[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
PERSPECTIVES ON REFORM OF THE CFIUS REVIEW PROCESS
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HEARING
BEFORE THE
SUBCOMMITTEE ON DIGITAL COMMERCE AND CONSUMER PROTECTION
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
APRIL 26, 2018
__________
Serial No. 115-122
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
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COMMITTEE ON ENERGY AND COMMERCE
GREG WALDEN, Oregon
Chairman
JOE BARTON, Texas FRANK PALLONE, Jr., New Jersey
Vice Chairman Ranking Member
FRED UPTON, Michigan BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
MICHAEL C. BURGESS, Texas ELIOT L. ENGEL, New York
MARSHA BLACKBURN, Tennessee GENE GREEN, Texas
STEVE SCALISE, Louisiana DIANA DeGETTE, Colorado
ROBERT E. LATTA, Ohio MICHAEL F. DOYLE, Pennsylvania
CATHY McMORRIS RODGERS, Washington JANICE D. SCHAKOWSKY, Illinois
GREGG HARPER, Mississippi G.K. BUTTERFIELD, North Carolina
LEONARD LANCE, New Jersey DORIS O. MATSUI, California
BRETT GUTHRIE, Kentucky KATHY CASTOR, Florida
PETE OLSON, Texas JOHN P. SARBANES, Maryland
DAVID B. McKINLEY, West Virginia JERRY McNERNEY, California
ADAM KINZINGER, Illinois PETER WELCH, Vermont
H. MORGAN GRIFFITH, Virginia BEN RAY LUJAN, New Mexico
GUS M. BILIRAKIS, Florida PAUL TONKO, New York
BILL JOHNSON, Ohio YVETTE D. CLARKE, New York
BILLY LONG, Missouri DAVID LOEBSACK, Iowa
LARRY BUCSHON, Indiana KURT SCHRADER, Oregon
BILL FLORES, Texas JOSEPH P. KENNEDY, III,
SUSAN W. BROOKS, Indiana Massachusetts
MARKWAYNE MULLIN, Oklahoma TONY CARDENAS, California
RICHARD HUDSON, North Carolina RAUL RUIZ, California
CHRIS COLLINS, New York SCOTT H. PETERS, California
KEVIN CRAMER, North Dakota DEBBIE DINGELL, Michigan
TIM WALBERG, Michigan
MIMI WALTERS, California
RYAN A. COSTELLO, Pennsylvania
EARL L. ``BUDDY'' CARTER, Georgia
JEFF DUNCAN, South Carolina
Subcommittee on Digital Commerce and Consumer Protection
ROBERT E. LATTA, Ohio
Chairman
JANICE D. SCHAKOWSKY, Illinois
Ranking Member
GREGG HARPER, Mississippi BEN RAY LUJAN, New Mexico
Vice Chairman YVETTE D. CLARKE, New York
FRED UPTON, Michigan TONY CARDENAS, California
MICHAEL C. BURGESS, Texas DEBBIE DINGELL, Michigan
LEONARD LANCE, New Jersey DORIS O. MATSUI, California
BRETT GUTHRIE, Kentucky PETER WELCH, Vermont
DAVID B. McKINLEY, West Virgina JOSEPH P. KENNEDY, III,
ADAM KINZINGER, Illinois Massachusetts
GUS M. BILIRAKIS, Florida GENE GREEN, Texas
LARRY BUCSHON, Indiana FRANK PALLONE, Jr., New Jersey (ex
MARKWAYNE MULLIN, Oklahoma officio)
MIMI WALTERS, California
RYAN A. COSTELLO, Pennsylvania
JEFF DUNCAN, South Carolina
GREG WALDEN, Oregon (ex officio)
C O N T E N T S
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Page
Hon. Robert E. Latta, a Representative in Congress from the State
of Ohio, opening statement..................................... 1
Prepared statement........................................... 2
Hon. Greg Walden, a Representative in Congress from the State of
Oregon, prepared statement..................................... 117
Hon. Frank Pallone, Jr., a Representative in Congress from the
State of New Jersey, prepared statement........................ 118
Witnesses
Heath Tarbert, Assistant Secretary, International Markets and
Investment Policy, U.S. Department of Treasury................. 5
Prepared statement........................................... 7
Answers to submitted questions............................... 123
Richard Ashooh, Assistant Secretary, Export Administration, U.S.
Department of Commerce......................................... 13
Prepared statement........................................... 15
Answers to submitted questions............................... 125
Kevin Wolf, Partner, Akin Gump Straus Hauer and Feld, LLP........ 41
Prepared statement........................................... 43
Answers to submitted questions............................... 127
Clay Lowery, Managing Director, Rock Creek Global Advisors....... 63
Prepared statement........................................... 65
Answers to submitted questions............................... 129
Celeste Drake, Trade and Globalization Policy Specialist, AFL-CIO 76
Prepared statement........................................... 78
Answers to submitted questions............................... 131
Derek Scissors, Resident Scholar, American Enterprise Institute.. 91
Prepared statement........................................... 93
Answers to submitted questions............................... 133
Submitted material
Statement of the Federal Communications Commission............... 120
Statement of the Department of Energy............................ 121
PERSPECTIVES ON REFORM OF THE CFIUS REVIEW PROCESS
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THURSDAY, APRIL 26, 2018
House of Representatives,
Subcommittee on Digital Commerce and Consumer
Protection,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:15 a.m., in
room 2322 Rayburn House Office Building, Hon. Robert Latta
(chairman of the subcommittee) presiding.
Members present: Representatives Latta, Kinzinger, Burgess,
Lance, Guthrie, McKinley, Bilirakis, Bucshon, Mullin, Walters,
Duncan, Schakowsky, Welch, Kennedy, and Green.
Staff present: Samantha Bopp, Staff Assistant; Daniel
Butler, Staff Assistant; Melissa Froelich, Chief Counsel,
Digital Commerce and Consumer Protection; Adam Fromm, Director
of Outreach and Coalitions; Ali Fulling, Legislative Clerk,
Oversight & Investigations, Digital Commerce and Consumer
Protection; Elena Hernandez, Press Secretary; Zach Hunter,
Director of Communications; Paul Jackson, Professional Staff,
Digital Commerce and Consumer Protection; Bijan Koohmaraie,
Counsel, Digital Commerce and Consumer Protection; Austin
Stonebraker, Press Assistant; Greg Zerzan, Counsel, Digital
Commerce and Consumer Protection; Michelle Ash, Minority Chief
Counsel, Digital Commerce and Consumer Protection; Lisa
Goldman, Minority Counsel; and Caroline Paris-Behr, Minority
Policy Analyst.
OPENING STATEMENT OF HON. ROBERT E. LATTA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO
Mr. Latta. Good morning. I would like to welcome you to the
Digital Commerce and Consumer Protection Subcommittee of Energy
and Commerce. And before we get started, just to let everyone
know the Environment Subcommittee is also running downstairs,
so we will have members coming in and out from downstairs from
that subcommittee meeting, too.
So I, again, want to welcome you to the subcommittee and I
recognize myself for 5 minutes.
And again, good morning and welcome to our witnesses. And
we thank you for being with us today to discuss proposed reform
of the Committee on Foreign Investment in the United States or
CFIUS. CIFUS was first established by the Executive order by
President Ford. Over the years, the committee was codified and
its members expanded based on input from this committee under
both Republican and Democratic leadership.
CFIUS is tasked with reviewing mergers, acquisitions, or
takeovers of U.S. businesses by foreign persons to see if they
pose a threat to our national security. If CFIUS determines
that a transaction does threaten national security, it can
negotiate changes to the terms of the proposed deal.
Alternatively, the committee can recommend that the President
block a proposed deal.
Until recently, presidents have generally not found it
necessary to block a proposed foreign purchase of or
controlling interests in U.S. assets. However, in the last 6
years, presidents from both parties have blocked a total of
four proposed transactions.
The increase in presidential action to stop foreign
takeovers of American companies is one indication of how the
world has changed. Foreign direct investment in the United
States in 2016 doubled over the previous 10 years. In addition
to an increase in monetary investments, foreign investments
have also taken new forms, including the joint venture.
While more foreign investment in America is generally a
good thing, for example, Honda has a large presence in Ohio,
concerns have arisen that some investments could be the work of
foreign governments that want to access the U.S. technology or
infrastructure. If America's international competitors lack the
ability to develop their own technology, they may find it
easier to buy it by acquiring an American business or, they
might seek to purchase critical U.S. infrastructure as a way to
harm American interests.
CFIUS is the organization charged with examining who is
investing in national security-related U.S. companies and why.
Today, we are going to examine whether CFIUS has the proper
tools to do that job, what tasks are already assigned to other
government bodies, including export control agencies, and what
steps are already being taken through regulation to reform
CFIUS.
The most important job of Congress is to ensure the safety
and security of our nation. Whether through the CFIUS process
or other government programs, it is our duty to be vigilant for
the American people. Our security, both economic and national,
secures the freedoms that helps Americans thrive.
I look forward to hearing from our witnesses today on their
thoughts on the reform processes and proposals for CFIUS, in
particular H.R. 4311, the Foreign Investment Risk Review
Modernization Act of 2017, and what other considerations
policymakers should keep in mind during this debate.
I want to, at this time, yield to the ranking member, the
gentlelady from Illinois, the ranking member of the
subcommittee.
[The prepared statement of Mr. Latta follows:]
Prepared statement of Hon. Robert E. Latta
Good morning and thank you to our witnesses for being here
today to discuss proposed reform of the Committee on Foreign
Investment in the United States, or CFIUS. CFIUS was first
established by Executive Order by President Ford. Over the
years, the Committee was codified and its members expanded
based on input from this Committee under both Republican and
Democratic leadership.
CFIUS is tasked with reviewing mergers, acquisitions or
takeovers of U.S. businesses by foreign persons to see if they
pose a threat to our national security. If CFIUS determines
that a transaction does threaten national security, it can
negotiate changes to the terms of a proposed deal.
Alternatively, the Committee can recommend that the President
block a proposed deal.
Until recently presidents have generally not found it
necessary to block proposed foreign purchases of, or
controlling interests in, U.S. assets. However, in the last 6
years presidents from both parties have blocked a total of four
proposed transactions.
The increase in presidential action to stop foreign
takeovers of American companies is one indication of how the
world has changed. Foreign direct investment in the United
States in 2016 doubled over the previous 10 years. In addition
to an increase in monetary investments, foreign investments
have also taken new forms--including the joint venture.
While more foreign investment in America is generally a
good thing when more jobs are created for our citizens,
concerns have arisen that some other investments could be the
work of foreign governments that want access to advanced U.S.
technology or infrastructure. If America's international
competitors lack the ability to develop their own technology
they may find it easier to buy it by acquiring an American
business. Or, they might seek to purchase critical U.S
infrastructure as way to harm American interests.
CFIUS is the organization charged with examining who is
investing in national security related U.S. companies, and why.
Today, we are going to examine whether CFIUS has the proper
tools to do that job, what tasks are already assigned to other
government bodies-including export control agencies-and what
steps are already being taken through regulation to reform
CFIUS.
The most important job of Congress is to ensure the safety
and security of our nation. Whether through the CFIUS process,
or other government programs, it is our duty to be vigilant for
the American people. Our security, both economic and national,
secures the freedom that helps Americans thrive.
I look forward to hearing from our witnesses today on their
thoughts on reform proposals for CFIUS, in particular H.R.
4311, the Foreign Investment Risk Review Modernization Act of
2017, and what other considerations policymakers should keep in
mind during this debate.
Thank you and I yield now to the Ranking Member.
Ms. Schakowsky. Thank you, Mr. Chairman. My opening
comments will certainly reflect what you have said, as well.
American ingenuity attracts investment from around the
world. That investment can bring much-needed capital to
American companies but foreign interests can also use
investment to threaten our national and economic security.
Congress has instructed the Committee on Foreign Investment
in the United States to review mergers and acquisitions by
foreign investors for potential national security threats. It
has been a decade since the last major CFIUS legislation. We
are more than due for evaluating how CFIUS is operating.
In 2016, the stock of foreign direct investment in the
United States totaled $7.6 trillion and foreign investors spent
more than $365 billion acquiring U.S. companies. Given the
enormity of that investment, we must consider whether the
current safeguards for our national security and our nation's
workers are sufficient.
State-owned and state-affiliated enterprises in China have
sought U.S. intellectual property through mergers and
acquisitions, as well as joint venture agreements. Current
CFIUS review is inadequate to capture the various ways a
foreign interest may try to access sensitive American
technologies.
Today, we will be hearing about several bills to reform
CFIUS. H.R. 4311, the bipartisan Foreign Investment Risk Review
Modernization Act, would expand the investments covered by
CFIUS--CFIUS review to protect critical technologies and
infrastructure. Congressman Ed Royce and Eliot Engel, the chair
and ranking member of the Foreign Affairs Committee, have
introduced H.R. 5040, the Export Reform Control Act, to control
the outflow of military and dual-use items.
Finally, Congresswoman Rosa DeLauro has introduced H.R.
2932, the Foreign Investment and Economic Security Act, to
expand CFIUS' review to greenfield transactions which are new
investments, as opposed to acquisitions. Her bill would also
ask CFIUS to evaluate not only national security risks but also
economic, public health, and safety risks.
