[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EVALUATING CFIUS: CHALLENGES POSED
BY A CHANGING GLOBAL ECONOMY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 9, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-67
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Monetary Policy and Trade
ANDY BARR, Kentucky, Chairman
ROGER WILLIAMS, Texas, Vice GWEN MOORE, Wisconsin, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan BILL FOSTER, Illinois
ROBERT PITTENGER, North Carolina BRAD SHERMAN, California
MIA LOVE, Utah AL GREEN, Texas
FRENCH HILL, Arkansas DENNY HECK, Washington
TOM EMMER, Minnesota DANIEL T. KILDEE, Michigan
ALEXANDER X. MOONEY, West Virginia JUAN VARGAS, California
WARREN DAVIDSON, Ohio CHARLIE CRIST, Florida
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
C O N T E N T S
----------
Page
Hearing held on:
January 9, 2018.............................................. 1
Appendix:
January 9, 2018.............................................. 37
WITNESSES
Tuesday, January 9, 2018
Blair, Dennis C., Co-Chair, The Commission on the Theft of
American Intellectual Property, and former Director, National
Intelligence, National Security Council........................ 9
Hunter, Rod, Partner, Baker & McKenzie LLP, and former Special
Assistant to the President and Senior Director, National
Security Council............................................... 11
Kassinger, Hon. Theodore W., Partner, O'Melveny & Myers LLP, and
former Deputy Secretary, U.S. Department of Commerce........... 10
Kennedy, Scott, Director, Project on Chinese Business & Political
Economy, Center for Strategic & International Studies.......... 7
Scissors, Derek M., Resident Scholar, American Enterprise
Institute...................................................... 5
APPENDIX
Prepared statements:
Blair, Dennis C.............................................. 38
Hunter, Rod.................................................. 43
Kassinger, Hon. Theodore W................................... 49
Kennedy, Scott............................................... 55
Scissors, Derek M............................................ 63
Additional Material Submitted for the Record
Blair, Dennis C.:
Responses to questions for the record from Representatives
Moore and Posey............................................ 75
Hunter, Rod:
Responses to questions for the record from Representative
Moore...................................................... 81
Kassinger, Hon. Theodore W.:
Responses to questions for the record from Representative
Moore...................................................... 82
Kennedy, Scott:
Responses to questions for the record from Representative
Moore...................................................... 84
Scissors, Derek M.:
Responses to questions for the record from Representatives
Moore and Posey............................................ 86
EVALUATING CFIUS: CHALLENGES POSED
BY A CHANGING GLOBAL ECONOMY
----------
Tuesday, January 9, 2018
U.S. House of Representatives,
Subcommittee on Monetary Policy and Trade,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn House Office Building, Hon. Andy Barr
[chairman of the subcommittee] presiding.
Present: Representatives Barr, Williams, Lucas, Huizenga,
Pittenger, Love, Hill, Emmer, Mooney, Davidson, Tenney,
Hollingsworth, Hensarling, Moore, Sherman, Green, Heck, Kildee,
Vargas, and Crist.
Also present: Representative Posey.
Chairman Barr. The committee will come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time, and all members will have
5 legislative days within which to submit extraneous materials
to the Chair for inclusion in the record.
This hearing is entitled, ``Evaluating CFIUS: Challenges
Posed by a Changing Global Economy.''
Without objection, the gentleman from Florida, Mr. Posey,
is permitted to participate in today's subcommittee hearing.
Mr. Posey is a Member of the Financial Services Committee, and
we appreciate his interest in this important topic.
I now recognize myself for 5 minutes to give an opening
statement.
Napoleon famously said that an army marches on its stomach,
meaning if it ran out of provisions, an army would quickly
cease to be useful. To paraphrase that line, an economy marches
on investment. And for that reason, the American economy always
has welcomed foreign as well as domestic investment.
But with increasing globalization has come an increased
velocity of international investment and developing economies
with geysers of money to invest, and, in turn, that has brought
some caution to our welcoming posture. In 1975, concerned that
barrels of petrodollars would distort the economy, President
Ford created a multiagency panel to monitor foreign investment.
In 1988, concerned that Japanese yen were flooding the United
States, President Reagan signed legislation that gave him the
authority, working through that panel, to actually block a
foreign investment that threatened national security. Ten years
ago, in the aftermath of the first big wave of terrorism,
Congress upgraded the panel's enabling legislation again.
Now, a new tide of money has hit the U.S. shores, but it
comes from China, which many fear is not merely a business
competitor that plays hard ball harder than most but, is
actually, a threat to national security.
To that end, our colleague Robert Pittenger and Senator
John Cornyn have undertaken a yearlong study of that
multiagency panel, the Committee on Foreign Investment in the
United States, known by its acronym as CFIUS, and proposed some
changes.
To evaluate the challenges posed by this new global
economic environment, the committee today is holding its second
hearing on CFIUS in less than a month--part of an effort that I
believe will consume much of the committee's hearing in the
first half of this year.
We are fortunate to have, as we did at our first hearing,
top-flight witnesses to discuss CFIUS operations and the
challenges it faces. We have a former Deputy Secretary of
Commerce, the former Director of National Intelligence, a
former Senior Staffer from the National Security Committee, and
two top economists from a pair of the elite think tanks in this
country.
One theme we will discuss today is perhaps at the center of
how we should consider any changes: Can we precisely define the
technologies or ideas or techniques we need to protect, and can
we find ways to protect them without unnecessarily affecting
other flows of capital or creating an investment scrutiny
regime so onerous that good money just decides to go somewhere
else? Could we inadvertently make the U.S. investment climate
so difficult that even U.S. companies move their research and
development efforts--the labs that create the innovations that
have kept our economy strong and vital for so many decades--to
other countries, even to China? With the best intentions, could
we do CFIUS reform that fails to improve U.S. national security
or, worse, enact reforms that will make the American people
less safe than when we started?
I believe Congress can achieve the opposite. I believe we
can modernize the CFIUS review process so that it better
addresses security threats while avoiding undue harm to U.S.
business at home or to its efforts to compete abroad. And I
believe that with enough effort we can do that relatively
quickly, even in what is likely to be a hard-fought election
year, because protecting national security and protecting U.S.
economic interests are bipartisan goals we always have been
able to work together on productively.
As evidenced by the first CFIUS hearing this committee held
less than a month ago, members are engaged on the issue,
educated about the process, and already working on solutions.
And I am hopeful, confident even, that we will be successful in
crafting an approach that will get to the President's desk
before the August work period. That is going to take a lot of
work here and in the U.S. Senate, and it is going to require a
lot of input from outside voices interested in a successful
outcome, but I believe it is achievable and that it must be
achieved. And I am anxious to get to work.
Again, I would like to recognize the work of our colleague
Mr. Pittenger and for his leadership on this issue.
With that, I yield back the remainder of my time and yield
to the Ranking Member for an opening statement.
Ms. Moore. Thank you so much, Mr. Chairman, and thanks to
our distinguished panel for appearing here today. I wish
everyone a happy new year.
I just want to start out by agreeing with the chairman that
this is definitely a bipartisan issue. While on one hand we
want to make sure that we become the destination of choice for
foreign investment, we want to make sure that we don't allow
our open borders with regard to investment to make us prey to
technological attacks and other attacks on our country.
And we look forward to hearing from our distinguished panel
here today about how we can achieve those reforms to CFIUS that
wisely balance the need to protect our national security and
other interests without needlessly cutting off the benefits
that can be gained from foreign direct investment. And
undergirding this debate are a variety of national security
concerns, including countries attempting to use foreign direct
investments in our country to access sensitive technologies.
It has been over a decade since Congress last acted in
response to concerns about the CFIUS process. I am most
familiar with the DP World debacle, but the world has changed
considerably even in the last decade. The last time we
addressed this issue, it was through strong bipartisan
legislation that came out of this committee, and I hope that
this is the route we are going to take. It is going to really
require that. And we have seen that that is what is occurring
so far.
As we consider what new authorities may be needed to
address the modern-day threats, I do want to point out that
this subcommittee's previous hearing, the one we just had, the
witnesses agreed that the greatest challenge facing CFIUS today
is, Mr. Chairman, the lack of resources available to the
Federal agencies to do thorough and extensive investigations
and reviews.
So, when we start thinking about standing up our national
security efforts, we can't always do it through a defense
authorization bill. Financial crimes are a peril to our
national security, and we need to fight for the resources to
protect these agencies. And I really look forward to a good
discussion on the key issues that we need to keep in mind as we
look to reform CFIUS.
At this point, I want to yield the balance of my time to
our Vice Chair of the full committee, Mr. Kildee.
Mr. Kildee. Thank you to the Ranking Member and to the
chairman and to the witnesses for being here today, our second
hearing in as many months aimed at evaluating the operations
and challenges that CFIUS faces.
CFIUS plays an extremely important function in the area of
national security. Congress has an important responsibility to
ensure that CFIUS is balancing the benefits of our
traditionally open investment climate with the requirement to
protect U.S. national security.
Given that we have not formally reviewed the CFIUS process
in over a decade, in the evolving threat environment with
respect to certain kinds of foreign investment, I appreciate
the chairman's intention to hold this series of hearings in the
coming weeks so that members can assess not only the challenges
that CFIUS faces but also determine an appropriate set of
policy responses.
A primary concern that we face, that I am particularly
challenged on, is the area of China's aggressive industrial
policy and their efforts to invest in early stage cutting-edge
U.S. technologies with potential military applications,
including artificial intelligence, robotics as well, in part to
advance China's military modernization and to diminish
America's technological advantage.
If China represents the biggest threat to U.S. security
with respect to foreign investment, I would argue that the
second-greatest threat is an underfunded and understaffed U.S.
Government. A serious problem facing CFIUS today is the lack of
resources. Even without expansion of authority, CFIUS already
has significant staffing and resource problems. As the volume
of cases and the complexity of transactions continue to
increase, along with the need for an aggressive use of
intelligence resources, any expansion of CFIUS authority,
absent additional resources, would not only jeopardize the
existing mission but would also undermine U.S. national
security.
And I know there are members working on legislation--Mr.
Heck, to my left, which is not something I often say, is
working on legislation--sorry, Denny--which would not only
address authority but would also provide a mechanism for
additional resources. So that is important legislation. It is
something that we need to seriously consider.
And I appreciate the panel's willingness to contribute--
Mr. Heck. Time.
Mr. Kildee. --And I yield back.
Chairman Barr. The gentleman yields back.
The gentlelady yields back. The gentlelady's time has
expired.
Today we welcome the testimony of several distinguished
witnesses, and we thank them for their participation in this
hearing.
And we look forward to your insights.
Dr. Derek Scissors is a Resident Scholar at the American
Enterprise Institute, where he focuses on the Chinese and
Indian economies and on U.S. economic relations with Asia. He
is concurrently Chief Economist of the China Beige Book. Dr.
