration, we have seen DPA funds
    used at the Energy Department for Electric Heat Pumps to fight
    Climate Change and more broadly for biomanufacturing
    capabilities. With global challenges and the current
    shortcomings in our defense industrial base, how can we get
    this program back on track, with a focus on core defense
    capabilities, to ensure that we have a robust and resilient
    defense industrial base?

    A.3. Response not received in time for publication.
                  Additional Material Supplied for the Record

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