Lawmakers Hoping to Include Outbound Investment Screening Mechanism in Upcoming NDAA

Although the current congressional proposal for a new outbound investment screening mechanism faces some hurdles, it could be incorporated into the upcoming National Defense Authorization Act. Sen. Pat Toomey, R-Pa., said he has concerns with some of the provisions but hopes to work with bill’s sponsors to include some type of outbound screening measure in the fiscal year 2024 defense spending bill, which could be passed this year.

Lawmakers may be looking to speed up passage of some version of the National Critical Capabilities Defense Act -- which would create a new committee to review outbound investments -- to get ahead of the White House unilaterally creating such a regime (see 2209140041). Toomey, speaking during a Sept. 29 Senate Banking Committee hearing, said he would much rather work within Congress to carefully sculpt a review mechanism than see the administration create one with an executive order.

“Let me be very clear about this: an executive order is not a substitute for a new congressionally passed law,” Toomey said. “Legislation benefits from a deliberative, open accountable, democratic process. A White House EO will inherently lack these characteristics, even if an EO is accompanied by a notice and comment period.” He also said an executive order would “very likely place no limits on what technologies can be added to the regime in the future.”

Sen. John Cornyn, R-Texas, one of the bill’s sponsors, agreed, saying legislative action is “far preferable” to an executive order. “I know the administration -- in my conversations with [Commerce] Secretary [Gina] Raimondo in particular -- would welcome congressional action,” he said while testifying before the committee.

In a Sept. 29 letter to the committee, the bill’s House sponsors, Reps. Rosa DeLauro, D-Conn., and Bill Pascrell, D-N.J., said they would not be opposed to an executive order but also said they prefer legislation. “While we are encouraged by support from the Biden Administration on this issue and have encouraged executive action,” they said, “we continue to believe that statutory provisions, like the [National Critical Capabilities Defense Act (NCCDA)], are essential to safeguard our Nation’s critical capabilities, national security, and American workers.”

But before any outbound investment screening measure can be included in the NDAA, Toomey said, the bill’s scope needs to be clarified. He said he plans to formally recommend a “set of principles to guide the creation of any outbound investment regime,” including one that would limit the regime’s jurisdiction to cover only direct U.S. investments in Chinese entities that are manufacturing, producing, developing or testing a technology that would normally require a U.S. export license.

He urged Congress and the administration to “proceed very carefully,” saying a new investment screening mechanism could be used as a trade protectionist tool and discourage foreign and domestic investment. “Creating a flawed outbound investment regime would undermine our economic leadership,” Toomey said. “After all, why would you start a firm in the U.S. if you knew that doing so would risk precluding you from investing in China, the second-largest economy in the world?”

Toomey also questioned the argument made by some administration officials that the regime would help close a gap in export controls. “In the words of National Security Adviser Jake Sullivan, it would capture outbound investments that, and I quote, ‘circumvent the spirit of export controls,’” Toomey said. “Well, the inherent problem with Mr. Sullivan invoking the spirit of export controls is it's hard to define a spirit. And therefore it could be subject to expansive and varying interpretation.”

Cornyn agreed that the U.S. shouldn’t “overreach,” stressing that “trade and investment with China must continue and it will continue.” He also said the mechanism should be “targeted” and operate as a “scalpel” instead of a “sword.”

“No one's suggesting that we decouple entirely,” Cornyn said, “but we do need to look at this with our eyes wide open.”