Our hearing today occurs within a broader debate over
trade. President Trump has placed tariffs on steel and aluminum
and the United States is currently renegotiating--it could be
today, I hear, we might get some sort of announcement on NAFTA,
the North American Free Trade Agreement with Canada and Mexico.
Any new NAFTA deal must include strong labor protections for
workers in this country, as well as for workers in Mexico and
Canada.
Last week, I was among the 107 House Democrats who sent a
letter to the U.S. Trade Representative Robert Lighthizer
emphasizing our opposition to legislation in the Mexican Senate
to weaken labor standards in Mexico. I am encouraged that the
legislation has now been tabled.
I believe that Americans benefit from trade relations that
are fair. Americans are increasingly aware that corporations
have manipulated U.S. trade policy to the detriment of workers
and consumers. As we examine our trade policy, we want to keep
fairness to American workers and consumers front and center.
Corporations have used trade agreements to fight against
countries' labor and environmental laws. We should be fighting
for fair trade agreements that protect workers and our
environment, rather than encouraging a race to the bottom.
National security is an important consideration as we
review foreign investment in the United States but I hope we
also spend time today on other risks that unfair trade
practices pose to this country.
I look forward to hearing from our two panels of witnesses.
I appreciate your being here today. And I want to thank
Chairman Latta.
And I yield back.
Mr. Latta. Thank you very much. The gentlelady yields back,
and the chair of the full committee, the gentleman from Oregon
is not here. Is there anyone on the Republican side that would
like to claim his time? Seeing none, and we haven't had--I saw
that Mr. Green had checked in but we will go ahead and conclude
with member opening statements at this time.
And the chair would like to remind members that pursuant to
the committee rules, all members' opening statements will be
made part of the record.
And again, I want to thank all of our witnesses for being
with us today and taking the time to testify before the
subcommittee. Today's witnesses will have the opportunity to
give 5-minute opening statements, followed by a round of
questions from the members.
Our first panel of witnesses for today's hearing will
include the Honorable Heath Tarbert, the Assistant Secretary
for International Markets and Investment Policy at the U.S.
Department of Treasury, and the Honorable Richard Ashooh, the
Assistant Secretary for Export Administration at the U.S.
Department of Commerce.
And, again, I thank you both forth being here. And Mr.
Tarbert, you are recognized for 5 minutes.
STATEMENTS OF HEATH TARBERT, ASSISTANT SECRETARY, INTERNATIONAL
MARKETS AND INVESTMENT POLICY, U.S. DEPARTMENT OF TREASURY; AND
RICHARD ASHOOH, ASSISTANT SECRETARY, EXPORT ADMINISTRATION,
U.S. DEPARTMENT OF COMMERCE
STATEMENT OF HEATH TARBERT
Mr. Tarbert. Chairman Latta, Ranking Member Schakowsky,
Vice Chairman Kinzinger, and distinguished members of the
subcommittee, thank you for the opportunity to testify in
support of FIRRMA and about CFIUS more generally.
The United States has always been a leading destination for
investors. Alexander Hamilton argued that foreign capital is
precious to economic growth. Foreign investment provides
immense benefits to American workers and families, such as job
creation, productivity, innovation, and higher median incomes.
At the same time, we know foreign investment isn't always
benign. On the eve of America's entry into World War I,
concerned by German acquisitions in our chemical sector,
Congress passed legislation empowering the President to block
investments during national emergencies.
During the Depression in World War II, cross-border capital
flows fell dramatically. And in the boom years of the 1950s and
'60s, investment in the U.S. was modest compared to outflows.
During that time, foreign investment also posed little risk.
Our main adversaries, the Soviet Union and its satellites, were
communist countries that were economically isolated from us.
But when the post-war trend changed in the 1970s, CFIUS was
born. The oil shock that made OPEC countries wealthy led to
fears that petro dollars might be used to buy strategic U.S.
assets.
In 1975, President Ford issued an Executive order creating
CFIUS to monitor foreign investments. Then in 1988, a growing
number of Japanese deals motivated Congress to pass the Exon-
Florio amendment. For the first time, the President could block
a foreign acquisition without declaring a national emergency.
For the next 20 years, CFIUS pursued its mission without
fanfare but, in the wake of the Dubai Ports controversy, it
became clear that CFIUS needed greater procedural rigor and
accountability. In 2007, some of you helped enact FINSA, which
formally established CFIUS and codified our current structure
and process.
Well now we find ourselves at yet another historic
inflection point. The foreign investment landscape has shifted
more than at any point during CFIUS' 40-year history. Nowhere
is that shift more evident than in the caseload CFIUS now
faces. The number of annual filings has grown within the last
decade from an average of about 95 or so to nearly 240 last
year. But it is the complexity, not simply the volume, that has
placed the greatest demand on our resources. In 2007, about
four percent of the cases went to the more resource-intensive
investigation stage. Last year in 2017, nearly 70 percent did.
This added complexity arises from a number of factors:
strategic investments by foreign governments, complex
transaction structures, and globalized supply chains.
Complexity also results from the ever-evolving relationship
between national security and commercial activity. Military
capabilities are rapidly building on top of commercial
innovations. What is more, the data driven economy has created
vulnerabilities never before seen.
And I know the gravity of this last point isn't lost on any
of you. Protecting against the disclosure of Americans'
sensitive personal data lies at the core of this subcommittee's
work. In several cases we have seen, even over the last year,
the company being acquired had access to significant amounts of
sensitive information capable of exploitation by state actors.
Similar sensitivities can arise because a company has
concentrations of data regarding American servicemen and women,
private information such as medical records, or simply
personally identifiable information on such a vast scale that
the national security concerns are too large to ignore.
New risk require new tools. The administration has endorsed
FIRRMA because it embraces four pillars critical to CFIUS
modernization. First, FIRRMA expands the scope of transactions
potentially reviewable by CFIUS to include certain non-passive
investments, joint ventures, and real estate purchases. These
changes lie at the very heart of CFIUS modernization. Right
now, we can't review a host of transactions that present
identical concerns to those we regularly examine.
Second, FIRRMA allows CFIUS to refine its procedures to
ensure the process is tailored, efficient, and effective. Only
where existing authorities, like export controls, can't resolve
the risk will CFIUS step in.
Third, FIRRMA recognizes that our closest allies face
similar threats and incentivizes our allies to work with us to
address those threats.
And finally, FIRRMA acknowledges that CFIUS must be
appropriately resourced.
Since testifying in the Senate in January and the House in
March, I have been meeting regularly with Members of Congress,
the business community, and other stakeholders to hear their
views on the bill. As a result of these meetings, we have been
working on proposed technical amendments to ensure that FIRRMA
is even better tailored to address jurisdictional gaps, while
also encouraging investment in our country. There is only one
conclusion here: CFIUS must be modernized. In doing so, we must
preserve our longstanding open investment policy. We must also
protect our national security. These twin aims transcend party
lines and they demand urgent action.
I look forward to working with this subcommittee on
improving and advancing FIRRMA.
Thank you.
[The prepared statement of Mr. Tarbert follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Latta. Well, thank you very much for your testimony.
And, Mr. Ashooh, you are recognized for 5 minutes. And,
again, thank you for being with us this morning.
STATEMENT OF RICHARD ASHOOH
Mr. Ashooh. Thank you, Mr. Chairman, and thank you also
Ranking Member Schakowsky, and the members of the committee for
having us here today.
I appreciate the opportunity to testify before the
subcommittee today regarding CFIUS. And to share the
perspective of the Department of Commerce, not only as a member
agency of CFIUS but also, Mr. Chairman you mentioned in your
opening statement about export control agencies, and we will
bring that perspective to our testimony today as well.
Within Commerce, the International Trade Administration and
the Bureau of Industry and Security, or BIS, play important
roles in the Department's review of CFIUS matters. BIS is the
administrator of the Export Administration Regulations or EAR
is the regulatory authority for the licensing and enforcement
of controls on dual-use items, which are items that have a
civilian end-use but can also be used for a military or
proliferation-related purpose, and also includes less-sensitive
military items.
The export control system administered by BIS is a process
that, like CFIUS, involves multiple agencies, primarily the
Departments of Defense, Energy, and State. We work closely with
these agencies to review not only license applications
submitted to BIS but also to review and clear any changes to
the EAR itself, ensuring that the export control system is
robust.
The interagency licensing process also takes into account
intelligence information to assist in the analysis of the
potential threats posed by those proposed exports. Further, the
export control system benefits from close cooperation with our
international partners through four major multi-lateral export
control regimes focused on national security, as well as
missile technology, nuclear, and chemical weapons
nonproliferation. Through these regimes, the United States and
our partners coordinate on which items and technologies merit
control and how those controls should be applied.
The EAR's authority covers an array of in-country transfers
of technology, as well as exports of goods, software, or
technology to foreign countries. For example, the EAR regulates
the transfer of controlled technology within the United States
or abroad to foreign nationals under what we call deemed
exports. It differentiates between countries that range from
our closest allies to embargoed nations; thus, allowing the
export control system to handle technology transfers under
different licensing review policies, depending on the level of
concern with the recipient country.
The EAR also includes lists of end-users of concern that
trigger extraordinary licensing requirements, as well as
prohibitions of certain end uses.
The export control system is also highly adaptable to
evolving threats and challenges. BIS is currently reviewing
control levels and procedures to specifically address such
threats from adversary nations, as well as their interest in
emerging critical technologies.
Our export control system includes aggressive enforcement
capabilities as well. BIS' special agents are located across
the United States and overseas with a primary focus on
identifying violations of the EAR and bringing to justice
domestic and foreign violators.
Recently, BIS, in conjunction with other federal law
enforcement agencies announced a prosecution against two
individuals conspiring to violate export control laws by
shipping controlled semiconductor components to a Chinese
company that was under a Commerce license restriction known as
the entity list.
The export control system and CFIUS are complementary tools
that we utilize to protect U.S. national security, with CFIUS
addressing risks stemming from foreign ownership of companies
important to our national security and export controls dealing
with the transfer of U.S. goods, technology, and software to
foreign nationals, regardless of the mode of transfer.
As with the export control system, it is also crucial that
CFIUS remain adaptive to current and evolving security
challenges. The FIRRMA legislation introduced in the House and
the Senate would, if enacted, take several important steps in
this direction, especially the provision requiring mandatory
filings for certain transactions involving foreign government-
controlled entities, as well as the provision which would
facilitate greater cooperation and information-sharing with our
allies and partners. Such international cooperation is an
essential part of our export control system and would benefit
CFIUS as well.
In sum, the export control system and CFIUS are both vital
authorities and complementary tools that the United States
relies upon to protect our national security. Strengthening
CFIUS through FIRRMA, while ensuring that CFIUS and the export
control authorities remain distinct, will enable even stronger
protections of U.S. technology.
The Department of Commerce looks forward to working with
the committee and the bill's cosponsors on this important
effort.
And I look forward to taking your questions.
[The prepared statement of Mr. Ashooh follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Latta. Well, again, thank you for your testimony. And
that will end our presentations from our witnesses. And I will
begin the questioning and recognize myself for 5 minutes.
Pardon me, it is allergy time in Washington.
First this is a question for both of you. What are the
administration's views on the proper relationship between
export controls and CFIUS?
Mr. Tarbert, would you like to start or Mr. Ashooh?
Mr. Tarbert. Sure, I can start. I think Assistant Secretary
Ashooh said it right, the administration believes they are
complementary and mutually reinforcing tools of the United
States Government. And so the stronger export controls are, the
better that it makes CFIUS and vice-versa.
Mr. Ashooh. And I would certainly reiterate that. And the
fact that the--not only is CFIUS in need of modernization but
our export control authorizing legislation, as well. And right
now there are independent efforts to do both. That is very,
very important because, as we modernize one, it is important to
modernize both because they really are knitted together and
rely upon each other to be effective.
Mr. Latta. Let me follow-up with that, then, Mr. Ashooh, if
I could, because do current legislative proposals create a
distinction between CFIUS and export controls? And if they
don't, should they?
Mr. Ashooh. The current legislation, the CFIUS legislation?
Mr. Latta. Right. Right.
Mr. Ashooh. The latest, and I don't want to pretend to be
an expert on what is going on in the committees that are
working on the legislation but, as we understand it, the latest
draft does do a very good job of not only drawing the line but
leveraging each other. There is an acknowledgment that the
goals of FIRRMA need to be accomplished with several
authorities. And expert control is specifically carved out and
reinforces the relationship that the two have.
Mr. Latta. Thank you.
Secretary Tarbert, how has foreign direct investment in the
United States changed since the last time this committee
considered CFIUS legislation in 2006?
Mr. Tarbert. So we are seeing, and I mentioned a few points
in my opening testimony but just to give you a little bit more
flavor on that, the rise of state-owned enterprises,
particularly from certain countries that are buying strategic
assets as part of an industrial plan and, in some cases, that
industrial plan involves civil military fusion. And so there is
this inflow of state-owned enterprise money that is sort of
government-backed money that are not purely financial
investments but are purchasing U.S. businesses with more
military and strategic goals in mind.
