Last night, the Senate overwhelmingly adopted a proposal by Senators John Cornyn (R-TX) and Bob Casey (D-PA) to require covered U.S. entities to notify the Department of Treasury 14 days prior to and 14 days after making investments in sensitive technologies in China, Russia, Iran, and North Korea. The Cornyn/Casey language, called the Outbound Investment Transparency Act, was added to the Senate’s FY24 National Defense Authorization Act (NDAA) by a vote of 91-6. The “no” votes were Senators Blackburn (R-TN), Braun (R-IN), Lee (R-UT), Paul (R-KY), Sinema (I-AZ), and Tillis (R-NC).
Specifically, the amendment covers acquisitions, debt obligations, subsidiaries, joint ventures, and “know how” (technology transfers, board representation, business services) in the following sensitive technologies:
- Advanced semiconductors and microelectronics;
- Artificial intelligence;
- Quantum information science and technology;
- Satellite-based communications; and
- Networked laser scanning systems with dual-use applications.
NDAA Conference Report
Once the Senate passes the NDAA, the Cornyn/Casey amendment will be a conference-able item between the House and Senate. As the first standalone vote on outbound investment in years, this is a significant development in the ongoing China public policy debate. At its core, the debate revolves around whether (and how) to economically de-couple the United States and our allies from China without impeding legitimate investment, as well as deterring the national security and military threat presented by the Chinese Communist Party (CCP) and its intertwining with Chinese companies.
It is an open question whether outbound language will emerge from the NDAA conference committee process. House Financial Services Committee (HFSC) Chairman Patrick McHenry (R-NC) is skeptical to the creation of an outbound investment regime, having sent multiple letters to the Biden Administration opposing the idea. Put simply, McHenry does not believe the U.S. can “beat” China by becoming more like the CCP (i.e., adoption of “big brother” public policy). Accordingly, the House FY24 FSGG Appropriations bill blocks funding for implementation of any outbound investment executive order (EO).
At the same time, many national-security focused House Republicans, including House Select Committee on the CCP (“China Select Committee”) Chair Mike Gallagher (R-WI) and House Foreign Affairs Committee Chair Michael McCaul (R-TX), support Senator Cornyn’s general position and would prefer to go further in blocking investments to China.
The House Parliamentarian will litigate which House committees have jurisdictional claims over the NDAA conference. Given the Senate’s adoption of the Cornyn/Casey language, we would expect HFSC to be named a secondary committee to the conference, thereby giving McHenry two majority party members of HFSC on the conference committee. Thus, despite the strong Senate vote, it is far from a foregone conclusion that the outbound investment language will emerge from the final NDAA conference.
But even without the Cornyn/Casey language included, the NDAA is already serving as a viable vehicle for China deterrence policy, as highlighted by the China Select Committee. Expect NDAA as a year-end legislative vehicle to be a prime target for any China-related policy pushed by lawmakers.
Regardless of the outcome of NDAA policy, we do expect the Biden Administration to finally issue an EO this August, establishing an outbound investment review regime, similar to the already existing Committee on Foreign Investment in the United States (CFIUS). While the Administration has some leeway in the creation of a new review mechanism, they would be bolstered in terms of resources and effectiveness by the Congress establishing (and potentially funding) the regime in statute. Congress-especially Chairman McHenry-is sure to quickly exercise vigorous oversight over implementation of the EO.
China Select Committee
At the same time, the China Select Committee is moving from an educational phase to a more tangible investigatory phase. Previous hearings by the Committee have included outside experts and witnesses who have highlighted abuses by the CCP, the risks associated with doing business in China, and problematic U.S. investments in the People’s Republic of China (PRC).
Following the August Recess, we expect the China Select Committee to begin calling as hearing witnesses those doing business with the CCP and in the PRC writ large. Already, the Select Committee has launched an investigation into U.S. venture capital firms funding PRC companies. Future hearings could include witnesses representing:
- Financial firms and asset managers;
- State and local pension limited partners (LPs); and/or
- Those with passive investments.
In addition to the risks of U.S. firms doing business in China (e.g., forced data transfers, criminalization of consulting and diligence), the China Select Committee is likely to scrutinize funds that utilize capital from-or partner with-the China Investment Corporation (CIC). In fact, Chairman Gallagher has already coordinated with the House Education and the Workforce Committee and Chair Virginia Foxx (R-NC) to take a greater look at the investment strategies of U.S. pension funds.
As such, there is particular risk for those firms involved in joint ventures, especially when U.S. taxpayer subsidies are used (e.g., Detroit-related industries). In other words, there will be significant pushback from lawmakers on U.S. manufacturing that is being funded by the CCP’s sovereign wealth fund. This will also include foreign ownership of U.S. land and the potential for CFIUS to review these purchases (see: land owned near Travis Air Force Base).
OUTLOOK/ANALYSIS. U.S. policy towards the CCP and the PRC is reaching a tipping point. The FY24 NDAA will serve as a catch-all vehicle for many of the proposals that have been bipartisan and bicameral to date, and potentially those yet-to-be voiced. Further, the political risk of U.S. firms doing business in the PRC or with CCP capital is growing exponentially. Such firms can expect a heightened level of scrutiny by the Administration and to potentially be investigated by the China Select Committee (called as witnesses or subpoenaed for documents).