January 04, 2024
Noteworthy: House Select Committee on CCP Report on Economic Competition
Key Findings and Recommendations
Pillar I: Reset the Terms of Our Economic Relationship With the People’s Republic of China
For decades, the PRC has failed to live up to its World Trade Organization (WTO) commitments by empowering its state-owned enterprises, massively subsidizing its domestic industry, and closing its markets. At the same time, the CCP has pursued extensive industrial policies that provide low-cost—often free— capital and regulatory support to PRC companies, which puts U.S. companies at a severe disadvantage globally. Unburdened by typical corporate constraints, such as concern for profits and losses, national champion PRC companies have managed to dominate key markets globally.
Yet, as the Select Committee’s hearings, investigations, travel, and meetings revealed, the U.S. government and private sector have yet to fully grasp the risks inherent in investing in the PRC.
During the Select Committee’s hearing titled “Risky Business: Growing Peril for American Companies in China,” Desmond Shum warned, “China is no longer a market for long-term investors…It is a casino that one should take his or her winnings and run for the door.” William Evanina likewise warned that “China's ability to strategically obtain our intellectual property and trade secrets via legal, illegal, and sophisticated hybrid methods is like nothing we have ever witnessed.”
U.S. companies doing business in the PRC must also navigate an increasingly complex network of laws, regulations, and protectionist policies, which subject businesses to the persistent threat of raids or arrests by security services and make it nearly impossible for U.S. companies to do the due diligence required to certify compliance with U.S. law. Likewise, U.S. investment in the PRC creates systemic risks for U.S. financial stability. However, as Roger Robinson testified, no one knows “the total amount of financial risk exposure of the American people” to PRC securities. Nor can anyone be certain what the costs of a potential future conflict with the PRC could be.
In sum, continued, unfettered economic ties with the PRC poses a direct threat to U.S. national and economic security, financial stability, and values. Guided by these concerns, the Select Committee has identified five findings and associated recommendations.
Key Finding: The PRC’s economic system is incompatible with the WTO and undermines U.S. economic security.
When Congress affirmed the PRC’s permanent normal trade relations (PNTR) status 2000, it did so in the expectation that the PRC, in its accession to the WTO, would eventually transition to become a market economy. As the Office of the United States Trade Representative (USTR) states in its 2022 Report to Congress on China’s WTO Compliance, “WTO Members understood that China intended to dismantle existing state-led, mercantilist policies and practices, and they expected China to continue on its then-existing path of economic reform and successfully complete a transformation to a market-oriented economy and trade regime.” More than 20 years later, the PRC has failed to live up to these commitments and to the foundational principles of the WTO—open, market-oriented, non discriminatory treatment. It has inconsistently implemented its bilateral trade and investment commitments to the United States, and CCP intervention in the economy has continued to grow, rather than recede. The CCP wields expansive and expanding power over nearly all areas economic activity, which poses a significant challenge to the United States and other market economies. At the same time, the United States no longer maintains some of the key tools that were once available to protect itself against the distortions from non-market economies. Hearing witnesses encouraged Congress to rebuild that toolkit, including by revisiting the PRC’s permanent Normal Trade Relations and returning to annual renewal.
It has become clear that the PRC’s accession to the WTO has fundamentally undermined and impaired the benefits that the United States and many economies expected to receive from expanded trade relations with the PRC. The WTO’s dispute settlement mechanism has proven to be of limited value in addressing the PRC’s state-led, non-market approach to the economy. For many years, the United States and other WTO members attempted both multilaterally and bilaterally to address the unique challenges that the PRC presented to the global trading system. The United States brought 27 cases against the PRC at the WTO, but even if the PRC changed the specific practices at issue, it did not change the underlying problem. It is time for likeminded countries to come together and seriously examine how to collectively counter the PRC’s approach to economics and the harm it is doing to the global trading system. If this cannot be achieved within the confines of the WTO, then a new multilateral effort by likeminded market economies that goes back to first principles is needed, excluding mercantilist non market economies that reject the basic principles upon which the WTO was established. Because the PRC’s state-led economic system is antithetical to the founding principles of the WTO, actions to defend the United States and global economy against PRC economic aggression are consistent with the U.S. commitment to a multilateral trading system based on market-oriented principles.
Recommendation 1: Aggressively counter the PRC’s economic and trade strategy and the harm it inflicts on the United States and the global economy.
We acknowledge that granting the PRC PNTR did not lead to the benefits expected for the United States nor did it lead to the structural reforms in the PRC that Congress expected. Instead, it has ceded critical U.S. economic leverage in our relationship with the PRC. Furthermore, the PRC’s consistent failure to meet its WTO obligations and its systemic and widespread State and Party intervention in market decisions, economic coercion, IP theft, cyber-attacks, forced labor, lack of basic transparency, and the rule of law have harmed U.S. industry, workers, and manufacturers.
Therefore, Congress should:
1. Move the PRC to a new tariff column that restores U.S. economic leverage to ensure that the PRC abides by its trade commitments and does not engage in coercive or other unfair trade practices and decreases U.S. reliance on PRC imports in sectors important for national and economic security. This shift should be phased in over a relatively short period of time to give our economy the time necessary to adjust without avoidable disruptions.
The recommendations start off with a bang here, calling for the unilateral revocation of China's benefits under the WTO. How would the United States do this under the WTO legal framework (or, does the United States care if this move is consistent with its own WTO commitments)? What would a new tariff structure look like? Would this sort of move tank any warming relations with key allies on trade issues (hello, EU.....). There are loads of unanswered questions on how to implement this in a manner that is in the U.S. economic and strategic interest.
This is not unrelated to ongoing debates about what to do with the Trump-era 301 tariffs. One could foresee a path towards restructuring the tariffs to implement higher tariffs on national security goods (e.g., chips) or goods where there is a near-term economic threat from unfairly subsidized Chinese imports (e.g., batteries) and lower tariffs on consumer goods. Clearly the Committee does not think that USTR is moving fast enough in the 301 process. Fair enough.
This recommendation is provocative and tariff restructuring is an important debate to have. The Committee's perspective on how to overcome the legal, economic, and diplomatic challenges associated with revoking PNTR would be helpful to advance the conversation.
2. Renew the China Safeguard mechanism, under Section 421, which expired in 2013, by amending the Trade Act of 1974. The PRC-specific safeguard was meant to be a transitional mechanism available to all WTO members as the PRC transitioned to a market economy after joining the WTO. The safeguard mechanism allowed the United States to impose tariffs or other restrictions if the U.S. International Trade Commission determines that products from the PRC are being imported into the United States in such a way that causes or threatens to cause “market disruptions,” which would allow for expedited relief. Unlike other trade remedies, the China Safeguard does not require a showing of an unfair trade practice.