The other thing that has changed is that, to go back to
this committee and what you all are really specialists in, is
the vulnerability side. So there is sort of the sources of the
funds coming into the United States and why people are
investing but then there is also the U.S. companies. There is
much more. We live in a big data economy now. And so when we
are looking at a particular U.S. company, a healthcare firm,
for example, or even an internet servicing firm, the data on
U.S. citizens is much greater than it was 10 years ago and
certainly 30 years ago, when the actual jurisdictional
provision of CFIUS was created. So it has been 30 years since
CFIUS' actual jurisdiction has been revisited.
Mr. Latta. Thank you.
Secretary Ashooh, do the current export controls
administered by your Department adequately prevent the transfer
of sensitive goods in intellectual property?
Mr. Ashooh. They do but they need to be utilized
aggressively. This is not a one and done scenario, as we have
learned. Not only on the CFIUS side, on the export control
side, bad actors seek to evade current restrictions. And they
do this all the time and the volume of this activity is also
going up.
So the authorities, while they need to be updated, are
certainly able to deal with the threats to the technology
transfer but they need to be utilized aggressively.
Mr. Latta. When you talk about utilized aggressively, how
would you define that?
Mr. Ashooh. Well, as I mentioned, one of the things that is
important about the export control system is we do have
enforcement and we need to utilize our enforcement. And so I
referred to one example in my opening statement but that is
something that we are relying on Congress to help us make sure
is resourced properly because, at the end of the day, this
comes down to having the right people doing the job but it also
means making sure that we are staying ahead of the technologies
that are targets. And we are living in a world now where
emerging technologies, which is clearly the strength of the
U.S. innovation base.
We are very excited about the technologies that are coming
online, most of them for civilian purposes, but which could
have national security implications. And so we need to be
aggressive about identifying and potentially controlling that
category of technology.
Mr. Latta. In my last 20 seconds, not to be picking on you,
one last question.
In your testimony you said that however we are concerned
that the 25 percent threshold in FIRRMA is too high and that
you might encourage that Congress consider a lower threshold.
What would that lower threshold be, in your opinion?
Mr. Tarbert. So we have identified 10 percent, which is
similar to what the SEC uses to identify their definition of
control. Our view is from an export control perspective. The
wider the aperture that proceeds through CFIUS is an
opportunity for the export control system to understand and
examine those specific transactions for export control
purposes. So, we think the overall system benefits from having
that wider aperture.
Mr. Latta. Thank you very much. My time has expired.
And the gentlelady from Illinois, the ranking member of the
subcommittee, is recognized for 5 minutes.
Ms. Schakowsky. I have so many questions. I am going to try
and get through some of them, anyway.
So I am interested in hearing from both of you the issues
of staffing and resources. It is my understanding that the
number of investments or transactions that CFIUS is reviewing
is already--you talked about that, how many more there are and
that FIRRMA could require CFIUS to review even more
transactions.
So, if we could start with you, Secretary Tarbert.
Mr. Tarbert. Sure. So in order to do this, we will need
resources, particularly FIRRMA. I mean we are committed to
ensuring that the resources are there so that cases can be
reviewed adequately for national security purposes.
One thing that FIRRMA does is it has special funding
mechanisms, which helps ensure that the resources are there. It
also has a special, the legislation would not go into effect
until there is a certification by the Treasury Secretary that
the new regulations and resources are in place.
So, absolutely, resources are a very important part of
this.
Ms. Schakowsky. So how many transactions per year does
CFIUS review now and how many do you expect it would be
required to review if the bill became law?
Mr. Tarbert. Right now we had a little under 240 cases
before.
Ms. Schakowsky. Yes, you said that.
Mr. Tarbert. We don't know with exact certainty because the
bill is changing. It will certainly be multiples of that but we
don't know exactly how many because the bill is changing and we
also want to make sure that the regulations really pinpoint
those transactions that are most likely to give rise to
national security concerns.
Ms. Schakowsky. And how many staffers work for or are
assigned to the committee and how many more staff--so you can't
really tell how many more would be required if the law passed.
Mr. Tarbert. Not at this time.
Ms. Schakowsky. OK. Secretary Ashooh, did you want to
respond?
Mr. Ashooh. Sure. There is actually a good reason why it is
difficult to forecast. And that reason is, certainly in the
case of Commerce, the majority of people who work CFIUS cases
are also working licensing and other export control-related
matters. So we are leveraging the expertise of both.
We have got a cadre of about 30 engineers and scientists
that help us understand the technology in question and those
are people who would work on both. The caseload will go up,
there is no question, but I don't think it will be necessarily
a one-for-one increase because we will continue to leverage the
overall organization to support what we are doing.
Ms. Schakowsky. So, Secretary Tarbert, we have been, this
subcommittee and the Energy and Commerce Committee, has been
dealing with the issue in pretty high-profile hearings on
security, data security, privacy, that kind of thing.
And the things that you were saying really concern me
because then what are the guiding principles? The United States
of America has very few real regulations when it comes to data
privacy and security. Europe has come up with a new regime on
how to do that. So what guides you on whether or not the data
that these investments want to have or do have is protected, or
how do you balance it?
Mr. Tarbert. Yes, it is a great question. So there is
probably a whole other data protection debate that you have
raised about that.
What CFIUS looks at are specifically are there national
security concerns arising from the vulnerabilities of the
target company. So when we do an assessment of a transaction,
we look at the threat, which is an intelligence community
analysis of the foreign acquirer, and then we look at the
vulnerability, which is essentially an assessment of what the
target company has in the U.S. And then we put those two
together and say if a threat meets the vulnerability, what are
the potential consequences.
So if we have a foreign acquirer----
Ms. Schakowsky. Well, these all ifs, but have you actually
enforced some? Can you tell me about that?
Mr. Tarbert. Absolutely. So we see cases where the foreign
acquirer, there may be concerns that they could take American's
information and share them with their state authorities in a
way that could have intelligence community effects. And so, in
some cases, we would require mitigation that effectively
doesn't allow certain people from the foreign acquirer to have
access to Americans' information.
Ms. Schakowsky. And then how often does that happen?
Mr. Tarbert. It is happening more often than before. But,
again, it has to arise to the level where we need to say there
is actually a national security concern. But it is arising more
often than certainly 5 years ago and certainly 10 years ago.
Ms. Schakowsky. And what kind of company would that be?
Mr. Tarbert. It could be any particular company.
Ms. Schakowsky. What company has there been?
Mr. Tarbert. They are in various industries, health care,
for example, where healthcare information is particularly
sensitive. And it can be in the financial services industry, as
well, where we have seen cases where, again, there is lots of
personal data and financial data on Americans, where we are
concerned that it could have national security ramifications.
Ms. Schakowsky. Thank you. I would like to hear more about
that but I have run out of time.
Mr. Tarbert. Absolutely, my pleasure.
Mr. Latta. Thank you very much. The gentlelady yields back.
The chair now recognizes the gentleman from Illinois, the
vice chair of the subcommittee for 5 minutes.
Mr. Kinzinger. Thank you, Mr. Chairman, and thank you both
for being here. I appreciate it. Obviously, there are a lot of
questions we have.
This is an extremely important issue, especially when you
deal with the economy. We obviously want to make sure we are
protected. At the same time, anytime we make changes in the way
our economy works, it could have implications that we know
nothing about. And so part of you being here is extremely
important for that.
Mr. Tarbert, in your testimony, you emphasized the gravity
of potential vulnerabilities arriving from the digital data-
driven economy that we live in. Can you explain how countries
are exploiting this and how you believe that modernizing CFIUS
will help address those concerns?
Mr. Tarbert. Yes. There is only so much I can say because
some of that is classified as to how countries may be
exploiting the vulnerabilities. But I think if you think about
a company that contains lots of personally identifiable data,
personal healthcare data on individual Americans, one can
easily see that if that information got into the wrong hands,
particularly if those individual Americans work in sensitive
U.S. Government positions, that a foreign actor could exploit
that.
Mr. Kinzinger. OK.
Mr. Ashooh, in your testimony, you state that our export
control system and CFIUS are complementary tools, as the
chairman talked about, that we utilize to protect our national
security. Given that they complement each other, are there any
gaps in the way that they interplay?
Mr. Ashooh. I think any gaps that might exist are not gaps
between the two. I think that FIRRMA is addressing gaps that
need to be addressed in certain transactions. That will benefit
the export control system.
And I think it is also important you know to illustrate why
these two need to be complementary. If we are concerned about a
certain technology, oftentimes the concern will be over the
nature of the transaction under which that technology would be
transferred. CFIUS is very good at understanding, and blocking,
or mitigating those transactions.
Once that occurs, though, the technology still exists and
may belong to several companies. In fact, it usually does. And
so if we have a concern over the technology that was resonant
in that transaction, we want to make sure, as an export control
agency, we follow it and control it wherever it goes.
So the----
Mr. Kinzinger. Kind of cradle-to-grave, in essence.
Mr. Ashooh. Yes, really, belt and suspenders, whatever you
want to use. It is very important for us to follow the
technology of concern wherever it goes.
And I think the changes that we are talking about, if there
are gaps, those will be addressed in FIRRMA and that will then
help the export control system be more robust.
Mr. Kinzinger. And then let me ask you how does
coordination with other agencies, such as DOD, occur with
respect to the evaluation of potential military application of
a civilian technology?
Mr. Ashooh. So the export control system is founded on an
interagency process. And so the agencies that I mentioned,
Energy has a nation security role, protects a stockpile;
Defense; State all are the member agencies that review export
control licenses. That includes an escalation process, meaning
if one agency has a concern that it does not feel is being
addressed, it can raise that up to the Assistant Secretary
level, all the way up to the Cabinet, so we can really drill
down into the issues that are of concern.
I would also like to expand on that internationally. We
have a similar process where we work with international allies
because, again, we are talking about evasion in cases. Where
the adversary nation wants to obtain something from the U.S.,
can't get it, it doesn't do us any good to control it if they
can get it from Europe or somewhere else. So we have a number
of ways to work with our allies to control technology.
And FIRRMA, again, acknowledges the need to work
internationally, as the export control system does, again,
creating more complementary natures.
Mr. Kinzinger. And then do you think, for both of you, do
you think that CFIUS is capable of addressing emerging
technology concerns, given how rapid innovation is occurring?
And what changes do you think are necessary to better position
it to do so?
In a month we are going to have technology we don't even
know exists today.
Mr. Tarbert. I would just say there needs to be a process
where emerging technologies are identified, and considered, and
made part of the CFIUS review process or certainly the export
controls. And so we have been working a lot on that process in
the bill with Members of Congress, with the committees of
jurisdiction, to make sure that we have such a process and that
that process keeps up.
Mr. Ashooh. Sir, this is a critical issue for us. We are
spending a great deal of our resources and focus on adapting to
the trend you just identified.
We have technical advisory committees that include private
sector individuals and companies that are those early stage
innovators. We were relying on them. In fact, we have
reorganized them around emerging technologies, one of many.
With more time, I would be happy to fill you in on what we are
doing to tackle that.
Mr. Kinzinger. Cool.
And Mr. Chairman, to be an example for generations to come,
I yield back with time on the clock.
Mr. Latta. The gentleman yields back.
The chair now recognizes the gentleman from Texas for 5
minutes.
Mr. Green. Thank you, Mr. Chairman.
The bill contemplates increasing CFIUS scrutiny of certain
transactions that involve critical technology or critical
infrastructure. While I understand the purpose of CFIUS is to
consider each transaction in light of national security, I am
interested in how labor issues are considered.
I understand that the Secretary of Labor is a nonvoting
member. What is their role in the committee?
Mr. Tarbert. Sure. So if an issue raises to the level of
national security, it will be considered. And as you say, the
Secretary of Labor has an observer role. And so, therefore, if
there is a case--so normally what happens is that if there is a
case involving a company where let us say the Labor Department
is primarily involved, whether it is a set of ERISA funds or
other things, a labor union of some sort, where there is a
foreign acquisition there, then we would often ask that Cabinet
secretary to sit as the co-chair of the case.
Mr. Green. OK. Can CFIUS consider whether a transaction
would strip the U.S. of these good high-paying jobs or pose
threats to the health or environment of Americans?
Mr. Tarbert. Right now, CFIUS is focused solely on national
security. So if there is an issue where it rises to the level
of national security, it would be considered.
There are a number of other tools the U.S. Government has
to address some of those issues, as well as some of the issues
that you raised, Ranking Member Schakowsky, about unfair trade
practices and things. But for now, CFIUS is just focused on
national security.
Mr. Green. Well, and I know I live in a very urban area, an
industrial area in Houston. If a foreign company comes in and
there is a labor bargaining unit, by federal law they continue
that agreement.
Does CFIUS take that into consideration or is that
Department of Labor responsibility?
Mr. Tarbert. I believe that is the Department of Labor. We
are set up solely to focus on does this pose a national
security concern to the United States.
Mr. Green. OK. The issue is focused on foreign investment.
Obviously, we like to have foreign investment in our country.
And discuss, either of you, do you agree that the U.S.
needs to support R and D and infrastructure spending? I mean
that ought to be a no-brainer. I think all of us do.
