January 30, 2024

Principles and Policy Options for Designing Better Investment Barriers


I. Summary of Testimony

Chairman Luetkemeyer, Ranking Member Beatty, and Members of the U.S. House of Representatives Committee on Financial Services, Subcommittee on National Security, Illicit Finance, and International Financial Institutions, 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 on economic security issues, 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. I have spent my career in national security roles, but always from the perspective of an economic agency. This perspective has engrained in me a deep appreciation for the strategic advantage that open markets and open capital flows provide the United States.

At the request of the Committee, this testimony focuses on options for designing an effective program to address the national security risks that can arise from certain U.S. investments in countries of concern. As the U.S. government considers establishing new outbound investment restrictions, it must account for a range of policy objectives, including the need to robustly protect U.S. national security, maintain U.S. economic and technological competitiveness, and ensure that any new programs can be effectively administered and enforced. As my fellow witness Rich Ashooh has wisely noted, “U.S. global technology leadership in indisputable—but it is perishable” and a first principle of new restrictions must be to “cause no harm to the very thing you are trying to promote and protect.” Additionally, many U.S. investments in China do not present national security concerns and should be allowed to proceed so that investors can take advantage of commercial opportunities available in one of the world’s most consequential markets. The analysis and recommendations of this testimony are provided with this in mind.

A summary of recommendations for congressional consideration are as follows:

  • Codify and provide resources for a targeted and proportionate set of outbound investment controls focused on transactions that may enable China’s indigenous development of technologies critical to U.S. national security interests;
  • Enhance transparency around investments made in China, including by establishing new requirements to notify the government of investment transactions involving high-risk technologies;
  • Prohibit U.S. investments in Chinese entities that produce, design, test, manufacture, fabricate, or develop high-risk technologies, including military items, advanced semiconductors and related equipment and software, and frontier artificial intelligence (AI) systems;
  • Consider additional prohibitions related to quantum information systems, hypersonics, and supercomputing;
  • Expand the non-SDN Chinese Military-Industrial Complex (non-SDN CMIC) program to prohibit all types of investments in listed entities and to authorize the listing of Chinese entities that produce, design, test, manufacture, fabricate, or develop high-risk technologies;
  • Exercise strategic restraint on the use of full blocking sanctions;
  • Require alignment of U.S. outbound investment policies with those of key international partners; and
  • Require independent evaluation of any new outbound investment authorities to ensure they are being implemented in a manner consistent with Congress’s national and economic security objectives.

This testimony draws from joint work conducted by the author and Sarah Bauerle Danzman, associate professor of international studies at Indiana University and resident senior fellow with the Atlantic Council, including the report Sand in the Silicon: Designing an Outbound Investment Mechanism published jointly by the Atlantic Council and CNAS. The testimony also draws from prior testimony provided before the U.S. Senate Committee on Banking, Housing, and Urban Affairs and the U.S.-China Economic and Security Review Commission. Citations to these prior publications, and other resources that may aid the Committee’s work, are included at the end of the testimony.

II. Introduction

Certain U.S. investments in China present national security risks that are not addressed by existing U.S. authorities. U.S. firms and investors may, in some cases, be supporting the development of critical technologies in China that have important national security applications. These include investments related to chips, AI, or other technologies that can accelerate advances in Chinese military capabilities. Just as U.S. law and policy have long recognized that the export of certain technologies can be counter to U.S. security interests, so too can certain overseas investments if such investments are contributing to increasing military capabilities of competitor nations. The goal of an outbound investment program is not to impose broad capital controls, but to instead address the specific transactions through which critical industrial knowhow may transfer to China and to plug a specific gap that export controls cannot fill in the technology competition with China.