3. Defend America from PRC retaliation and prescribe allowable uses for revenue raised from increased tariffs to advance American national security and competitiveness and to expand American market opportunities with allies across the globe as outlined in this report. In anticipation of PRC retaliation, the U.S. Department of Agriculture (USDA) and USTR should collaborate to determine alternative market access for agriculture exports that predominately rely on the PRC market and offset the adverse effects of PRC retaliation. Congress should also consider additional appropriations to offset retaliation for farmers and ranchers, U.S. exporters, and other American workers. A broader strategy must also be developed to support workers to prepare for a period of increased trade tensions and uncertainty.
South Korea, Lithuania, and Taiwan must be thinking "better late than never!" Chinese trade coercion is not a new issue for those countries that have been targeted for years, but it has become more of a pointed concern for the United States over the last year. China is showing new willingness to crack down on U.S. firms or critical tech sectors in retaliation for U.S. policy moves. The United States needs a robust toolkit to respond to Chinese economic coercion. (For some ideas, see our prior work). While agriculture is clearly a vulnerable sector in this context, the U.S. policy response must be much broader. China won't limit itself to one sector, and they are clearly wiling to hit advanced tech sectors and consumer goods based on what we have seen to date.
4. Ensure that the United States’ existing trade agreements with third-party countries, including the U.S.-Mexico-Canada Agreement (USMCA), have strong rules of origin to prevent non-market economies from using our trading partners as a backdoor to gain preferential access to the U.S. market.
5. Build consensus on the PRC’s distortive trade and economic practices and reinforce U.S. commitments to its international partners by working with likeminded countries to propose new plurilateral disciplines on non market economies, which could be modeled on the U.S.–EU–Japan Trilateral initiative.
This sort of work is sorely needed. Prior trilateral efforts got snagged on the question of forum, namely where can the U.S. and partners negotiate directly with China to impose binding disciplines on their non-market practices. This proposal implies a new emphasis on stronger and more coordinated use of domestic authorities to impose penalties on China, rather than seeking to work directly with China. For this to work, all trilateral partners must be more willing to engage in a give and take, so that trade irritants between them do not prevent progress on the larger challenge presented by China.
6. Direct USTR to bring a comprehensive WTO dispute against the PRC’s subsidization, support for state-owned enterprises, and non-market economy policies and practices with a broad coalition of countries documenting how the PRC has undermined a world trading system “based upon open, market-oriented policies” and impaired the benefits that many Members expected to receive from expanded trade relations with the PRC.
Even if one is skeptical about the WTO, this is still a good idea. Reinforcing the basic principles of a rules-based trading system, and showing that the United States will still litigate to protect such principles, can avoid a free fall into chaos where all countries impose whatever restrictions catch their fancy. WTO litigation won't change the structure of China's economy, but it can signal that the United States will continue to push all countries to meet a minimum standard of behavior in the trade space.
7. Direct USTR to publish a full assessment of the PRC’s compliance with the “Phase One” agreement and remedies necessary to address any areas of non-compliance.
8. Pass legislation amending the Tariff Act of 1930 to reduce the de minimis threshold for duty-free shipments into the United States with particular focus on foreign adversaries including the PRC. Congress should also direct CBP to strengthen its enforcement against transshipments from the PRC into the U.S. market using the de minimis rule, as it cannot adequately scrutinize goods sent to the United States from the PRC for concerns about forced labor under current de minimis rules.
9. Enact legislation like the COOL Online Act (H.R. 6299) mandating country of origin labeling for online-purchased products to ensure transparency, consumer understanding, and clear trade practices in the digital marketplace. With the increasing prevalence of e-commerce, consumers should be able to make informed choices about the products they buy, taking into consideration factors such as sourcing from regions with forced labor. Country of origin labeling not only fosters consumer trust but also enables individuals to align their purchasing decisions with personal values and support businesses that adhere to responsible practices. Additionally, such legislation would create a level playing field for domestic and international businesses by promoting fair competition and preventing deceptive marketing practices.
10. Increase investigative capacity and enforcement and recover lost U.S. revenue by appropriating additional funding for trade enforcement capacities, including the Department of Justice’s Trade Fraud Task Force, which investigates PRC transshipment, evasion of tariffs, trade-based money laundering, violations of the Uyghur Forced Labor Prevention Act (UFLPA), and other trade-related crimes. It should also pass the Strengthening the Uyghur Forced Labor Prevention Act (H.R. 4567) to strengthen safeguards against products made with forced labor in the PRC entering the United States.
11. Consider providing financial assistance or other substantive support to small- and medium- sized businesses or first-time petitioners who are pursuing an unfair trade case.
12. Require an assessment from USDA, to be updated on an annual basis, on U.S. dependency on critical agricultural products or inputs that could be exploited in the event the PRC or another foreign country weaponizes any of these critical dependencies. Earlier this year, the United States and ninety other UN Member states condemned the use of food as a weapon of war, but the PRC and Russia were not signatories to this joint communique.
This is a good idea and could be even better if expanded to include medicine. Weaponizing food or medicine is clearly a violation of international norms. U.S. sanctions policy recognizes this and typically includes carve-outs for these areas, due to a concern about humanitarian impacts. Ethical application of economic force is an important factor in building more widespread support for U.S. coercive economic statecraft, and the United States should continue to push for global norms in this space.
Recommendation 2: Create transparency into U.S. investment in the PRC, the recipients of that funding, and the risks associated with it.
Specifically, Congress should:
1. Enact legislation, such as the Reveal Risky Business in China Act (H.R. 4451), requiring large U.S. public companies to disclose key risks related to the PRC and the expected effects of a sudden change in market access. Specifically, to ensure transparency for investors, annual disclosure requirements should include details regarding material ties to the CCP, supply chain, profit from the PRC, and the company’s preparation for and ability to withstand the sudden loss of market access that could result from a conflict in the region—with safe harbor protections for forward looking statements. Congress should also mandate that the Financial Stability Oversight Council submit regular reports to Congress on the aggregate quantities of all PRC-associated assets held by Americans and the risks to the U.S. financial system of a PRC scenario, as described here.
Increased transparency requirements strike the right balance here. Geopolitical risk is rising, and investors should have visibility into how that affects them. At the same time, if investors go into the China market clear-eyed and informed, the government should not micro-manage their decisions, so long as there are appropriate guardrails related to national security and financial stability risks.
Recommendation 3: Assess and prepare to respond to the economic, financial, and industrial impacts of potential future conflict with the PRC.
CNAS just released a report on how to do exactly this.
Specifically, Congress should:
1. Designate a coordinating office that is responsible for assessing and developing an economic security strategy and for assessing the possible economic, financial, and supply chain effects of the PRC’s military and economic aggression. Legislation could be modeled on the bipartisan SHIELD Act (H.R. 5703) and should direct this office to perform the following functions:
a. Formulate a U.S. Economic Security Strategy. The strategy should assess on an annual basis the risks to the resilience of U.S. supply chains, with an emphasis on critical dependencies that are likely to be weaponized by the PRC or other foreign adversaries for geopolitical purposes, such as a potential conflict in the Indo-Pacific, and strategies to defuse threats without unnecessarily undermining economic growth or damaging American security. The analysis should identify market-distorting policies or other unfair trade practices that have contributed to these dependencies and what the United States should be doing to address them.
