Congress Should Play Role in New Outbound Investment Limits, Experts Say

U.S. lawmakers should finish pending legislation to restrict outbound investment to China so it doesn't leave the job of controlling such capital flows solely to the executive branch, a congressionally mandated commission heard last week.

While the Treasury Department, in response to an executive order, is drafting an outbound investment rule and expects to finalize it by year-end (see 2405080039), passing a law would make it harder to undo the restrictions and would give Congress a mechanism to conduct much-needed oversight, several experts told the U.S.-China Economic and Security Review Commission.

“We need something that’s durable,” said Derek Scissors, a senior fellow at the American Enterprise Institute. “Congress needs to do this.”

“The lack of any restrictions on outbound U.S. capital flows represents an unaddressed area of risk, one that Congress should move urgently to address,” said Emily Kilcrease, a senior fellow at the Center for a New American Security.

While Treasury’s draft rule would apply to certain technology sectors, lawmakers have been unable to agree whether their legislation should place restrictions on sectors or individual entities (see 2401180067). Foreign Affairs Committee Chairman Michael McCaul, R-Texas, said in January that lawmakers were seeking to reach a compromise between the two approaches (see 2401180067).

Scissors testified that he favors a sector-based approach because China “can easily move assets around from entity to entity.” Kilcrease told the commission she favors a combined approach. While entity-based restrictions require a lengthy process to implement, “they can provide an important complement to the technology-based prohibitions where the U.S. government has knowledge that a particular entity is acting in a manner contrary to U.S. national security and foreign policy interests,” she testified.

Scissors said Treasury has moved too slowly to implement the new restrictions and that he would prefer to have the Commerce or Defense Department take over. Kilcrease said multiple agencies should have a role but that she favors keeping Treasury in the lead because of its expertise in tracking financial intelligence.

Whichever agency ends up in charge, Scissors said, the list of regulated sectors should be reviewed periodically, such as every three years, because technology will change in ways that are difficult to predict. "What we think of as advanced AI today is going to change," he said. "What we think of as advanced chips has already changed." To ensure the new restrictions are followed, he favors "serious financial penalties" for those who willfully ignore them.

Kilcrease said that outbound investment restrictions are unlikely to be effective if implemented unilaterally. She recommended that the U.S. work closely with its foreign partners, including the EU, which is considering its own outbound investment rules (see 2401260060). Congress could use legislation to emphasize the importance of international engagement, she added.