U.S. Economic Security Strategy, Authorities, and Bureaucratic Capacity

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I. Summary of Testimony

Chairman Brown, Ranking Member Scott, and Members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, thank you for the opportunity to provide testimony. While I am currently employed by the Center for a New American Security (CNAS), I am providing testimony in my personal capacity. The testimony draws from a large body of research that I have conducted at CNAS, as well as my prior experience serving the U.S. public as a proud civil servant in the U.S. Department of Commerce, the National Security Council, and the Office of the U.S. Trade Representative, including most recently serving as the Deputy Assistant U.S. Trade Representative for Investment.

At the request of the Committee, this testimony focuses on three economic security tools that the United States has or is considering establishing: export controls; screening of inbound foreign direct investment (FDI), as implemented by the Committee on Foreign Investment in the United States (CFIUS); and the possibility of new authorities related to outbound investment controls. Specific analysis and recommendations for enhancing the capacity and effectiveness of each of these economic security tools is included, with a focus on how these tools can be used to maintain a U.S. technological lead vis-à-vis China. The testimony focuses on issues of strengthening economic security strategy, authorities, and bureaucratic capacity, rather than advising on specific technologies that may be suitable for more or fewer controls. Given common issues across the programs and the acute need for stronger integration and coherence across the economic security toolkit, the testimony begins with cross-cutting recommendations.

A summary of recommendations for congressional consideration are as follows:

Cross-cutting issues in the economic security toolkit

• Direct the administration to develop an economic security strategy that defines a clear vision for bounding the economic relationship with China to address national security risks, including specific and measurable plans for the use of economic security programs to address national security risks;
• Establish and provide resources for strategic planning functions in the agencies responsible for managing economic security programs, including dedicated full-time staff for strategic planning;
• Promote stronger alignment on economic security with key international partners and allies, including through guidance on the types of formal or informal arrangements that can facilitate stronger collaboration and resources to support expanded international outreach efforts;
• Establish and provide resources for dedicated offices to evaluate the effectiveness of existing and proposed economic security policies; and
• Facilitate government access to diverse, unbiased sources of information and expertise, including from industry, the intelligence community, and independent analysts.

Export controls

• Increase the budget for the Bureau of Industry and Security to match its expanded national security and foreign policy mandate and to enable it to fulfill new responsibilities related to strategic planning, evaluation, and international outreach;
• Mandate regular reviews of the Commerce Control List;
• Assess the effectiveness of country-wide controls on commercial technology exports to China, including the impacts on U.S. competitiveness and the feasibility of securing support for such controls from key international partners;
• Mandate the evaluation of novel export controls, such as the foreign direct product rules; and
• Require a study on the feasibility of releasing additional export control data to the public.

Committee on Foreign Investment in the United States (CFIUS)

• Expand the CFIUS definition of “critical technologies” to include “critical technologies controlled for investment purposes,” as defined by CFIUS and focused on emerging technologies; and
• Address high case volumes and potential mission creep by passing data security and data privacy legislation and conducting oversight on the use of mitigation agreements for transactions involving firms located in U.S. allied countries.

Outbound investment controls

• Codify and provide resources for a targeted set of outbound investment controls focused on transactions that may enable China’s indigenous development of technologies relevant to U.S. national security interests;
• Require mandatory notifications of U.S. investments in China to enhance U.S. government insights into the scoping and administration of outbound investment controls;
• Prohibit U.S. investments into high-risk technologies or sectors in China; and
• Expand the Non-SDN Chinese Military-Industrial Complex program to prohibit all types of investments in listed entities.

II. Introduction

China is a foremost geopolitical challenge for the United States. As Secretary of State Antony Blinken has stated “China is the only country with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to do it.”¹ Unlike prior eras of strategic competition, China is deeply integrated with the U.S. and global economies, creating new types of national security risks from China’s potential to weaponize these economic ties. While strategists might have previously bet on economic entanglement leading to geopolitical stability, Russia’s brutal invasion of Ukraine and the increasingly authoritarian bent of China under Xi Jinping have rightly shaken policymakers’ reliance on this view. The urgent task for the United States now is to mitigate national security risks arising from the economic relationship with China, prevent China from exploiting the open nature of the U.S. market, and anticipate future risks that may emerge due to the rapid, global advance of critical technologies.