This is a good start but does not go far enough. The United States also needs to envision a scenario in which it is more dramatically decoupled from China and it must develop a game plan for regaining that market access and economic opportunity elsewhere. Addressing discrete vulnerabilities is important, but there is a bigger picture economic threat from a broad and abrupt decoupling that could be disastrous for the U.S. economy. How do we build closer economic relations with our friends today to prepare for a worst case scenario tomorrow? That is what an economic security strategy should address.
2. Direct the Administration to develop joint plans with U.S. allies and partners to enact severe diplomatic and economic costs on the CCP in the event that it engages in military aggression against Taiwan or other U.S. allies or partners, as previously recommended by the Select Committee. Congress should also enact legislation similar to the STAND with Taiwan Act (H.R. 2372), which would require the U.S. government to impose sanctions on the PRC should it invade Taiwan.
This is work that must start now. One of China's first moves will be to try to undercut the alliances that are a core U.S. advantage. Our CNAS economic gaming shows that when the United States works with partners, it has a much stronger ability to box China in with sanctions.
3. Direct the Federal Reserve to stress-test U.S. banks for their ability to withstand a potential sudden loss of market access to the PRC and to produce classified reports detailing the results of those assessments and considering the impact on U.S. financial markets of potential U.S. and allied sanctions against PRC financial firms in the event of a conflict.
I'd add to this: stress tests to gauge the impacts of sanctioning China's banks, which are the largest in the world. It is not just about whether U.S. banks can provide services in the China market. What happens if China's banks can no longer legally transact in the U.S. dollar? Today, China holds the majority of its foreign exchange reserves in U.S. dollars and is reliant on use of the U.S. dollar for its international trade.
Recommendation 4: Prevent U.S. companies from being driven out of the U.S. market by market-distorting PRC products.
Specifically, Congress should:
1. Direct the Administration to implement Section 232 of the Trade Expansion Act to impose remedies on products or components from a country of concern while limiting applicability to allies and partners. Section 232 currently allows Commerce to review the impact of imports on national security, but insufficiently distinguishes between imports from our partners and allies and imports from countries of concern. Under congressional guidance, the Secretary should act on the importation of an article in such quantities or under such circumstances when a country of concern threatens to impair our national security. This would allow Commerce to focus its efforts on imports from a country of concern, including through third countries while encouraging, rather than undermining, work with U.S. partners and allies.
2. Direct the Department of Commerce to impose import duties on foundational (i.e., legacy) semiconductors from the PRC. Urgent action is needed to prevent the PRC from dominating legacy chips, which would give the PRC excessive leverage over the modern global economy.
Agree with the diagnosis, not sold yet on the remedy. This recommendation is another one where further analysis is needed to see if it can implemented in a pragmatic way. For a start, would a tariff response actually cut into China's market share of legacy chips, or would it just make most electronic products more expensive for U.S. consumers? How could tariffs work in tandem with affirmative measures, such as subsidies or collaboration with allies on friend-shoring? Should the United States consider outright bans on the use of Chinese legacy chips in certain critical infrastructure or national security applications? It is an interesting
idea to use tariffs in an attempt to reshape the market, but history shows it is hard to get right.
U.S. export controls, intended to cut China off from advanced chip production, are creating a strong incentive for China to push hard into legacy chips. Coming up with a policy response to a growing Chinese market share should be an area where the United States and the EU should be able to find common ground, given European firms' role in legacy chips.
Recommendation 5: Require the U.S. government to prevent U.S. reliance on the PRC for advanced technology and to protect the U.S. market from harmful PRC technology.
Specifically, Congress should:
1. Enact the Chinese Military and Surveillance Company Sanctions Act of 2023 (H.R. 760), which authorizes the Treasury Department to make a determination of sanctions on PRC companies it identifies as being directly tied to the Chinese military industrial complex.
2. Establish a National Technology Competitiveness Analysis Center (NTCAC) to be housed at the Department of Energy that directly supports the End User Review Committee (ERC) and other relevant stakeholders in conducting analysis on critical and emerging technology ecosystems. The NTCAC should report directly to the Secretary of Energy and function as the interagency representative of the Department of Energy at interagency conversations related to science and technology. The NTCAC should draw upon expertise across the federal government, such as national labs, and the Department of Defense, in addition to industry analysis. This should also include input from the intelligence community on areas of PRC IP theft, the state of technology transfer, and identifying and tracking chokepoint technologies.
3. Enact authorities to allow the President to ban technology products and services critical to national security from the U.S. market if they are owned, controlled, or developed by a foreign adversary. These technologies should include but not be limited to quantum computing, biotechnology, artificial intelligence, autonomous systems, and surveillance technology.
The report takes another swing at an issue that both Congress and the executive branch have failed to move forward: import restrictions on adversary-owned IT goods and services. The lack of import restrictions is a worrisome gap in the U.S. toolkit, and much of the debate has unfortunately been dominated by TikTok rather than giving a concerted push to develop workable legislation. Here's hoping that the Committee's work can make progress where other efforts have languished.
My prior thoughts on how to structure this type of authority.
4. Enact legislation that would force divestment of or, if necessary, ban foreign adversary-controlled social media platforms such as TikTok, from the United States.
5. Prevent U.S. government funds, including loans or grant funds, from being used to reimburse the use or purchase of biotechnology machines, products, and services from the PRC biotechnology and PLA-affiliated entity, the BGI Group, and its subsidiaries. Additionally, Congress should require the Department of Commerce to add BGI and its subsidiaries to the Entity List and should take steps to prevent foreign adversaries from collecting or acquiring U.S. genomic and other sensitive health data.
Although the United States remains the global biotechnology leader, China races to close the gap. Without strong investments and home and new efforts to curtail China's biotechnology sector, the United States risks losing its lead and becoming dependent on Beijing for future biotech breakthroughs in energy, health, manufacturing, agriculture, and more. Beijing has named biotechnology a strategic emerging industry, as it previously did for 5G. By some estimates, China’s central, local, and provincial governments have invested up to $100 billion in the life sciences research and development. Leading Chinese biotechnology companies are also amassing vast genomic and health data, and the government’s clear prioritization of the sector has sent a clear signal for research and market investment.
6. Enact the bipartisan American Security Drone Act (H.R. 6143) or the Securing Our Airspace from Reconnaissance (SOAR) Act (H.R. 3974) into law to effectively restrict U.S. federal agencies from procuring drones manufactured in foreign adversary countries. Ensure that all PRC commercial drone companies and subsidiaries that have proven PRC military ties should be on the Entity List maintained by the Department of Commerce, the 1260H List maintained by the Department of Defense, and other relevant government lists.
7. Require the Department of Commerce, in coordination with the ERC, to determine whether the promulgation of open-source microelectronic architectures, like RISC-V, pose a risk to U.S. national security or supply chain security. Congress should require the ERC determine whether authorities under Section 1753 of the Export Control Reform Act of 2018 (P.L. 115–232) or E.O. 13873 could be used to address any national security concerns posed by open-source chip architecture.