What are you doing to push the administration to make such
investments?
Mr. Tarbert. Do you want to?
Mr. Ashooh. Sure. So I come from the Bureau of Industry and
Security, which is dedicated to national security issues within
Commerce but we are a very small bureau in a very large agency
that is focused on ensuring that we are putting pedal to the
metal on innovation, research and development. R and D in the
United States exceeded $500 billion last year, which is an all-
time high. Most of that is private and so we want to make sure
that we continue to encourage that private investment.
Mr. Green. Mr. Tarbert, some have recommended that a net
economic benefit test should be added to CFIUS review
procedures, like those that some of our allies employ. Would
you support such a test being mandated or, if not, why not?
Mr. Tarbert. Sure. So the administration's position is is
that CFIUS has always been designed and should continue to
focus solely on national security.
Mr. Green. OK.
Mr. Tarbert. That said, there are other tools available to
address economic issues. And so the 301 investigation is
something that I think goes to many of the concerns that you
have raised.
Mr. Green. OK, thank you, Mr. Chairman. I yield back.
Mr. Latta. Thank you. The gentleman yields back.
And the chair now recognizes the gentleman from Florida for
5 minutes.
Mr. Bilirakis. Thank you, Mr. Chairman.
Secretary Ashooh, is that correct?
Mr. Ashooh. Yes, sir. It rhymes with cashew, if you like
cashews.
Mr. Bilirakis. Oh, gosh. OK, very good.
When CFIUS law was last amended in 2007, does the term
national security include homeland security when analyzing the
national security implications of a transaction? And if so,
does this include issues related to state and local enforcement
agencies, which are often on the front line of homeland
security?
Mr. Ashooh. Yes, sir, it does.
Mr. Bilirakis. It does?
Mr. Ashooh. Yes.
Mr. Bilirakis. OK, very good. Thank you.
And Secretary Tarbert, how does CFIUS seek out the input of
other federal agencies not included on the committee, such as
FTC or other regulators, who review, separately enforce
competition and consumer protection?
Mr. Tarbert. Sure. So in many of the cases, you brought up
the FTC, and also the FCC, there is often a regulatory process
ongoing. So if a company is buying another company, CFIUS will
be running, in many cases, in parallel to whatever separate
regulatory process there is.
So sometimes we will coordinate with them if they spot a
national security issue that we haven't spotted. That is rare
because we use the intelligence community and the Defense
Department. We will work with them.
The other thing we do is sometimes we will see a case
involving an agricultural company, for example. And there, the
Secretary of Agriculture doesn't technically sit on the
committee, the Department of Agriculture, but because they have
unique expertise, we will invite them in to help co-chair the
case. And so that has happened a number of times.
Mr. Bilirakis. Well thank you very much.
Again, for Secretary Ashooh, how does the Department ensure
that the Commerce Control List is keeping up with emerging
technologies that we might not want to fall into the wrong
hands?
Mr. Ashooh. Again, this is something we are devoting a
great amount of energy to.
Emerging technologies, that is not a new thing. We have
always had the concept of new technologies that have yet to be
subject to the Commerce Control List but, as we alluded to
earlier, it is the volume. And again, this is a good trend. We
are seeing amazing innovations occur.
I have already referred to one change that we made
structurally just to our technical advisory committees but we
have also established a certain control number, a control area
within the Commerce Control List specifically designed for
emerging technologies. And what this does is allow us to place
an immediate control on a technology that may be so new, it has
yet to be considered and that we are not clear on what the
national security implications might be. This way, we can
control it immediately and that then triggers a process, an
interagency process that was referred to earlier that will
allow us to work under certain time constraints, so we are not
going on forever, and adjust the control appropriately, and
then, take it the multilateral regime so we are doing it
internationally.
This is an area that is going to get much more attention
based on this trend and the large volume of emerging
technologies.
Mr. Bilirakis. Very good. It sounds like you have been very
proactive.
Mr. Ashooh. Devoting a lot of time to it, sir.
Mr. Bilirakis. I appreciate that very much.
I yield back, Mr. Chairman.
Mr. Latta. Thank you. The gentleman yields back.
The chair now recognizes the gentleman from Indiana for 5
minutes.
Mr. Bucshon. Thank you, Mr. Chairman.
Assistant Secretary Tarbert, obviously you look at
governments and investment with direct connections and stuff
but, as you know, around the world there are individuals who
also have maybe nebulous connections to various governments. Is
that the type of thing that would trigger a CFIUS review,
potentially, as a specific individual? Tell me what you can
tell me.
Mr. Tarbert. Yes, absolutely. No, when someone files with
CFIUS, the intelligence community does something called the
national security threat assessment. And that national security
threat assessment looks at the acquirer, as well as the
individuals behind the acquirer to get an understanding of who
they are.
At the same time, within the Treasury Department, we have
the Office of Terrorist Financing and Intelligence, which runs
a check through our systems on the individuals as well, whether
they have been involved in anti-money laundering or there are
any issues there, and their potential connection.
So that is a very thorough part of the process because I
think, as you are intimating, we could have a company from a
country who is an ally but had bad people at that company.
Mr. Bucshon. That is my point. You have people that have
people that have maybe nebulous----
Mr. Tarbert. Exactly.
Mr. Bucshon [continuing]. Connections to other people that
aren't necessarily on our side on certain issues.
Mr. Tarbert. Exactly.
Mr. Bucshon. The other thing is can you briefly describe
maybe the chain of command-type decisionmaking process with
CFIUS? Because obviously, the ones that we hear about are in
the newspaper. The President, himself or herself, whatever the
case may be, has made that decision but, obviously, that is
kind of unusual probably.
Mr. Tarbert. Right.
Mr. Bucshon. And whatever you can say publicly about the
process because I think, from a representatives perspective,
the more that the American people know about a process, the
better they understand it, the more people like me are able to
help you reform the process.
Mr. Tarbert. Absolutely. And so in the wake of the Dubai
Ports controversy, FINSA was passed. And so that statute
essentially lays out what the process needs to be.
And so the case comes in. We assign it to case officers and
members from all of CFIUS' member agency, case officers work on
that particular case. Ultimately, a case cannot be cleared
unless a Senate-confirmed official, at least one, signs off on
the case.
There are certain cases that require higher level sign-offs
at the deputy or even secretary level. And those involve ones
that go to the investigation stage, as well as when the
acquirer is a foreign-controlled entity, foreign government-
controlled entity.
Mr. Bucshon. All right because I think that is an important
concept for people to understand. The only cases you are seeing
in the newspaper that the President, him or herself, has
decided are not the only cases that you all are looking at. And
sometimes I think that that impression is created where people
are saying well why did the President make that decision. And
to know that there was a more complicated process that actually
ramped up to that level I think is important.
Mr. Tarbert. Right. In less than one-tenth of one percent
of the cases, the President blocks. So there are a lot of cases
where we review them. They either get cleared or we impose
mitigation.
Mr. Bucshon. Right.
Mr. Tarbert. So, people only read the newspaper story but
it is----
Mr. Bucshon. Yes, and I think also people have the
impression that sometimes it is a political decision, not a
national security decision that a President, him or her, has
made and that is just not the case.
Last question, Secretary Tarbert, in your testimony you
touch on the gaps and jurisdictional authority to protect
national security. Obviously, those are probably commonly known
gaps by people that are trying to get around your process.
Can you describe what those might be and how H.R. 4311
might help to resolve those gaps?
Mr. Tarbert. Sure. And those gaps, in many cases, have been
brought to our attention because the parties themselves have
said well, if you don't approve our transaction, we will
restructure it this way to get around it.
Three gaps are essentially these: number one are real
estate in close proximity to military bases and other sensitive
U.S. Government. The statute allows us to look at mergers/
acquisitions of a U.S. business but if it is vacant land, that
is not a business.
So there have been situations where if it has a windmill on
it, we can review it; if it doesn't have the windmill on it and
they put the windmill on after they buy it, we can't review it.
The second area are non-passive investments. So these are
investments that come below the level of control but they
involve a board seat, they involve the ability to come on the
premises to get all the information they need, and many foreign
actors have found that that is even better than even getting
control because it is cheaper but they get what they need.
And finally, there is the J.V. provision, where
essentially, they replicate the business in the U.S. overseas
and, therefore, it is not a U.S. business anymore.
Mr. Bucshon. I yield back.
Mr. Latta. Thank you very much. The gentleman yields back.
The chair now recognizes the gentlelady from California for
5 minutes.
Ms. Walters. Thank you, Mr. Chairman.
Mr. Ashooh, in general, the Trade Sanctions Reform and
Expert Enhancement Act of 2000 prohibits unilateral sanctions,
restrictions, or conditions on the export of key humanitarian
products, such as food, medicine, and medical devices.
Is it your sense that medical device products should
generally be excluded from proposed CFIUS reform definitions,
in particular, the terms critical technologies and emerging
technologies?
Mr. Ashooh. I would say that that is definitely an issue
for the export control system and is one that we have in
consideration. But as far as definitions within CFIUS, we
believe that those definitions should synch up, just as the two
systems should synch up.
And so I mean this is a reasonable policy. It is primarily
an issue in the export control system. I don't know that it is
one that has really emerged on the CFIUS side.
Ms. Walters. OK, is there any reasonable argument that
medical device products, including the associated intellectual
property are sufficiently relevant to national security to
justify subjecting transactions involving such products to
CFIUS jurisdiction?
Mr. Ashooh. It is possible. It is possible. I don't have a
crisp answer for you because I don't have any direct experience
in that case but it is certainly possible.
Ms. Walters. OK. And do you have any suggestions as to how
to ensure CFIUS legislation accounts for such a humanitarian
exemption?
Mr. Ashooh. I am sorry, one more time.
Ms. Walters. Do you have any suggestions as to how to
ensure CFIUS legislation accounts for such a humanitarian
exemption?
Mr. Ashooh. Yes. And again, it gets back to the theme we
have been repeating. That is the sort of thing that Department
of Commerce would bring to the table, as well as potentially
other CFIUS member agencies, HHS, for example. That is why the
interagency process in CFIUS is so important. We rely on the
expertise where it belongs in the various agencies.
Ms. Walters. OK, thank you.
And I yield back the balance of my time.
Mr. Latta. Thank you. The gentlelady yields back.
And the chair recognizes the gentleman from South Carolina
for 5 minutes.
Mr. Duncan. Thank you, Mr. Chairman. Thank you guys for
being here.
Before I got on Energy and Commerce back in December, I
chaired the Western Hemisphere Subcommittee of the Foreign
Affairs Committee. And during my time there, we had hearings on
the Venezuela situation and especially with their company,
PDVSA. And during that time, PDVSA pledged their stake, 49
percent of Citgo, to Russia for a loan of $1.5 billion,
something like that I believe.
Rosneft is the company, the Russian oil company that
basically took the collateral. And if Venezuela defaulted on
that loan, that would effectively give Russia and their energy
company, Rosneft, a 49 percent stake in Citgo, an American-
based refinery company and oil producer.
We sent a letter, Ranking Member Albio Sires and I sent a
letter to the secretary on April 6th of last year asking you
guys at CFIUS to look at this transaction and with the
possibility of blocking Russia's ownership of not a majority
stake but a dang-near close majority stake in a huge American
asset of Citgo Refinery.
So let me ask you what the status of that investigation is
and where we may go from here. What is the next step?
Mr. Tarbert. So the statute prohibits us from talking about
specific cases in a public setting. So if you are amenable to
it, I will give you a confidential briefing to your office
whenever you would like.
But let me just say this. The point that you are raising is
an important one because right now the statute allows us to
look at anything where there will be control. But for a non-
passive investment that doesn't pass that threshold of control,
particularly for a critical infrastructure asset, CFIUS does
not have jurisdiction.
So that was one of the things that we looked at very
carefully in crafting the provision of FIRRMA to ensure that
transactions similar to the one that you described would
absolutely be within our jurisdiction.
Mr. Duncan. Thank you. I am going to take you up on that
briefing.
Mr. Tarbert. Absolutely.
Mr. Duncan. I am no longer chairman of that subcommittee
but this is an issue that I have followed for a long time, the
situation in Venezuela but also Russia's involvement in energy,
in guaranteeing loans and assets that are American assets.
Let me just ask you one more question in the time I have
got.
Assistant Secretary Tarbert, in your testimony you touch on
gaps and your jurisdictional authority to protect against
national security concern. What are these gaps and does H.R.
4311 help resolve those?
Mr. Tarbert. Yes, to the three gaps are land that is not a
business but, nonetheless is near a sensitive military
installation of some sort or other national security
installation.
The second would be the one that we just talked about,
where potentially you have an ownership stake that doesn't
technically meet the definition of control but, nonetheless,
has a lot of influence, has access, has the ability to get
information and to influence the decisions of the company. So
that is a non-passive investment.
And then the third are when someone essentially tries to
replicate a business or a core business capability overseas.
That is not a U.S. business and hence, CFIUS doesn't have the
authority.
FIRRMA addresses all of these things and is continuing to
evolve in a manner that addresses them with more effectiveness.
Mr. Duncan. Well, thank you.
