The Role of Investment Security in Addressing China’s Pursuit of Defense Technologies

Summary of Testimony

Chairman Bartholomew, Vice Chairman Wong, and Commissioners, thank you for the opportunity to provide testimony before the Commission.¹ A summary of the recommendations included in this testimony is included below, followed by the supporting analysis.

In order to strengthen the ability of the U.S. government to mitigate national security risks associated with inbound and outbound investments that may contribute to China’s military modernization efforts, including its efforts to obtain foreign defense and dual-use technologies, Congress should consider the following actions.

Committee on Foreign Investment in the United States (CFIUS)

• Establish new authorities to list emerging technologies as critical technologies for the purposes of investment screening, as a limited addition to the existing FIRRMA definition of “critical technology.”
• Reduce CFIUS burden of addressing risks only indirectly related to foreign investment by passing data privacy and data security legislation.
• Strengthen the role of the Office of Legal Council to provide a check on possible CFIUS mission creep.
• Amend the Foreign Risk Review Modernization Act of 2018 (FIRRMA) to allow the Secretary of the Treasury to delegate approval authority for sharing transaction-specific information with key allies to strengthen cooperation.

Outbound investment controls

• Establish a set of outbound investment controls focused on addressing national security risks associated with China’s indigenous development of critical technologies, including notification requirements, entity-based restrictions, bright-line prohibitions on investments involving certain high-risk indigenous technology capabilities, and ultimately a sector-based screening process.
  • Implement new controls through a phased approach that allows the government to build its knowledge base, expand institutional capacity, and coordinate with allies and partners.
  • Establish a broad notification requirement for U.S. investments in Chinese companies making technologies that would be controlled if made in the United States, as well as a select set of other technologies that have not yet been specified on U.S. control lists.
  • Establish bright-line prohibitions on U.S. investments in Chinese companies producing items that meet the technical specification of items listed on the U.S. Munitions List or for military or space purposes on the Commerce Control List.
  • Expand the Chinese Military-Industrial Complex (NS-CMIC) sanctions program to include all types of investments into designated companies and to allow for designations of a broader range of entities engaged in China’s indigenous development of critical technologies.
  • Implement a sector-based outbound investment screening process, starting with the semiconductor sector.

• Incorporate strong transparency and due process requirements, taking lessons learned from the CFIUS context.
• Do not implement any new authorities until a robust public consultation is conducted, including through hearings and a public comment period.
• Establish a new office under the supervision of the Assistant Secretary of the Treasury for Investment Security to coordinate a new interagency process for outbound investment authorities.

International coordination on investment security

• Fully resource the international engagement functions of the Departments of the Treasury and State.
• Create new requirements for CFIUS to assess and report to Congress on the impact of the CFIUS process on foreign investment flows from allies and partners, including an assessment of the effectiveness of the exempted foreign state authorities and the frequency and impact of mitigation agreements on investors from allies and partners.
• Encourage full use of existing fora, such as the U.S.-EU Trade and Technology Council, to coordinate export controls and investment screening policies with allies and partners.
• Pursue a broad coordination mechanism with allies and partners that would identify technologies of shared strategic importance and align export controls and investment controls authorities to protect such technologies.