House Lawmakers Disagree on Best Way to Impose Chinese Investment Restrictions

The House Foreign Affairs Committee is renewing a push to pass a bipartisan bill that could expand the Treasury Department’s upcoming outbound investment prohibitions to cover more Chinese technology sectors and additional countries. But some lawmakers disagree on the best way to scope U.S. investment restrictions under the bill, arguing that they should be imposed through individual sanctions on specific entities rather than on whole technology industries.

Supporters of the bill, including both committee chairs and former Biden and Trump administration officials, say a sector-based approach to outbound investment restrictions would be easier for the Treasury Department to implement, would be more difficult for Chinese companies to evade, and would lead to less strain on industry compliance departments. But at least two Republicans on the committee said company-specific financial blocking sanctions would be more powerful and would force non-U.S. businesses to also cease certain investments in those companies.

“I think the question is: What's most effective?” said Committee Chair Michael McCaul, R-Texas, speaking during a committee hearing this week. “I'm not saying that sanctions aren't an effective tool,” but “I think the sector-based approach is going to be a more effective way to capture capital flow and investment.”

McCaul and Rep. Gregory Meeks, the committee’s top Democrat, said they will be pushing the House to pass the Preventing Adversaries from Developing Critical Capabilities Act, a bill advanced by the committee in November that would require the Biden administration to place investment prohibitions on China’s hypersonics and supercomputing sectors along with the three other industries Treasury is considering: semiconductors, artificial intelligence and quantum technology (see 2311140013). The legislation would also require those restrictions to cover investments in Russia, Iran and North Korea.

Although the administration is still drafting those rules, Meeks said that doesn’t mean Congress is “off the hook.” Lawmakers need to create a “statutory framework” for sector-based restrictions so they can’t be easily undone by a future administration, Meeks said, and give the government more resources to implement the restrictions. He also said the restrictions shouldn’t be so strict that they harm “global capital flows and the United States’ preeminent position in global financial markets.”

The Preventing Adversaries from Developing Critical Capabilities Act does that, he said. “It is the most effective and robust legislative solution.”

McCaul agreed, calling the bill “one of the most important steps this committee has taken to protect U.S. national security and counter” China. “We plan to get this bill signed into law,” he said. “We cannot wait.”

Former officials from both Democratic and Republican administrations voiced support for the bill, including Matt Pottinger, a deputy national security adviser during the Trump administration. He said a sectoral approach to investment restrictions would be “less resource intensive” because Treasury wouldn’t have to actively scour Chinese industries for firms that should be subject to an investment ban. He called that a “gargantuan task.”

“The idea is that you don't have a barn full of analysts -- God bless them -- over at Treasury” looking for new sanctions targets, said Pottinger, chair of the China Program at the Foundation for Defense of Democracies. “That Treasury team is getting spread very, very thin.”

He also said compliance departments would struggle to keep up with a host of new individual investment sanctions, partly because it can be difficult to gather information about corporate ownership structures in China. A sector-based approach is “just much more clear cut,” Pottinger said. “It allows for the compliance teams at various American financial institutions and investment funds to simply adjust and not to get caught in this very complex web of subsidiaries and shell companies.”

Peter Harrell, a former National Security Council official with the Biden administration, made similar points, saying that requiring the U.S. government to “know upfront every Chinese firm that's problematic” would be a “virtually impossible task.” If the U.S. just targets “one or two firms,” Harrell said China’s response will be: “We’ll just galvanize all the other firms in this sector to do what that firm can no longer do.”

He also said restrictions focused only on a handful of technology sectors -- as opposed to individual companies -- will be easier for the U.S. to implement, although it will still be challenging. “There is going to be a learning curve, a need for agencies and companies to build expertise, and a risk of unintended consequences,” said Harrell, a non-resident fellow at the Carnegie Endowment for International Peace.

He said legislation “along the lines” of the Preventing Adversaries from Developing Critical Capabilities Act would “strengthen and expand” on the Biden administration’s initial executive order released last year (see 2308090066 and 2310050035).

“I do think it's very important for Congress to act here,” Harrell said. “I think what the administration has done, while an important start, is not sufficient to meet the challenge.”

Several Republicans said they weren’t yet convinced, including Rep. Warren Davidson, R-Ohio, who said existing U.S. sanctions regimes “work pretty well. … I think that's the right way to solve the problem.”

Rep. Andy Barr, R-Ky., said he disagreed with the suggestion “that a sector-based approach is quite stronger than an entity-based sanctions approach.” He said sector-based outbound investment prohibitions may not have much of an impact on Chinese military companies that are subsidized by Beijing, and it wouldn’t stop those Chinese companies from earning revenue by selling their goods globally.

But full blocking sanctions under Treasury's Specially Designated Nationals List would have a “multilateral, extra-jurisdictional effect” that would cut off that company from earning revenue through most global financial markets, Barr said. “This is why I think we ought to not just dismiss this entity-based approach.”

Pottinger agreed that blocking sanctions may be more powerful, but he said implementation would be challenging. He asked: “How do you incentivize the Department of Treasury to really apply those” sanctions?

Barr pointed to his Chinese Military and Surveillance Company Sanctions Act, a bill advanced by the House Financial Services Committee in September that would require the administration to make annual determinations on whether sanctions should be applied to companies subject to existing U.S. investment restrictions, among other measures (see 2309200052).

And even though he acknowledged that companies can create shell companies to evade individual sanctions, Barr said the Office of Foreign Assets Control is “particularly equipped, in conjunction with the intelligence community, to continue to adjust those sanctions.”

Barr said he and McCaul have had “many discussions on this,” and the committee is also working with the House Financial Services Committee on the issue. He said he doesn’t believe the sector-based approach and the entity-based approach “are necessarily incompatible,” adding that “we're working on potentially marrying both approaches.”

McCaul said he’s “not opposed to sanctions. It's just that we have to have a compromise.”

He added: “You can take the best of both, perhaps, and that's precisely what we're working on.”