U.S. policymakers are currently debating whether and how to regulate U.S. investments in China. The administration has released an executive order, with an accompanying advanced notice of proposed rulemaking (ANPRM), outlining a targeted proposal to mandate notifications of—and in some cases, prohibit—certain U.S. investments into China’s AI, semiconductor, and quantum technology ecosystems. Congress has considered a range of proposals, with current efforts in the Senate coalescing around a mandatory notification program. Debate remains ongoing in the House of Representatives, with the House Financial Services Committee advancing legislation that leans more heavily on traditional sanctions tools to address concerns with outbound investment. A proposal from House Foreign Affairs Committee Chairman Michael McCaul (R-TX) and Ranking Member Gregory W. Meeks (D-NY) advances a sectoral approach to outbound investment restrictions. The House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party, in its recent bipartisan report on the U.S.-China economic relationship, has recommended an approach that blends both sectoral restrictions and entity-based investment restrictions.

III. Need for Congressional Action

Congress has an essential role in establishing any new outbound investment authorities. While substantively the administration’s executive order generally aligns with the recommendations of this testimony, implementing these authorities under executive action is not optimal over the longer term. The International Economic Emergency Powers Act (IEEPA) provides sufficient authority for the President to establish outbound investment restrictions. However, a legislative solution would ultimately provide a more durable policy response, as executive orders can be rescinded by subsequent administrations. Legislation also avoids the mission creep that has been associated with recent use of IEEPA for a range of China-related threats, many of which present serious national security and foreign policy concerns but may not strictly speaking constitute “emergencies” as originally envisioned in IEEPA. Brennan Center research has noted that the President’s use of IEEPA is “virtually unchecked,” calling in to question whether the extensive use of IEEPA as a routine foreign policy tool erodes the checks and balances between the executive and legislative branches.

A strong congressional role would ensure that any new outbound program is designed in parallel with a consideration of the resources required for effective implementation and enforcement. Congress’s keen focus on resources during the 2018 process to modernize the Committee on Foreign Investment in the United States (CFIUS) is commendable, enabling CFIUS to effectively implement its expanded mandate. A similar resource assessment process should accompany the establishment of an outbound investment program.

Congress also has a role in determining the operational structure of a new outbound investment program. The Department of the Treasury is best situated to lead a new outbound investment program. The Treasury experience chairing CFIUS, as well as its lead role in implementing U.S. sanctions, give it unique strengths and insights when it comes to tracking international investments and global financial flows. Congress should create a new office to lead an interagency outbound investment program and place it under the leadership of the Assistant Secretary for Investment Security or the Under Secretary for Terrorism and Financial Intelligence. The outbound investment authorities should not be located within CFIUS, as this process is already under significant strain and Congress should seek to reduce rather than increase the burdens on CFIUS. The Departments of Commerce, Defense, Energy, and State should also have a role, given the need to align outbound investment restrictions with export controls. The Office of the Director of National Intelligence should be tasked to provide threat assessments in support of the outbound investment program.

IV. Principles for Outbound Investment Authorities

Addressing national security risks associated with U.S. investments in China will require a carefully calibrated approach. Overarching principles guiding the development of future outbound investment programs include that new authorities should be:

  • targeted at transactions of highest national security risk;
  • clearly defined and understandable to private-sector entities, who will be responsible for the first line of compliance;
  • non-duplicative of and consistent with existing tools, including export controls;
  • scoped proportionately to the administrative capacity available to effectively administer a new mechanism; and
  • designed to enable meaningful conversations with allies about adopting similar regimes, including the need to limit extraterritorial application of U.S. authorities.

Consistent with these broad principles, the United States should focus on U.S. investments that: 1) convey management expertise or other non-technical industrial knowhow along with the investment (i.e., “smart money” investments); and 2) may advance the indigenous development of China’s technology capabilities in areas critical to U.S. national security.

