SBC Examining Outbound Investment
Senate Committee on Banking, Housing, and Urban Affairs
Thursday, September 29, 2022
Topline
- Ranking Member Patrick Toomey (R-Pa.) set out a set of principles to guide the creation of any outbound investment regime. He said a notification regime for outbound American investments in China should, at a maximum, only be applicable to direct U.S. investments in Chinese entities that are manufacturing, producing, developing, or testing a technology that a U.S. exporter would otherwise be required to seek a license under current U.S. export law.
- All the panelists agreed that multilateral engagement/approach on an outbound investment regime is very important and highlighted the importance for any outbound investment notification regime to be specific.
Witnesses
- The Honorable Bob Casey, United States Senator, Pennsylvania
- The Honorable John Cornyn, United States Senator, Texas
- Professor Sarah Bauerle Danzman, Associate Professor of International Studies, Indiana University
- The Honorable Richard Ashooh, Former Assistant Secretary for Export Administration, U.S. Department of Commerce
- The Honorable Thomas Feddo, Former Assistant Secretary for Investment Security, U.S. Department of the Treasury
- Robert Strayer, Executive Vice President of Policy, Information Technology Industry Council
Opening Statements
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown said it is critical the Biden Administration has the tools it needs to protect our national security. He discussed laws Congress has passed to maintain U.S. technological leadership and said U.S. investments, venture capitalist, or pension funds could willingly or unwilling support foreign advisories technological investments. Brown touted Senators Casey’s and Cornyn’s National Critical Capabilities Defense Act and said we must be sure we are not investing in technologies that harm our national security. He concluded by saying we must understand the scope of outbound investments and address the impact it plays in supporting efforts by U.S. advisories to achieve their foreign policy preferences.
Ranking Member Patrick Toomey (R-Pa.)
In his opening statement, Toomey acknowledged China’s threats to U.S. national security and U.S. allies and the importance of actions to safeguard U.S. ventures and workers. He quoted the U.S. National Security Advisor Jake Sullivan who stated, “the need for an outbound investment regime would capture outbound investments that circumvent the spirit of export controls.” Toomey said the problem with this statement is that its hard to define the spirit and, therefore, could be subject to expansive and varying interpretation. Toomey expressed his concern that the White House is rushing to issue an Executive Order (EO) that establishes an outbound investment regime unilaterally, adding that an EO is not a substitute for a new congressionally passed law. He discussed the importance of establishing clear parameters for an outbound regime from the onset to avoid Presidents misusing their power and said a notification regime for outbound American investments in China should, at a maximum, only be applicable to direct U.S. investments in Chinese entities that are manufacturing, producing, developing, or testing a technology that a U.S. exporter would otherwise be required to seek a license under current U.S. export law.
Panel I
Testimony
The Honorable Bob Casey, United States Senator, Pennsylvania
In his testimony, Casey discussed the importance of screening outbound investments and said the National Critical Capabilities Defense Act (NCCDA) would help the U.S. better understand the risks of allowing foreign adversaries to gain access to critical capabilities and technology and to design and manufacture goods critical to our economic and national security interests. He concluded by saying an outbound investment screen is an idea whose time has come.
The Honorable John Cornyn, United States Senator, Texas
In his testimony, Cornyn discussed the challenges the U.S. faces with China regarding our national security when it comes outbound investments. He said the Chinese Communist Party’s trade practices paint an alarming picture for our national security, and it requires a collective response by the U.S. government, American businesses, our allies, and those nations who at least attempt to abide by the rules-based international trading system. Cornyn concluded by saying he hopes this is one of several hearings to come that will provide additional, diverse perspectives and oversight on the topic of outbound investments.
Panel II
Testimony
Professor Sarah Bauerle Danzman, Associate Professor of International Studies, Indiana University
In her testimony, Danzman said while there are a set of national security risks that
some kinds of outbound investments generate, there remains a great deal of uncertainty about the
size of the problem and the cost of potential solutions. She offered five observations that Congress should keep in mind when contemplating outbound investment controls. First, she said active forms of U.S. investment – particularly foreign direct investment (FDI) and venture capital (VC) can provide intangible benefits to the Chinese firms and industries in which they invest but noted there are reasonable arguments for why narrowly scoped expanded review authorities are necessary to protect national security. Second, she said Congress should resist temptations to use outbound investment screening for purposes other than national security, adding that outbound screening should focus on
national security risks associated with indigenous technology development in countries of concern. Third, she suggested Congress recognize the uncertainty that pervades this issue, saying an EO related to outbound screening is likely a good first step because it allows for more experimentation before committing to a statutory requirement. Fourth, she said Congress should not assume that a mirror image of the Committee on Foreign Investment in the United States (CFIUS) will work for outbound screening. Lastly, Danzman suggested Congress think in network terms when contemplating what technologies to work hardest to protect.
The Honorable Richard Ashooh, Former Assistant Secretary for Export Administration, U.S. Department of Commerce
In his testimony, Ashooh suggested Congress clearly define the national security threat to be addressed by outbound investments legislation, that outbound screening criteria align with the criteria that are already the foundation of the export licensing and inbound investment authorities, and that Congress should consider whether existing authorities such as the export control system can be leveraged as a tool
to obtain insights into financial transactions of concern, or even address gaps in the current system. He concluded by saying that amendments to current authorities hold the potential to address the most pressing concerns regarding outbound investments, without the establishment of an additional, entirely new regime.
