WASHINGTON — Amid concerns from U.S. lawmakers and the Pentagon that China is “weaponizing” investment in early-stage technologies, Congress is considering legislation aimed at sealing regulatory gaps.
Sen. John Cornyn, the Senate’s No. 2 Republican, is poised to introduce a bill to modernize and broaden the reach of the Committee on Foreign Investment in the United States, or CFIUS, a secretive, interagency panel that screens foreign investment in the U.S. economy to safeguard national security.
China has been able to circumvent the committee by investing in early-stage technologies that are potentially critical to the military. The trend, which is setting off alarm bells as both an economic and national security threat, has been detailed in an unreleased Pentagon report.
The Senate Armed Services Committee has meanwhile advanced its 2018 defense policy bill with language to order the secretaries of defense, state and treasury to develop plans to better screen foreign investments with potential impacts on U.S. national security.
Neither the SASC’s nor Cornyn’s proposal names any countries, but Cornyn has highlighted China as “the most aggressive.”
The proposals come amid broader questions of whether the White House will make good on U.S. President Donald Trump’s protectionist, America-first campaign rhetoric and whether that would create a backlash for U.S. defense firms that rely on exports to overseas markets. Many U.S. defense firms use international sales to keep production lines viable and drive down costs domestically.
Concurrently, the administration has attempted to both renegotiate the U.S.-China trade relationship and seek Beijing’s help to crack down on North Korea’s nuclear missile program. Trump has in recent days inched toward possible tariffs or trade restrictions to punish China for its theft of U.S. intellectual property.
Beijing, meanwhile, has rocked Western companies with the launch of its Made in China 2025 plan, which aims to use state funds to turn China into a self-sufficient tech superpower dominant in semiconductors, robotics, smart sensors, aerospace and other technologies.
There’s concern that technologies invented in the U.S. might fuel that rise. Chinese investment in acquisitions, new operations and expansions in the U.S. jumped to $46 billion in 2016, more than three times the previous record in 2015, according to a report by the Rhodium Group.
The Pentagon report, detailed by Cornyn, warned that China is taking advantage of America’s open market to invest in U.S. firms under the radar, all to close the technological gap with the U.S. It’s unclear how widespread the tactic is, but Chinese firms are said to be supplying early seed money to tech startups, which offers access to new technologies instead of a controlling interest.
Though the Pentagon has a 2-year-old effort to invest in startup tech firms, the Defense Innovation Unit Experimental, the military typically does not invest in this way — and the concern is it is being outflanked.
“Most of what China wants to invest in is leading-edge U.S. technology that’s key for our future military capabilities,” Cornyn, of Texas, said at an event in June to announce his bill. “Unless the trend line changes, we may one day see some of these technologies incorporated in China-made equipment that could be used against our own country in the event, heaven forbid, of a military conflict.”
The draft legislation would expand CFIUS’ jurisdiction to review both noncontrol transactions and overseas joint ventures that result in access to U.S. technology. It proposes a tiered system, with heightened scrutiny for countries of special concern — likely China and Russia.
CFIUS reform, Cornyn said, has the support of the intelligence community as well as the secretaries of defense, commerce and treasury.
Treasury Secretary Steven Mnuchin has, in public remarks, urged legislative fixes for CFIUS, while Commerce Secretary Wilbur Ross has specifically expressed concern for protecting the U.S. edge in semiconductors from China. (The Obama administration acknowledged cutting-edge semiconductor technology as critical to defense systems and U.S. military strength.)
Defense Secretary Jim Mattis told a Senate Armed Services Committee hearing earlier this year that CFIUS is “outdated” and “needs to be updated to deal with today’s situation.”
A Center for Strategic and International Studies report last year, however, stopped short of recommending an overhaul. It concluded that CFIUS is working, but complex, cross-border ownership structures are making it difficult to identify the origin of investments, fueling the perception of risk.
One of the report’s authors, Andrew Hunter, a former Pentagon acquisition official and congressional staffer, said there is legitimate concern with China. However, he warned that expanding mandatory reporting requirements could saddle industry and swamp an already backlogged CFIUS.
“There’s an easy possibility that the government gets overwhelmed and not only might they miss transactions that need government scrutiny, and they may have to extend the length of these investigations,” Hunter said. “You could have a lot more deals that fail because of the extended time frame.”
The White House in July ordered a broad review of the U.S. defense-industrial base and supply-chain resiliency to suggest steps to strengthen it. Earlier in the year, it launched an investigation into whether foreign imports of steel compromise U.S. national security, a move that was viewed as a step toward cracking down on China’s unfair trading practices and protecting defense needs.
On Aug. 14, Trump authorized United States Trade Representative Robert Lighthizer to investigate state-backed theft by China of intellectual property from American technology and defense companies. The White House estimates intellectual property theft costs the U.S. economy $600 billion per year.
That probe will reportedly focus on Beijing’s practice of forcing U.S. companies that seek market access in China to partner with local firms to hand over of proprietary technological secrets, which is deemed unfair.
Seeking to outdo Trump and perhaps play to Rust Belt voters, Senate Democrats earlier in the month introduced a trade agenda that includes an American Jobs Security Council, like CFIUS, to review foreign investments in American companies for their economic impact — as opposed to their national security impact.
“China is trying to buy up our best robotics companies, our best American intelligence companies — Hollywood,” Senate Minority Leader Chuck Schumer, D-N.Y., said at an Aug. 2 news conference. “They’re rapacious, they do not play by the rules and we sit there.”
Joe Gould is the Congress and industry reporter at Defense News, covering defense budget and policy matters on Capitol Hill as well as industry news.