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Lawmakers struggle to limit US tech investment in China

Fence around domestic technology has holes, according to experts

Rep. Mike Gallagher, R-Wis., has raised concerns about companies that have links to China's military.
Rep. Mike Gallagher, R-Wis., has raised concerns about companies that have links to China's military. (Tom Williams/CQ Roll Call)

China hawks who want to limit how U.S. investors send money and share industrial know-how with Chinese businesses in sensitive advanced technology sectors see signs of halting progress from the Biden administration and Capitol Hill, but aren’t optimistic that serious action is coming this year.

Those signs include the coming retirement of one of the most potent threats to legislative efforts to restrict outbound investment into China. House Financial Services Chairman Patrick T. McHenry, R-N.C., who in December thwarted efforts to include a Senate-passed provision that would screen outbound investment into security-related sectors in China and other adversarial countries in the final version of the fiscal 2024 National Defense Authorization law, has said he will leave the House at the end of this Congress.

And the Treasury Department is expected to announce regulations this summer implementing an August 2023 executive order issued by President Joe Biden. The order prohibits private equity and venture capital investments from flowing into sensitive technology sectors in China, including artificial intelligence, quantum computing, semiconductors and microelectronics if they would help Beijing gain new military capabilities. The administration says the theory behind the order is to erect a “high fence” around particularly critical areas of U.S. investments and technologies but to otherwise allow continued U.S.-Chinese trade.

Derek Scissors, a senior fellow at the American Enterprise Institute, said a lack of political will on Capitol Hill and in the administration has hamstrung efforts to bring more transparency and oversight into investments into key sectors in China, even as overall U.S. portfolio investment in the Asian giant has fallen off due to the worsening outlook of the world’s second-largest economy.

“The administration used the term ‘small yard and high fence,’ but it’s a fence with a gate and a lot of holes in it,” Scissors said, referring to what he calls lack of enforcement around U.S. sensitive exports and investments. He blamed Treasury Secretary Janet L. Yellen for “stalling” the new regulations to implement last summer’s executive order despite the administration first broaching the subject in summer 2021.

Even as lawmakers have drawn more attention to the risks of Chinese competition in technology, they have struggled to find a way to stop U.S. money from contributing to Beijing’s effort. The U.S. is only now trying to put limits in place and technology advances often can outpace government rules. The line between civilian and military technology may be fuzzy as well, and international investment flows can be circuitous, making it hard to see what’s benefiting China.

Rep. Mike Gallagher, R-Wis., the chairman of the House Select Committee on the Chinese Communist Party, described some of the challenges in a letter this month to Commerce Secretary Gina M. Raimondo. He raised concerns about a United Arab Emirates artificial intelligence company, Group 42 Holdings, that he said has links with Chinese military companies. The letter said several U.S. companies have extensive commercial relationships with Group 42. 

House Foreign Affairs Chairman Michael McCaul, R-Texas, led a hearing this month that examined U.S. investment into China.

“While we can restrict China’s access to U.S. critical technology through export controls, we can’t stop big investors from using their money, know-how, and network to help build highly advanced technology companies in China. Regrettably, U.S. money is fueling the [Chinese Communist Party] war machine and surveillance state,” he said. 

Among the challenges is getting good data on the extent of the problem. Scissors said there is no sector-by-sector breakdown of portfolio investment into China and that the data that does exist is unreliable. 

Democrats and Republicans in both chambers say they will continue to try to pass bills that would screen and potentially limit U.S. investment and industrial expertise from flowing into sensitive Chinese sectors. But it’s not clear if they will run into the same hurdles as they did last November, when McHenry and his allies prevented a provision from Sens. John Cornyn, R-Texas, and Bob Casey, D-Pa., from becoming part of the final defense policy measure.

The Senate voted 91-6 last summer to adopt an amendment to its version of the annual defense policy measure from Cornyn and Casey based on their legislation requiring advance notice to the Treasury Department of investments into sensitive technology sectors like quantum computing and artificial intelligence into countries of concern, but it was dropped in conference negotiations.

McHenry has said restricting U.S. financial investment into China would reduce the influence that American executives and business leaders can have with key Chinese companies when it comes to encouraging Western standards and compliance with U.S. laws.

Looking ahead

McCaul is touting legislation from himself and House Foreign Affairs ranking member Gregory W. Meeks, D-N.Y., that the committee unanimously advanced last November. Their bill would require the administration to identify categories of technologies and products in the sectors of semiconductors and microelectronics; artificial intelligence; quantum information science and technology; hypersonics; and high-performance computing and supercomputing that could pose a threat to U.S. national security. The legislation would require U.S. investors engaging in those sectors to notify the government if their investments could be developed or acquired by China, Russia, North Korea and Iran.

House Financial Services member Andy Barr, R-Ky., late last year said he is part of a working group that House Majority Leader Steve Scalise, R-La., is convening to find a unified position for House Republicans on how to approach restricting investments into China. Other members of the group include McHenry, McCaul, and Gallagher.

Barr was among the House Financial Services subcommittee leaders who joined McHenry last fall in the letter opposing the provision in the defense policy bill. That letter proposed a sanctions approach. 

At a Senate Banking hearing earlier this month, Emily Kilcrease, who leads the Energy, Economics, and Security Program at the Center for a New American Security think tank, said efforts to restrict outbound investments into China need to do more than bring transparency into where U.S. dollars are flowing but also understand how specialized U.S. industrial know-how can be used to benefit the Chinese government in ways that undermine U.S. national security.

She cited the complex supply chain management involved in a semiconductor factory. “It requires skilled workforce, the recruiting and retention of that sort of skilled workforce. That includes commercial strategies that can survive in a cutthroat environment. … It’s this exact sort of know-how that flows along with an investment and we don’t have a tool to capture that currently,” she said.

Caitlin Reilly contributed to this report.

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