July 20, 2022 | RealClearWorld

Momentum Grows for Scrutiny of Business in China

July 20, 2022 | RealClearWorld

Momentum Grows for Scrutiny of Business in China

Congress is debating government funding for the U.S. semiconductor industry. The scope of a bill remains in flux, but it may include guardrails to restrict funding for recipients’ activities in China.  

Another, broader congressional proposal to enhance government oversight of certain business activities in China that have a national security nexus has also gained traction. The White House signaled its support last week.  

These measures may be narrowed in the near term, especially as corporations in the semiconductor industry lobby to protect the status quo, but the signs from Washington are clear: Policy momentum for national security-based scrutiny of U.S. business and investment in China is growing and here to stay. That momentum is needed, given the threat posed by the Chinese Communist Party and the stakes for U.S. national security.  

One recent proposal in Congress provides an important policy roadmap to translate momentum into concrete policy action.     

On June 13, a bipartisan group in Congress – including Senators Bob Casey (D-PA) and John Cornyn (R-TX) and Representatives Michael McCaul (R-TX) and Rosa DeLauro (D-CT) – released discussion draft bill language that would empower the U.S. government to identify, review, and take action to address the risks posed by investments and other commercial activities in China and other countries of concern.  

The text is an update to the National Critical Capabilities Defense Act introduced in May 2021. It is an alternative to a similar but less targeted provision that was included in the House’s America COMPETES Act, which has been the subject of negotiations alongside the Senate’s United States Innovation and Competition Act of 2021.  

The June 13 proposal includes three important features oriented on U.S. national security and the threat from Beijing.  

First, a U.S. company’s or investor’s activities in China could trigger a government review when a transaction involves specific fields, industries, technologies, and supply chains critical to America’s prosperity and security. The types of transactions that would be reviewable include providing investment capital, which can empower Beijing no less than U.S. companies; basing critical operations in China; or selling technology to Chinese companies that could be weaponized against the United States.  

The proposed language is reasonably specific, in part to address criticisms from the business community that earlier versions of the legislation were overly broad and unfocused. And they confront this dangerous consequence the Defense Department’s innovation unit chief has described: “U.S. investments in these technologies developed in China fuel the ability [of the People’s Liberation Army] to gain a technology edge.”  

One sensitive technology the proposal would address is semiconductors, where China is racing to catch up with the U.S. and others. The proposal could enable review of American venture capital money funding China’s semiconductor companies; American companies’ semiconductor manufacturing equipment and tools supplying Chinese government-backed chipmakers; and American semiconductor companies basing operations in China.  

Second, the June 13 proposal gives the president latitude to block or mitigate problematic activities – not just to identify them, as others have suggested. For example, the Treasury Department floated a pilot program that entails a “notification only” approach that would require that companies and individuals making certain investments in China to notify the government of their action – end of story. That approach lacks teeth and should be viewed as the policy floor – not its ceiling.  

Imagine if the interagency body that currently reviews, vets, and in some cases blocks certain Chinese investments in the U.S. – the Committee on Foreign Investment Review in the United States – only required notification, and allowed deals threatening U.S. national security to move ahead without constraints. It would render the committee powerless.  

Lastly, the June 13 proposal removes the U.S. Trade Representative from the role of chairperson of the committee screening U.S. business activity in China, as earlier iterations envisioned. This makes sense, because the review mechanism should at its core be a national security function, not a trade one. The language includes a placeholder for the president or a designee (such as a cabinet secretary) without identifying one. The chair of the committee should ultimately be an executive branch entity with a primary focus on defense and national security. 

The key focus now should be on how U.S. companies and individuals doing business in and with China that may pose risks to America can work with policymakers to support the development of a credible national security screening system.  

The alternative for the private sector is to cast aside national security concerns and mobilize against action for the short-term benefit of retaining customers, supply chains, and investment ties in China. That position disadvantages America, it absorbs dangerous risk, and it is steadily losing ground. 

Maseh Zarif is director of congressional relations at FDD Action, a Washington, D.C.-based nonprofit and nonpartisan organization promoting U.S. national security and the defense of free nations. He previously served as a professional staff member on the U.S. House Homeland Security Committee advising on national security and foreign policy issues. Follow him on Twitter @masehz.

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