Meeting the China challenge will require the U.S. government to prioritize economic security programs (i.e., programs that address the national security risks that can arise from economic activities), including expanding the legal authorities and resources available to these programs across the executive branch. In the post 9/11 period, the Department of the Treasury was transformed to address the threat of terrorism, leading to major changes in how the United States can target the illicit sources of finance.² The U.S. government is in a similar moment now, with the need to fundamentally rethink and reorient how economic security programs are implemented to address the full range of risks presented by China. Technology competition is at the core of the U.S.-China strategic competition, and the role of technologies in economic security should be central to a strengthened government capacity to counter the China challenge.

III. Cross-cutting Issues in the Economic Security Toolkit

Too often, economic security issues are dealt with in bureaucratic silos. Economic security strategy tends to be a greatest hits list of what the government is already doing and has always done, rather than setting an ambitious vision to guide the use of economic statecraft tools. Program implementers stay confined to their area of bureaucratic turf and, through no fault of their own, are often too consumed by the intense day-to-day demands of dealing with ongoing crises to advance longer term objectives. These dynamics do not bode well for the whole-of-government approach needed to transform the U.S.-China economic relationship to better serve U.S. strategic interests and advance democratic values.

Congress can act to remedy these negative dynamics, including through directing the executive branch to develop an economic security strategy; establishing and providing resources for strategic planning functions in the economic agencies, including through dedicated full-time staff; pushing for greater alignment of U.S. economic security strategies and policies with key international partners; strengthening the government’s capacity to evaluate the effectiveness of economic security programs; and ensuring that economic security functions have access to a wide range of non-biased, technical information.

U.S. Economic Security Strategy

The United States needs an economic security strategy. The Department of Defense recently released a defense industrial base strategy, the Department of Commerce is reportedly set to release its own national security strategy, and the Department of the Treasury in 2021 released a sanctions strategy.³ That each agency is developing and releasing its own strategies is emblematic of the larger problem: the United States does not have a holistic vision for how to utilize all of its economic tools in tandem to achieve an articulated end state in the economic and geopolitical relationship with China.⁴

Recent CNAS research put forth one framework for developing economic security strategies, including introduction of the concepts of economic domain ends, ways, and means:

• “Ends specify the desired end state between the U.S. economy, its partners’ economies, and that of its adversary, and are derived from broader … strategic objectives….
• Ways are the various methods of applying economic pressure … including a range of coercive economic statecraft measures such as financial sanctions, technology export controls, and tariffs.
• Means are defined in terms of the United States’ relative capacity in an area of strategic economic activity.”⁵

While this economic domain ends, ways, and means construct was developed in the context of research on sanctioning China in the event of a conflict, it equally applies to managing the economic security relationship today. The United States must set a clear vision for what a future economic relationship with China looks like, balancing the economic need for continued ties with the security need to de-risk certain areas of economic activity. This vision should be derived from the broader national security strategy and focus on addressing the risks to national security that can arise from economic activities.⁶ It then needs to develop specific, measurable strategies for how it can use all tools of economic statecraft to achieve the desired end state. Statements from administration officials have planted the seeds for what a potential strategy could look like, but none yet provide a clear view on how the United States should define the economic relationship with China to address growing national security concerns.⁷ This is a particularly important gap, as the range of sectors that are assessed to have national security implications continues to grow and now encompasses much broader swathes of ordinary commercial activity.

This testimony focuses on three areas within the economic security toolkit. However, the potential range of policies and programs that could be used to advance U.S. economic security objectives (i.e., economic domain ways) are much broader and include tools such as tariffs and trade policy, subsidies, and restrictions on the import of information technology goods and services. Government procurement can also be used to address economic security issues, and Congress is considering bipartisan legislation to address government contracting with Chinese biotechnology companies, in one example of where this may be relevant.⁸ How these tools are used in tandem to promote U.S. technological leadership should be a core element of an economic security strategy.

Semiconductors can provide a useful case study in the need for more holistic strategies. The United States has taken proactive steps to maintain U.S. advantage in advanced chips, including through precedent-setting export controls on technologies China needs to make advanced chips, as well as a large push on industrial policy to support domestic chips production and research and development. So far, so good. However, the effect of these policies is to create a structural incentive for China to double down on investments in legacy chip production, and the United States is not prepared to address a surge in imports of Chinese legacy chips.⁹ Export controls would likely be ineffective, simply because China already has the technology necessary to make such chips. Tariffs, import restrictions, government procurement policies, and outbound investment controls could all play a role in addressing the import problem, though whether they can slow China’s global growth without harming U.S. economic interests remains unclear. A more deliberative process for setting economic security strategy should anticipate these sorts of unintended consequences to enable more nimble and effective U.S. response to shifting market dynamics, including those shifts that are caused by actions of the U.S. government itself.