Mr. Chairman, because of the jurisdictional boundaries,
this committee may not have been aware of the situation I was
talking about with Venezuela, and PDVSA, and Rosneft, and
Citgo. I would like unanimous consent to enter into the record
copies of the letters we sent to CFIUS.
Mr. Latta. Without objection.
[The information appears at the conclusion of the hearing.]
Mr. Duncan. Thank you. With that, I will yield back.
Mr. Latta. Thank you. The gentleman yields back.
And the chair now recognizes the gentleman from
Massachusetts for 5 minutes.
Mr. Kennedy. Thank you, Mr. Chairman. Thank you to our
witnesses for being here. Thank you holding an important
hearing.
A couple of topics I wanted to touch on. So first,
gentlemen, this is about state-owned enterprises. There has
been a bit of discussion as to whether Congress or CFIUS should
make a distinction between foreign investments made by private
persons or firms as compared to those made by firms that are
state-owned or partially state-owned.
During one of the hearings at Financial Services Committee,
members commented that it really did not matter in the case of
China because even private firms are influenced by the Chinese
Government and would rather make investments or disclose
information upon request of the Chinese Government.
So curious as to your thoughts, either one of you. Can you
share your thoughts as to whether we should be making such a
distinction or whether China is a problem no matter what?
Mr. Tarbert.
Mr. Tarbert. Thank you. Thank you, Congressman Kennedy.
For purposes of state-owned enterprises we think there is a
mandatory declaration requirement for those because we think
that certainly with state-owned enterprises, there is a clear
nexus and, therefore, we think that we should be notified of
those transactions.
When we go through the threat analysis and the intelligence
community does the national security threat assessment, they
look very carefully at the history of a given company and its
potential connections to the state.
And so you are exactly right that with respect countries,
particularly those with doctrines of civil military fusion, the
line between state-owned and private becomes blurred and we
take that into account.
Mr. Ashooh. And certainly, that is an issue we deal with
constantly in the export control system. And the system is
designed to allow us to examine whether or not that civil
military integration, which is a factor certainly in China, and
in fact is common to the countries that we find ourselves
spending most of your time with, Russia and Iran as well.
Mr. Kennedy. And I assume then, gentlemen, it would be kind
of a similar analysis with regards to investment in a venture
capital fund or a private equity fund, in terms of foreign
investment going into a partnership with a V.C. that is either
buying up potentially strategically important early stage
companies. Someone?
Mr. Tarbert. If the venture capital firm itself--so the
question is is the venture capital firm, itself, a foreign
firm. If the answer is yes, then that would be within our
jurisdiction.
If it is an American firm and the foreign investor just has
a passive L.P. interest but doesn't control that, then that is
out of our jurisdiction.
Mr. Kennedy. OK. Do you believe that CFIUS can place
appropriate conditions on the investments that could critically
limit Chinese or any other government their access to critical
or emerging technology when investors are Chinese firms? So
similar, I guess, followed between the two.
Mr. Tarbert. Yes and we do it nearly every day. Thank you.
Mr. Kennedy. Pushing a little bit more on the passive
investment side, some concerns have been raised about a
provision in the bill that would limit investments, even when
they are passive and the investor would not have control of the
U.S. company and would not have a say in those decisions.
Under such a case, does the committee have a way to ensure
that the relationship does not change after a review takes
place? So for example, if a foreign investor started to see
certain I.P., from what or how at least I understand it, the
relationship would already be established. So could such a case
get before CFIUS on a secondary review?
Mr. Tarbert. That is a great question. And so we have
thought about exactly the point that you made. And so in the
FIRRMA bill, there is an additional basis of jurisdiction when
an investor's ownership changes you know materially to fall
into one of the jurisdictional categories that exist.
Mr. Kennedy. And forgive me. How would you be notified if
that investor's relationship changes?
Mr. Tarbert. Well, if it is a state-owned enterprise, there
would be a declaration. But otherwise, CFIUS remains a
voluntary process. So we have methods and capabilities of sort
of monitoring the landscape but, as a technical matter, it
could occur.
Now sort of the ability that we have is if it does occur
and they don't notify us, then we have the ability to go in and
reopen that transaction at any time.
Mr. Kennedy. OK.
Anything to add, sir?
Mr. Ashooh. Only that if there is a case where there is a
technology transfer concern in what you are discussing.
The Commerce Department will often place an additional
licensing requirement on the companies in question as an
important reminder that they are obligated to not transfer that
technology, not only to a foreign national but the re-export of
that as well. So, again, we keep track. This is how we leverage
the CFIUS process to make sure we are keeping track of the
technology.
Mr. Kennedy. Thank you both.
I yield back. Thank you, Chairman.
Mr. Latta. Thank you. The gentleman yields back.
The chair recognizes the gentleman from Kentucky for 5
minutes.
Mr. Guthrie. OK, thank you very much. Thanks, Mr. Chairman.
Thanks for having this hearing and thank you guys for being
here.
And I have the questions. These two questions are for both
of you. One, you mentioned earlier today that about the volume
of reviews. Specifically, if the current form of legislation is
enacted, how many additional transactions will CFIUS be
required to review and can CFIUS handle that increase?
Mr. Tarbert. So I can answer it. We don't know with exact
certainty because the bill continues to evolve----
Mr. Guthrie. In current form.
Mr. Tarbert [continuing]. In current form. We are still--
because then there would be regulations, additionally, that
redefine it. We think it would be multiples of what we are
currently reviewing and we would need the resources to be able
to staff that.
But more importantly, we don't think that the per case/per
case officer volume would remain the same, that ratio. Because
one of the things that the bill does, which I think is
critically important is for those transactions that don't
really require an immense amount of government resources, there
is a streamlined filing process.
So for example, when our ally buys an American company,
there is very little national security issues, we can process
those a lot quicker. Today, if you want to file before CFIUS,
you have to fill out a 50- to 300-page form listing all this
stuff. And so for things that are more likely to be cleared, a
much shorter form, more efficient and effective will actually
reduce the time spent on each particular case.
So we think that it is really helpful to modernize it.
Mr. Guthrie. Because you know the volume goes up and there
will be tools to moderate it.
Mr. Tarbert. Absolutely. And this would not go into
effect--one of the key provisions in the bill says that nothing
will go into effect and become live until the Secretary of the
Treasury signs a certification saying the resources and the
regulations are in place.
Now at the same time, the argument there is, well, that
could take a while. That could take a year. What about stuff we
are seeing today that is a concern? It also allows us,
potentially, if passed, to have a pilot program. So if we know
there are transactions out there of a certain type that we want
to stop, the day the bill is passed, we can issue an immediate
sort of regulation to address those, while getting the
resources in place for the larger jurisdiction.
Mr. Guthrie. Well here is another question, too, is we are
looking at H.R. 4311 and if the reviewable transactions
dramatically do increase--I know you have this streamlined
process but let's say it dramatically increases and it is an
issue, what do you think that will do to foreign investment in
the U.S.? Will it deter it or hamper it?
Mr. Tarbert. We don't think so because America still
remains the preeminent destination for investment. And the more
we are able to protect those companies, to protect national
security, in the long-run, the more attractive that is going to
be for investors.
Mr. Guthrie. OK.
Mr. Tarbert. But obviously, the reason why CFIUS is chaired
by the Treasury Department is we are particularly aware of
wanting to attract investment to the United States.
And so in 1988 and 2007 we have always got that balance
right and we want to continue to get that balance right by
protecting our national security but, obviously, continuing to
attract foreign investment.
Mr. Guthrie. OK, do you have any comments on this?
Mr. Ashooh. Yes, I might add it is worth pointing out that,
even absent FIRRMA, the caseload under CFIUS has gone up year
on year fairly substantially. So the resource issue is one that
we have been grappling with and will continue. I don't see, and
Secretary Tarbert might agree, we don't see that steady
increase slowing. This is being driven by, obviously, some
trends regarding nations that see a benefit in pursuing it.
Mr. Tarbert. And one final point. As a Treasury Department,
we don't really like to spend a lot of money. We like to
collect it.
But I think our view on this is that----
Mr. Guthrie. It is like business; you want more money to
come in than go out.
Mr. Tarbert. Yes. But well, no, given the amount of money
that we spend on the defense of this country, this, to spend
whatever we need to spend have people reviewing these critical
transactions to ensure that our technological edge isn't lost.
In many ways, it is an insurance policy that is well worth the
money.
Mr. Guthrie. OK, thanks. And I have a question just for
you, Secretary Tarbert, or either one.
Can you tell us, in general and obviously in unclassified
terms of what you can share, what is the greatest threat to the
U.S. that CFIUS is tracking right now? For instance, is it the
transfer of technology, foreign control of infrastructure, or
something else? Because I did a town hall recently and somebody
stood up and said--the hardest question I had to answer was of
all the questions I had to answer and they were from left and
right--were what keeps you up at night.
Mr. Tarbert. You know the truth is, all of the above that
we are seeing threats and vulnerabilities. Obviously, state-
owned enterprises as well as other companies that are working
in close contact with their states and trying to acquire
companies that are critical to our technological edge, that is
important. But on the vulnerability side, the personally
identifiable information. There are a number of other things we
are worried about and we are always worried about
infrastructure, you know the purchase of infrastructures.
So I would say, unfortunately, it is all of the above.
Every day I come in I see sort of a new threat or a new
vulnerability, I feel.
Mr. Guthrie. All right, thank you very much.
My time has expired and I will yield back.
Mr. Latta. Thank you. The gentleman's time has expired and
he yields back.
The chair now recognizes the gentleman from Vermont for 5
minutes.
Mr. Welch. Thank you both. You know this question of
imposing a big responsibility without providing the resources
to get the job done is of concern to me. So one of the
questions that is brought up in this bill is whether there are
some ways to streamline without relinquishing review.
And one of those ideas is to have the bill apply only to a
limited number of countries or, in the alternative, have a
large number of countries listed that are not of concern and
they would receive a safe harbor.
I guess I am looking to your reaction to that because we
could, over time, have a list of countries that would shift.
You know it might have been Japan 10 or 15 years ago, whereas,
it probably would be China now.
So, I would ask your thoughts about this. Is this a
practical way to try to relieve the burden without sacrificing
safety?
Mr. Tarbert. Sure, the bill chooses the second alternative
in what is called sort of the good guys list. It doesn't choose
a blacklist and the reason is is because if you start
blacklisting certain countries, it can easily be evaded,
particularly in the acquisition context.
So if you had--and then you run into the problem well then,
if you are a blacklisted country and then how many investors in
a particular entity do you need to make that entity
blacklisted, and then we end up sweeping in our allies. And to
your point, the threat changes over time.
And the vulnerabilities remain the same. So it is very well
possible that we have a U.S. company that is so important that,
even people from countries that we wouldn't necessarily
blacklist, still requires review and some kind of mitigation.
But the good guys list is important because there our
allies are facing, in many cases, the exact same threats that
we are. And so the idea is is that if we can get them to work
with us to create similar investment screening regimes, that
would actually save us potential concerns because--yes.
Mr. Welch. Similar protocol----
Mr. Tarbert. Exactly.
Mr. Welch [continuing]. For them and us because we have a
unified interest.
Mr. Tarbert. Correct.
Mr. Welch. Yes, thank you.
Mr. Ashooh. And if I might add, you know one of the
benefits of CFIUS is that the member agencies bring their
expertise and authorities to the CFIUS table. And the export
control system is very list-driven. We have got end-users,
countries of concern. And I can tell you that lists come with a
cost. It takes a fair amount of effort to maintain those lists.
Mr. Welch. Right.
Mr. Ashooh. So rather than have multiple and perhaps
overlapping lists, you know it is useful, I think, for these
agencies to bring them to the table and Commerce certainly does
that in the CFIUS context.
Mr. Welch. OK, thank you. That is all I have. Thank you
very much.
I yield back.
Mr. Latta. Thank you. The gentleman yields back.
The chair recognizes the gentleman from West Virginia for 5
minutes.
Mr. McKinley. Thank you, Mr. Chairman. I am sorry I was at
another hearing downstairs and so I have missed a lot of the
testimony that perhaps you have given. But one thing that I did
hear as I came in was early you made point that CFIUS is a
voluntary program. And that concerns me a little bit--a great
deal, actually.
And I am hesitant because we went through our classified
briefing and then I had another classified briefing on another
situation that had to do with CFIUS. So I am hoping I am going
to be able to stick to what we can have from open source.
But should we be making it mandatory?
I come from the construction industry, 50 years in
construction. You can't start a project without getting your
permits for water, sewer, air, archeological digs, what
environmental yet we allow a project to begin. Someone, a
foreign entity, can invest in a project and it may take you a
while before you become engaged. And by that time, it is too
late.
The information on energy transporting data is already out
there and it is gone. Why is it voluntary and why is it--why
would we not make it mandatory that they have to first check
the box that they have approached CFIUS for preliminary ruling
before they proceed?
Mr. Tarbert. Great. So the first question, you know why has
it been voluntary, and it has been voluntary since the start of
it----
Mr. McKinley. That doesn't make it right but go ahead.
Mr. Tarbert. Yes, and I think the thought there is that
because CFIUS has the ability then to address the transaction,
to potentially unwind the transaction, those----
Mr. McKinley. After the fact.