RISC-V (pronounced "risk five") is an open-source "instruction set architecture", or ISA. An ISA specifies a common language for computers to do tasks like arithmetic and handling data. Using an existing ISA when building a chip greatly simplifies the overall process, but many commonly-used ISAs are proprietary to companies such as Intel and ARM. RISC-V is an initiative to create an open-source alternative, and is increasingly being used to build AI chips, including Meta's recent custom AI chips.
As demonstrated here, some U.S. lawmakers are now worried about China benefiting from this technology as it seeks to modernize its semiconductor industry. However, RISC-V is an open source technology managed by a non-profit in Switzerland, making it difficult for the U.S. to do anything to prevent Chinese companies from using it. According to that non-profit (RISC-V International), around half of the RISC-V chips shipped in 2022 came from China. Restricting Chinese firms from accessing this technology will likely require a significant change to U.S. export control policy.
8. Require the Department of Commerce, in consultation with the ERC, to determine whether the promulgation of Light Detecting and Ranging technologies (LiDAR) manufactured in foreign adversary countries is a risk to U.S. national security, and whether U.S. technology flowing to PRC LiDAR firms should be subject to export controls. Congress should require the Federal Acquisition Security Council to determine if LiDAR technology produced by foreign adversary countries should be subject to a federal procurement ban, including by the Department of Transportation.
9. Enact legislation similar to the bipartisan, bicameral NETWORKS Act (as introduced in the 116th Congress as H.R. 6235) to effectively place Huawei, ZTE, and other high-risk foreign adversary-controlled telecom vendors on the Specially Designated Nationals and Blocked Persons List to cut these national security threats off from foreign markets, and enact the FACT Act (H.R. 9236), which would require the Federal Communications Commission (FCC) to publish a list of companies who hold FCC authorizations, licenses, or other grants of authority with over 10 percent or more ownership by foreign adversaries.
The report endorses a "company killer" policy, in which all policy tools available to the United States are used to whack at big Chinese tech companies. The problem remains, however, that unless the United States and partners have a viable, cheap alternative to these companies, much of the world will still want to work with them, including those that disagree with the U.S. threat assessment.
There is also a risk that sanctioning these companies spends down U.S. economic leverage. Our report on sanctioning China found that the United States has only modest means to place economic pressure on China in the event of a conflict, and financial sector pressure is one of the few areas of obvious U.S. strength. If the United States is genuinely worried about a conflict with China, there is a case for keeping these types of sanctions in reserve for now, as we might need them more later.
10. Fully fund “rip and replace” for Huawei, ZTE, and other high-risk foreign adversary-controlled telecom vendors to ensure that such equipment is removed from U.S. networks.
The FCC created a $1.9 billion program to compensate smaller telecommunications network operators to "rip and replace" equipment from companies like Huawei and ZTE over concerns about data security. However, the funding provided insufficient. The costs have fallen especially hard on smaller, rural telecom providers, some of which are at risk of shutting down parts of their networks. If the United States wants to pursue future policies like this to de-risk critical infrastructure, Congress has to do a better job of anticipating implementation costs up front. Better yet, it will anticipate these issues ahead and time to avoid having to fund a "rip and replace" effort at all.
Key Finding: U.S. export controls have been slow to adapt to rapid changes in technology and attempts by adversaries to blur the lines between private and public sector entities, particularly the PRC’s strategy of Military-Civil Fusion.
In their written testimony submitted to the Select Committee, Emily de la Bruyère and Nathan Picarsic, senior fellows at the Foundation for the Defense of Democracies, quote a PRC scholar to describe the nature of the PRC’s Military Civil Fusion (MCF) strategy: “The military is for civilian use, the civilian is military, and the military and civilian are fused.” In other words, no line exists between civilian and military technological development. U.S. export controls have yet to adapt to this reality. According to Assistant Secretary of Commerce for Export Administration, Thea Kendler, the PRC’s MCF strategy “requires the United States to impose stronger export controls targeting advanced commercial items that can be used also in military applications.” The U.S. must modernize its export controls to fully adopt this mentality.
Recommendation 2: Strengthen export controls to restrict the flow of critical and emerging technologies to any entity in the PRC and stop currently uncontrolled dual-use commercial technology from going to the PRC.
Specifically, Congress should:
1. Direct additional resources to the Commerce Department’s Bureau of Industry and Security (BIS) to ensure sufficient personnel, technology, data management, intelligence community support, and other resources for the agency to carry out its national security mission. These additional resources to BIS should be paired with necessary reforms, to include updating the End User Review Committee deliberation process; closing the “subsidiary loophole;” and expanding BIS authorities to adjudicate the risk posed by dual-use open-source technology.
As the export control mission of BIS expands, its resources and mandate have not kept pace, creating vulnerabilities that adversaries could exploit. A recent CNAS working paper examines this challenge and offers recommendations around one particular area of concern–the illicit transfer of AI chips to China.
2. Using the Biden administration’s October 7, 2022, country-wide controls on advanced semiconductors as a model, require the Department of Commerce to adopt “country-wide” controls for specific technologies going to foreign adversaries, regardless of end-use or end-user, and establish a “policy of denial” for export licenses for items with “National Security” (NS) controls.
3. Require the executive branch to quickly establish general controls on critical and emerging technology to foreign adversaries, to include but not limited to artificial intelligence, quantum technologies, biotechnology, advanced materials, optics and sensing, advanced energy research, and space-based technologies.
4. Expand export-license requirements to subsidiaries of foreign adversary entities on the Entity List to address the issue of diversion.
5. Require the ERC to conduct a full top-to-bottom review of all items classified as commercial items (EAR-99) to determine if they should be subject to export controls. Allow the Department of Defense, Department of State, and Department of Energy to nominate EAR-99 items to be controlled if these Departments believe there is a national security or foreign policy reason to prevent the item from being exported to foreign adversaries.
This would require a review of things like pencils, toothbrushes, my daughter's Taylor Swift poster. EAR99 simply means that an item is not listed on the Commerce Control List or other control list. It is a catch-all term for basically everything else in the U.S. economy.
A more pragmatic approach could be to focus on technologies on the OSTP critical technologies list.
6. Require the Department of Commerce to establish a “cloud computing” end-use rule to limit U.S. technology from enabling advanced cloud computing clusters above a certain compute threshold to foreign adversaries and to prevent remote access to export-controlled technologies. Require U.S. cloud computing firms to adopt “know-your customer” requirements. U.S. companies should report to the Department of Commerce any foreign adversary company renting above a certain threshold of compute to increase transparency and prevent U.S. firms from providing advanced computing services to foreign adversaries.