Scissors is the author of the China Global Investment Tracker,
which shows China's investments throughout the world. Before
joining AEI, Dr. Scissors was a Senior Research Fellow in the
Asian Studies Center at the Heritage Foundation and an Adjunct
Professor of Economics at George Washington University. He has
worked for London-based Intelligence Research Ltd., taught
economics at Lingnan University in Hong Kong, and served as an
action officer in international economics and energy for the
U.S. Department of Defense.
Dr. Scott Kennedy is Deputy Director of the Freeman Chair
in China Studies and Director of the Project on Chinese
Business and Political Economy at CSIS, a leading authority on
China's economic policy and its global economic relations.
Specific areas of focus include industrial policy, technology
innovation, business lobbying, multinational business
challenges in China, global governance, and philanthropy. For
over 14 years, Dr. Kennedy was a Professor at Indiana
University. From 2007 to 2014, he was the Director of the
Research Center for Chinese Politics and Business. And he was
the founding academic director of IU's China office. From 1993
to 1997, he worked at the Brookings Institution.
Admiral Dennis Blair is Co-chair of the Commission on the
Theft of American Intellectual Property. He serves as a member
of the Energy Security Leadership Council and on the board of
the National Committee on U.S.-China Relations. From January
2009 to May 2010, he served as Director of National
Intelligence. During his distinguished 34-year Navy career, he
has served as Director of the Joint Staff and held budget and
policy positions on the National Security Council and has been
Commander in Chief of the U.S. Pacific Command. He has been
awarded four Defense Distinguished Service Medals and three
National Intelligence Distinguished Service Medals.
The Honorable Ted Kassinger is a partner in the Washington
office of O'Melveny & Myers, LLP. Ted joined O'Melveny in late
2005 after serving from 2001 to 2005 first as the General
Counsel and then as Deputy Secretary of the U.S. Department of
Commerce. Ted is a member of the Council on Foreign Relations
and of the U.S. Department of State's Advisory Committee on
International Economic Policy, which he formerly chaired.
Mr. Rod Hunter is a partner based in the Washington, DC
office of Baker McKenzie. He previously served as Senior
Director for International Economics at the National Security
Council, the White House office that coordinates international
trade policy and supervises national security reviews conducted
by the Committee on Foreign Investment in the United States,
CFIUS. In that role, he managed CFIUS cases, including
negotiating resolution of the most sensitive cases,
coordinating the Administration's legislative communications
and diplomatic outreach in particular cases, and developing the
Government's procedures for incorporating intelligence
agencies' assessments. He also served as Senior Counsel at the
U.S. Trade Representative's Office, where he litigated cases
before the World Trade Organization.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. Without objection, each of
your written statements will be made part of the record.
Dr. Scissors, you are now recognized for 5 minutes.
STATEMENT OF DEREK M. SCISSORS
Mr. Scissors. Thank you, Mr. Chairman.
As you mentioned, I am the creator of the China Global
Investment Tracker. I think that my contribution here is
primarily going to be to provide facts about Chinese investment
in the U.S. and around the world.
The tracker is every Chinese construction and investment
transaction globally, including the United States, worth $100
million or more since 2005. There are more than 2,700 of such
transactions. And our main contribution is you get to see all
of them. We don't tell you what the totals are and it comes out
of nowhere. You can see everything that we include, all of our
numbers. They are tagged by year. They are tagged by sector.
They are tagged by name of the company, so you can see if it is
a state company or a private company. So I urge you to utilize
that resource in the process of your work on CFIUS and other
issues involving China.
Some facts: Chinese investment in the U.S. fell about 50
percent in 2017. In 2016, it was in the $50 billion range;
2017, in the $25 billion range.
However, this hearing is focused on the globe. Globally,
Chinese investment rose mildly from a record-breaking 2016 to
about $185 billion globally last year. And the reason was that
private Chinese firms investing in the U.S. were stopped by the
Chinese government, but their investment was replaced by large
Chinese state-owned enterprises investing primarily in Europe.
I can go into detail, but that is the main event of 2017:
Less private Chinese investment in the U.S.; more state
investment in Europe. We can easily imagine security questions
that arise out of that change.
By sector, in the U.S., aviation led due to one large
purchase. Real estate was second. There was almost no
successful Chinese technology investment in the U.S. in 2017.
However, there were multiple Chinese purchases of U.S.
healthcare firms, which raises an issue that I think we are
going to talk about more: Personal data.
Again, there is a lot more information along those lines. I
do want to make some nonfactual points, but I urge you, if you
or your staff would have questions, we would be happy to help
answer them.
Point one I want to hammer home: State-owned enterprises
and private Chinese firms are different with regard to
economics. State-owned enterprises are heavily subsidized;
Chinese private firms usually are not. However, in my opinion,
with regard to national security and the rule of law, there is
no effective difference between Chinese state-owned enterprises
and private firms.
The reason is a private Chinese firm has no more recourse,
it has no more protection against the Communist Party than a
state-owned enterprise. So if a private Chinese firm has
technology or personal data of Americans that the party wants,
the party will get it. The private Chinese firm cannot protect
that data even if its intent is to do so. Not all data, not all
technology is important. But I don't think anyone should think,
in this room or outside, that private Chinese firms can protect
anything they acquire in the United States from the Communist
Party. They cannot.
That is a factual statement, I think. Now we are getting
into opinion, for sure.
There is an obvious split over what to do about CFIUS
between the economic community/business community on one side
and the national security community on the other side. I am
from the econ side. I like foreign investment. It increases
competition in the United States. It creates or supports jobs.
I don't think all infrastructure is critical and needs to be
protected from foreign competition, but I have watched Chinese
investment since 2005, and the sophistication of both the firms
and the government is still growing now. They will be better
this year than they were last year or the year before in
acquiring, coercing, stealing, and using technology, whether
American, European, or otherwise.
There has long been a risk, as Admiral Blair knows
extremely well, to our intellectual property (IP). There is now
a risk to personal data, as Chinese companies try to buy U.S.
firms which hold Americans' personal data.
What can we do about this, in my last minute? We need to be
transparent. In my opinion, for the foreseeable future, China
is the threat. I don't like the language in some bills that
talk about ``critical countries'' or ``countries of special
concern.'' We are talking about China here. Don't put other
countries in the crossfire.
It has already been mentioned repeatedly, and I agree
wholeheartedly, that we need to devote resources to this
problem. Loss of technology could come back to harm the U.S. in
national security terms in a huge way. It is a small investment
to try to limit that now.
I want action to be taken yesterday, if I were in charge.
Our current rules have not been sufficient to stop the Chinese
from acquiring or coercing American technology. We cannot look
forward to ``well, we could do this better in the future'' or
``this could happen.'' We need to take substantive action
immediately, in my opinion.
Finally, there is a global element to this, and I encourage
U.S. global cooperation, but first we need to get our own house
in order. So let's do that first and then reach out to our
partners.
Thank you.
[The prepared statement of Mr. Scissors can be found on
page 63 of the appendix.]
Chairman Barr. Dr. Kennedy, you are recognized for 5
minutes.
STATEMENT OF SCOTT KENNEDY
Mr. Kennedy. Thank you, Chairman Barr, distinguished
members of the committee. I appreciate the invitation to appear
before you.
I have been asked to share my views about Chinese
industrial policy, trends in technology flows, and the
implications for American policy to limit diffusion of advanced
technologies to China that could harm U.S. national security,
including the role of CFIUS.
Today I want to make three analytical points and then offer
several policy recommendations. There are more details in my
written statement.
First, although highly wasteful and inefficient, Chinese
industrial policy has been relatively effective at facilitating
both the domestic development of technology in China as well as
the acquisition of foreign technology from the United States
and elsewhere.
Chinese technology policy, I think, could long be defined
as engaging in techno-nationalism, but under Xi Jinping in the
last few years Chinese industrial policy is much more
centralized than ever before, and steps have been taken to make
industrial policy serve China's economic and national security
goals. Just recently, China formed a national commission on
civil-military integration. Xi Jinping personally chairs that
commission, and its goal is to find ways to take commercial
technologies and use them to help Chinese national security.
China has set specific targets for technology acquisition
and growing market share across a vast range of technologies,
including electric cars, renewable energy and storage,
robotics, commercial aircraft, biologics and pharmaceuticals,
and many other areas relevant for the U.S. economy and national
security. If you just look today at the Consumer Electronic
Show, CES, which is opening in Las Vegas, fully one-third of
all of the exhibitors, 1,500 of them, are from China.
Relatedly, China is using globalization to pursue all of
these goals through international trade, sending students to
study abroad, hiring foreign employees, foreign investment in
and out of China, opening R&D centers in Silicon Valley and
other technology hubs.
As Dr. Scissors said, there was a slight downward tick in
overall investment out of China in the United States in 2017,
but a growing share of Chinese investment is in high-tech
overall. There are some investment deals which are in high-tech
that aren't covered by his database that are important even
though at a dollar level they are relatively small. Some of
these deals are acquisitions of mature companies, as well as
minority stakes and also venture investment in startups.
Second, the U.S.-China economic relationship brings both
benefits and problems to the American economy. Industrial
policy is inherently discriminatory, and, given China's size,
Chinese tech policy could harm global supply chains and
business models. But, on balance, the United States, our
companies, workers, consumers, still benefit in many ways from
our commercial ties with China.
At the same time, the U.S. and China have conflicting
strategic interests in the Asia-Pacific. As a result, while the
U.S. has to balance issues of fairness and opportunity in the
economic realm, the security challenge should lead us to be
more conservative and withhold more technology than would
otherwise be the case.
Third, American technology reaches China through a variety
of channels, including investment, trade, employment, R&D
centers, education, as well as cybertheft, industrial
espionage. And constrained diffusion of technology in one area
doesn't necessarily stop diffusion of technology in other
areas. In fact, it may be more like a balloon, where you plug
one place and you will see expanding technology diffusion in
another way. So an American response needs to be comprehensive;
it can't just focus on one avenue of technology diffusion.
Let me just make a couple policy recommendations and then
look forward to the discussion.
In terms of the technology CFIUS covers, I can see it makes
sense to expand the definition of critical technologies and
infrastructure to include critical materials, data, and
potentially IP, because of how acquisitions of technology, even
in their early stages, can be misused against American
interests. At the same time, in addition, I could see the
benefits of expanding CFIUS's mandate to cover nonpassive
investments, not just majority acquisitions, where the foreign
party doesn't gain a controlling interest because Chinese, even
as minority shareholders, can still get access to that
technology, whether they are private or state-owned.
I would suggest several limitations, including limiting
some of these expansions to areas of countries of special
concern. I actually like that terminology and can explain why
in more detail. One area I would also limit is, I would try to
explicitly be sure the legislation doesn't cover American
outward investment because it would be too broad and difficult
for the Committee to manage.
[The prepared statement of Mr. Kennedy can be found on page
55 of the appendix.]
Chairman Barr. Thank you.
The Honorable Admiral Blair, you are recognized for 5
minutes.
