The White House is set to strengthen the oversight framework for both Chinese investments into the United States and US exports to China of what it bills as “industrially significant technologies” (ISTs) in a plan to be issued by the end of the week, per the Wall Street Journal.
New restrictions to be issued by the Treasury are set to expand the role of the Committee on Foreign Investment in the US (CFIUS), the interagency panel vetting foreign ventures that pose significant national security risks. The new rules may prevent companies with 25 percent Chinese ownership or more from investing in US ISTs – that threshold may be dropped even lower.
Rules jointly issued by the Commerce Department and the National Security Council would tighten existing export controls to reduce exports of ISTs to China. The Commerce Department’s Bureau of Industry and Security (BIS) administers Export Administration Regulations and issues licenses. The State Department’s Directorate of Defense Controls plays a secondary role in regulating weapon exports.
Congress and the White House agree that existing cracks in the CFIUS review process have opened the door for Chinese companies to acquire sensitive technology, degrading our defense industrial base and other areas critical to national security.
However, even with widely agreed-upon objectives such as the updating of CFIUS’ review processes to cover financial undertakings other than regular acquisitions, Congress’ approach to reform can better take into account industry demands and provide certainty to foreign investors.
Agencies’ rules are in fact likely to be hastily crafted, include more restrictions than necessary and carry little input from foreign entities and the domestic beneficiaries of their investments. Congress, on the other hand, has a longer record of welcoming industry input and crafting comprehensive and balanced legislation – even when it ends up nowhere.
S. 2098, the Foreign Investment Risk Review Modernization Act of 2018, a bill filed last November by Sens. Cornyn [R-TX] and Feinstein [D-CA] and awaiting a full floor vote on an amended version reported out of committee after several hearings, strikes a balance between toughness on covert technology theft and limited burdens on non-sensitive investments.
S. 2098 broadens CFIUS’ purview to review operations beyond simple acquisitions to include joint-ventures, minority position investments and real estate transactions near military bases, and incorporates incipient innovations that China is likelier to covet into its definition of “critical technologies”.
At the same time, S. 2098 would have CFIUS allow “light filings” for smaller amounts and exemptions when all investing parties come from countries deemed allies or having mutual investment security arrangements.
Additional tweaks to the bill in March provided welcome certainties by defining previously blurred categories of transactions subject to review and narrowing down the list of targeted countries.
On the exports side, Rep. Royce’s [R-CA] H.R. 5040, the Export Control Reform Act of 2018 could also deliver better solutions than the Administration. The bill was unanimously reported out of the House Foreign Affairs Committee in April and awaits action from the Oversight and Government Affairs Committee.
Rather than pulling the brakes on technology exports at large, Royce’s bill would extend the Commerce Department’s export-control jurisdiction across a larger range of products and stages of the innovation process while leaving out transfers to foreign-based companies that are majority-owned by Americans.
Investment restrictions seem to garner more support than export controls from both Congress and the White House. Unfortunately, they are also less pressing. Investment-driven tech transfers present a lesser threat, given that Chinese Foreign Direct Investments (FDIs) into the US have been nearly cut in half through the past year – $30 billion in 2017 down from $46 billion in 2016.
Though the decline has been less steep in the critical sectors under review by CFIUS, China's rollback of investment in those areas is notable nonetheless. Commerce Department data on investment by sector is supplemented by data from the US-China FDI Project – a joint research venture by market consultancy Rhodium Group, the National Committee on US-China Relations and the two countries’ respective boards of trade.
After China’s peak of investments in Silicon Valley in 2014 – $5.88 billion that year –annual outflows into US tech companies have declined to a level of $2.73 billion in 2017. In electronics and electrical equipment, 2017 saw a calamitous fall from $4.24 billion to $228 million. In industrial machinery, China has never surpassed $220 million and has stayed below $100 the last two years.
In energy, investment declined after a peak of $3.66 billion in 2013 and has not risen above $50 million in the past two years. Only in health, pharmaceuticals and biotech does Chinese investment seem to be rising, with FDIs more than doubling in 2017 from $974 million to $2.52 billion.
Generally, Chinese investments are also fewer and further in between than in years past, easing the review work at CFIUS. The China Global Investment Tracker, an exhaustive list of every Chinese FDI flow produced by the American Enterprise Institute and the Heritage Foundation, flagged only 27 investments in the United States in 2017, down from 56 the year before.
On the export side, however, the dollar values are far higher. In 2017, US exports of computer and electronic equipment to China stood above $17 billion, 44 percent of which were semiconductors. The largest exports however are of transportation equipment, nearing $30 billion in 2017, over half of which are aerospace products and parts.
These are the kind of multi-billion exporting sectors that would be affected by the President’s announcement of executive action to reform outbound controls. While agencies and lawmakers may well end up merging their approaches to deliver much-needed reforms to CFIUS, the real unknown lies on the exporters’ side.
Granted, our technology may be likelier to be stolen when exported than when opened up to foreign ownership at home. Executive action, however, risks over-adjusting to that threat by halting US exports to China that could in fact strengthen our competitive advantage in sensitive technologies, not weaken it. Congress would do the nation a service by passing its own legislation – if the President allows.
Jorge González-Gallarza is a policy associate at Economics21. Follow him on Twitter here.
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