The Department of Commerce's current authorities to restrict services such as cloud computing are limited to controls on the activities of U.S. persons. This move would additionally create an "end-use" based control, restricting cloud services where they used for a particular purpose. However, the language used to define the end-use rule suggests it's more of a "list-based" control, where controls are applied based on the particular technologies being used: in this case, computing clusters above a particular computing capacity, with a specific reference to "export-controlled technologies." The best explanation here is that the Committee would like to control the particular end-use of large-scale AI training, and is using a computing capacity threshold to define this.
The additional "Know-Your-Customer" recommendation mirrors the approach taken by the White House in its recent AI executive order, which issues almost exactly the same guidance.
This all implies an approach where U.S. cloud computing firms will need to confirm the identity of customers who are accessing large amounts of AI computation, and block access if the customer is Chinese (assuming a broad definition of "foreign adversaries"). Given China's military-industrial fusion, and the often dual-use nature of the general-purpose AI models that require large amounts of computation, this seems a balanced approach. However, these controls may evolve into U.S. AI cloud computing being restricted to all Chinese users: this could risk eroding the United States' leverage over China's AI compute supply chain, and accelerate the emergence of competitive Chinese AI chips. Both could be strategically important for the U.S. if large-scale AI systems continue to grow in importance for national security.
7. Adopt a “policy of denial” for all U.S. technology exports to PRC firms involved in espionage campaigns against the United States, to include Huawei and ZTE, and revoke any existing licenses. Deny all export control licenses of all products and technologies related to the development of supercomputing for PRC entities involved in the development, design, or operation of supercomputers, to include Inspur Electronic Information and its subsidiaries.
8. Require the Department of State, through the Multilateral Action on Sensitive Technologies group, in coordination with the Department of Commerce, to negotiate expanded multilateral controls on biotechnology, quantum computing, artificial intelligence, aerospace, and space-based technologies with democratic partners and allies that are producers of advanced technology. Congress should require the Department of State, in coordination with National Institute of Standards and Technology (NIST) and the Department of Energy, to work towards multilateral agreements on international standards with likeminded partners to maintain western leadership in artificial intelligence.
9. Require the Department of State to negotiate the establishment of a new “plurilateral” export control regime similar to the former Coordinating Committee for Multilateral Export Controls (COCOM). The new regime should include likeminded partners and allies focusing on preventing the PRC and other foreign adversaries from gaining access to critical and emerging technologies with dual-use applications. Congress should offer creative incentives for countries to join this new group and provide resources for the Department of State to maintain it.
The emphasis on plurilateral work is encouraging, and the recent work to secure Dutch and Japanese alignment with U.S. tooling controls is a sign that such efforts can pay off. Building a formal new institution to complement Wasenaar will be a long slog, and to date it is not clear that other countries are bought in to the idea. The United States will need to spend a decent amount of diplomatic capital to push this, and as it does, it should consider how to align the export controls work with outbound investment and FDI screening, so that countries are using these tools similarly to protect technologies of shared national security concern. More on this here.
Key Finding: The Committee on Foreign Investment in the United States (CFIUS) needs additional authorities and tools to effectively evaluate inbound investments from the PRC.
CFIUS’s regulatory approach is not sufficient to combat Military-Civil Fusion. CFIUS is statutorily country-agnostic,treating investment from foreign adversary countries like the PRC the same as that of any other country. Currently, one significant challenge lies in the Committee’s ability to assess “foundational and emerging technologies” that are not subject to export controls. In addition, CFIUS lacks jurisdiction over many joint ventures and greenfield investments (other than a narrow class of real estate transactions) and the ability to review certain elevated risk real estate transactions near sensitive sites. Finally, CFIUS has relied far too much on mitigation agreements with foreign adversary entities, sometimes lasting indefinitely, and has proven unable to adequately monitor and enforce these agreements.
This statement ignores key facts, such as that Chinese FDI in the United States has plummeted in large part as a result of CFIUS actions. The process is country-agnostic; the results are not.
Recommendation 3: Amend the Foreign Investment Risk Review Modernization Act of 2018 to give CFIUS the legal authorities, mandates, resources, and focus necessary to address the PRC threat to U.S. technology.
Specifically, Congress should enact legislation that would:
1. Expand the definition of “critical technology” in the Foreign Investment Risk Review Modernization Act (FIRRMA) (P.L 115-232) to include:
a. Technologies that directly or indirectly enable those technologies listed as a Critical and Emerging Technology by the White House Office of Science and Technology Policy; and
b. Any technologies that are deemed “critical technologies” by either a majority of CFIUS member agencies or a single member agency of CFIUS with concurrence by the Chair (the Treasury Department).
There is a case that risks arising from investment transactions (i.e., covered by CFIUS) are different in some important ways than those from export transactions (i.e., covered by export controls). AI is a great example here, especially in the OpenAI aftermath. How leading AI companies are governed is critically important in shaping the future of these technologies and which country will have/maintain global leadership. Export controls will not capture that, nor should they. There is a role for the USG to assess how foreign investors would impact governance of leading tech companies, and a targeted expansion of the critical technology definition would provide important additional authorities for CFIUS to accomplish this. More thoughts here.
2. Expand the list of sensitive sites over which CFIUS has jurisdiction to cover all military facilities, acknowledged intelligence sites, national laboratories, defense-funded university-affiliated research centers, and critical infrastructure sites. Congress should also:
a. Codify the Secretary of Agriculture as a voting member of CFIUS for cases that involve farmland or agriculture technology and allow the Secretary of Agriculture to flag potentially problematic land purchases for CFIUS review.
There is no need for USDA to be a voting member. CFIUS practice is already to bring them into the process for ag-related transactions. Why make them opine on the hundreds of other transactions annually that have nothing to do with their interests (which is what would happen if they were a voting member)?
3. Grant CFIUS jurisdiction over greenfield investments from foreign adversary entities involving critical technologies, critical infrastructure, or sensitive personal data and require mandatory filings for such transactions.
Greenfield investments from China are at their lowest level in years.
4. Grant CFIUS jurisdiction over all joint ventures involving foreign adversary entities, including minority stakes, and require mandatory filings, imposing a presumption of unresolvability for transactions involving critical technologies.
There are a lot of new ideas packed in here. CFIUS has jurisdiction over certain joint ventures, but this would expand it to a (vaguely defined but presumably broad) scope of transactions that involve a foreign adversary either in the United States or elsewhere. This could be intended to catch transactions such as the Ford-CATL deal, which focused on licensing Chinese battery technology and didn't fall under CFIUS's investment review jurisdiction.
A "presumption of unresolvability" is a new idea for CFIUS (and perhaps also a new addition to the English language with "unresolvability"). It would create a higher legal bar for clearance of these transactions. Currently, CFIUS must assess that a covered transaction does not present any unresolved national security concerns. This recommendation would remove CFIUS discretion and impose a default presumption of blocking these transactions. This mirrors licensing policy concepts under export control authorities, but would be novel for CFIUS.
5. Address mitigation agreements by requiring CFIUS to block any transaction for which the national security concerns cannot be resolved through a mitigation agreement within three years, and provide additional funding for continued monitoring and assessment of all such agreements.