STATEMENT OF ADMIRAL DENNIS C. BLAIR
Admiral Blair. Chairman Barr, Ranking Member Moore, and
members of the committee, it's really heartening for those of
us who have been involved in these issues for a while to see
that Congress is tackling the task of governing the control of
foreign investment into this country. And I am delighted to be
able to participate in the process through testifying about the
updating of the CFIUS statute, because it is dealing with a
very major and growing threat to our national security.
The changes that have been proposed under one potential
statute, what is called the Foreign Investment Risk Review
Modernization Act, or FIRRMA, I consider to be well-considered,
very important. Widening the category of covered transactions,
expanding the specific factors that are to be considered by the
Committee, as well as the improved Congressional notification
will go a long way toward plugging the loopholes in the
application of the current statute. And I certainly urge
adoption by this committee of those provisions of H.R. 4311.
But I also think we need to think more widely about the
risks of investment in this country by foreign companies. And I
would urge the incorporation of an additional fairly simple
principle into the CFIUS statute: If a foreign company has
stolen American intellectual property or has taken actions
against American security policies or interests, it should not
be allowed to invest in this country.
This committee needs no education on the damage to our
precious technological edge that has been caused by the theft
by foreign companies and governments of our intellectual
property. As we on the Commission on the Theft of American
Intellectual Property stated in our reports, it has robbed this
country of up to $600 billion a year, more than our trade
deficit with all of Asia. It erodes the competitiveness of our
companies and the combat capability of our Armed Forces.
And FIRRMA would go a long way toward protecting our
militarily relevant technology, but I recommend going further
to prevent the investment in this country by any company that
has stolen American IP--big, international Chinese companies
like Sinovel, like Trina Solar, like Jiangsu Shinri Machinery
Company.
We should prevent investment in this country by companies
that have harmed American security interests in other ways. The
China Communications Construction Company, or CCCC, was the
company that built the wall of sand in the South China Sea. It
acquired a Houston-based American design firm, Friede Goldman
United, in 2010. CNOOC then sent its oil rig, the HD-981, off
the coast of Vietnam to assert China's territorial claims.
We should force foreign companies to make a choice. They
either steal our intellectual property and otherwise undercut
this country's interests, or they invest in the United States.
They can't have it both ways.
Finally, I would like to add my voice to those highlighting
the resource consequences of expanding the scope of the CFIUS
statute. Policy without capacity is frivolous. Right now, the
CFIUS work in the Executive Branch is done by a group of the
part-time and the willing. The application-fee funding
mechanism, the special hiring authorities that are currently in
H.R. 4311 will put the right people in greater numbers on the
job to protect our national security interests.
My business friends do not object to government regulation.
They object to slow, incompetent government regulation. We owe
them speedy, savvy decisions, and we owe the country the
protection of its national security.
Thank you.
[The prepared statement of Admiral Blair can be found on
page 38 of the appendix.]
Chairman Barr. Mr. Kassinger, you are recognized for 5
minutes.
STATEMENT OF THE HON. THEODORE W. KASSINGER
Mr. Kassinger. Thank you, Mr. Chairman, Ranking Member
Moore, members of the subcommittee. I very much appreciate the
invitation to appear before you today. It is an honor to join
my distinguished fellow panel members in contributing to your
work assessing the operations and activities of CFIUS.
I wish to emphasize that I appear today solely in my
personal capacity, and the views that I express are my own.
I concur in the sentiments expressed by several members
that, 10 years after Congress last amended section 721 of the
Defense Production Act, it is time to take stock of how the
purposes and processes that Congress put in to place in 2007
have worked, how they withstood the test brought by
dramatically changing economic and geopolitical circumstances.
Section 721 established the legal foundation for what is a
critically important but nonlegal task of the Government, and
that is to determine on a case-by-case basis whether specific
foreign direct investment transactions present a threat to the
national security and, if they do, what are the appropriate
means, if any, to resolve those issues.
Unlike some of my fellow panel members, I think that
section 721 has and continues to provide the fundamentally
correct approach to balancing national security and economic
interests of the United States and that the process
administered by CFIUS works reasonably well.
There are clear signs of stress in that process however,
and there are serious questions to examine regarding whether
CFIUS is optimally empowered and resourced to address current
challenges.
I think in any assessment of changes to the current process
it is important to look back at what Congress created in 2007
and then what the Administration, through CFIUS, promulgated in
its rules in 2008. These were thoughtful processes on all
counts, and they leave us, I think, with certain principles
that should be kept in mind as we look again at CFIUS in new
circumstances.
The first, to which many have alluded here, of course, is
the longstanding U.S. commitment to welcoming foreign
investment.
Second is that, in the competition for global capital, the
United States is well-served by regulatory processes that are
transparent, predictable, and efficient. Foreign investors and
U.S. business partners understand that the United States must
be able to step in where business transaction presents a threat
to national security. Nevertheless, before committing to
transactions involving perhaps billions of dollars, they want
to manage the business risks appropriately, including by
structuring transactions to address potential national
securities ahead of time, if possible. That is a natural
business process.
These two fundamental principles lead to a third
overarching proposition. Any statutory or regulatory amendments
to section 721 should seek to replicate the principles that I
think were achieved through the 2007 act and regulations. Those
were models of deliberative consideration. They produced an
unusually well-crafted set of Federal rules. The rules
carefully define concepts and terms, provide numerous examples
to indicate how the rules might apply to specific factual
circumstances.
That rulemaking process took about a year after the 2007
law was enacted. It was well worth it, not because the rules
answer every question that arises, but because, as a whole,
they faithfully implemented the balance struck by section 721
while providing useful guidance to private enterprises and
entrepreneurs, who are the primary sources of investment
capital.
CFIUS does face, as the country faces, many current
challenges that were not present in 2007. The rise of China as
an increasingly assertive strategic adversary and global
economic power lie at the heart of most of those concerns. You
have heard from experts, in the December hearing and here
today, who can provide you far more insights on those concerns,
which I fully share.
I wish principally to observe that the complexity of the
U.S.-China economic relationship itself provides reason not to
lose sight of the basic principles of consistency, fairness,
efficiency in a process that is adopted. Over the last 20
years, commerce between China and the United States has become
evermore interdependent, and the rules going forward should
address not only the threat from China but also the continuing
value of foreign investment in the United States.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Kassinger can be found on
page 49 of the appendix.]
Chairman Barr. Thank you.
Mr. Hunter, you are recognized for 5 minutes.
STATEMENT OF ROD HUNTER
Mr. Hunter. Thank you, Mr. Chairman, Ranking Member Moore,
and members of the subcommittee. I appreciate the invitation to
speak, and I would like to offer a couple of observations based
on my experience in a prior Administration and as a practicing
attorney.
The highest priority for public officials is, of course,
ensuring the national security. Our national security depends,
however, on the innovation and the productivity of our economy.
And the open investment environment and open investment regime
enables us to draw the capital and ideas and talent from around
the world to make America more productivity, innovative, and
prosperous.
As my fellow panelists have pointed out, recent increases
in Chinese investment has created concerns here in the United
States but also across advanced markets. Now, there are
legitimate reasons for Chinese investment in the United States:
Diversification, proximity to customers/consumers, a number of
others. Still, the deep involvement of the Chinese Communist
Party and the state in the Chinese economy gives reasons for
concern and particularly in this increasingly tense strategic
competition with the United States and China.
The CFIUS law was designed to secure the benefits of open
investment while ensuring that the President had broad
authority to block or unwind foreign investments in order to
protect national security. The President is assisted by CFIUS,
made up by economic and security agencies and, importantly, by
the Intelligence Committee, which forms in many ways a key
component of the analysis that guides the CFIUS work.
In my personal experience, national security was never
given short shrift in those debates, though there were, as all
the people who participated in CFIUS know, long and extensive,
vigorous debates within CFIUS about the proper analysis of risk
and balancing.
In practice, any agency can force the escalation of an
issue of a case up to the President for guidance--something
which, in my experience, happened with some frequency. As the
subcommittee considers CFIUS going forward, I would highlight
four questions:
First, does CFIUS have adequate legal authority to reach
foreign investments of concern? CFIUS can reach any investment
in the United States in a U.S. business enabling a foreign
person to acquire control. The ``control'' definition in the
legislation and as it is applied is actually quite low so that
CFIUS's jurisdiction is quite encompassing.
There is one gap in particular, around real assets where
there is no commercial activity and, hence, no business. This
can be a problem when someone acquires land next to a sensitive
government site, something that Congress may want to consider.
A second question is whether CFIUS is adequately resourced,
and Ranking Member Moore highlighted this at the very
beginning. The caseload has doubled in recent years. Resources
have remained essentially constant. The most visible indication
of the stretching of the resources has been the lengthening of
timelines as applied to individual transactions. Indeed, the
uncertainties around timelines, as much as outcomes, are going
to have an impact on investment decisions of people from
diverse nationalities. And no doubt the protraction is caused
in part by policy debates within the Committee but also, I
would believe strongly, because of the resource constraints.
A third question is, should CFIUS's mandate be expanded to
technology control? Technology transfer, as many have
highlighted, is the right issue; CFIUS emphatically is the
wrong tool. CFIUS was designed to manage risks arising from
foreign ownership or control of U.S. businesses. It is a
reactive instrument. It is labor-intensive, time-consuming,
and, frankly, is straining under its current workload of 240
cases or so. Imposing a committee process vetting the
international licensing, joint development projects, even
hiring by U.S. technology companies could, in fact, drive the
R&D that is so essential to our economy and defense industrial
base offshore.
The export control regime, however, was crafted for just
this purpose. And while there may be important issues to look
at in terms of a legal basis for the export control regime and
whether it is adapting to policy--and those are, in fact,
issues worthy of Congressional attention.
With that, I would stop and thank the committee.
[The prepared statement of Mr. Hunter can be found on page
43 of the appendix.]
Chairman Barr. Thank you all for your testimony.
And the Chair will now recognize himself for 5 minutes for
questioning. Let me start with Mr. Kassinger.
Are Chinese and U.S. companies routinely structuring deals
to avoid CFIUS jurisdiction presently?
Mr. Kassinger. Not in my experience, Mr. Chairman. I think
there is a narrative that all minority investments are somehow
designed to avoid CFIUS jurisdiction. I just don't think that
is true. I have never seen that. Investments are structured for
business reasons. The rules themselves, until recently,
provided certain safe harbors for sizes of investments, and
people often, actually, to the benefit of U.S. national
security, have pushed Chinese and other investors to maintain
minority positions.
So I think CFIUS has jurisdiction currently to cover
virtually any transaction that it seeks to cover. I don't think
circumvention is an issue.
Chairman Barr. Admiral Blair, do you believe that CFIUS
jurisdiction should be more defined or perhaps even expanded in
order to capture all the transactions that you believe CFIUS
should be scrutinizing?
On a related note, do you believe that there could be a
risk of giving CFIUS too many different things to do so that it
could not do any of them well?
