China hawks prep tech investment screening measure

Gopal Ratnam, CQ-Roll Call on Oct 1, 2024

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WASHINGTON — Lawmakers hoping to stanch the flow of U.S. money into China’s tech sectors are turning to a time-tested method to improve their odds by appending the measure to a must-pass defense policy bill.

A bipartisan amendment by Sens. John Cornyn, R-Texas, Bob Casey, D-Pa., and Dan Sullivan, R-Alaska, appears among nearly 100 separate proposals that make up a manager’s package for the Senate fiscal 2025 National Defense Authorization Act. That package, with the underlying Senate Armed Services Committee bill, is to be the chamber’s offer in an informal conference with the House.

The amendment would require U.S. companies and individuals to notify the Treasury Department if their planned investment is directed toward certain critical tech sectors in China — otherwise known as an outbound investment notification mechanism. The sectors that would require notice include advanced semiconductors and microelectronics, artificial intelligence systems, quantum information science and technology, hypersonics, satellite-based communications and networked laser scanning systems with both civilian and military applications.

The push to restrict U.S. investments flowing to China’s tech sector is part of a broad attempt by Congress and the Biden administration to slow down technological advances that could boost China’s military power. That includes curtailing exports of high-end chips and other technology components and is aligned with removing Chinese-made technology from U.S. mobile networks and critical infrastructure sectors.

Between 2015 and 2021, at least $40.2 billion, or about 37 percent, of the $110 billion in capital raised by Chinese artificial intelligence companies involved U.S. investors, according to a 2023 report by the Center for Security and Emerging Technology at Georgetown University’s Walsh School of Foreign Service.

Attaching a measure to the defense authorization bill, however, doesn’t guarantee it gets into law.

An identical measure to the Cornyn-Casey amendment passed in the Senate in June 2023 on a 91-6 vote as an amendment to the fiscal 2024 defense policy bill, but it was not included in the final measure because of objections from some House lawmakers. Prominently, House Financial Services Chairman Patrick T. McHenry, R-N.C., was against it, favoring sanctions on companies that advance China’s military over investment screening.

Top House Republicans are indicating that things may be different when lawmakers return after the November elections. For one thing, McHenry is retiring from Congress.

An outbound investment notification and screening measure is “probably our No. 1 priority right now,” Rep. John Moolenaar, R-Mich., chair of the Select Committee on the Chinese Communist Party, said Sept. 25 at an event hosted by the conservative American Enterprise Institute. “Because when you look at it, we are actually funding our demise” by pouring U.S. investments into China’s tech sector that strengthens its military, he said.

Moolenaar said at the event that House Speaker Mike Johnson, R-La., has said that “he would like to have something before the end of the year, an outbound investment legislation.”

House Foreign Affairs Chairman Michael McCaul, R-Texas, told Politico Sept. 26 that discussions among House Republicans were “going in a good direction” and would likely result in a compromise that includes investment prohibitions in some sectors as well as export controls and sanctions overseen by the Treasury Department’s Office of Foreign Assets and Control. McCaul’s office declined to confirm those comments.

Stronger measures sought

Meanwhile, Rep. Rosa DeLauro of Connecticut, the top Democrat on the House Appropriations Committee, said the Cornyn-Casey measure is a good start but legislation must go further.

It “would be a good start, making sure we build on the Biden Administration’s executive order from earlier this Congress and begin holding foreign adversaries like China and Russia accountable for their theft of intellectual property and efforts to undermine our defense industrial base,” DeLauro said in an email. “However, I still believe that comprehensive review, rather than mere notification, must be the end goal for any outbound investment mechanism, and I will advocate for continuous strengthening of our investment screening process to ensure our supply chains and technological capabilities always stay on the cutting edge.”

DeLauro introduced legislation in the previous Congress that called for screening U.S. capital flowing into Chinese tech. It passed the House with bipartisan support but not the Senate.

Subsequently, in August 2023, President Joe Biden issued an executive order calling on the Treasury Department to formulate rules on outbound investment. The department in June proposed such a screening rule but has not set a date for issuing a final version. A spokesman for the department did not immediately respond to an email seeking comment.

The proposed rule would outright prohibit investment by U.S. citizens and residents in specific technologies within artificial intelligence, quantum computing and semiconductor manufacturing.

The proposal would bar outlays for design automation software and fabrication of certain high-end semiconductors. The bans include investments in development and production of quantum computers and their critical components, as well as quantum sensing and certain communications platforms. And it aims to stop U.S. capital from flowing into AI systems with national security end uses, as well as those that require a certain threshold level of computing power or are trained using biological sequence data.

Congress is pushing to enshrine the provisions into law because Treasury Department actions based on a presidential executive order can be easily reversed in a future administration, and such orders may be susceptible to court challenges.

The proposed amendment is likely to add to the uncertainty faced by investors, said Deborah Curtis, an attorney at Arnold & Porter LLP. “Investors are undoubtedly uncertain about how these different mandates would interact,” Curtis said in an email. “There are still unknowns over the actual capture of the Treasury regulation, and new statutory disclosure obligations would only up the ante — as broad disclosure obligations will spawn additional regulation, as night follows day.”

In the absence of a mechanism to screen outbound U.S. investments, even pension plans for federal employees may inadvertently invest in China’s tech sector, Rep. Raja Krishnamoorthi of Illinois, the top Democrat on the select committee on China, said at an event hosted by the American Enterprise Institute.

In November, the Federal Retirement Thrift Investment Board, which oversees federal employees’ retirement savings plans, voted to change a benchmark index to an international one that excludes China and Hong Kong.

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