Focus on “smart money” investments

An outbound program should focus on regulating “smart money,” that is an investment that conveys non-technical industrial knowhow along with capital. Purely passive investment flows are unlikely to present a high-risk profile and are most easily replaced by other sources of capital. China has ample access to capital, from both domestic and foreign sources, and thus restrictions that focus on broad flows of money are unlikely to have a meaningful impact. Instead, an outbound program should focus on the unique contribution that flows from individual investment transactions, including access to leading U.S. knowhow on how to build a successful critical technology company. Outbound investment controls can be best thought of as a complement to U.S. export controls, filling a gap related to non-technical industrial expertise that export controls are ill suited to capture. Export controls address part of the national security risk associated with outbound investments, namely the risk that investments may involve the transfer of sensitive U.S. technologies. However, export controls do not cover the risks that arise from the transfer of management expertise, non-technical industrial knowhow, or other intangible benefits. The administration’s executive order on outbound investments notes that “certain intangible benefits…such as enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing” can convey along with an investment.

For example, one can consider the broad range of skills and expertise needed to establish and operate a semiconductor fabrication facility that can produce high-quality chips at scale and on commercially competitive terms. Technical knowledge and technology innovation will be critical to this business, and export controls can address this aspect of potential risk associated with U.S. investments in China-based facilities. But, the operators of these facilities will also need to manage complex supply chains, maintain a skilled workforce, and develop commercial strategies for succeeding in a cutthroat global marketplace. Few companies today can master these complex operational and management requirements, and it is in exactly these areas that U.S. firms excel. These types of non-technology related benefits that can flow along with an outbound investment are not, and never would be, suitable to capture under export control authorities.

Additional types of risks may arise from investments made in the start-up or venture capital space. Research from Georgetown University’s Center for Security and Emerging Technology (CSET), examining U.S. investments in China’s AI sector, describes additional types of non-technical expertise that advance indigenous technology development, noting that “earlier stage VC investments in particular can provide intangible benefits beyond capital, including mentorship and coaching, name recognition, and networking opportunities.” These types of intangible benefits can be critical in determining the success or failure of young technology companies, which generally have a high failure rate. The CSET report noted that, while Chinese investors remain the majority of investors in China’s AI start-ups, U.S. venture capital has been active in China’s AI start-up field.

Focus on high-risk technology areas

An outbound investment program should focus on investments in technology areas of high national security risk. This includes technologies that are subject to high levels of export controls, as well as emerging technologies that may not be mature enough to warrant export controls but are nonetheless critical to future U.S. technological and national security advantage.

Investments in technologies that are subject to high levels of export controls represent a relatively more straight forward case for policymakers. The United States maintains an arms embargo for China, which includes items on the U.S. Munitions List, items in a series 600 entry under the Export Administration Regulations (EAR), and space and military items in a series 9x515 entry under the EAR. It also maintains export controls on a wide range of dual-use technologies (i.e., those technologies that have both civilian and military applications), implemented by the Department of Commerce and listed on the Commerce Control List. Of these, multiple dual-use technologies are subject to strict (i.e., presumption or policy of denial) licensing policies for exports to China, including for national security or regional security reasons. Leveraging these lists to scope the outbound investment program can enhance coherence across policy instruments. Additionally, the U.S. government has already determined that the technologies on these lists are important for U.S. national security and foreign policy interests, and outbound investment controls can be viewed as a reinforcing measure to ensure that outbound investment does not erode the efficacy of the export control system. A key decision for Congress will be how closely to align outbound investment with the export control system, and whether it should proceed with a narrow set of technologies from these lists for an initial phase of any outbound investment program.

Emerging technologies present a more difficult case. Often, the full applications of an emerging technology area are not known, and it is therefore difficult to impose controls on the basis of an anticipated end use or end user. At the same time, these technologies, such as AI and quantum technologies, may be central to future U.S.-China competition. Given relatively lower levels of export controls in many emerging technology areas, Congress may wish to consider whether a direct link between export controls and any future outbound investment restrictions is appropriate. Noting the need for clarity and precision in applying new outbound restrictions, should Congress determine that a bespoke list of emerging technologies is required for outbound investment control purposes, it will need to develop technical descriptions of which technologies are captured and which are not—or instruct the executive branch to do so via regulation. One guide for the types of emerging technologies to consider is the Office of Science and Technology Policy’s List of Critical and Emerging Technologies.