Admiral Blair. I would say that the definition should be
expanded and then the application of that expanded definition
should be worked out in practice and that it should be governed
by the size of the competent staff that can be assembled under
the new procedures. So I think it is a balance of the staffing
of it.
But I don't think we should simply limit the CFIUS-
controlled transactions definition to what we see today and
just narrowly tailor it. I think we need to leave some room to
be able to adapt without coming back and getting a new piece of
legislation, a new review process, so that smart people can
interpret a fairly broad set of guidelines to protect the
interests of the United States.
Chairman Barr. So, in your judgment, should the Committee
make ad hoc decisions regardless of the structure of the deal
in terms of whether or not to assert its jurisdiction?
Admiral Blair. Yes.
Chairman Barr. OK.
Mr. Hunter, given your experience coordinating CFIUS, what
is your sense of the Committee's ability to handle a broader
caseload? There has been a lot of discussion about resourcing,
but including these nonpublic transactions, contributions of
intellectual property to foreign persons through licensing,
joint ventures, and the like?
Mr. Hunter. Thank you, Mr. Chairman.
I think that it would overwhelm the Committee. The
Committee is stretched by resources, but it is, on top of that,
a committee, and, as we all know, committees often require
considerable deliberation to reach consensus. And going to the
President for every significant, challenging decision would be,
itself, not feasible.
So I think the ultimate consequence of a dramatic expansion
of jurisdiction would actually be a poorer performance by the
Committee in dealing with those transactions that matter.
Chairman Barr. Thank you.
Dr. Scissors, most, if not all, of our major developed-
world trading partners do not have a CFIUS-like process, or, if
they do, it is much different than ours. Can a stricter CFIUS
process be effective if it merely incentivizes investment and
innovation to flow to less-regulated countries?
Mr. Scissors. I think there are two answers. Yes, it can be
more effective than we have now. We can debate about how to do
that. The U.S. is still the primary source for dual-use in
military technology. We are the leader in semiconductors, where
the main Chinese research effort is devoted. So our actions, by
themselves, are going to help.
But, in terms of protecting our national security, of
course it would be good to coordinate with our allies. Our
allies, as you mentioned, don't seem to have this process in
place at all. In fact, I know and I am sure other panelists
know from personal experience they look to us for an example.
So the first step in coordinating with our allies is deciding
what we want to do and then telling them why.
I agree with your point, but I do think we have to handle
ourselves first.
Chairman Barr. Fair point.
Dr. Kennedy, final question in my remaining time. Your
fifth point in your written testimony was, I think, a good one.
You state that ``although it is important to protect the United
States from unwise transfer of technologies, the United States
also gains tremendous strength from having an economy open to
flows of goods, services, people, and ideas.''
What specific recommendations would you have to update the
CFIUS process without unduly burdening foreign direct
investment?
Mr. Kennedy. Mr. Chairman, I think clarifying the
definitions of what CFIUS covers, the type of transactions
related to the types of technologies and the type of investment
inward to the United States, I think would help; also
increasing funding for the Committee but not overburdening it
by adding cases that could be better handled through export
controls or other types of things that are better prepared to
handle that increased burden.
But the American economy benefits tremendously from being
open. Even though it looks like China is catching up fast and
passing, China's economy also has lots of burdens as a result
of its industrial policy. So we want to protect what is best
about our economy while also making sure that our national
security is protected as well.
Chairman Barr. Thank you.
My time has expired, and the Chair now recognizes the
distinguished gentlelady from Wisconsin, the Ranking Member of
the subcommittee, Ms. Moore.
Ms. Moore. Thank you so much, Mr. Chairman.
I have 1,001 questions, but just let me start out very
quickly with Dr. Scissors.
I noticed how cute your thing was, said, ``Don't listen to
my colleagues on this topic, only me.'' I am wondering about
the difficulty of differentiating between legitimate economic
motivations that China might have and strategic motivations
that may be a threat.
And I want to congratulate you on putting together the
metric. I am sure I will be studying this for a long time.
Could you give us some advice about what we ought to be
looking for specifically, a metric for what are legitimate
investments and what are not?
Mr. Scissors. Thank you for the compliments. It has become
an enormous amount of work. When I started, it was small and
easy, and I think I may have made a mistake.
Obviously, the first thing to do is to look at sectors.
There are some sectors where it is very difficult to see any
strategic rationale. The Chinese like to buy soccer clubs in
Europe. If they want to buy the Redskins--please don't take
this as a political comment about the Redskins--I don't think
we see a strategic threat there.
So I think the first thing to look at is that there should
be some sectors that are open to China because they will
benefit the American economy and they have no strategic element
to them whatsoever.
I will, however, then say, to provide a caution, as I try
to drive home in my statement, you can't use ownership of a
Chinese firm to say it is strategic or it is not strategic. A
private Chinese firm can be a strategic tool for the Communist
Party just like a state-owned firm can be a strategic tool. And
if it isn't now, if it is a well-intentioned Chinese firm now
just looking to operate on commercial principles, which is
likely, 5 years from now it may not be.
So I would use sector; I would not use ownership.
Ms. Moore. OK. Thank you so much.
Let me ask Admiral Blair, given your extensive experience,
if the President decides to not follow the recommendations of
CFIUS, is this something that is made public? How will this
committee--is there any mechanism for our supporting the
Committee's recommendations if the President decides not to
act?
Admiral Blair. It has been my experience that Congress has
had no trouble in influencing CFIUS decisions that are of high
consequence and category. Process is one thing, but once
something gets into the press, once something becomes a big
issue, it really gets higher than the CFIUS process.
Ms. Moore. So it would be public?
Admiral Blair. Yes, it would be.
Ms. Moore. OK. Good.
I want to yield the balance of my time to the distinguished
member, Mr. Heck on this committee, who has a lot of background
in this area.
Mr. Heck. I thank the Ranking Member.
I would like to start with you, Admiral Blair, and begin by
thanking you for your lifetime of service to this country in
uniform and in so many ways. Your co-chairmanship of the IP
Commission is something that I have specifically cited, and the
data coming out of it, on numerous occasions here in this
committee.
My perspective is that we are here today, frankly, because
there has been a problem that has been growing as a consequence
of a lot of the trends and behaviors on the part of other
actors, most specifically China, and so it brings us to the
point of revisiting a 10-year old-statute and its adequacy for
the current challenges. But it is also my perception that this
body doesn't act unless we are at critical mass or threshold of
perception of a problem that is going to get worse and going to
be compelling.
So I want to ask you the ``what if'' question. What if we
don't do anything? What if we don't act? What if we don't
reform CFIUS? What if we don't increase its resources? What if
we don't change it? Based on your considerable experience, look
forward and describe as best you can what you think occurs if
we fail to act.
Admiral Blair. I think if we don't make these changes our
military technological edge erodes in key areas. Our choices
are either accepting the consequences of a narrowing gap or
else spending more money on defense. I think our economic
competitive, similarly, erodes as those high-technology, high-
innovation sectors, in which the United States really has a
competitive advantage, are undercut by other competitors.
So I think it contributes to negative trends in this
country. It doesn't mean we can't overcome them by the inherent
entrepreneurial nature of the country, by the dynamism of our
people, and so on, but why make it harder, I guess is my--
Mr. Heck. Well, they have been catching up. Are you
suggesting that the velocity at which they continue to catch up
increases?
Admiral Blair. Yes, I think it has in recent years. And we
should protect our own interest in order to slow it.
Mr. Heck. Thank you, sir.
Chairman Barr. The gentlelady yields back.
The Chair now recognizes the Vice Chairman of the
subcommittee, the gentleman from Texas, Mr. Williams.
Mr. Williams. Thank you, Mr. Chairman.
The preservation of our national security I think is every
Member of Congress's constitutional responsibility, and I and
this committee remain committed to finding policy solutions
which promote U.S. interests and keep bad actors away.
I want to thank Chairman Barr and Ranking Member Moore for
holding today's hearing. I am also glad to see this
subcommittee making CFIUS a priority. I look forward to
learning more about this important interagency committee and
the best ways that Congress can potentially improve it while at
the same time still promoting foreign investment to the U.S.
I thank the witnesses for their time, and I thank many of
them for their service to this Nation and their prior
involvement with CFIUS. Our Nation is indebted to your
dedication.
Mr. Hunter, I want to start with you. Thank you for being
here today. And I, too, share your concerns about the gap
existing where a foreign investor seeks to acquire an asset
that is not a U.S. business. The example in your testimony of
fallow land near a military base was particularly concerning to
me because I represent a large portion of Fort Hood, the
largest military base we have.
So does a change need to be made to codify the inclusion of
sensitive assets by CFIUS? And can you explain what a provision
could look like to achieve that goal?
Mr. Hunter. Thank you.
I think the solution is really quite simple. It is just to
say specifically that real estate can be covered. At present,
you need to have a covered transaction involving a U.S.
business being acquired by a foreign person. The limitation of
a U.S. business is an asset plus a commercial activity. Fallow
land, land that is not being used, doesn't have a commercial
activity.
So you just define specifically land. Easily done.
Mr. Williams. OK.
Another question. I agree with your assessment that foreign
direct investment in the United States is positive for the
economy. When companies invest in America, they bring jobs,
they bring facilities and further development. But it is
concerning to me that CFIUS delays could create uncertainty
that drives away investment.
So how can we modernize CFIUS in such a way that makes the
U.S. more attractive to development but at the same time does
not compromise our national security?
Mr. Hunter. Thank you. That is a great question.
The timelines, as I have mentioned in my written testimony,
have gotten longer in practice. The intelligence community does
a fantastic job of producing their analysis very quickly, but
it is a committee and so it requires a lot of debate internally
within CFIUS. The resources that Ranking Member Moore
highlighted at the outset I think are a key component of that.
The second thing is, I would be very cautious about what
additional responsibilities one gives to CFIUS. The export
control issues are very important issues, in fact, maybe the
most sensitive issues. But the CFIUS process would come to a
grinding halt if one were to put all of that inside of CFIUS
instead of doing it through a reform of the export control
procedures.
Mr. Williams. OK. Thank you.
Dr. Scissors, I am concerned with patterns of targeted
investment by Chinese state-owned enterprise into this critical
U.S. infrastructure--for example, the investments that Chinese
groups have already made into the U.S. rail manufacturing.
Do you believe that involvement of Chinese state-owned
enterprise in U.S. critical infrastructure has or could
potentially jeopardize our Nation's ability to effectively
respond to national security threats?
That would be my first question.
Mr. Scissors. The way I would put it is, again, I don't
think it matters that it is a state-owned enterprise, except
that they have access to more Chinese government funding. So
the size is what matters there, not the ownership.
I think what we should consider, with regard to China, is
not what is happening now. Right now, China is trying to expand
its rail industry all around the world, not just in the U.S.,
not principally in the U.S., mostly in Southeast Asia, sub-
Saharan Africa. But if it is owned by a Chinese entity, it is a
future national security risk. I don't know any other way to
put it.
