Former DOD Official Calls for More Industry Input on Trade Controls, Expects Outbound Tool in June

U.S. export controls and investment restrictions can successfully maintain America’s lead over China in sensitive technologies, including semiconductors, said Michele Flournoy, a former Defense Department official. But she also warned against policies that could push the U.S. toward decoupling from Beijing, saying the government needs to do a better job working with industry to craft the restrictions.

“We really need a higher level and more candid level of dialogue between government and industry, because there’s so much uncertainty,” Flournoy, co-founder of WestExec Advisors, said during an event last week hosted by the Milken Institute. “There's continuing evolution in these export controls, in investment controls and various regulations in how we're going to manage this competition, and it needs to be informed by voices from industry.”

The U.S. in October released new export controls on semiconductor-related items and activities involving China, and is considering a new outbound investment screening mechanism that could seek to close loopholes used by Chinese companies to acquire sensitive chip technologies (see 2304270066 and 2209140041). Flournoy said the controls and outbound investment restrictions -- which “we anticipate coming out in June” -- can help the U.S. “actually create a gap where it will take them years” to catch up. They will allow the U.S. to “prevent those advanced chips from enabling [China] to have a big leap forward in their military capability.”

“What we're aiming for is to retard their indigenous development of chips at the high end,” she said, “and this is one of the few technology areas where there is enough of a differential that we can.”

But she stressed that the restrictions need to be created with input from U.S. companies so they don’t unintentionally cut off economic ties that advantage U.S. innovation. Chip industry officials have made similar comments, saying the U.S. should have given industry more time to review its new chip controls before they were published in October (see 2212140038).

Flournoy specifically urged caution surrounding any potential outbound investment restrictions “because we could overplay this in a way that shoots us in the foot.”

There's “a lot of Chinese capital” in Silicon Valley,” she said, and the U.S. should be concerned about Chinese investments that could give Beijing access to sensitive intellectual property or controlling interest over an important American technology company. “But if it's just blood in the bloodstream, and they're a shareholder like anybody else, and it's money for our innovators but it doesn't advantage the Chinese, I personally think that's fine,” she said. “So we have to be really thoughtful and really careful about where and how we disentangle.”

Kevin Rudd, Australia’s ambassador to the U.S., made similar points, saying trade restrictions are a “complex Rubik's Cube” and shouldn’t be implemented in a way that leads to a “complete ban.” The U.S. should look to “de-risk as opposed to decouple the relationship,” Rudd said, echoing comments made by European Commission President Ursula von der Leyen in March (see 2303310036).

That de-risking strategy should only apply to U.S. exports involving “explicit national security” concerns, Rudd said. It also “places the United States in the mainstream of what is now the officially embraced policy of the European Union,” he said. “They will support the United States based on this approach,” but will “find it much harder on the broad decoupling front, as will a whole large slab of American industry.”

Rep. Michael McCaul of Texas, the top Republican on the House Foreign Affairs Committee who has been critical of the U.S. export control policies, called for a stronger approach to restricting technology shipments to China. He added that he has had “good talks” with Commerce Secretary Gina Raimondo, whose agency oversees dual-use export control regulations, but said more needs to be done.

“Export controls is what I'm very focused on, and I have jurisdiction over that,” said McCaul, who has vowed to conduct a review of the Bureau of Industry and Security's export control policies and procedures this Congress (see 2210030068, 2301190055, 2301300052 and 2302210010).

“We have to stop exporting and selling them the very technology they can put in their most advanced weapon systems, that then they could turn against us,” he said. “That's a policy that I think most Republican and Democrat Americans can agree with.”