US Should Codify Military Company Investment Restrictions, Former Official Says

Congress should codify regulations from a November executive order that imposed investment bans on certain Chinese companies with ties to the military, said Matt Pottinger, a former deputy national security adviser during the Trump administration. He also said the U.S. should take a stricter stance on export licenses involving semiconductor shipments as China tries to become the world’s “only” supplier of advanced technologies.

Pottinger, speaking during a hearing last week held by the U.S.-China Economic Security Review Commission, framed these moves as part of a broader U.S. response to what he called China’s “audacious strategy for offensive decoupling.” He said China wants to “wean” itself off advanced technology imports from industrialized countries while making those nations “heavily reliant” on Chinese imports. But the U.S. can take steps to counter the strategy, Pottinger said.

“They still want to have access to our technology, they want to have access to our laboratories and our intellectual property,” he said. “That, above all, that's the thing that scares them, that gives them night sweats. It’s the fear that at some point we might pull the plug on their ability to access our cutting edge technology.”

Pottinger said the U.S. should do more to restrict U.S. capital from flowing to China, which is “helping them build all of their new technology firms.” Congress can start by creating laws similar to the investment restrictions issued by the Trump administration last year, which placed restrictions on several lists of Chinese technology companies issued by the Defense Department (see 2101150006 and 2101150008).

Those restrictions should also apply to companies on the Commerce Department’s Entity List, Pottinger told the commission, adding that Congress should approach most legislation with an eye toward increasing U.S. competition against China. “In every bill that Congress introduces,” he said, lawmakers should “always ask first whether the new measures that we're considering increase our leverage in this competition or surrender leverage to our opponents in Beijing.”

Although Pottinger praised moves made by Commerce last year to restrict sales of semiconductors to China, including an update to its foreign direct product rule that increased restrictions on certain foreign-made items destined to Huawei (see 2012210044), he said U.S. semiconductor policy is still “incomplete” and said the restrictions aren’t having their intended effect.

“What appears to be happening from my vantage point on the outside is that licenses are being granted in spite of those rules in order to advantage one component of the U.S. semiconductor industry -- mainly the tool makers, the equipment makers,” said Pottinger, who is also a visiting fellow at the Hoover Institution. Pottinger said those shipments are “helping China build up capacity that's going to wipe out several other aspects of the American semiconductor industry. That’s something that we can’t let happen.” A Commerce spokesperson said the agency doesn't comment on licensing decisions.

Miles Yu, former Secretary of State Mike Pompeo’s China adviser, said the U.S. should be treating Chinese companies how China treats U.S. companies. Yu said China routinely “uses market access to absolutely mold the behavior of these big companies and subjugate them to Chinese demands. During the Trump administration, Yu said Pompeo often invited leaders of the U.S.’s top companies to privately speak about China, where they “exploded with complaints” about the government’s restrictions. “But in the open, nobody wants to say anything,” Yu told the commissioners. “I think it's only fair and imperative for us to take reciprocal actions against the Chinese government.”