So I think what you look at is the size of the transaction,
the extent of Chinese involvement, and the future risk, not the
current risk. At present, I would say the Chinese have no
interest in disrupting U.S. national security preparations, but
a Chinese entity is controlled by the party, and if the party
changes its mind, so does the Chinese entity.
Mr. Williams. Real quick, is there more that you think we
can do to modernize our investment review laws to address the
challenge we are talking about?
Mr. Scissors. Yes. This is where my colleague and I
disagree. We have heard people talk about not overburdening
CFIUS. The way I would not overburden CFIUS is make it clear
that there is one primary national security risk to the United
States and it comes from China. Everything else is much smaller
in comparison.
So, when we give CFIUS additional tasks, whether they are a
little bit of an additional task or a lot of additional tasks,
we can focus on the primary country of concern, which is the
Chinese side. We are not worried about the Iranians buying up
U.S. rail assets. They don't have the money.
Mr. Williams. OK. Thank you for your testimony.
And I will yield my time back.
Chairman Barr. The gentleman yields back.
The Chair recognizes the gentleman from Washington, Mr.
Heck.
Mr. Heck. Thank you, Mr. Chairman.
Back to you, Admiral Blair, if I may. So I asked you to
look forward before. Now, I do, in fact, want to ask you to
look back a little, and characterize for us, if you would, the
advances in technology and equipment made by the Chinese Armed
Forces in, let's say, the last decade, and indicate whether or
not you think that those advances were materially advanced by
IP theft by the Chinese and technology transfers. Was there a
role there?
Admiral Blair. The Chinese Armed Forces have done a
remarkable job in transforming from the mid-1990's when they
were basically a pretty immobile, light-infantry-based
defensive force to a much more advanced force capable of
projecting in the near areas around China, with ambitions to go
further. And they have, in fact, leapt several generations of
technology that other countries have gone through over many
decades.
And I would say that a combination of strict theft,
breaking into companies like Lockheed Martin and Northrop
Grumman and pulling out information, which they accomplished,
and taking advantage of the examples of other armed forces,
chiefly the United States, they have used in a pretty savvy
way.
And when I was Commander in Chief for the Pacific Command,
we could handle contingencies like Taiwan without scratching
the paint on our ships and our airplanes. Now, it is going to
be a tough confrontation if we get into it over an issue like
Taiwan. And part of that has been Chinese ability to jump to
the latest technology by acquiring it by fair means and foul,
and the foul means have been a major part of that.
Mr. Heck. So I realize there is an underlying disagreement
here about how to deal with the outbound stuff. But, before we
get to the solution to that, I want to size the bread box and
have you maybe describe what role you think joint ventures,
Chinese performance requirements, and the outbound stuff, has
played in their absorption, if not theft, and acquisition of
technology that has enabled this more rapid advance and the
implication to our national security.
Mr. Blair. The Chinese weapons designers and engineers are
competent people. And when they are devising a new surface-to-
air system, for example, they look around at what the most
advanced systems are. A large part are American.
They then issue orders to their intelligence service to go
out and get as much of the specific data on wavelengths, design
of components, sources, as they can. The Chinese actors, human
intelligence and so on, know the companies and the--
Mr. Heck. Excuse me for interrupting, Admiral, but do our
outbound investments play a role in that?
Mr. Blair. Oh, our outbound investments?
Mr. Heck. Right. That is what I am getting at. Is it the
fact that we enter into these joint ventures with them and they
have performance requirements which--
Mr. Blair. No. From the military point of view, the primary
theft that has benefited China has been their penetration of
our domestic defense industries and the cooperation with
allies, the U.K., Japan, and all. There have been some losses
through our allies, but most of the benefit has come from
stealing from American companies in the United States that are
building defense equipment.
Mr. Heck. Not American companies that are operating in
China?
Mr. Blair. Correct, in the past, mostly through coming
here. There are certain filters. American businesses are smart.
They are not going to take their best stuff. They are going to
be careful in China. So why go for the second rate stuff there
when you can go into the United States and get it at its
source? And that is what Chinese intelligence units have been
tasked to do, and they have been somewhat successful in doing
it.
Mr. Heck. Dr. Scissors, would you agree with that?
Mr. Scissors. Yes. I think there has been a progression in
the way China has approached stealing IP. I work on the econ
side, not the security side, so I can't answer your national
security question. But I agree with the admiral's point that
the Chinese are now skipping over whatever they think is
secondary technology and moving to where they think the best
technology is. I used to tell clients, if you don't want China
to steal your IP, don't go to China. That doesn't work anymore.
Mr. Heck. Thank you. My time is up. I yield back, Mr.
Chairman.
Chairman Barr. The gentleman yields back.
The chairman now recognizes the author of the Foreign
Investment Risk Review Modernization Act, the gentleman from
North Carolina, Mr. Pittenger.
Mr. Pittenger. Thank you, Chairman Barr. I sure appreciate
your support and leadership on this important bill.
And certainly I appreciate Senator Cornyn and the
leadership and partnership he has been on this bill, and
Secretary Mnuchin, who played a major role in writing the bill.
And thank each of you for being with us today.
I would like to say that the bill now has the full support
of not only Secretary Mnuchin, but Secretary Mattis and
Attorney General Sessions. Many others have commented about the
bill and the need for reforms in CFIUS.
Mr. Kassinger, I heard your remarks in terms of joint
ventures. I would say to you respectfully that the Director of
the CIA and Secretary of Treasury both would have disagreed
with that, that they believe that they are an important,
critical part of how the Chinese and others would pursue
acquisitions. Mike Pompeo said CFIUS deals mostly with changing
control of transactions and analysis. There are many other ways
one could invest in an entity in the United States and exert
significant control over that entity, and I think we need to
look into that. So I would respectfully disagree.
I would say that I would like to hear from Mr. Scissors
regarding your perspective of the export control regime and its
ability to adequately address our national security risk
related to foreign transactions. In your opinion, do you
believe that the control regime has adequately addressed
national security risk, particularly Chinese investments?
Mr. Scissors. I will give a disclaimer. I am not an export
control lawyer. But on the Chinese side I do have a lot of
information, and I would say our current export control regime
has not been sufficient to prevent illegal Chinese acquisition
of technology. It is not supposed to do all the work. But we
can say for sure it is not doing the job.
So we can argue about where we want the changes, whether to
be in CFIUS, or in export controls, or elsewhere, some
combination. But I would disagree with anyone who says, oh,
export controls are handling this problem, we are fine. That is
evidently not the case with China.
Mr. Pittenger. So you would then concur that the need to
expand, reform, modernize CFIUS would be important to address
the concerns in the future?
Mr. Scissors. Yes. Again, how we do that and whether that
is sufficient, whether we should locate all reform in CFIUS, I
think those are big questions, and I don't want to use up all
the time. But I think modernization and improvement of CFIUS is
indispensable.
Mr. Pittenger. I think underscoring our concern lies in a
comment that Secretary Mattis made. He stated that rapid
technology change is one of the several concurrent forces
acting on the Defense Department. And as well he said that new
commercial technologies will change society and ultimately will
change the character of war.
So I think looking ahead in the future, our objective is to
have a structure that will address the needs and concerns as we
proceed ahead.
Admiral Blair, you have obviously worked a great deal on
intellectual property and matters relative to national
security. Can you please help us understand what we need to do
to further tighten CFIUS regulations and the rules and
procedures to protect the intellectual property of national
security?
Mr. Blair. We have talked a great deal about tightening
CFIUS in order to protect militarily relevant technology. But I
think CFIUS need not be simply limited to that. As the chairman
said in the beginning, it was used in the 1970's because of
concern about petrodollar recycling. It was done in the 1980's
because of concern about Japan. These were not military secrets
that we were worried about there. It was the economic
competitiveness.
And as the commission that I had the honor of co-chairing
testified, this is a hemorrhage of profits and competitiveness
of this country. And I think it is fully appropriate that CFIUS
go beyond simple narrow military calculations and be used to
punish, and therefore deter, companies that are stealing
American-owned intellectual property, whether it is applied to
military devices or whether it is putting companies out of
business in many parts of this country. So I say go further
with CFIUS.
Now, put the statute on the books and then all the
questions of implementing it in smart ways, getting the right
people, those can be solved. But if you have the goal there,
then you can build the capacity to do it and face these
companies with a challenge: They either use the United States,
they use our stock market, invest in our company, export to
this country, and play it by the rules, or else they don't. I
think we ought to freeze them out if they don't.
Mr. Pittenger. Thank you. I yield back.
Chairman Barr. The gentleman yields back.
The Chair recognizes the gentleman from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman. I thank the Ranking
Member as well. And I thank the witnesses for appearing.
I am concerned about energy. I am a Representative from the
State of Texas, so it seems that would be something that would
be of concern to me and of course to the country as well.
My concern emanates from technology that the Russians don't
have. They seem to have the ability to drill but not nearly as
much ability and technology as is needed to drill in the Black
Sea where it is exceedingly cold.
In 2012, Secretary Tillerson signed a deal with Rosneft,
the Russian-owned oil company, and that deal would allow
drilling in the Black Sea by way of the Russian-owned company
and our very own Exxon.
The deal was thwarted, but the question still remains: How
will our associating ourselves with a Russian-owned oil company
that doesn't have the technology necessary to drill in these
cold waters, how will that possibly impact us long term?
Who would like to take the first shot at my question?
Mr. Blair. That is a very complicated question,
Representative Green. And there is a tension there, because the
increase of the world oil supply is a good thing for the
economy of the United States and for all other countries. It
gives the United States a flexibility in its security policies
which we don't have when the price is high and it is only
countries in the Middle East that can quickly increase their
production that will keep the price under control.
So I don't think any of us who watch this issue are against
helping other oil companies provide more into the world market.
Where we do have concerns is how that power is used for
geopolitical purposes. And Russia has clearly demonstrated,
particularly in the use of its gas lines, that it is perfectly
willing to use that for political pressure. It has not been so
successful in oil because of the fungibility of oil shipments
around the world.
So, in general, I think cooperative oil measures are OK,
and ought to be entered into by U.S. companies. They are pretty
savvy at not giving away the family jewels when they work with
another company. They have been doing it for a long time. And
then we watch the use to which these oil shipments are put, by
countries like Russia or Saudi Arabia or Iran or other
producing countries.
Mr. Green. Would someone--yes, sir, if you would, please.
Mr. Kassinger. Just two quick points, Congressman Green.
First, of course right now the Ukraine sanctions, both
promulgated by Executive Order and by this Congress, preclude
transfers of unconventional oil and gas technologies from U.S.
persons, U.S. companies, to Russia. So at least for the time
being that is not an issue.
Second, I think in considering this issue I align with
Admiral Blair but for another reason. And that is, U.S.
companies don't have a monopoly on offshore drilling
technology. The question is, would we rather have U.S.
companies there participating or cede that market, and the
presence that goes with it, to others?