The Honorable Thomas Feddo, Former Assistant Secretary for Investment Security, U.S. Department of the Treasury
In his testimony, Feddo said creating an investment screening mechanism by EO would be a significant mistake. He discussed what a new outbound investment regime might examine and urged Congress to collaborate with and receive key input from the Administration, private sector stakeholders, national security experts, and the intelligence community to address the issue of outbound investments.
Mr. Robert Strayer, Executive Vice President of Policy, Information Technology Industry Council
In his testimony, Strayer recommended that Congress and the Executive Branch consider five criteria in crafting an outbound investment regime: 1) identify gaps between existing authorities, 2) identify specific risks to U.S. national security, 3) consult with industry iteratively, 4) develop clear lines and avoid ambiguity, and 5) seek to build international coalitions. He concluded by saying it is important for the U.S. government to apply objective clearly defined rules to a narrow range of technologies and transactions, adding that the private sector has the best information about supply chains and the development of transformative innovations so it should be consulted regularly in scoping the policy.
Question & Answer
National Security Risks Gaps
Brown asked Danzman to elaborate on what U.S. capabilities gaps need to be addressed that pose a risk to our national security. Danzman said it is important to examine what kinds of intangibles benefit the U.S. that are separate from technology transfer and that are not addressable through export controls. She discussed foreign direct investments (FDI) and venture capital investments and how they play a role in outbound investments in countries of concern. Sens. Mark Warner (D-Va.) and Toomey asked what exact outbound investments the U.S. should be focused on going after. Ashooh said the U.S should focus on going after cash money investments because it presents a disconnect between the goals and the authorities’ reason, being that an end user that is export restricted could still receive U.S. investment. He added that technology in this sense is information and just not a tangible product. Sen. Robert Menendez (D-N.J.) asked how a lack of a comprehensive outbound investment strategy for certain critical sectors could mitigate recent efforts to strengthen our supply chains. Danzman said when firms move oversees, it is because of commercial viability in the U.S., and if the goal of Congress is to make sure the U.S. retain some amount of domestic capabilities, there are other measures we should use beyond prohibiting outbound investments in an effort to help with making those types of investments in the U.S. commercially viable.
Outbound Investments Notification Requirement
Brown asked how policy makers should consider the scope of the outbound investments notification requirement. Danzman said outbound investment screening should mirror U.S. export controls similar to what Sen. Toomey suggested, adding that as it relates to emerging technologies, it may be necessary to narrow the critical and emerging technology list to a few areas that are not currently controlled. Brown asked what information would be helpful to collect if policy makers established a notification requirement. Ashooh said the most important information will be whether or not a company’s export engagement intersects with our current export restriction under CFIUS. Feddo agreed with Ashooh, adding that collaborating with the FBI on this issue is important as well. Toomey asked about the significance of restricting the application of the outbound investment regime to precise and well-defined boundaries, and the importance of these boundaries as references to existing laws related to the concerned technology. Strayer said it is important that we are very precise in how we are identifying those technologies. He also discussed how specific the Department of Commerce control list is. Feddo, Ashooh, and Danzman all said the power of our export control system is in its specificity.
Statutory Language
Toomey asked how important it is to have statutory language regarding outbound investments. Feddo said this issue is specifically Congress’s job, adding that Congress has explicit authority to regulate Commerce with foreign nations. Feddo also discussed the importance of a comprehensive approach to addressing the issue of outbound investment screening.
Economic Competitiveness/Foreign Production
Menendez asked what some of the consequences are of having so much critical production abroad in countries like China. Danzman said when looking at supply shocks we should look at national security concerns, adding that the CHIPS Plus Science Act was passed to diversify the supply chain and that it is important to not over learn the example of the covid pandemic that provided shocks to the system. Menendez asked how stolen intellectual property in countries like China has degraded our economic competitiveness and national security. Ashooh said it is hard to measure because intellectual property theft is a global issue and not just limited to China, adding that export controls as a solution to that is not ideal, and it is worth contemplating how else to address intellectual theft. Feddo discussed how often the FBI is addressing the theft of intellectual property and said the U.S. must examine how risks from outbound investments compare to risks like espionage and other high risks we face.
Sen. Chris Van Hollen (D-Md.) said our allied partners should also adopt similar mechanisms as it relates to an outbound investment regime if the U.S. wants to be effective. All the panelists said multilateral engagement on this issue is very important. Van Hollen asked if there are any other countries that have adopted a screening process for outbound investments. Ashooh said some of our allied partners do currently conduct outbound investment screening and discussed the multilateralism that currently exists. He said an initial step in outbound screening should be to synchronize it with the existing national security criteria that exist between CIFIUS and the export control system.
Stock Buybacks
Sen. Elizabeth Warren (D-Mass.) asked as it relates to the CHIPS Plus Science Act, if Intel Corporation or Integrated Device Manufacturer (IDM) could accept CHIPS funds and then use their own money for stock buybacks. Danzman said possibly. Warren asked why it is important that taxpayer funds in the CHIPS Act programs are not used indirectly or directly to fund stock buybacks or other shareholder payouts. Danzman said taxpayers are investing billions of dollars on conductor manufacturing on the bases that the U.S. will be safer and more economically resilient, adding that if there are a lot of stock buybacks, this would undermine U.S. public support for these types of programs.
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