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  1. This testimony reflects the personal views of the author alone. As a research and policy institution committed to the highest standards of organizational, intellectual, and personal integrity, the Center for a New American Security (CNAS) maintains strict intellectual independence and sole editorial direction and control over its ideas, projects, publications, events, and other research activities. CNAS does not take institutional positions on policy issues and the content of CNAS publications reflects the views of their authors alone. In keeping with its mission and values, CNAS does not engage in lobbying activity and complies fully with all applicable federal, state, and local laws. CNAS will not engage in any representational activities or advocacy on behalf of any entities or interests and, to the extent that the Center accepts funding from non-U.S. sources, its activities will be limited to bona fide scholastic, academic, and research-related activities, consistent with applicable federal law. The Center publicly acknowledges on its website annually all donors who contribute.
  2. Combatting the Economic Threat from China: Hearing before the U.S. House of Representatives Committee on Financial Services 118th Cong. (2023) (statement of Rich Ashooh, former Assistant Secretary of Commerce for Export Administration, U.S. Department of Commerce, February 7, 2023), https://docs.house.gov/meetings/BA/BA00/20230207/115279/HMTG-118-BA00-Wstate-AshoohR-20230207.pdf.
  3. Emily S. Weinstein and Ngor Luong, U.S. Outbound Investment into Chinese AI Companies (Washington, D.C.:, Center for Security and Emerging Technologies, February 2023), https://cset.georgetown.edu/publication/u-s-outbound-investment-into-chinese-ai-companies/; and Alex Alpers and Eduardo Baptista, “China chip firm powered by US tech and money avoids Biden’s crackdown,” Reuters, December 13, 2023, https://www.reuters.com/technology/china-chip-firm-powered-by-us-tech-money-avoids-bidens-crackdown-2023-12-13/.
  4. White House, Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern, Washington, D.C., August 9, 2023, https://www.whitehouse.gov/briefing-room/presidential-actions/2023/08/09/executive-order-on-addressing-united-states-investments-in-certain-national-security-technologies-and-products-in-countries-of-concern/.
  5. Karen Freifeld and Andrea Shalal, “US senators push China investments tracker in defense bill as White House finalizes order,” Reuters, July 14, 2023, https://www.reuters.com/world/us/us-senators-push-china-investments-tracker-defense-bill-white-house-finalizes-2023-07-14/.
  6. U.S. House of Representatives Financial Services Committee, “McHenry, Subcommittee Chairs Urge House and Senate Armed Services Committee Leadership to Reject Misguided Outbound Investment Regime, Prioritize Time-Tested Sanctions and Export Controls,” press release, November 29, 2023, https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=409061.
  7. U.S. House of Representatives Foreign Affairs Committee, “McCaul, Meeks Introduce Bill to Restrict Outbound Investment,” press release, November 13, 2023, https://foreignaffairs.house.gov/press-release/mccaul-meeks-introduce-bill-to-restrict-outbound-investment/.
  8. The Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, Reset, Prevent, Build: A Strategy to Win America’s Economic Competition with the Chinese Communist Party (Washington, D.C.: U.S. House of Representatives, Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, December 12, 2023), https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/reset-prevent-build-scc-report.pdf.
  9. Andrew Boyle, “Checking the President’s Sanctions Powers” (Washington, D.C.:, Brennan Center for Justice, June 10, 2021), 3, https://www.brennancenter.org/our-work/policy-solutions/checking-presidents-sanctions-powers.
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  11. Sarah Bauerle Danzman and Emily Kilcrease,Sand in the Silicon: Designing an Outbound Investment Controls Mechanism (Washington, D.C.:, The Atlantic Council, September 14, 2022), https://www.atlanticcouncil.org/in-depth-research-reports/issue-brief/sand-in-the-silicon-designing-an-outbound-investment-controls-mechanism.
  12. White House, Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern.
  13. Emily S. Weinstein and Ngor Luong, U.S. Outbound Investment into Chinese AI Companies, 23.
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