Mr. Green. Just quickly, this point. It is my understanding
from the intelligence that has been accorded me that, within
that deal there is also an opportunity for Rosneft to do some
drilling in the United States. Any response to this contingent?
[Inaudible responses.]
Mr. Green. Well, thank you very much. Madam Ranking Member,
I greatly appreciate the time. Mr. Chairman, thank you.
Chairman Barr. Thank you. The gentleman yields back.
The Chair recognizes the gentleman from West Virginia, Mr.
Mooney.
Mr. Mooney. Thank you, Mr. Chairman.
So one issue was brought to my attention about a year ago
where the Chinese--although any country could do it--but the
Chinese tried to buy a company based out of Europe somewhere,
use it as a third party, then have that company purchase an
American semiconductor company. Lattice was the one that was
brought to my attention.
But I was just wondering--I guess anybody could answer
this--but how do we detect when a company is being bought out
by a foreign entity and then that company is also trying to buy
American technology, a company that has access to sensitive
American valuable technology.
Dr. Scissors, but anybody else can jump in.
Mr. Scissors. Well, we do it, so I assume the U.S.
Government can do it. If you decide to focus on certain
companies, like large Chinese entities who have funding from
the state, you know what they have done in the past. So the
biggest example, quantitatively, is not the failed Canyon
Bridge-Lattice Semiconductor deal. It is the successful HNA--
which is a Chinese private firm with very strange ownership--
purchase of CIT Leasing in the U.S.
HNA did that through its Irish subsidiary, Avolon, wholly
owned Irish subsidiary. All the money came, supposedly, from
Ireland. But if you know what HNA has done in the past, you
know that is a Chinese entity.
And I believe the U.S. is perfectly capable of tracking
back companies of concern or of special interest and knowing
who actually owns what. I don't know that we do that,
necessarily, on a consistent basis.
And the evidence I would give is my number, our number at
AEI, other numbers, not just ours, for Chinese investment in
the U.S. are larger than the U.S. Government number, in
particular because the U.S. Government treats that investment
as being from Ireland. It is not. It is from China. We can
determine that, but we may not be doing so on a regular basis.
Mr. Mooney. Sure.
Mr. Hunter. Thank you.
So, first off, the legal structures, from CFIUS'
perspective, the legal structures don't matter. CFIUS looks all
the way up the chain to ultimate owners and control. So in
terms of legal authority, that is there. What I think your
question is getting to is the information, whether CFIUS is
aware.
Now, CFIUS does track transactions. They can see the public
transactions that are reported and they do a pretty good job at
that. When there are government contractors involved, there are
rules under the government contracting rules that require
notification. So there is visibility there.
I think the bill that we were talking about a moment ago,
FIRRMA, seeks to deal with what is perhaps one of the gaps that
may be there, which is particularly smaller businesses,
businesses which may not be publicly held companies, where
there may not be visibility in terms of the transaction. And
that may be most relevant to what I think has been the constant
theme in this discussion today, is the concern about
technology. So I think that is--and I think that was your focus
in the legislation.
Mr. Mooney. Sure. And I guess also, to follow up on that,
how do you determine if--normally a company is owned by
somebody if they have 51 percent of the stock or more. They are
a majority shareholder. But if a Chinese company or some other
company in the world buys a third of the company, or 5 percent,
or even 1 percent of the stock, are they then considered
eligible to be reviewed by the CFIUS process because they have
access to sensitive information? Or do they have to have a
certain amount of stock? Like, how do you determine that, is my
question.
Mr. Hunter. One of the virtues as a Government official,
one of the virtues of CFIUS is its flexibility, both in its
national security definition, but also the definition of
control. Control is basically the ability to influence business
decisions and financial decisions and personnel decisions. It
doesn't really matter what the threshold in terms of ownership
is.
Mr. Mooney. And then another follow up, and you can answer
both of these if you want. I only have a minute left. But I
read an article about a port, or a trucking company, an
exchange company, that would have access to the information for
a short period of time. They don't own the chip-making company,
but they own the truck or the boat that is going to transport
it, and there were some concerns about that. Is that also
something that you look at?
Go ahead, Dr. Scissors.
Mr. Scissors. This is a very important point because you
have to decide what constitutes control. And I agree that it
requires flexibility and we are not always going to do a
perfect job of this.
My solution is, it is where firms respond to money. If the
Chinese are putting money in a firm, directly or indirectly, I
don't care if they formally own it or whether they have seats
on the board. So if you look at dependence on Chinese
financing, that is when you know the Chinese have influence.
That is when you know data could be compromised.
Mr. Mooney. I guess my last 20 seconds, Mr. Chairman, I
would just suggest that if they control the port or the truck
or the airplane and they have total control of that product for
a few days, they can look in the product and get everything
they want out of it, and then go ahead and ship it. So that
could be something of concern that we need to watch more
closely.
Thank you, Mr. Chairman.
Chairman Barr. The gentleman yields back.
The Chair recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. Thank you.
I have asked the prior panelists the same question. CFIUS
does not currently contain an explicit provision stopping state
sponsors of terror or companies based in countries that are
state sponsors of terror or other nations that support terror
but are not formally designated from acquiring U.S. assets.
Do you believe that we should put into the statute a
requirement that we explicitly take into consideration whether
the company seeking to invest in the United States is located
and based in a country that supports terror? Does everyone
agree with that? Let me know if anyone disagrees.
Mr. Blair. If you use the phrase take into consideration, I
don't think any of us would disagree. Of course you should take
into consideration. And Dr. Scissors has been quite eloquent
about the control that authoritarian countries can have over
the company.
But I think you have to look at the company itself as well.
Has it, in fact, connived in or supplied the materials for
terrorism? Has it done it? And then you make a call. But take
it into consideration, absolutely.
Mr. Sherman. Yes.
Mr. Kassinger. Mr. Sherman, I would just add two things.
One is most, if not all, of the countries designated as
state sponsors of terrorism are, of course, a subject of U.S.
sanctions, which would preclude investments in the U.S. in most
cases anyway.
Second, I don't think there is any question that CFIUS
would take into account, in its threat analysis, the status of
the country.
Mr. Sherman. I would point out that with our current trade
relationship with China, they export goods here, they don't
allow us to export goods there. When they do, they require a
co-production agreement. We have a huge trade imbalance.
And we can try to have government stand in the way of this
tidal wave, but those dollars do come back to the United States
either as loans or investments in U.S. Government bonds or as
direct controlling investments in our companies, and that the
real solution to this is to impose such tariffs as are
necessary to assure a balanced trade agreement.
I am concerned with the CFIUS process that allowed China to
control the AMC movie screens. Do we have sufficient provisions
in CFIUS designed to prevent them from controlling what movies
are made in the United States? Because I will tell you now, if
you have another movie about Tibet and it can't be shown on one
quarter of the movie screens in the United States, they aren't
going to make the movie.
Does anybody have a comment on that?
Dr. Kennedy.
Mr. Kennedy. I agree that Chinese investment in Hollywood
and influence over movies and China's effort to influence
popular opinion positively toward China is an issue that the
U.S. needs to be aware of.
Mr. Sherman. And I would also point out they also control,
because we have accepted it, have not imposed massive tariffs
in response to their limitation--first of all, the theft of our
intellectual property. But, second, they limit us to 35 to 40
movies. So every studio is turning somersaults trying to make
their movies favorable to China so that they can get in.
Mr. Kennedy. So I would agree that these are problems in
the commercial relationship and things that Washington ought to
be worried about. I just don't think that the CFIUS process is
the appropriate place to manage that, just because we have
already talked about potentially adding all companies where we
have all different kinds of IP problems or where it is not
necessarily a deal in the United States.
But I guess the question is, from a practical perspective,
what is the best approach? And I am not sure that CFIUS would
be the best approach.
Mr. Sherman. If you buy one studio, you control one studio.
If you control the entire Chinese movie market and a quarter of
the screens or a fifth of the screens in the United States,
then you control all the studios in the United States because
not one of them will dare to make that next Tibet movie.
I will try to squeeze in one more question and that is,
does CFIUS adequately take into consideration, not only the
technology that is being acquired in the target company, but
the technology that company has the capacity to develop? Does
someone have an answer to that?
Mr. Scissors. I will say that, I consider that almost
impossible. The great thing about the American economy is how
innovative it is. And today's company that is leading, is
tomorrow's loser because it has been surpassed.
I think it is a legitimate concern that China would, or
another country, potentially buys a lot of U.S. startups
because some of them may pay off. But I think CFIUS has a
difficult task in evaluating that security threat.
Mr. Sherman. Is the solution there to have CFIUS have the
right to force a divestiture?
Mr. Scissors. I think the solution is for CFIUS to have a
re-review right, yes. If the Chinese buy a company that we
don't consider a national security threat and it becomes one
later, CFIUS should be able to re-review.
Chairman Barr. The gentleman's time has expired.
The Chair recognizes the gentleman from Ohio, Mr. Davidson.
Mr. Davidson. Thank you, Mr. Chairman.
Witnesses, I thank you all for your expertise on this
subject matter and your willingness to come share it with us.
So it is nice to spend some time talking about this very
important topic for all of U.S. national security.
Frankly, I spent my first years as an adult wearing our
uniform in the United States Army. And I thought at the time I
would probably never--well, back then, the cold war was going
on. We were thinking about the Soviets and the threat. And then
we think about China, and I thought I would probably never go
there without a rucksack full of ammo, some body armor, night
vision goggles, and all the kit.
But I was fortunate to go there and do a fair bit of trade.
So I have seen a lot from 2005 until the end of 2015 when I
decided to run for this office. Now that I am here, I see
things that we are doing from a policy thing in a different
way.
But I will highlight one of the concerns I had while I was
at West Point was the technology transfer. Hughes transferred
the ability to launch multiple satellites in this case--could
be warheads--from one launch vehicle to China. In fact, that
was one of the first things President Clinton did, was shift
release authority for sensitive technology from Defense to
Commerce. Unfortunately, shortly thereafter Secretary of
Commerce Brown died in a plane crash. So we still aren't able
to ascertain some of his opinions about that transfer.
But I am curious to know where the gaps are between
technology transfer. Because if you think about a company
like--let's just take Apple. They don't generally buy
everything that they need. They license lots of things. So they
don't necessarily control it, but they have access to exactly
how it works.
So could you highlight that interplay between CFIUS, which
deals with control, and export control, which nearly uniformly
the panel seems to say, keep this separation between the two?
But I think there is a pretty important gap to understand
there.
Mr. Blair. I will start, but there are practitioners here
who have worked in this.
The shortcomings right now in the Export Control Act, ITAR,
and so on, are that it requires a more defined definition of
the technology and it is generally at a more advanced stage and
a license has to be granted and so on.
The concern now in the fast-moving world of military
technology and other technology are the potential, which has
not formed itself into the technology to build a device but
pretty applicable, whether it is artificial intelligence or
high-speed computers or any of the others.