Mr. Tarbert [continuing]. After the fact, that is enough to
get people to file.
Now that said, the point you are raising is an important
one. And for certain types of transactions, our view,
particularly those by state-owned enterprises, and also by
particular types of technology, it is so important, just as you
said, that we want to get a declaration in advance of that
transaction so we know about it. And so the bill actually does
that.
The bill has a certain provision in there that there are
mandatory declarations, in some cases, for state-owned
enterprises.
Mr. McKinley. So under this legislation, will someone that
is acquiring an energy company, energy transmission company,
they will have to announce that they are going to do this?
Mr. Tarbert. Right now, the bill requires declarations for
state-owned enterprises that have some kind of substantial
interest. And it may be 25, it may be----
Mr. McKinley. I don't need that.
Mr. Tarbert. But if it is--yes.
Mr. McKinley. If I just have a seat at the board without
any investment in that, if I get a seat at that board, I have
got access to all the information I need. How are you aware of
that?
Mr. Tarbert. So right now, we are monitoring some things
but the bill would provide us with the authority. It doesn't
mandate us to do that but would provide us with the authority
to say that in certain types of transactions, like the one you
announced, you have to get a declaration before CFIUS before
you can engage in that transaction.
And so during the notice and comment period, we will be
soliciting--if the bill passes, be soliciting views of what are
the kinds of transactions, to your point, that are so critical
and important we don't want to be learning about them after the
fact, that we want an advanced declaration before----
Mr. McKinley. Is there any protection, as legislation,
that--because the technical information, understanding how our
utility markets operate is instantaneous. And by that virtue,
your coming is after the fact trying to address that. So will
this legislation prevent that transfer of information without
an investment, that is just merely a seat at the table? Are you
going to be able to prevent that from happening? Because it
happens in an instant before you are aware of it.
Mr. Tarbert. Yes, to be frank, it could prevent it in
certain instances, it may not prevent it in others. And so
there may need to be additional legislation. It may not even
require a board seat. Someone could just walk into the energy
company, get to know the CEO and----
Mr. McKinley. Thank you.
Mr. Tarbert [continuing]. A relationship starts. So it
sounds like for that specific instance, we just deal with
foreign investments of various sorts that there may need to be
added protection under some other area of the law.
Mr. McKinley. So let me ask you. You just offered to do
another classified. I would like to follow up on the
conversation you and I had last week and see where we might be
able to go with this.
Mr. Tarbert. We are planning that, actually. I think we
have got it--we are working to schedule that, the one specific
to your state.
Mr. McKinley. You know what I am talking about.
Mr. Tarbert. Yes, sir.
Mr. McKinley. Thank you. I yield back.
Mr. Latta. And you know what he is talking about, OK.
The gentleman yields back and the chair now recognizes the
gentleman from Texas, the chairman of the Health Subcommittee
of Energy and Commerce for 5 minutes.
Mr. Burgess. Thank you, Mr. Chairman, and thanks to our
witnesses for being here today. I also thank the subcommittee
for putting together the classified briefing that we had on
this subject. It was important.
And I will just ask if I ask you a question that really
should not be answered in an open setting, I will accept your
deflection on that.
I was here in the United States House of Representatives
when Dubai Ports World got all the headlines. Most people
didn't know what CFIUS was before them and then, of course,
everybody knew and became an expert on CFIUS. But what many
people didn't know and I didn't know at the time is that this
participation in this process is largely voluntary. Is that
correct?
And just as a matter of procedure, a notice which is given
to you for to answer a possible question, how does that arise?
Where do those notices come from? Do the companies make those
notices or the company that is involved makes the notices?
Mr. Tarbert. Normally, the acquirer and the target company,
the people doing the business combination will come to CFIUS,
oftentimes, as they are getting into the initial stages of
planning the transaction to tell us about the transaction and
to get the notice started. They will send us drafts back and
forth of the notice and we will work with them to complete the
notice so then we can deem it accepted.
Mr. Burgess. So that is part of their due diligence in
doing the merger and acquisition background. Does it ever come
to your attention from another source, through someone else say
hey, this is happening and I wonder about it?
Mr. Tarbert. It does. And we have members of the
intelligence community that are sort of--and other resources.
But that is one of the things that I think this bill
acknowledges that we also need to have resources devoted to
scanning the investment landscape for things that are not
notified to us.
So every now and again, we will get wind of a particular
transaction that wasn't notified to us. We will look into the
matter and, in some cases, ask the parties to file. If the
parties don't want to file or for some reason we don't think
they will be cooperative, we have the authority to actually
issue the notice ourself and start the case.
Mr. Burgess. Just as a general matter, of the number of
notices that come to your attention, are all of them
investigated, a portion of them investigated, a large portion,
a small portion? Could you qualify that?
Mr. Tarbert. Yes, normally not many at all investigated.
There is a technical definition of investigation----
Mr. Burgess. OK.
Mr. Tarbert [continuing]. Which means the second phase. But
I would say all of them we look at and we determine whether
there needs to be a filing.
One of the things that FIRRMA does, which makes it a lot
easier is because the filing costs a lot of money.
Mr. Burgess. Sure.
Mr. Tarbert. It is 50 to 300 pages. And so for let's say a
Canadian company buying an American company, where there is not
likely to raise any national security concerns, the parties
will often say this is what we are doing here. Do we really
need to file with you? We have to then say well, we can't tell
you not to file but, based on what you are saying and what we
know about the companies, there may not be a national security
concern.
But that is difficult. So one of the things that FIRRMA
does is it creates the declaration where they can actually file
a short version of that that doesn't cost as much money but we
can then review that and determine whether we want a full
notice of whether we have enough information to say that
transaction is OK.
Mr. Burgess. Well, under the current regime, are there any
particular countries that --when you list out the number of
countries that are investigating--or where you have notices
that you are investigating, do there tend to be a preponderance
of countries or is there a single country that is identifiable
as this is where we spend a lot of our time?
Mr. Tarbert. What I can tell you is in those cases where we
have reached out, where there hasn't been a notice and a
transaction has occurred and we have asked the parties to file,
required them to file, or filed a notice ourself to get it
started, those cases have involved recently China and Russia.
Mr. Burgess. And just of the transactions involving China,
how many are allowed to proceed? Can you quantify that? Is
there a percentage? Is it a lot, a little, all of them?
Mr. Tarbert. It is a substantial number but a number of
them, there is proceeding without mitigation, there is not
proceeding, and then there is sort of proceeding with
mitigation, where the Government requires certain things to
happen before that transaction can go forward.
Mr. Burgess. And you may have already answered this or you
may have been asked this. I am not sure if I understood or
heard the answer. Is this a two-way street? U.S. involvement in
other countries, is it blocked from time to time?
Mr. Tarbert. Well, it is. In some countries, U.S. investors
are blocked regardless of national security. There are simply
investment caps that don't allow our companies to invest in
other countries but that is more of an economic issue than an
issue.
I am not aware of any situation where for national security
reasons another country has blocked an American acquisition of
one of their companies.
Mr. Burgess. For economic reasons, when the President talks
about he wants trade to be fair and reciprocal, is this one of
those areas?
Mr. Tarbert. That would be potentially one of those areas.
And I know that the Treasury Department and other government
agencies have talked to different governments about you know if
we allow your countries to invest here, why are you preventing
our companies from opening their doors in your country or
requiring that our company needs to form a joint venture with
one of your nation's companies, that if we are going to allow
investment in our country, why don't you allow our companies to
go and do business in your country without imposing constraints
on them. But that is an economic issue.
Mr. Burgess. Yes, sir.
Mr. Ashooh. And sir, if I might just add, the concept of
CFIUS is still fairly unique in the world. Although we are
seeing the EU, and Japan, and other allied countries establish
similar procedures, we generally think that is a good thing
because this is, again, a national security review. And to the
extent we share national security goals, it is helpful to
manage the foreign----
Mr. Burgess. Good enough. As far as the economic goals, I
may follow up with you, Mr. Tarbert, just because that is of
interest to me.
Thank you, Mr. Chairman, I will yield back.
Mr. Latta. Thank you. The gentleman yields back.
The chair recognizes the gentleman from New Jersey for 5
minutes.
Mr. Lance. Thank you very much and good morning to our
distinguished panel.
Both the Treasury and the Commerce Department maintain
lists of prohibited persons and nations for purposes of trade
and sanctions. Gentlemen, do you believe that these lists are
effective in identifying the entities that pose threats to
American interests?
Mr. Ashooh. Yes, indeed.
Mr. Tarbert. Yes.
Mr. Lance. And do they provide a model of how CFIUS should
view certain types of investment? For example, should CFIUS
have a list of nations that will draw special scrutiny?
Mr. Tarbert. On this, we don't think so. And the reason is
is that we want to be able to review all transactions involving
foreign investors, where relevant. And each transaction is
looked at specifically for the threat, the vulnerability, and
the consequence. So there is an intelligence analysis of the
particular acquirer. And so you could have a situation where
you have an acquirer from an allied country but the particular
individuals within that are not necessarily friendly to U.S.
national security interest.
And so our view is that we have never maintained a
blacklist, so to speak, for particular countries. But since
every transaction undergoes a very thorough intelligence
analysis, the kinds of issues that you are talking about are
always unearthed.
Mr. Ashooh. And sir, if I might, Commerce, through the
export control system, does maintain a multiplicity of lists.
It can be individuals, companies, technologies, end uses, end-
users. And Commerce, as one would hope, we bring those to the
CFIUS table. So you know the experiences and knowledge that we
have get brought to the CFIUS table and that way we are not
having to overdo it on the list side.
Mr. Lance. Thank you. Obviously, foreign direct investment
has historically been a tremendous boom to our economy. Does
the administration seek to ensure that any reforms to the CFIUS
process do not create unnecessary hurdles for legitimate and
beneficial direct involvement?
Mr. Tarbert. Absolutely, and that is why the Treasury
Department of the chair of CFIUS because it recognizes that we
are looking at protecting our national security while, at the
same time, maintaining an open investment environment.
So while the FIRRMA bill would increase the jurisdiction to
certain types of transactions that have been avoiding review,
at the same time, it has a number of measures to modernize the
process and to streamline it a bit for those transactions that
are least likely to raise national security issues.
Mr. Lance. Thank you.
Mr. Ashooh. And sir, where there is a technology transfer
concern, we spent a lot of time really drilling down to what
actually matters from a national security perspective so that
we are not over-controlling and being overly restrictive.
Mr. Lance. Thank you and thank you for your distinguished
testimony.
And Mr. Chairman, I yield back 2 minutes.
Mr. Latta. Well, before the gentleman yields back, would he
yield?
Mr. Lance. Oh, I will be happy to yield to the chair.
Mr. Latta. Well, thank you very much because I would like
to follow up on a question that the gentleman from Texas asked
and came back.
How often is a company or companies not cooperative with
you when you want to get with them and all of a sudden they say
we are not going to cooperate?
Mr. Tarbert. It is very rare. Because CFIUS has the
ultimate power to unwind the transaction, impose other things,
and in some cases impose fines if there is a violation of a
mitigation agreement, most companies seek to comply and work
with us.
Mr. Latta. And you say most. OK. All right. Well, thank
you.
The gentleman yields back and I will yield back his time.
And we want to thank you very much for testifying before us
today. It has been very, very informative. We appreciate all
that you do out there to help keep things straight for
Americans and especially when it comes to our security reasons.
We really appreciate your testimony today and all you do. So,
thanks for being with us today.
And so that will conclude the first panel. And we will get
ready to have the second panel come before us.
[Recess.]
Mr. Latta. Well, good morning and I would like to take this
opportunity to thank you all for coming before the
subcommittee. And again, we do have the other subcommittee
running downstairs, so we do have members coming in and out
during the hearing.
And if I could, I would like to introduce our second panel.
The Honorable Kevin Wolf, partner at Akin Gump Strauss Hauer
and Feld, and former Assistant Secretary for Export
Administration at the United States Department of Commerce.
Welcome. The Honorable Clay Lowery, Managing Director at Rock
Creek Global Advisors, and former Assistant Secretary for
International Affairs at U.S. Department of Treasury. Ms.
Celeste Drake, Trade and Globalization Policy Specialist at the
AFL-CIO. Thank you. And Dr. Derek Scissors, the Resident
Scholar at the American Enterprise Institute.
And again, we want to thank you for being with us today
because this is a really important subject.
And Mr. Wolf, you are recognized for 5 minutes. So, thank
you very much for being with us.
STATEMENTS KEVIN WOLF, PARTNER, AKIN GUMP STRAUS HAUER AND
FELD, LLP; CLAY LOWERY, MANAGING DIRECTOR, ROCK CREEK GLOBAL
ADVISORS; CELESTE DRAKE, TRADE AND GLOBALIZATION POLICY
SPECIALIST, AFL-CIO; AND DEREK SCISSORS, RESIDENT SCHOLAR,
AMERICAN ENTERPRISE INSTITUTE
STATEMENT OF KEVIN WOLF
Mr. Wolf. Thank you, Mr. Chairman, Ranking Member
Schakowsky, for inviting me to speak today.
As an opening note, the comments I make today are my own
views and are not on behalf of anyone else.
