Outbound Investment Screening Could Mitigate Export Control Gaps, US Official Says

While the Biden administration hasn't yet decided whether to establish an outbound investment screening regime, officials believe more investment screening could help fill certain gaps in semiconductor-related export controls, said Peter Harrell, a National Security Council official. Harrell said an outbound regime also could provide the U.S. with more information about global semiconductor investments, which could be useful as the U.S. seeks to stop China from acquiring advanced chip equipment.

Outbound investment screening could help the U.S. better capture a “handful of narrow areas where investments could potentially pose risks,” Harrell said during a Sept. 14 event hosted by the Atlantic Council and the Center for a New American Security. While he said that the Biden administration has already taken steps to restrict certain U.S. outbound investments -- such as the president’s decision last year (see 2106030067) to expand a Trump-era policy that banned investments in Chinese military companies (see 2105190009) -- more may need to be done.

“We do think there are gaps in certain [government] tools,” Harrell said. “Against that backdrop, it's important to consider whether and how certain narrowly targeted categories of U.S. investment in foreign competitor semiconductor firms might undermine the effectiveness of these other policy tools.”

He also said the U.S. has information gaps that might be solved by an outbound investment regime. “We’re able to identify information about some private investments in narrow, strategic sectors, like semiconductors, from publicly available data and from commercially available data sources,” Harrell said. “But the truth is, as a government, we probably don't know as much about what investments are occurring as we should, given the state of U.S. geopolitical competition with China.”

If the U.S. creates an outbound screening tool, Harrell said, it should be “narrowly tailored and tightly scoped to address identified gaps in existing regimes.” A new regime should also have “clear and specific rationales for any regulations or requirements,” he said, “and they should apply only to the specific sectors and types of investments that present clear national security risks and specific national security risks.”

He also said the U.S. would seek to work closely with industry if it decides to create such a regime. “We understand the complexity of the global investment environment,” he said. “We understand that U.S. firms need stable investment regimes, and we want to make sure that we’ve thought through the unintended consequences of any new regulatory regime.”

But he also stressed that the administration is still working through many of these ideas. “No final decisions have been made,” Harrell said. “We understand the complexity of this issue, and have a lot of work ahead of us.”

Harrell’s comments came after CNAS and the Atlantic Council published recommendations for an outbound investment screening regime. CNAS expert Emily Kilcrease, one of the report’s authors, said the proposed regime would undoubtedly require more investment due diligence by U.S. companies. Under the proposal, U.S. firms investing in a Chinese entity would have to notify the U.S. government about their “covered” investment if the Chinese entity is involved in making technology that would normally be subject to U.S. export controls if it was U.S.-origin, Kilcrease said during the event. This includes any technologies listed on the Commerce Control List or any investments made in companies on the Entity List.

“The notification process was intentionally broad, and there's no question that it would require companies to do additional diligence beyond what they're already doing as part of their normal investment due diligence process,” Kilcrease said. “That's a level of technical diligence that we're not sure companies are doing right now, candidly. So clearly there would be a bit of a burden.”

But she said the notification requirement doesn't necessarily mean there would be a “clear hook for the government to take action” on the investment. “There's clearly a need to collect this information, and hopefully companies would be willing to play ball, because the idea is that it would lead to a more narrowly targeted scope of authorities that permit the government to take action, including to prohibit transactions,” Kilcrease said. “We want to make sure we get that piece of it right.”