Right now the Export Control Act does not reach far enough
into those things which experts can figure out are pretty much
a threat. So we need to fill in that gap between CFIUS and the
export control pushing from one direction or another. You all
are considering CFIUS. I vote for having CFIUS take up some of
the burden of trying to protect that earlier-stage technology
that will have military application soon.
Mr. Davidson. Thank you.
Mr. Hunter, you highlighted some concerns. Could you please
address them?
Mr. Hunter. Thank you.
Well, first off, export control issues come up in CFIUS.
And CFIUS does deal with those. Export control officials
participate in CFIUS. So there is overlap.
Second, while we have a pretty robust, well-thought-out
export control regime, one, the legislation on which it is
based has lapsed. It is being supported now through IEEPA, so
the temporary authority. That is worth looking at.
Second, the policy process, which Admiral Blair was
highlighting, for designating which technologies need to be
protected is not keeping pace with the evolution of the
technology. That you might look at as something of a software
problem, something that, again, Congress may want to look at,
as well as the Administration.
But the tools exist. And they are highly adaptable. They
can deal with evolving technologies. They can deal with
transfers outside the United States of U.S. technology.
Mr. Davidson. Thank you, sir.
Mr. Kennedy, maybe, any concerns there, that you want to
address?
Mr. Kennedy. I would agree. I am particularly worried about
Chinese investment in Silicon Valley and elsewhere with
investment funds that then go around scooping up garage-size
companies that end up providing technology which has commercial
and military applications, which I think needs to be covered.
Whether that is through expanding CFIUS or through export
controls, I think whatever is most practical makes the most
sense.
Mr. Davidson. Thank you.
And I would highlight, some of the things we look at that
seem nefarious, it is good that you highlighted that CFIUS does
have the capability to address. So if you think an investment
through Ireland as a vehicle, for example, where beneficial
control is Chinese, perhaps it is because of the tax haven. So,
hopefully, we have done some good with our own tax laws. Thank
you.
Mr. Chairman, I yield.
Chairman Barr. The gentleman yields back.
The Chair recognizes the gentlelady from Utah, Mrs. Love.
Mrs. Love. Thank you. Thank you very much for being here.
Mr. Hunter, you mentioned in your written statement that
the recent flow of Chinese investment, $46 billion into Europe
and $48 billion into North America in 2016, has spurred
concerns across advanced markets. Since the United States is
not the only advanced market generating cutting edge
technologies, unilateral U.S. action is less likely to be
effective over time.
I would like to ask you, and maybe some of the other
witnesses, if they have any comments to add on this, how the
United States could best coordinate with other countries,
either bilaterally or through forums such as G7 or OECD, to
evaluate the implications of these transactions. And what
should that coordination look like? For instance, should we
coordinate on specific cases or do you think we should be more
general in our coordination?
Mr. Hunter. Thank you, Representative Love.
The substantial increase of Chinese investment, as we have
discussed and Derek Scissors has highlighted, is having a
political effect across advanced markets. You have seen
legislative changes, regulatory changes in Germany. The United
Kingdom is considering its own CFIUS process. The EU has
proposed a framework as well. And then there are a number of
very sensitive cases that have come up in a number of
countries, like Australia.
I think that the opportunities for coordination are two, as
you highlighted. One is on the policy. I think it would be a
wise thing for this Administration and Congress to engage with
counterparts in other advanced markets to ensure that their
legal systems, their regulatory systems, are adequate to the
challenges, that are both transparent, predictable, but also
address the national security issues that may be there.
Second, on individual cases, the CFIUS legislation imposes
strict constraints on confidentiality and the handling of
information relating to transactions. That is entirely
appropriate. However, those confidentiality rules could have an
unintended consequence in restricting the ability of our
national security officials to communicate with their
counterparts.
And it would make sense, it would seem to me, that just as
our competition officials can communicate with their
counterparts in other countries, that our national security
officials can communicate with their counterparts about
particular individual transactions. So I think both dimensions
are possible.
Mrs. Love. So you think it should be, as far as you are
concerned, all of the of the above, just on general policy and
also on specific transactions?
Mr. Hunter. Correct.
Mrs. Love. OK.
Does anybody else have anything?
OK. Yes.
Mr. Scissors. So we have an example of CFIUS working with a
country that does not have an investment review process
already, which is the U.S. coordinated with Germany to block a
Chinese purchase of a German chip firm in 2016. We can do that
on an ad hoc basis. What I think would be more useful is if the
Congress, the Administration, laid out principles for how they
would like to guide the regime.
I spent a lot of last year in Australia, in Germany,
talking to governments. They do see this as a concern, as Mr.
Hunter just said. But they are behind us. We are considering
more advanced questions than they are. And I think the number
one thing the U.S. can do to its allies is tell them what we
think is most important, as practical as saying not
semiconductor investment right now, that is what we want you to
close off.
Mrs. Love. Are we not doing that currently?
Mr. Scissors. Talking to Europe about their political
process is very confusing, at least for me. But they don't
perceive that we are doing that. And one of the reasons is we
are having an extensive and valuable debate here.
My point is, at the conclusion of this debate, if we adopt
some clear principles about what we want to do, that is the
first step, and countries are waiting for that.
Mrs. Love. OK. So the general consensus is to make sure we
have at least our ducks in a row and then communicate that and
let everyone know which standards that are OK.
Would our European trading partners have any reservations
about coordinating with the United States as far as you are
concerned? Do you see any circumstances where they would have
some trouble or reservations about coordinating with the United
States?
Mr. Scissors. Well, having just been there and had this
discussion, they are not going to adopt the same tactics and
strategies that we are. They are actually probably more
concerned about personal data. But they are also not going to
get into a war over Taiwan with technology that was taken from
European firms because they don't have the same military
concerns.
So I see the European side as more interested in economics
than we are, less interested in national security. It is not
that they will hesitate to cooperate, but they have their own
priorities.
Mrs. Love. OK. Thank you.
Chairman Barr. The gentlelady's time has expired.
The Chair recognizes the gentleman from Arkansas, Mr. Hill.
Mr. Hill. I thank the chairman and the Ranking Member for
this second and a good hearing on discussing how we can improve
our CFIUS process. And I certainly think it needs to have the
flexibility that keeps up with the times, both in terms of
style of investing in companies or technology, keep up with the
changing times in how technologies develop. I thank the
chairman for his work, and I certainly thank my friend from
North Carolina for his work in bringing this to us.
But we also need to keep in mind, we need a permanent
reauthorization of our export control systematic process as
well. These two work hand-in-hand. One doesn't work without the
other. Both need improvement. That is something that I think
Congress should and must do.
Also, listening to the testimony today in our first panel,
this is something we have gotten right since World War II. We
know how to do this over the years. We have led the world in
trade liberalization during that period, but we have also
protected what we thought was important here in our country,
not just national security, but media ownership, control of the
media was an equally important issue, telecommunications,
utilities, and power generation in this country.
All of these things are important. So I don't want us to
lose sight that we can do more than just the military
application of technology in this work, and that is not
inconsistent with standing as the world's leader in trade
liberalization.
Admiral Blair, I have a question for you. In listening to
your testimony and reading it, very interesting in terms of
your re-review recommendation that came from your panel, review
acquisitions that have been previously approved when new
evidence comes to light of damaging actions by foreign
companies. I found that interesting.
Are you suggesting that the U.S., through the CFIUS
process, have a no-buy list, that we actually essentially put
companies on a no-buy list for just general purposes because of
their--maybe what country they are--this is a nonsanctioned
country, let's presume. What is your response to that?
Mr. Blair. If I were DNI again, I would establish an
organization somewhat like our National Counterterrorism Center
where you have a fairly sizable, several dozen people, some of
them full-time staff, some of them detail personnel coming from
other agencies, Commerce. They would have a different character
from the combination of intelligence analysts and legally
trained people that we primarily use now.
And you would really have a group that knows about what is
going on in this world of foreign companies dealing in the
United States, dealing with technology. And you would have
built up databases so that instead of having a research project
for each new transaction that came along, you would have a
sense of where these companies were, and who ought to be ruled
out right from the start, and who requires more research.
So in that sense, yes, it would develop a de facto, this
company is dirty, we are not going to approve anything that
they do.
Mr. Hill. Yes. So we wouldn't even entertain a transaction?
Mr. Blair. No. And I think that would be a very powerful
tool for the United States to develop.
Right now, I would defy you to find that--Dr. Scissors has
been very kind. But the people who work on export control
within the intelligence community are part-timers who have
other jobs. It is not that full time, intense, really
understand the world.
A lot of this information is done by private research
firms. But we can tap that. We can bring them in. And then we
know what is going on, and then we can make smart decisions.
Mr. Hill. I thank you for your contributions to the debate
and your leadership for our country.
And I would like to yield, Mr. Chairman, what time I have
remaining to my friend from North Carolina.
Mr. Pittenger. Thank you, my good friend, Mr. Hill.
Again, thanks to each of you all.
I would like to clarify that I am from North Carolina. We
have, in my district, the largest hog processing plant in the
world in Bladen County, and it is owned by the Chinese, a
Smithfield processing plant. So I have a great respect for
Chinese investments. Notwithstanding that, I do have a concern
for their focus today.
Admiral Rogers, Director of the NSA, stated that: ``I think
we need to step back and reassess the CFIUS process and make
sure it is optimized for the world of today and tomorrow,
because I am watching nation-states generate insight and
knowledge about our process. They understand our CFIUS
structure. They understand the criteria broadly that we use to
make harder, broader policy decisions, and it is an investment
acceptable from a national security perspective.''
So I would just say to each of you, as we move forward with
this deliberation, your perspective is welcome and appreciated
because this is a very important area for us to address.
Thank you very much. I yield back.
Chairman Barr. The gentleman yields back.
The Chair now recognizes the gentleman from Florida, Mr.
Posey.
Mr. Posey. Thank you very much, Mr. Chairman, for having
this hearing and for allowing me to participate in the
discussion on the Committee on Foreign Investment in the United
States, or CFIUS, as it is known.
Is there anyone on the panel who would disagree with the
statement that national security is a mission of the Committee
on Foreign Investment in the United States?
OK. We all agree on that.
Out of curiosity, have any of you ever read the book ``One
Second After''? It was a New York Times bestseller by William
Forstchen who talked about an absolutely incredible threat to
this country. It is a novel, but it is based on confidential
and some public Congressional resources. Has anyone ever heard
of that or read that book?
Many are concerned about the entry of a Middle Eastern
company as an investor and service provider in container
operations at one of Florida's seaports. Since 9/11, the Nation
has been focused on the potential threats posed by containers
as a vehicle for delivering terrorist activities to our shores.
TSA is spending millions on screening of these containers.
I am thinking that the entry of a firm like this with
uncertain relationships to terrorist organizations should be
reviewed by the Committee on Foreign Investment in the United
States. And I am just wondering if you are aware of any current
authorities that would require CFIUS to be involved in this.
OK. Seeing none.