First before I begin, a compliment. As I have been
following this FIRRMA and CFIUS reform discussion, it has been
a genuine, nonpartisan, good faith, regular order, civil,
spirited public debate over a--this hearing has been too
straightforward. Let's see if we can raise it up a little bit.
But no, seriously, these are legitimately difficult issues
and on difficult national security and economic security
issues, where bright lines are hard.
So in fact, just a summary of where the debate really is.
It is sort of between, and apologies for over-generalizing, two
camps, two very nonpartisan, good faith camps. There is one
view that believes that CFIUS should have substantially
expanded jurisdictional authority over far more transactions
going in and out of the country to address evolving and
emerging threats, particularly with respect to strategic
acquisition from China of emerging technologies. Technologies
evolve quicker than law or regulations can. Commercial
transactions are very creative and more creative than the
Government can quickly understand.
And so, therefore, we need substantially more authority to
be able to metaphorically look in every box going in and out of
the country and decide whether if in that box there is a
transaction of concern, technology, or PII, or other types of
activity of concern.
And then the other camp does not deny the underlying threat
but says that before the Government uses this extraordinary
authority to impose additional controls on otherwise commercial
transactions, that it should do the hard work first to identify
the particular technologies, and threats of concern, and tailor
the scope of the new authorities accordingly, so as not to
discourage because fear and uncertainty about what would be
controlled discourages investment in the United States. The
U.S. is an open investment culture for which there are great
benefits to foreign direct investment.
And so that is really what the debate in FIRRMA is going
back and forth. In my prepared testimony, I lay out some detail
about the benefits of foreign investment and the issues with
respect to the strategic plans from China but I also lay out
the questions to be asking when considering any changes to
CFIUS.
And the first question is: Does the statutory authority
exist in some other area of law to address the issue through a
regulatory or process change?
And then the second question is: Would what the threat is
you are trying to address be better addressed more directly,
with fewer collateral consequences, by another area of law,
such as the export control system, trade remedies, government
contract issues, and intellectual property protection?
And then the third question is: The threat that you are
trying to address or the issue that you are trying to resolve,
can it be addressed through more investment simply internally
in the Government, for example, in identifying more non-
notified transactions, to have more and deeper robust review of
already filed transactions or to be able to have more staff to
monitor mitigation agreements, which are alterations of
agreements thereafter? And if the answer to any one of those
questions is no, then that is the sweet spot for reform.
The area for which I am the particular expert in, given my
background, is with respect to the issues pertaining to
technology transfer. And one of the threats identified in the
previous panels and in general is the identification of and the
control over technology that is being sought, that is emerging,
that has dual-use implications, both commercial, and other
activities of concern. And my main theme is that with respect
to efforts to control outbound investment to please remember
that there is an entire area of law, the export control system,
which Secretary Ashooh spoke about so well, that exists
explicitly to do that, to identify and to regulate through an
interagency process for national security purposes technologies
of concern without imposing unintended collateral burdens on
foreign direct investment, which we want to encourage.
So, I am here to answer your questions about anything
involving CFIUS, or export controls, or how they could or would
work better together.
And with that, I will stop and turn it over to my
colleagues.
[The prepared statement of Mr. Wolf follows:]
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Mr. Latta. Thank you very much.
Mr. Lowery, you are recognized for 5 minutes.
STATEMENT OF CLAY LOWERY
Mr. Lowery. Chairman, Ranking Member, and members of the
committee, thank you for the opportunity to testify today on
CFIUS and the modernization efforts underway.
In general, I support FIRRMA but I would like to point out
what I consider to be several key shortcomings in the current
bill, particularly from the perspective of someone who had to
implement the major reform of CFIUS that happened about a
decade ago.
Before I discuss these issues, however, I did want to say
just a few words about CFIUS that goes beyond what Assistant
Secretary Tarbert had to say. The easiest way to understand it
is to know what its mandate is. And that mandate is to ensure
national security while promoting foreign investment. It is not
solely about protecting national security. And the reason for
this is because welcoming foreign investment, in fact promoting
foreign investment, is part of our national security. It is
core to our economic growth. It is core to our increasing
productivity. And it is core to creating jobs in this country.
There was an earlier discussion about whether it should be
a voluntary process. The reason it is a voluntary process, in
many respects, is because of that issue. There is usually over
1,200 or 1,500 mergers and acquisitions that happen in the
United States every year. Most of them have exactly nothing to
do with national security. If we had mandatory process, we
would have to be investigating all of those.
The CFIUS is exactly what I said. It is a committee. It is
an interagency committee that investigates cross-border mergers
and acquisitions that could put our national security at risk.
Mergers and acquisition parties file with CFIUS, and CFIUS
determines whether the acquirer will gain control in the U.S.
business, and then it does a three-part analysis, as Assistant
Secretary Tarbert laid out.
The history of CFIUS is that it addresses complex
transactions under very tight timelines, in an orderly process,
that protects classified information and proprietary
information very well. While most transactions don't raise
national security risks, as I just mentioned, those that do are
addressed because CFIUS has extraordinary powers to
investigate, to mitigate, and, in very rare circumstances, to
recommend to the President to block a transaction.
The FIRRMA bill, I think, does a good job of modernizing
CFIUS and does a good job of filling in some of the gaps that
were mentioned earlier. My worry, though, is that the
legislation that we saw back of November is that portions of
the bill use vague language, duplicate existing export control
authority, and will be overly burdensome for both the private
sector and the Government.
There is a substantial part of this bill that transforms
the committee on foreign investment in the United States into a
technology control regime in which there isn't a merger, there
isn't an acquisition, in fact there isn't even a foreign
investment into the United States. In this scenario, CFIUS
would go from reviewing approximately 200 transactions a year
to several thousand. If this expansion is truly necessary for
our national security, and cost is the only issue, then, by all
means, let's find a way to pay for it. But this expansion is
not driven by national security. Instead, it would be the
needless result of a bill that is too vague and too
duplicative, rendering it practically impossible for CFIUS to
accomplish the work it has been tasked to do and that is so
vital for our U.S. economic and national security.
We have just heard from Assistant Secretary Tarbert and
Ashooh that the administration has recognized some of these
concerns and is making a serious effort working with Congress
to fix bill. And this trajectory, in my mind, is very positive
and it suggests that we may actually find a way to modernize
CFIUS, make it implementable, and improve our national
security. If we don't fix it, though, I fear we will not
enhance our security, we will harm it.
Thank you very much.
[The prepared statement of Mr. Lowery follows:]
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Mr. Latta. Well, thank you very much.
And Ms. Drake, you are recognized for 5 minutes. Thank you.
STATEMENT OF CELESTE DRAKE
Ms. Drake. Thank you.
Chairman Latta, Ranking Member Schakowsky, and members of
the committee, good morning. Is it still morning? Good.
I appreciate the opportunity to testify on behalf of the
AFL-CIO on the critical issues of foreign investment and job
creation. I have submitted written testimony for the record and
will highlight just a few key points here.
The AFL-CIO and its affiliate unions support investment
that creates good jobs. In determining the impact of foreign
investment on U.S. security, we must recognize that our
economic and national security are intricately linked.
America's economy is really the source and foundation of our
national security and that is also the source of the AFL-CIO's
interest in efforts to update and improve the Committee on
Foreign Investment in the United States or CFIUS. At the end of
the day, for us, it is a jobs issue.
As you know, the U.S. is a premiere destination for foreign
investment. In comparison to other countries in which investors
are required to create joint ventures for nearly every
investment, or pressured to transfer important technology or
intellectual property, the U.S. has a very open system and we
must make sure that openness does not become a weakness,
allowing jobs, and critical technology, and knowhow to bleed
away.
While foreign direct investment can contribute to the
creation and maintenance of high-quality jobs, we cannot assume
this is a given. Some foreign investors may seek to drive U.S.
competitors out of the market, or to transfer valuable
technology, equipment, and intellectual property overseas,
taking jobs with them. State-owned and controlled enterprises,
in particular, may not invest with a goal to operate in the
U.S. for the long-term but, instead, merely to acquire
strategic technology for their home country that could, in the
end, jeopardize U.S. security.
Because of these risks, we have long-supported updating
CFIUS. CFIUS' current charge is too limited. It reviews mergers
and acquisitions but needs broader authority to address new and
evolving acquisition strategies and vehicles. It cannot review
new or greenfield investments and its definition of national
security is too narrow.
Some of these shortcomings are directly addressed by the
Foreign Investment Risk Review Modernization Act or FIRRMA,
which we believe will benefit American's working people. FIRRMA
balances open investment with important national security
considerations.
FIRRMA will allow CFIUS to respond more effectively to
efforts by China and other nations to buy technological and
military components of the United States. Importantly, it will
update the definition of a covered transaction, require filings
for certain investments by state-owned enterprises, and ensure
that mitigation agreements are monitored.
Accordingly, we support FIRRMA as a needed update that
recognizes the complex business structures and fast-moving
technology development of the 21st century. However, in our
view, FIRRMA does not address all of CFIUS' shortcomings.
America's working people have additional concerns. We would
expand CFIUS' ability to review greenfield transactions and to
consider the net economic benefits of any transaction.
By limiting greenfield reviews to those in proximity to
strategic installations, as FIRRMA does, we may miss certain
predatory investments or the attacks on our companies piece by
piece, rather than wholesale.
The Tianjin Pipe Facility provides a case in point. It is a
greenfield investment that we wish we knew more about. If
Tianjin uses its own inputs made in China, with illegal
subsidies, or sold at less than the cost of production, Tianjin
could harm U.S. businesses that make those same inputs, costing
jobs, wages, and perhaps whole communities. We could get at
those things with trade remedy law but not once Tianjin is
producing here in the United States.
And by failing to review economic impacts, we may miss the
forest for the trees, allowing investments that drive down
wages or leave the U.S. with fewer high-value jobs in the long-
run.
Trading partners such as Australia and Canada already
require foreign investments to undergo such a review. And cases
like the 1990s Magnequench acquisition demonstrate that not all
foreign investment creates good jobs.
In sum, we look forward to working with you to advance
FIRRMA, to improve CFIUS, and to promote the growth of the
American economy through investment that creates high wage,
high benefit jobs.
I thank the committee for its time and would be pleased to
answer any questions you may have.
[The prepared statement of Ms. Drake follows:]
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Mr. Latta. Thank you for your testimony.
And Dr. Scissors, you are recognized for 5 minutes.
STATEMENT OF DEREK SCISSORS
Mr. Scissors. Thank you.
So my written testimony presented China facts to show the
context for the CFIUS reform discussion. I am going to go
straight to the punchline here.
If the amount of money tells us anything, Chinese
technology acquisition is not done primarily in the United
States. So if you just restrict Chinese investment in the
United States, you are not going to block Chinese technology
acquisition. You are going to do very little, in fact, to block
it.
To protect national security the United States must be able
to regulate certain businesses overseas, and particularly
businesses involved with China. That is what the facts say. It
is not an easy thing to do. I am not arguing that it is easy
but that is what the facts say.
On the flip side, the business community's objections are
right that you can restrict investment in such a way that you
deter beneficial investment. So legislation has to be as narrow
and clear as possible.
So I am going to talk about the security requirement and
then suggest some ways to make sure that H.R. 4311 or any
modification of it does not or does minimal harm to foreign
investment.
It is not a good idea to single out China in U.S. law but
the policy debate is actually about China. And the reason I
feel confident of that is not just the numbers. It is because
China is our first security rival which has enough money to use
it as a weapon.
All over the world, China uses loans as a political tool.
For those following the Belt and Road Program that China has
announced that it received some recognition from U.S. foreign
policy, is basically using loans as a political tool. In that
light, it would be a mistake, in my opinion, to spend too much
time thinking about the size of the equity stake or what the
definition of passive investment is. If China is providing
financing to a firm, they have influence over a firm. And you
know that doesn't mean that automatically something nefarious
is going on. It means we need to realize that Chinese financing
brings Chinese influence. Just like with any firm, if I am
providing the money, I get a say in what you are doing.
And the money trail here is actually evaporating. Total
Chinese investment in the U.S. was in the $50 billion range in
2016. This year it is tracking to reach less than, it is not
going to even hit $20 billion annually. So total investment is
falling.
There have been no $100 million technology investments. We
track $100 million investments and up. There have been no $100
million technology investments since January 2017. So it has
been well over a year.
Now Beijing hasn't given up on acquiring technology. So the
fact that we are not seeing investments in the U.S. is not a
sign like OK, well, problem solved. The problem is obviously
not solved and the administration has told us what their
primary concern is.
The Section 301 investigation was launched primarily to
deal with coercion by China of U.S. firms using access to the
Chinese market in order to gain technology. In other words, the
primary technology threat is coercing American firms who want
access to China; it is not Chinese firms investing here. We
know that from the administration's position and we know that
from the facts.
And if China is blocked from an investment here, just as an
example, it is a trivially easy thing to do to say hey, would
you like to set up a joint venture in China? Really favorable
terms. You are going to make a lot of money. All we need is to
get a look at the technology you are using, for our own
regulatory purposes. So, we cannot locate the action here of
Chinese technology acquisition as investment in the United
States.