An effective economic security strategy will require breaking down of bureaucratic siloes and a sharp focus on prioritization of issues. It will require working across all the economic agencies in the executive branch and across multiple committees of jurisdiction in Congress. As officials proceed with developing economic security strategy, they must remain laser focused on addressing the most pronounced gaps in the U.S. toolkit. In addition to continual updating of export controls and CFIUS, passing legislation to address problematic vacuums in U.S. authorities, such as those related to outbound investment and data security (discussed further in later sections of the testimony), are an important part of an effective economic security strategy.

Strategic Planning Functions¹⁰

The agencies responsible for managing economic security programs should establish strategic planning functions, which would continually assess how economic security tools could effectively be used in a range of potential future scenarios with strategic competitors, with a focus on China. While this sort of strategic planning function is well established in the military community, it is practically non-existent for the economic agencies. Yet, should a crisis or conflict with China break out, economic tools would almost certainly be part of the U.S. policy response. An economic domain strategic planning process can enhance U.S. readiness for such scenarios, as well as enable the United State to consider the deployment of economic tools in support of longer-term deterrence objectives and in the ongoing strategic competition with China.

Economic domain strategic planning should be carried out at three levels.¹¹ First, the economic agencies must deepen their institutional capacity to engage in long-term strategic planning. Second, planning must be integrated with similar planning exercises in the defense community in support of an “integrated deterrence” objective that utilizes all instruments of national power.¹² Third, U.S. planning must be integrated with that of U.S. partners and allies, leveraging the core U.S. strategic advantage of alliances.¹³ Each of these areas must be staffed by experts whose full-time job is strategic planning, to avoid falling into the familiar trap of pushing off long-term thinking in order to deal with the crisis of the day.

Alignment with International Partners and Allies

Economic security programs are maximally effective when the U.S. approach is aligned with that of its key allies and partners abroad. While unilateral controls may be effective in the short-term and in some cases may be necessary to spur action from partners and allies, the effectiveness of unilateral measures erodes over time. U.S. firms must vigorously compete to maintain their leading role in global technology value chains, and restrictions only on U.S. firms will ultimately lead to foreign firms backfilling U.S. technology exports to China.¹⁴ A classic case in this regard is U.S. export controls on satellite technology. Europe did not implement similar controls and European firms were active in advancing China’s satellite technology developments.¹⁵ In these scenarios, the United States has the worst of both worlds—lost revenue and minimal impact on China’s indigenous technology development.

Various experts have put forth proposals for structures to enhance alignment on economic security with international partners. A new multilateral export control regime, designed with strategic trade control objectives in mind, could complement the current Wassenaar Arrangement structure, which coordinates country-agnostic controls.¹⁶ Broader agreements could be negotiated with partners that enhance coordination on a range of economic security tools, including export controls and investment security but also encompassing supply chain resiliency tools.¹⁷ Or, efforts could focus on strengthening the ability of partners and allies to implement unilateral controls under their domestic authorities, providing needed flexibility when the United States seeks to form ad hoc coalitions, such as it did recently with the Netherlands and Japan on semiconductor manufacturing equipment export controls. Ultimately, the right approach will be the one that can secure broad buy-in from a range of industrialized and emerging economies. To date, key partners have expressed skepticism about the viability of new formalized regimes, though multiple efforts at strengthening cooperation are underway (e.g., coordination on export controls and investment screening in the U.S.-EU Trade and Technology Council).¹⁸

To meaningfully advance international alignment, the United States must work with allies to address divergences in their strategic assessments of the threat presented by China, their legal frameworks to impose new controls, and their capacity to implement and enforce more robust economic security programs. Some progress has been made in strategic-level alignment, including at the G7, which issued an important leaders’ statement on economic security and resiliency this past year.¹⁹

While the views of many partners toward China are hardening, not least because of China’s continued support of Russia’s invasion of Ukraine, there remain important differences in their views on how hard and fast to pursue economic de-risking with China.²⁰ Divergent views on the threat posed by China will necessarily complicate efforts to align the development and use of economic security tools to address this threat.