Recently, my office attempted to contact the Committee on
Foreign Investment in the United States, or CFIUS, at the
Treasury Department to discuss this inbound foreign investment
transaction and were told that one Federal staff liaison was
managing 90 percent of the inquiries related to CFIUS filings.
My understanding is that CFIUS does not have a dedicated staff
at the U.S. Department of Treasury.
Two questions. Given the information, do the current
resources allocated to CFIUS seem adequate? I could take a
quick yes or no from each of you.
Secondarily, what types of mitigation requirements or
agreements might be appropriate in a case between one of our
Nation's busiest ports--containing a nuclear sub base, by the
way, and adjacent to Cape Kennedy, physically adjacent to Cape
Kennedy--and a Middle Eastern cargo terminal operations
company?
Mr. Blair. So the scenario is, Mr. Posey, that the Middle
East company that operates part of a cargo facility would
actively allow a terrorist organization to use that access to
introduce a device into the United States? I haven't read the
book so I am not quite sure of the--
Mr. Posey. Well, actually, the book is background material.
In this particular case, we have a Middle Eastern company, a
container company involved in a lease with a port, I think a
very, very critical location of a port.
And I don't know even if it is even remotely true, but
there have been posts and there have been statements to the
effect that some of the principals in this cargo company might
be terrorist sympathetic in one way or another.
And it has amazed me that we have not been able to be find
any Federal agency that vets people who lease property at our
ports like this for our national security, for the interest of
our national security. The agencies we have contacted have
passed the buck, one to the other, and by definition it seems
like that might fit in here. That is why I appreciate the
kindness of the chairman to let me sit in on this and seek your
information or input for this.
Mr. Blair. Right. Well, I think you ought to keep on it
until you get a good explanation. It sounds like something that
should be--I am not sure if it is CFIUS, export control,
antiterrorist legislation, or what the right legal thing is.
But I think you are absolutely right to get a good
investigation of this so you are satisfied whether this is a
clean operation or not.
Mr. Kassinger. Mr. Posey, I would say there certainly are
permanent employees of the Treasury assigned to CFIUS matters,
including the CFIUS staff chairman, and you might well go
directly there.
Also, the Department of Homeland Security has comprehensive
regulatory authority over port security matters, and I would
think they would have resources here.
Mr. Scissors. A comment has been made, starting with the
Ranking Member, and I think everyone agrees, that resources are
crucial. And CFIUS is not resourced properly, in my own view,
because of a surge of Chinese investment in 2016 that we didn't
respond to in terms of resources.
But I will add one other thing. You should be able to get
an answer. One of the things that has been raised by other
people, and I entirely agree with is, there are some ways in
which this process can be more transparent. An answer like,
``Yes, we reviewed this company and we did not find any
embedded foreign intelligence assets'', privately made to a
Member of Congress, seems to be appropriate.
Mr. Posey. Thank you.
Thank you, Mr. Chairman.
Chairman Barr. The gentleman's time has expired.
And there is a request for a brief second round of
questioning, and I will start with myself for an additional 5
minutes and then recognize a couple of other members.
I want to revisit this issue of the interplay between the
export control regime and CFIUS. It appears to me that there is
a diversity of opinion about what CFIUS reform should look like
in that regard and whether or not the CFIUS process should
become a one-stop shop.
Admiral Blair, I take it that is your view, that the CFIUS
process should be a one-stop shop and that there should be
greater integration between CFIUS and export controls, and
maybe Mr. Hunter disagrees with that.
Could you all amplify that discussion a little bit and help
us examine what is the right policy direction?
Mr. Blair. Well, Mr. Hunter has worked on the other end of
the organization. But I would say in this area that having both
belts and suspenders is not a bad idea and that if there is
some overlap in terms of the point in technological development
at which you make a regulatory--a go/no-go, decision, is going
to be moving.
So if have you a company in which you have some of the top
AI people in the world that are working on something that has a
military application, and there is a minority Chinese interest
in it that brings Chinese workers in to learn--and by
technology, how to approach this, the human potential--that is
something you ought to look at, at the early stage of the CFIUS
level.
Once this is turned into a device which can build a piece
of equipment with a military application, then, of course, ITAR
and export controls have to be considered.
But there are a whole range of threats that exist ahead of
time that I think can be handled better by CFIUS consideration
at the beginning of the covered transaction rather than waiting
until you know exactly what piece of militarily relevant
equipment is there. And I think I would attack it from the
CFIUS end as well as from the other end.
Chairman Barr. Mr. Hunter, do you disagree with that
assessment, and why?
Mr. Hunter. I think there is a consensus, probably across
the table here, about the importance of the technology control.
And I think to the extent that there are divergences, it is
about the best tool to deal with the emerging technologies.
My concern about CFIUS is that it is, as I mentioned
earlier, reactive. It only deals with cases that are presented
to it. It is very time consuming. And the beauty of the export
control regime, when it is operating properly, is that it can
be much more systematic. It can set rules that apply across the
economy.
Now, what has been missing, and I think this is where
Admiral Blair is highlighting, and others, is the policy
development, the identification of the technologies that need
to be controlled. But certainly the tools exist. Indeed,
Secretary Kassinger supervised the operation of those tools in
his time as deputy secretary, so he could probably speak to it
as well.
But this is not a disagreement about the fundamental
policy. I think it is about the tools.
Chairman Barr. I am sensitive to the concern about the
time-consuming nature of the CFIUS process. I think the admiral
painted out that we should be able to be identify--I think Dr.
Scissors as well--there are some obvious cases of actors that
are engaged in nefarious activities attempting to obtain
technology transfer.
I know, I think, in the last time the CFIUS process was
updated, 2007 timeframe, that there were some deadlines and
timelines that were codified in that process. Could we do a
better job in putting some better timelines in place that would
allow the process to work so that the transaction would be
approved or disapproved in a timely manner? Anybody want to
comment on that?
Dr. Scissors.
Mr. Scissors. I am just going to take a couple of examples,
and this is probably dangerous to generalize from. But I think
the short timelines are now hurting us. What we have is CFIUS
not responding within its allocated time, and companies, a lot
of companies, refiling, refile, refile, refile.
That is not the system we want to create. We want to think
about what is an adequate amount of time, in the current
environment, not 10 years ago, in the current environment, for
CFIUS to respond to a company, and then tell them that, and
they get a final decision. They don't get a constant
resubmission.
So I am not sure short time is the solution. Sticking to
the deadline, whatever it is, is a better approach.
Chairman Barr. Mr. Kassinger.
Mr. Kassinger. Just quickly on that. I think timelines are
misleading in the sense that CFIUS doesn't even initiate a case
until it has spent a lot of time with companies beforehand.
But, second, I do think that the existent timeline should
be extended. I think Mr. Pittenger's suggestion in his bill of
extending the initial review period is a good one. I think we
need it in the current environment.
Chairman Barr. My time has expired. And I will now
recognize the gentleman from Washington, Mr. Heck, for an
additional round.
Mr. Heck. Thank you, Mr. Chairman.
Dr. Scissors, back to you. You have written and I think
asserted here again today that you think the basis for CFIUS
evaluation ought to be restricted to national security
considerations. I agree with you. Not everybody does. There are
some people who advocate broadening this mission.
So I think this is a very basic issue for our
considerations. I know why I believe the way I do. But, as
succinctly as possible, will you share with us why you think it
is important to restrict CFIUS evaluations to national security
considerations?
Mr. Scissors. Two reasons, a U.S. reason and a China
reason.
The U.S. reason is, I really like foreign investment. It
creates jobs. It improves competition. It gives better products
to Americans. I want the default to be, we let in foreign
investment unless we have a really good reason not to.
The China-specific reason is that because of the rise of
China, because of the rise of their investment around the world
as seen in the last 12-13 years, it is a big job for CFIUS just
to do national security. We have heard people who disagree on
other issues all agree on that. I think we absolutely have to
get the national security mission right before we think about
anything else.
Mr. Heck. So second and last, I was fascinated by your
comment in your opening remarks about understanding, however,
that national security may be more broadly defined than we have
traditionally. It is not just software related to rocketry, for
example, but it could include access to personal data that can
then be weaponized in an effort against us.
I assume that you are aware that section 15 of our proposed
bill, which delineates factors to be considered, includes the
following language in subsection 14, and I quote: ``The extent
to which the covered transaction is likely to expose, either
directly or indirectly, personally identifiable information,
genetic information, or other sensitive data of United States
citizens to access by a foreign government or foreign person
that may exploit that information in a manner that threatens
national security,'' end quote.
So my question is what your reaction is to that. Is that
adequate? Would you have any recommended changes to it? Or do
you think this gets at the nubbins of what I thought you so
appropriately raised at the top of this hearing?
Mr. Scissors. I think it gets at it. I think there is a
legitimate issue of when personal data actually threatens the
national security. But I don't think there is any question that
as Chinese firms become more interested in U.S. firms which
hold personal data, there is a potential national security risk
there.
This is one of the changes that has occurred and I think
the bill responds appropriately to it, with the caveat that
this is going to be hard. Not everything involving personal
data is a threat to national security, but it should be one of
the considerations for CFIUS.
Mr. Heck. You are satisfied with this information?
Remember, I am a cosponsor of this bill before you respond.
Mr. Kassinger. And the first thing I would say is your
definition captures exactly current CFIUS practice. So I think
it would codify it and that is a good thing.
Second, I want to echo Derek's comments about personal data
being a very difficult issue. I thought his original comment
was, any consumer-facing company would have to be off limits
because they all collect personal data. That would include the
Washington Redskins. Think how much personal data is collected
by a sports team with its ticket buyers.
So it is a very difficult issue. I don't think there are
any bright line tests that can be made. But ensuring that CFIUS
takes into account appropriately how to deal with personal data
issues is an important task of the committee.
Mr. Heck. Thank you, sir.
And with that, not only I do yield back, I want to
reiterate my gratitude to the Chair for holding this second
hearing on a very important topic.
Chairman Barr. I thank the gentleman.
And for the final word today I will return to the gentleman
from North Carolina, Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
Again, thanks to each of you all sincerely.
I would like to clarify for those who may be watching this
hearing that this is a bill, H.R. 4311, that is directly laser
focused on national security application. And it is not by
design or intent or purpose to have a broader construct than
that. As well as this effort will be led by Treasury, with some
16 agencies having involvement.
So I think the purview of Treasury, in the total engagement
by the broad spectrum of our government, is very critical going
forward as we consider the direct interest by our adversaries
in acquiring our technology companies, we have the right people
who are positioned to review future interest.
So, again, thank you so much for being with us. I know that
we have much more to discuss. I think as we all look ahead, we
know that this is a critical area of concern for our national
security.
Thank you very much. I yield back.
Chairman Barr. The gentleman yields back. Thank you.
And I would like to thank our witnesses for their testimony
today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned.
[Whereupon, at 12:05 p.m., the subcommittee was adjourned.]
A P P E N D I X
January 9, 2018
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