[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
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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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\1\ https://www.bis.doc.gov/index.php/documents/about-bis/
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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\2\ https://www.bis.gov/press-release/department-commerce-
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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\3\ https://www.federalregister.gov/documents/2023/12/08/2023-
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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\4\ https://www.bis.gov/press-release/commerce-significantly-
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
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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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SENATOR FETTERMAN FROM PAUL ROSEN
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
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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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