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White House wants transparency on American investment in China

National security adviser Jake Sullivan speaks at the White House on July 11. (Kevin Lamarque/Reuters)
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The Biden administration says it supports congressional action to require U.S. companies to notify the government before investing in critical sectors in China, endorsing in its first public statement on the matter a bipartisan push for transparency that pits business interests against national security.

After more than a year of debate, the White House has achieved a consensus among relevant government agencies on an approach to legislation that mandates notification but empowers the president to go further: to develop regulations restricting and even prohibiting what officials say would be a broad set of investments in a narrow range of sectors that it believes undermine national security.

The issue arises as the pandemic has thrown into relief Western reliance on Chinese suppliers for essential items such as surgical masks, ventilators and drug ingredients, and as concern rises in Washington about China’s military buildup and its efforts to overtake the United States and allies’ lead in critical technologies.

While the U.S. government screens foreign investments in American companies that may harm national security, it has no corresponding program to scrutinize U.S. investments in countries of concern, such as China. The fear is that such investments could aid China’s production of key technologies and weaken the United States, leaving the country dangerously reliant on Chinese imports.

After several years of false starts, a somewhat unlikely coalition of Democrats and Republicans in both chambers have drafted a proposal — with administration input — that would require U.S. companies to disclose plans to invest in advancing Chinese sectors, such as semiconductors, quantum technology, artificial intelligence, critical minerals and materials, and high-capacity batteries. The lawmakers also want to give the president authority to include “any other sector” he deems to be a “national critical capability” based on its significance to national security, according to a June 30 draft obtained by The Washington Post.

“The administration supports the bipartisan and bicameral effort in Congress to provide greater transparency on U.S. investment into China and other countries of concern, particularly for transactions in critical sectors that could undermine America’s national security by blunting our technological edge or undermining our supply chain resilience,” national security adviser Jake Sullivan said in a statement.

And if Congress passes notification legislation, “we also think it is important to have the ability to limit narrow classes of investments that raise national security concerns, using rulemaking that would engage a broad variety of stakeholders,” Sullivan said.

The legislation is called the National Critical Capabilities Defense Act. Drafters say the bill is critical to keeping factory jobs in the United States and preventing China from surpassing U.S. industry in emerging technologies.

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“From [masks and ventilators] to computer chips, the pandemic shined a spotlight on just how vulnerable U.S. supply chains are,” said Sen. Robert P. Casey Jr. (D-Pa.), a member of the Finance Committee who introduced the bill last year with Sen. John Cornyn (R-Tex.). “When we export American expertise and know-how to China, we are ceding our manufacturing power to foreign adversaries, hurting American families and our economy.”

But the effort faces head winds from free-market Republicans and the business community, who say it will hurt American competitiveness. “In order to compete in today’s economy, companies have to be able to invest internationally,” said John Murphy, senior vice president for international policy at the U.S. Chamber of Commerce.

“The idea that the U.S. government may start vetting how and where a business can invest is concerning,” Murphy said in an interview. “It’s potentially a completely new and onerous set of constraints on companies that do business globally.”

A vocal opponent is Sen. Patrick J. Toomey (Pa.), the top Republican on the Banking, Housing and Urban Affairs Committee, who has criticized the lack of public hearings on the legislation and the prospect of a new bureaucracy to screen investments. He also argues that existing export controls are adequate to address any issues.

“I have yet to be convinced that existing export-control laws are falling short,” Toomey said. “Moreover, I’m concerned that what may begin as ‘notification’ will soon evolve into a new federal agency with sweeping authorities to dramatically disrupt and halt the free flow of trade and investment, risking slower economic growth and higher prices for consumers.”

The legislation’s prospects, which appeared pretty good last month, have been caught up in a largely unrelated political tussle in the Senate over Democratic attempts to try to pass a scaled-down version of Build Back Better — President Biden’s package to lower health-care costs and fight climate change. If the Democrats proceed, Senate Minority Leader Mitch McConnell (R-Ky.) has vowed to scuttle a major bipartisan package of China legislation that includes the outbound-investment bill.

The threat of inaction, lawmakers say, is real. They point to the U.S. semiconductor software design leader Synopsys, which has invested in a Chinese chip manufacturing software firm Amedac. Such investment, they say, essentially fuels China’s capability to replace American chip design software. Synopsys told The Post it was a “small minority investor” in the firm, but corporate registration records show that it has a nearly 20 percent stake and is the single largest shareholder.

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Lawmakers note that U.S. tech giants such as Microsoft have set up labs in China devoted to artificial intelligence research and that Microsoft, for example, collaborated on “deep neural network” research with a Chinese military-run university that was on a Commerce Department export blacklist. But being placed on Commerce’s Entity List does not bar such research or American investment. “We really have nothing at this point in time that can deal with any outbound-investment issues,” said Emily Weinstein, research fellow at Georgetown’s Center for Security and Emerging Technology. Microsoft declined to comment.

The administration is worried about capital flow but also knowledge transfer, or what is sometimes referred to as “smart capital.” Silicon Valley’s Sequoia Capital, a prominent venture capital firm, and its affiliate Sequoia Capital China, have a “massive footprint” across China’s high-tech sector and venture capital industry, Weinstein said. Sequoia Capital China’s executives sometimes sit on the boards of firms they invest in. Lending that management expertise and credibility to companies trying to establish themselves in the global market is “huge,” she said.

Sequoia Capital stressed that its U.S. entity is run by American and European investors, while its Chinese entity is run by Chinese investors.

Over the past several months, the bill’s scope has narrowed from covering more than a dozen sectors to a handful. The types of transactions covered, meanwhile, now also include joint ventures and “greenfield” investments in which a U.S. company opens a facility overseas, according to the draft.

Proponents say the effort is necessary precisely because the Commerce Department has failed to act. In 2018, Congress directed that the agency impose controls on exports of foundational and emerging technologies to China.

“The expectation was we would be seeing export controls in these areas,” said Matt Turpin, a National Security Council China director in the Trump administration. “Commerce has had four years to act with little to show for it.”

Jeanne Whalen contributed to this report.

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