U.S. partners and allies also tend not to have the same broad and flexible economic security programs that the United States enjoys. On export controls, the legal authorities of most partners and allies are limited to implementing the export controls agreed in the multilateral export control regime processes and they do not have easily available ways to impose unilateral controls.²¹ FDI screening mechanisms vary, and while many countries now have such mechanisms, their legal scope and maturity vary considerably. Very few partners and allies have outbound investment screening, with most U.S. partners and allies expressing some skepticism about the need for such authorities and waiting for the United States to act first before deciding whether to implement their own outbound investment programs. Further, international capacity to implement economic security programs lags that of the United States, with partners and allies tending to have smaller staff and more limited intelligence capabilities. These dynamics mean that the United States must prioritize outreach and technical assistance to partners and allies, as U.S. support and leadership can play a critical role in strengthening the economic security efforts of U.S. partners and allies.

Congress could promote stronger international alignment by pushing the administration to prioritize economic security issues in its diplomatic efforts with international partners, including important technology players in Europe and Asia. It can provide clear guidance on the types of formal institutions or agreements that the United States should seek to establish, while also setting realistic interim goals on strengthening alignment while such institutions or agreements are being considered by international partners. Funding the international coordination functions of the economic security agencies will be critical, as well as ensuring that the State Department political and economic officers have training in economic security issues and a mandate to prioritize U.S. economic security objectives in their engagements with foreign counterparts.

Evaluation

Economic security tools are being used at an unprecedented scale and for a range of novel policy purposes. Export controls, for example, have evolved from a limited tool designed to prevent accumulation of weapons into one of the United States’ favored policy responses to address a broad range of national security and foreign policy objectives.²² While the use of economic security tools is justified on national security grounds, policymakers must not forget that imposition of economic restrictions come with economic costs. Economic restrictions, if effective, shut off market access to one of the world’s most consequential economies, which has for decades been a driver of scale and growth for U.S. technology companies. As the range of economic security policies continues to grow, the U.S. government must have a way to assess the cost and effectiveness of these measures, including their long-term impact on U.S. technological competitiveness.

Currently, the evaluation function for economic security policies is sorely under-resourced. While the Department of the Treasury has established an office to assess the economic impacts of its sanctions programs, no comparable office exists for other economic security tools. Congress could consider establishing new offices within the Departments of Commerce and the Treasury to evaluate the effectiveness of export controls and investment security programs, while also assessing the impact of these programs on overall U.S. competitiveness. The evaluation of these offices should be used to inform the development of new economic security measures and the updating of existing ones. In cases where a measure may have high cost but is necessary nonetheless for national security reasons, these evaluations can inform how the government might use other policy tools to mitigate any impacts on U.S. competitiveness.

Access to Information and Expertise

Effective implementation of economic security programs depends on access to diverse, unbiased sources of information and expertise. These programs must have deep knowledge in legal and regulatory issues, market issues, critical technologies, China’s economic and technology landscape, and U.S. technological capabilities. Specialized skills, such as Mandarin language skills or deep technological expertise, are often in short supply within the government. While the agencies should prioritize hiring staff who possess these types of expertise, in reality the scope of expertise needed will always outpace the government’s ability to hire, particularly when considering the fast pace of technological development in the commercial space. The economic agencies will need to leverage a wide range of sources of information and expertise, including:

• Industry: Industry often has the most up-to-date and detailed information on technology products, simply because it is their engineers who develop these products. Regular engagement with industry can help government policies keep pace with commercial developments, while also alerting the government to unintended consequences of specific policies. At the same time, an over-reliance on industry sources should be avoided, as industry will have an inherent bias in its perspective.
• Intelligence: The intelligence community must provide robust support to economic security functions. Ways of achieving this vary. In the CFIUS process, the Office of the Director of National Intelligence (ODNI) provides coordinated intelligence assessments for each transaction under review. For sanctions, Treasury has its own intelligence capabilities through TFI. For export controls, Commerce has an analytic office that provides support for enforcement purposes.
• Independent analysts: Independent, third-party organizations, such as think tanks, federally funded research and development centers, academia, and business intelligence services, can also act as sources of unbiased technical and strategic information for economic security programs.²³

Congress could utilize its oversight functions to ensure that the economic security agencies are fully utilizing these sources of information. While not endorsing any particular proposal for ensuring more robust intelligence support for the export control programs, Congress could focus on whether the growing national security role of the Department of Commerce has sufficient support from the intelligence community. This should include intelligence support for export control licensing decisions and development of new export control policies, in addition to intelligence support for enforcement efforts, and should include capabilities to conduct Chinese-language, all-source intelligence analysis. Congress might also consider whether the agencies have sufficient resources to subscribe to business intelligence platforms or commission third-party studies, if doing so would support their overall missions.