This touches on a key CFIUS debate, which is whether a mitigation agreement can ever really resolve national security concerns with a determined state actor (e.g., China, Russia). With this recommendation, one could anticipate short-term mitigation agreements to spin off sensitive U.S. assets, for example, but it would generally prevent long-term structures where the government is on the hook for continual monitoring of a Chinese company's compliance.
6. Streamline CFIUS reviews from companies from allied countries that do not pose substantial national security risks, and provide clear guidance on regulation concerning “Excepted Foreign Investors” to ensure that the category does not become a scheme for evading CFIUS review. For example, Congress should add Japan to the “whitelist” of Excepted Foreign States and direct CFIUS to begin formal negotiations to include other close allies on CFIUS’s whitelist.
The 2018 FIRRMA reforms were intended to streamline review from allied countries, but this area of new authority is under-utilized so far. Only a small handful of countries can benefit from the "excepted foreign investor" status, and there has been little movement to expand the list, despite initial intent to do so. The reason seems to be more about bureaucratic inertia than outstanding national security concerns.
7. Enhance CFIUS’s ability to enforce the law and its own orders by:
a. Providing CFIUS subpoena power for transactions that do not require mandatory filing with CFIUS and creating carve out exceptions to confidentiality of information to encourage whistleblowers.
b. In rare cases where the national security risk has significantly heightened since the transaction was completed, allowing CFIUS to reopen or alter previously mitigated transactions.
This would be a great way to crater the U.S. open investment environment. CFIUS is based largely on a voluntary process, in which parties to a transaction have a strong incentive to file because they receive safe harbor from further regulatory review. Gutting the safe harbor, as this recommendation would do, throws the whole system out of balance and needlessly heightens regulatory risk for the investments that the United States wants to welcome. Today, CFIUS has the ability to use mitigation agreements to address potential future risk, and it does so aggressively (probably too aggressively, if one were to ask the CFIUS bar).
Key Finding: The United States is falling behind in the race for leadership in certain critical technologies.
The CCP’s distortionary industrial policies skew technological development to the benefit of PRC companies. To compensate for these economic distortions, the United States should develop a comprehensive package of tax incentives, properly conditioned and controlled public-private financing, and basic research funding to promote domestic development in essential industries and sectors. As Mr. Wolfe advised in his testimony, the United States should commit to “upgrading current funding institutions and building new ones that cultivate long-term horizons of excellence.” These financing efforts should focus on technology and sectors critical to U.S. economic resiliency, unresponsive to competitive market forces, and concentrated within the PRC or under PRC control. U.S. tax dollars must not be used to sustain and deepen dependencies on the PRC.
Recommendation 1: Invest in American innovation and strategic sectors and create tax incentives to encourage private U.S. investment.
Specifically, Congress should:
1. Fund the National Science Foundation (NSF), National Institute of Standards of Technology (NIST), and the Department of Energy’s Office of Science—the single largest supporter of basic research in the United States—with a focus on peer-reviewed research. This research should prioritize technologies that have implications for U.S. national security and supply chain security, including but not limited to biotechnology, quantum technologies, and artificial intelligence.
Congress has yet to fully appropriate the funds authorized for NSF, NIST, and the DOE's Office of Science in the 2022 CHIPS and Science Act. By one estimate, funding appropriated to NSF was 30% lower than authorized. As we face contentious budget talks in the new year, this pattern is likely to continue despite its costs to U.S. technology leadership.
2. Establish a mechanism where the Department of Defense, in coordination with the Department of Energy and other relevant agencies, has the resources to fund early-stage, capital-intensive emerging technologies with national security applications, with requirements for production in the U.S. or in closely allied nations. This should include:
There are numerous interesting ideas wrapped up here but it seems to be most focused on "established" R&D pathways. Not the rapid conversion of commercial technologies to national security applications or new innovation in the "hard tech" spaces.
a. Funding to ensure U.S. leadership in health sciences and new energy technologies that are central to the U.S.-CCP economic and technological competition, as well as legislation to enhance U.S. leadership in other critical technology areas, such as the Autonomous Systems Adoption and Policy Act (H.R. 3168).
b. Funding to support the Department of Energy’s and Intelligence Community’s (IC) research and collaboration on next generation microelectronics and communication systems to strengthen domestic manufacturing capabilities for printed circuit boards, which is necessary in almost all electronics used today by providing financial assistance programs for American facilities manufacturing or researching printed circuit boards.
c. Ensuring that U.S. funding for national security-relevant technologies, to include semiconductors, has clear guardrails for recipients to prevent foreign adversaries from exploiting U.S.- funded research.
d. Ensuring that the Office of Strategic Capital (OSC) in the Department of Defense receives loan guarantee authority and that Congress oversees the effective use of those funds. Congress authorized the creation of OSC to facilitate private capital investment in sectors directly relevant to U.S. national security and to diversify the defense industrial base. It should enact legislation, such as H.R. 4952, that authorizes OSC to fulfill its mission by extending lines of credit and guaranteeing private sector loans and requires the Department of Defense to report regularly to Congress on OSC investments and activities.
3. As recommended in written testimony submitted to the Select Committee by former director of the Defense Innovation Unit, Michael Brown, establish and fully fund a “critical technology industry fund… for building or expanding R&D and advanced production facilities in the United States.” This organization could take multiple forms but should be designed to increase access to low-cost capital for companies developing critical and emerging technologies with national security applications. The U.S. government could provide initial seed capital as well as non-dilutive capital and, to incentivize greater private sector buy in, adopt a first-loss position with capped upside.
Creating a "Def-Q-Tel" based on the successful model of In-Q-Tel is an idea worth strong consideration. It could help the DoD better steer the innovation ecosystem. If closely linked to DIU and the Office of Strategic Capital, it could create a clear pathway from seed to field.
4. Ensure that the United States remains the world’s leader in AI and that our adversaries cannot leverage our advances in AI to undermine our national security or competitiveness. To this end, the United States needs to set the rules of the road for global standards and set domestic regulations on governing these critical technologies. Congress should require the Department of Commerce, in coordination with the End-User Review Committee (ERC)—the Department of Energy, Department of Commerce, Department of Defense, and Department of State—to promulgate regulations related to risk assessments, red teaming, safeguards, cybersecurity, and post-deployment monitoring.
As well as directly addressing risks from AI, well-targeted regulations will enhance the U.S.'s legitimacy as it seeks to promote a responsible AI ecosystem on the global stage and counter China’s authoritarian misuse of AI.
Congress should empower the ERC to impose limitations on the open sourcing of an advanced model’s weights, transformer architecture, and training data, if the ERC determines the model can carry out national security-relevant tasks. Developers who build open-source models exceeding a certain sophistication threshold, as determined by the NIST should be required to report the development and details of their model to the Department of Commerce prior to deployment.
Open sourcing software offers broad benefits, and is generally not subject to export control regulations. But as AI capabilities rapidly grow, and constraining misuse of open-source models remains elusive, it's reasonable to account for future models that may pose unfavorable trade-offs between the gains from openness and risks of adversaries harnessing them.
