Former Officials Say US Needs Outbound Investment Reviews, but Should Be Cautious

Although former national security officials agreed that the U.S. should consider outbound investment review restrictions, they panned a congressional proposal that would have granted a new interagency committee “sweeping” power to restrict capital flows to China. Speaking during a House Financial Services Committee hearing this week, some of the former officials said Congress should rethink the proposal and also urged the Biden administration against issuing a unilateral executive order to establish an outbound investment review regime.

“We should stay focused on national security and avoid a bureaucratic supply chain mechanism like the National Critical Capabilities Defense Act,” said Clete Willems, a National Security Council official during the Trump administration, referring to the outbound investment review bill unveiled in 2021 (see 2209290043). Willems called the legislation, which would have created a Committee on National Critical Capabilities to review those investments, “the kind of bureaucratic mechanism that we often see out of Beijing.”

"I think we need to be surgical and crack down on the kinds of capital flows that could contribute to their military, but we shouldn't be telling every single private sector company what they can and cannot do,” said Willems, now an Akin Gump lawyer. “And we should not be overly broad in the way that we handle that issue.”

The initial proposed version of the Committee on National Critical Capabilities would have had broad authority to screen investments and had “undefined” terms that would have complicated implementation, said Thomas Feddo, the former head of Treasury Department’s Investment Security Review Office, which oversaw the Committee on Foreign Investment in the U.S. The bill would have left “substantial latitude to the executive branch,” Feddo said.

Later versions “were somewhat narrowed, but I believe more homework is necessary,” said Feddo, adding that the Biden administration also shouldn’t rush to establish a regime through its own executive order. “Doing so would be a mistake,” said Feddo, founder of Rubicon Advisors. He said “Congress is best suited to assess and respond to an issue of this complexity and potential scope and impact.”

The Biden administration is reportedly crafting an EO, but it appears to be leaning toward a more narrow investment screening mechanism than previously expected, prioritizing transactions involving quantum computing, artificial intelligence and semiconductor technology as opposed to a broader range of critical and emerging technologies (see 2301120035 and 2301190024).

Peter Harrell, who recently left the National Security Council, agreed that the U.S. should establish an outbound investment review regime, but it should be “narrowly targeted” to review a “small number of U.S. investments in China that could facilitate Chinese technological capabilities and undermine U.S. national security.”

Harrell in September said outbound screening could help fill certain gaps in semiconductor-related export controls (see 2209140041). “When we're investing in semiconductors here, and we are limiting exports of a semiconductor company to China, but U.S. companies can still invest in a Chinese semiconductor company to help that company develop its own technology, there's clearly a gap in the regime,” Harrell said during the hearing. “I think we need a narrowly targeted regime with the authority to close those kinds of gaps that we have in our national security apparatus currently.”

Feddo said there should be “no dispute” that the U.S. needs to try to better prevent Chinese “misappropriation” of sensitive technology. “The question is whether a new and potentially far-reaching bureaucracy is the answer,” Feddo said, adding that he feels as if the “debate has taken on a presumption that outbound screening is necessary.” He said “decision makers would benefit greatly by not rushing into a solution. Additional hearings should be held to define objectives and determine costs and benefits.”

Willems said the U.S. can already take steps to increase its investment restrictions on China without a new outbound screening regime. He said the U.S. should expand restrictions applied to the various U.S. lists of Chinese military companies, such as those maintained by the Treasury Department -- a proposal outlined by researchers with Georgetown University’s Center for Security and Emerging Technology this month (see 2302030023).

Current investment restrictions only apply to public securities, but they also should apply to all private investment, Willems said. The restrictions also only apply to a “limited subset of sectors within China,” including the surveillance technology industry. “There may be national security threats in other sectors, and we need to be able to look at those as well.”

Rep. Andy Bar, R-Ky., introduced a bill this month that would require the administration to impose financial sanctions on Chinese companies subject to those investment restrictions (see 2302060005). He also said he wants to expand the bill to broaden the types of Chinese companies that can be subject to those restrictions, including firms with ties to artificial intelligence or other dual-use technologies.