5. Incentivize private sector investment in critical and emerging technologies with a national security application, including by:
a. Establishing a capital gains tax exemption for small- and medium sized businesses working in those technologies sectors. The list of critical technologies should include foundational sectors, such as AI and quantum, as well as strategic infrastructure, including port facilities, telecommunications infrastructure, and defense equipment, and it should be publicly revised annually. Investment in companies developing technologies covered by that list should be exempt from capital gains taxes, if the investment is held for at least five years.
b. Enacting legislation providing full expensing of R&D investment in annual tax returns, such as the American Innovation and R&D Competitiveness Act of 2023 (H.R. 2673).
c. Enacting strong guardrails for tax credit eligibility to ensure federal incentives aimed at bolstering U.S. competitiveness do not benefit the CCP.
6. Task and resource the NIST and Department of Energy in coordination with other agencies to develop cyber security and “red teaming” standards for U.S entities involved in the research, development, and digital storage of advanced AI models. Congress should also mandate federal agencies adopt the NIST Risk Management Framework and implement increased cybersecurity practices. Federal agencies should build upon NIST's Risk Management Framework, adapting it to their specific use cases and sensitivities.
State-of-the-art AI relies on model parameters that are valuable and vulnerable. They crystallize massive investments in research, engineering and computation, as well as vast amounts of knowledge, in a few ready-to-run terabytes with potentially thousands of copies - coveted by global adversaries who see AI as a key strategic asset. The U.S. government should indeed lean further into harnessing its expertise and convening power to promote the cybersecurity of cutting edge models throughout the AI lifecycle.
Key Finding: The PRC is gaining on the United States in the race for global talent.
In his testimony, Dr. Schmidt emphasized that the race for technological leadership is as much a race for talent leadership, and the United States is falling behind. The CCP has invested heavily in scientific and technological education. It produces significantly more Ph.D.s and papers on AI and as many as five times as many STEM graduates as the United States. It is clear the United States needs more individuals working on research and development in critical and emerging technologies. As Mr. Wolfe testified, “America should be attracting defectors and accelerating China's brain drain, to our national benefit, by welcoming the best talent on the planet to the U.S.”
Recommendation 2: Execute a talent strategy to promote research and development in critical and emerging technologies and strengthen the defense industrial base.
Specifically, Congress should:
1. Establish a work authorization program for foreign nationals from partner countries that are part of Five Eyes (FVEY), the Quad, and select NATO countries who have a background in critical and emerging technology and are working on projects funded by the Department of Defense or other national security agencies. Applicants for the program should be subject to rigorous screening procedures, to include vetting by the intelligence community.
2. Allow properly vetted FVEY foreign nationals working on AUKUS or other joint-defense projects to be exempt from U.S. technology sharing restrictions such as those imposed by the International Traffic in Arms Regulations (ITAR).
3. Expand visa security screening procedures to prevent foreign adversaries from exploiting our open system to illicitly acquire U.S. technology and technical knowledge. The Office of the Director of National Intelligence should be required to participate in visa screening of high-risk researchers; mandate the State Department adopt machine-readable technology for visa applicant documents; require visa vetting be done by U.S.-based language-enabled analysts; and urge the State Department to adopt uniform standards for documents submitted by high-risk researchers (e.g., resumes, plan of study, previous research).
4. Update the Department of Labor’s Schedule A Group I occupations list which has remained unchanged since 1991 to add relevant occupations critical to national security and emerging technology. Mandate that Schedule A be updated continuously to reflect the dynamic job market and current market conditions and demands in certain industries.
The United States created Schedule A designations in the 1960s to help fill domestic labor shortages with foreign talent. However, the listed occupations under Schedule A haven't kept pace with STEM talent shortages, which have become a massive headwind in the U.S.-China technology competition. For example, One study found that the United States will require 300,000 more engineers than U.S. universities will graduate by 2030 to realize the full potential of the CHIPS and Science Act. Sam Howell and I wrote about the STEM workforce shortage here.
Key Finding: By working with allies, the United States can increase U.S. exports, reduce supply chain reliance on the PRC, and counter the PRC’s economic and technology mercantilism.
The CCP increasingly leverages its markets, technology, and control over critical minerals to pressure the United States and its allies and partners. To counter these predatory practices, the United States should enhance U.S. trade and technology collaboration with its allies and partners while decreasing dependence on the PRC in critical supply chains. By fostering stronger integration among allied economies, building resilient supply chains, establishing norms and standards for emerging technologies, and holding the PRC accountable for violating its commitments to international trade rules, the United States and its allies can collectively boost their economic resilience and reduce their vulnerability to the PRC’s predatory economic practices.
For the United States to successfully compete with the PRC’s active trade agenda, particularly in the Indo-Pacific, we must pursue trade agreements with strong rules of origin and high standards that protects U.S. firms and workers and our economic security. To do so, Congress must ensure that any agreement guarantees a level playing field for American workers and manufacturers and prevents non-market economies like the PRC from exploiting its provisions.
Recommendation 3: Develop a positive economic agenda to encourage ally and partner countries to work collaboratively with the United States.
This is a striking statement in support of the need for an affirmative U.S. trade policy, and it comes at a critical juncture. The administration's signature trade effort, the Indo-Pacific Economic Framework, is faltering under the U.S.'s own domestic squabbles and lacks the ambition to set global standards. Too often, trade policy is treated as a dirty word, but it should instead be seen as how the United States can shape the global economic order in its own interests. It is a pleasant surprise to see the Committee take this on with a series of pragmatic recommendations to get the United States back in the trade policy game.
Specifically, Congress should:
1. Enact legislation setting negotiating priorities and a process for congressional consideration of comprehensive bilateral trade agreements, starting with Taiwan under the auspices of the American Institute in Taiwan and the Taiwan Economic and Cultural Representative Office.
The United States concluded an agreement with Taiwan earlier this year, though it was not a comprehensive FTA.
Other potential partners could include the United Kingdom and Japan. With the high standards of USMCA as a starting point, these agreements must include among other things strict rules of origin and specific provisions to address non-market economies to ensure that the PRC is not able to take advantage of preferential access to the U.S. market.
It is worth remembering that USMCA passed with historically large, bipartisan support in Congress. The United States can, in fact, build a consensus on trade. And it is USMCA style ambition and comprehensiveness that will allow the United States to raise the bar on labor and environmental concerns.
2. Enact legislation to encourage sectoral agreements with key trading partners and allies with strong rules of origin and high standards on critical minerals and other critical goods (e.g., semiconductors, electronic vehicle batteries/components, active pharmaceutical ingredients) that the United States identifies as critical for resilient supply chains.
The United States talks a lot about friend-shoring. This recommendation is one concrete way for how the United States can actually do it.
3. Pass the United States-Taiwan Expedited Double-Tax Relief Act (H.R. 5988) to provide relief from double taxation for workers and businesses engaged in U.S.-Taiwan cross-border investment. Such legislation should significantly reduce withholding taxes on dividends, interest, and royalties paid on these cross-border investments, mitigate barriers for smaller businesses to make those investments, reduce complexity for dual residents, and unlock opportunity for deepening our economic cooperation with Taiwan.
4. Pass H. Res. 270, which provides that the United States should negotiate strong, inclusive, forward-looking, and enforceable rules on digital trade and the digital economy with allies and partners. These rules should address digital barriers such as restrictions on cross-border data flows and requirements for localization of computing facilities to ensure the American values of democracy, rule of law, freedom of speech, human rights, privacy, and a free and open internet are at the very core of the digital world and advanced technology.
The U.S. approach on digital trade has been controversial of late, pulling back from core disciplines at the World Trade Organization. A good trade negotiator (of which the United States has plenty) can craft rules that allow for sufficient policy space to address domestic concerns with Big Tech without undercutting the basic principles of open digital trade. That this is included in the Committee report is a good reminder of how U.S. leadership in international trade debates is a core part of a counter-China strategy.
Recommendation 4: Create transparency into U.S. supply chain dependency for critical minerals and develop a package of investments, regulatory reforms, and tax incentives to reduce that dependency.
7. Encourage and fund research for electric vehicle (EV) battery technology—particularly alternative battery chemistries—including for the manufacturing of advanced prototypes. Support efforts to scale up the domestic supply chain for EV batteries, while ensuring the implementation of national security guardrail against the flow of federal incentives to the CCP.
A "run faster" approach to building a U.S. battery sector makes sense, given that we are starting from a low base. This is one sector where the United States cannot export control its way to victory.
10. Authorize additional resources to support the expansion of the Mineral Security Partnership (MSP) and encourage USTR to develop sector-based trade agreements with allies and partners in close consultation with Congressional committees of jurisdiction, particularly with regards to critical minerals that are unavailable in the United States.
To be clear, this means going beyond the limited "free trade agreements" that the United States has negotiated with certain partners on critical minerals in order to clear IRA-related hurdles. Those deals are band-aids on the self-inflicted wounds of IRA. Getting critical mineral supply chains right will require deeper coordination and integration with key allies.
Recommendation 5: Authorize transparency measures, trade authorities, and reforms to reduce U.S. dependency on the PRC for pharmaceutical supply chains.
Specifically, Congress should:
1. Enact legislation requiring the Food and Drug Administration (FDA) to develop an expanded list of key pharmaceutical products used widely in the United States and to maintain a database tracking the supply chains for those products, including the extent and nature of U.S. dependency on the PRC.
2. Enact legislation authorizing the United States Trade Representative (USTR) to negotiate trade agreements to reduce U.S. dependencies on the PRC for medical and pharmaceutical goods, such as the Medical Supply Chain Resiliency Act (H.R. 4307). Building a trusted network of trading partners in the pharmaceutical sector would promote alternate sources for active pharmaceutical ingredients and encourage resiliency in pharmaceutical and medical good supply chains.
This is a great idea, and not just for pharmaceuticals. The United States should be pushing for these sorts of negotiations across a range of critical goods. At CNAS, we are working on the concept of economic security agreements, which share many of the same objectives as this recommendation across a wider range of sectors.
Recommendation 6: Expand the U.S. toolkit for global development and strategic investments to counter the Belt and Road Initiative.
Specifically, Congress should:
1. Consider reforms to the International Development Finance Corporation (DFC) that would:
a. Fix the equity scoring problem, wherein equity investments made by DFC are treated as grants and counted as a 100 percent loss in the annual budget. DFC’s equity investments should be scored appropriately, for example by assessing them on a net-present value basis or by treating them as a credit program.
b. Pass legislation to direct DFC to prioritize transactions that a) reduce a recipient country’s reliance on the PRC and b) are in a strategic sector of national security, such as critical minerals, telecommunications, transportation and ports, and energy. Congress should expand country eligibility to allow such transactions in high-income countries. The European Energy Security and Diversification Act (P.L. 116–94), which mobilizes DFC financing to reduce Europe’s vulnerability to Russian coercive energy policies, should be considered as a model for expanded country eligibility in key sectors. Congress should also allow DFC to support transactions with state-owned or state affiliated enterprises if such transactions are in strategic sectors of national security. Legislation should also require annual reports from DFC on how much of its maximum contingent liability—its “credit card”—has been committed to counter the PRC, including descriptions of those projects and the sums committed to each.
This was one of the original objectives of the push to bring OPIC back from the dead during the Trump administration, resulting in what is now the DFC. Development finance can be a powerful tool to provide strong U.S. commercial alternatives to China in otherwise risky markets, but the challenge has always been to balance the counter-China objectives with more traditional development ones.
c. Establish a dedicated funding mechanism, in concert with likeminded allies and partners, to fund digital infrastructure development as an alternative to the PRC’s Digital Silk Road and related investments.
d. Place DFC officers at the Department of Defense’s Combatant Commands to coordinate DFC activity more closely with U.S. security strategy.
e. Require annual reports from DFC that assess whether the maximum contingent liability should be increased above $60 billion.
The Digital Silk Road is a pillar of China's One Belt, One Road Initiative. The PRC seeks to deploy digital infrastructure across the globe to secure market share and geopolitical influence across the Global South, much as they have with physical infrastructure. U.S. efforts to counter the Digital Silk Road would benefit from stronger funding, clearer objectives, and improved coordination both within government and foreign allies and partners. The United States has tremendous technology assets to offer a credible alternative to the Digital Silk Road, the nation just needs to get in the game.
Authors
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Emily Kilcrease
Senior Fellow and Director, Energy, Economics and Security Program
Emily Kilcrease is a senior fellow and director of the Energy, Economics, and Security Program at the Center for a New American Security (CNAS). Her research focuses on the U....
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Vivek Chilukuri
Senior Fellow and Director, Technology and National Security Program
Vivek Chilukuri is the senior fellow and program director of the Technology and National Security Program at the Center for a New American Security (CNAS). His areas of focus ...
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Andrew Metrick
Former Fellow, Defense Program
Andrew Metrick is a former fellow with the Defense Program at the Center for a New American Security (CNAS). His research focuses on the linkages between strategic objectives ...
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Tim Fist
Senior Adjunct Fellow, Technology and National Security Program
Tim Fist is a Senior Adjunct Fellow with the Technology and National Security Program at CNAS. His work focuses on the governance of artificial intelligence using compute/comp...
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Caleb Withers
Research Associate, Technology and National Security Program
Caleb Withers is a research associate for the Technology and National Security Program at the Center for a New American Security (CNAS), supporting the Center’s initiative on ...
The House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party released a report in December of 2023 with over 150 recommendations to reset the United State's economic relationship with China. Experts at CNAS read and dissected the committee's report, and offer in-text analysis, context, and evaluations of the efficacy of the proposed policy recommendations.
Sections have been excerpted for length, read the full report for all the details.