Now the hard part is, What do we do? It is easy for me to
identify the problem. What do we do about it? I do work in a
free market think tank. The U.S. is by far the largest national
player in global investment, both coming in the United States
and going out. And what investors love is certainty.
So a phrase like country of special concern, that doesn't
promote certainty. We need to define high-risk countries, not
that they are the only risk countries, but we need to define
high-risk countries in a very clear and concrete way that could
be updated over time.
And just as an illustration, if we have an arms embargo on
a country, that is a higher risk country. That is a good proxy
for high risk. It is not perfect. It needs to be changed but it
is a lot better than saying countries of special concern.
Similarly, words like critical apply to technology,
materials, infrastructure, call out for definitions so business
knows what to expect from the U.S. review process. Because we
want investment, those definitions should be as narrow and
specific as possible. I am happy to talk more about that in
Q&A. The goal should be that most countries and most firms have
nothing to fear from CFIUS reform because it is not aimed at
most countries and most firms.
My last remark applies to all views of what should be done
here. Whatever the final bill looks like, whether it is more
intervention as to defense of national security or less, if
CFIUS isn't budgeted and staffed properly, it doesn't matter.
So I feel like even though we have talked about this, we
are not paying enough attention to that issue. In a sense, the
budgeting and staffing is the most important thing and then the
goals all follow from what you are willing to provide, in terms
of resources and people.
Thank you.
[The prepared statement of Mr. Scissors follows:]
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Mr. Latta. Well, thank you all for your testimony. And we
will now move into the Q and A portion of the hearing.
And I will begin the questioning and recognize myself for 5
minutes.
Mr. Lowery, how difficult is it for CFIUS to identify
transactions which involve a foreign purchase of a U.S.
company?
Mr. Lowery. I don't think it is that difficult. If it is a
foreign purchase, where there is going to be control, the first
thing is just kind of, as we heard in the last panel, there is
a process. There is a lot of incentive for the companies to
come forward and basically present that to the U.S. Government
for a review under CFIUS. If it is obviously in a non-national
security area, they wouldn't do that.
But beyond that, the Government does spend some of its
resources on kind of scouring the M and A Press, which is
actually a very robust press for a variety of reasons. And so
from that, at least, you can basically have the--CFIUS actually
has subpoena authority, if it needs to, to go out and actually
bring transactions in.
So my own view is that you actually capture most of the
critical controlling M and A transactions under CFIUS
currently. That doesn't mean that it doesn't take some effort
but I think actually most of them are actually brought in
through CFIUS.
Mr. Latta. So would you say that the notice requirements
right now are adequate that are out there already?
Mr. Lowery. I think they are adequate. I actually do think
in the FIRRMA bill the addition of having a mandatory
requirement for state-owned enterprises is a very good add.
Mr. Latta. Thank you.
Mr. Wolf, do export controls create a blacklist of
prohibited persons and transactions, or whitelist the permitted
goods and transactions, and is this the right approach?
Mr. Wolf. So with respect to individuals--and that is an
excellent question because export controls are about controls
on information and things, controls on people, end uses, and
end users. And as was described in the previous panel, there
are lists of proscribed individuals and companies to which the
export or re-export of anything is prohibited for national
security reasons, in order to get that threat. So that is the
blacklist approach. It goes to the certainty point that was
very well made a moment ago in that you have to know who you
can't deal with to know who you can't deal with.
With respect with the identification of technology, that is
done both unilaterally and multi-laterally with our regime
allies. And for companies to know what requires a license when,
what information is required to get government permission to
release, they have to know what it is. And so it is a very
explicit list, a very long list, a Commerce Control List, of
the types of technologies and related items that are
controlled.
To the extent it is sometimes too difficult to describe
exactly the term, occasionally, there are notes that say
particular technologies in these areas are not caught, such as
the whitelist. But the primary approach is a positive lit
approach of identifying the names of the companies, and the
individuals, and the types by technical description, or other
objective terms the technologies that require permission to
transfer.
Mr. Latta. Thank you.
Dr. Scissors, what role does foreign direct investment play
in creating economic growth here in the United States?
Mr. Scissors. Well, the world changes over time. I think I
will----
Mr. Latta. Yes, thank you.
Mr. Scissors. The role changes over time. I will answer
that question I think you know in a quick fashion but a very
important fashion.
The President and a lot of other national and local
politicians have said the U.S. needs to, at least partly, to
the extent we can, reindustrialize. There are manufacturing
jobs that can and should be created in the U.S. that, to some
extent, have been lost to automation or trade and we can bring
some of them back here. And I think that is true to some
extent. It requires foreign investment. We can't do it without
that.
So if you care, as I do, and I think probably almost
everyone in this room does, care about reindustrialization, if
you deter foreign investment, you are really striking--it is a
very difficult task to bring millions of manufacturing jobs to
the United States. You can't do it without foreign investment.
So that is the way I would say I would describe it. It is a
big question but foreign investment is crucial to the idea of
bringing manufacturing jobs, a large number of manufacturing
jobs to the economy.
Mr. Latta. Thank you.
Mr. Lowery, what is the best way to address the question of
how to ensure sensitive U.S. technology information that does
not fall into foreign hands?
Mr. Lowery. So I think that it is a combination of factors.
One is I think the most important one, which actually really
isn't the U.S. Government. It is actually the companies
themselves. The companies themselves, they don't want to allow
their technology to fall into foreign hands or, by the way,
domestic hands, because that is the technology that allows them
to make money. And so that is the ``secret sauce.''
Going beyond that, though, I think the export control
regime is probably the best regime we have and it needs to be
updated. And that is why I think Congressman Royce's bill is a
very positive bill and Congressman Engel's bill. And I think
that that helps put more force into what they should be doing,
the export control regime.
I think CFIUS also is very helpful but it is my own view
that it should be about what is a foreign investment into this
country. And so I think the combination of what the private
sector does, and then the export control regime, and the CFIUS
I think is the best way to address these issues.
Mr. Latta. My time has expired and I recognize the
gentlelady from Illinois, the ranking member of the
subcommittee for 5 minutes.
Ms. Schakowsky. Thank you, Mr. Chairman.
I wanted to explore some things with you, Ms. Drake. Gene
Green, I don't know if you were here for the earlier, he raised
some questions about labor and about the workforce. And the
answers that we heard from Mr. Tarbert at Treasury essentially
was we narrowly focus on national security issues. And I would
argue that it really is narrowly defining national security
issues. And in some ways I think you have tried to broaden
that, what is a national security issue, and I would certainly
like to see to the extent that jobs are at stake, et cetera, is
also a part of a national security issue.
But you mention in your testimony additional shortcomings
of CFIUS that are not addressed in FIRRMA, including the issue
of greenfield investments. And so what are greenfield
investments and why might they present a concern for the United
States?
Ms. Drake. Thanks. So greenfield investments are when you
are not buying a going concern. So you might be buying the land
and building a factory from scratch. And in theory, you would
think, well this one of the good kinds of foreign investments
that we want because if you are building a brand new workplace
or factory, you are creating jobs that didn't exists before.
And that is potentially the case.
But in the case, I gave the example, in my written
testimony and mentioned it briefly, Tianjin, which is a steel
pipe producer that is about to open a new facility actually in
Texas, near Mr. Green's district, and the problem is is that if
they behave in such a way, if the whole point of the investment
is to evade U.S. trade remedy law, whether it is dumping
countervailing duties, Section 232, and then they bring in from
their own company their own suppliers in China, which they own,
dump subsidized inputs, we are not going to be able to reach
those inputs through trade remedy law. And then they are
behaving here in a predatory manner that might drive other U.S.
competitors out of business.
So we could, in the long-run, be losing jobs, be harming
communities, and potentially driving down wages in that sector,
if we end up with a monopsony type situation, where there are
fewer buyers of labor.
So these are the kinds of things that we want to look at
when we are looking at does foreign investment benefit our
economic security, which really is linked. I mean whether you
talk about a net economic benefits test or you just talk about
expanding our view of what national security is, if our economy
isn't strong, then certainly our national security is at
greater risk.
Ms. Schakowsky. So right now CFIUS concentrates on this
narrow view of national security. And in your testimony, you
cited the U.S. China Commission's recommendation for addition
of a quote, net economic benefits test, unquote. And do you see
that being under CFIUS or some sort of a new regime?
Ms. Drake. We would put it under CFIUS, rather than
building a new whole regime. And you know Canada does a similar
thing. Australia does a similar thing. Those are both popular
destinations for foreign investment. So it is not driving away
investment but it is a way to say let's make sure, if you are
investing, it is not to strip the knowhow and technology and
take the jobs elsewhere but you are committing to having the
production here for the long-term. You are committing to hiring
U.S. workers, to pay them good wages. These all really matter
because if it is really predatory and it ends up killing an
entire sector of the U.S. economy, those are jobs but those
are, in the long-run, things that we can no longer make. And we
have got to rely, then, on imports from some other source.
So these things really should be looked at part and parcel
by CFIUS.
Ms. Schakowsky. And so you think that we have a structure
that could add on this whole additional piece. I mean I think
it is a really important piece and you know where it gets
housed and where it happens. Does the Department of Labor do
any of these things now, looking at these investments and how
they impact the overall economy and jobs?
Ms. Drake. Not in that manner. As you heard from Secretary
Tarbert on the first panel, the Secretary of Labor sits on
CFIUS but is a nonvoting member and doesn't really look at
these sort of workforce, wage, jobs issues. But it could easily
be done and I think it would be value added to what CFIUS is
already doing.
Ms. Schakowsky. You know I would really like to talk to you
about that. I think these are matters of national security. I
would like to work with you and the AFL-CIO on that.
Thank you.
Ms. Drake. Thank you.
Mr. Latta. Thank you. The gentlelady yields back.
The chair recognizes the gentleman from Indiana for 5
minutes.
Mr. Bucshon. Thank you, Mr. Chairman.
Mr. Lowery, when you were at Treasury, the CFIUS process
was substantially revised. How did the process change and does
it provide any insight into how policymakers should proceed
under the current proposals?
Mr. Lowery. Thank you, sir. So the way it mainly changed,
it didn't change what CFIUS was looking at, which I think Mr.
Tarbert talked about. What it did was it made a much more
formal review process by the intelligence community.
So the intelligence community was always part of CFIUS but
it just, it enhanced it. And then it also enhanced the level of
our accountability from the U.S. Government. So it wasn't just
signed off on by the career civil servants, not that they don't
do a great job but, basically, the people that have to testify
before Congress have to now sign off on all transactions.
It also provided a lot more transparency between the
executive branch and congressional branch which, frankly, did
not exist before that.
So all of those were a lot of process issues. The results
of some updates on the types of issues we were looking at,
especially on critical infrastructure and some homeland
security issues, which was an update from a previous era.
I would say probably the last thing is but it took a lot of
time. So in 2007, we passed FINSA, through Congress. It took
about a year and a half to do the regulatory process to get it
back up into place. And then you had to make sure you had the
right personnel because everybody has to have the right
clearances and so forth to look at this. So it just takes a
long time.
Some of my criticism of the FIRRMA bill, and not all of the
FIRRMA bill but parts of it, are that you would take this and
metastasize it. And that is the part that I worry about, that
we literally wouldn't be able to implement it.
Mr. Bucshon. Yes, understood.
Mr. Wolf, in your testimony, you said, and this is
interesting to me, that one side of the CFIUS debate are folks
that believe transactions are more creative than the Government
can understand. I am just curious if you thought that when you
were at Commerce.
Mr. Wolf. Yes, in fact, which is why I----
Mr. Bucshon. That is a serious question but it is also kind
of in jest because I----
Mr. Wolf. No, technologies are evolving, transactions are
evolving. The world is evolving quickly. And in any area of law
and regulation, it is difficult for the Government regulations
and statutes to keep up.
And I acknowledge that as a serious debate.
Mr. Bucshon. Let me just say I agree with you. I do think
that you know bureaucracies can get behind pretty quickly.
Mr. Wolf. Right.
Mr. Bucshon. And I would just phrase it in a different way.
It is not that the Government can't understand it, it is just
that things are evolving so quickly because of the inherent
nature of the way agencies and the Government do their business
that it is pretty easy for them to quickly get behind.
I am not saying I disagree. I just thought I would ask you
whether you thought that when you were at Commerce.
Mr. Wolf. But it is the key philosophical question in this
FIRRMA debate----
Mr. Bucshon. Yes.
Mr. Wolf [continuing]. Which is if, in light of that fact,
should you have rather expansive authority with very broad
general definitions on inbound and outbound investments, in
order to be able to know it when you see it later, whether
there is a transaction of concern.
Mr. Bucshon. Yes.
Mr. Wolf. And then the second question is if that expansive
authority does more harm than good with respect to the open
investment culture that every President before us has
acknowledged. So I have got a longer version of that but that
is the essential debate in this question.
Mr. Bucshon. Yes, understood and I don't disagree. I think
we need to balance our ability to accept foreign investment and
to make sure that our economy is strong and not inappropriately
burdensome on investment by overreaching. That is why we need
to strike a balance here.
But that said, based on what people like me are currently
hearing in the classified setting on a lot of issues, we have
some really pretty serious national security issues to address
and that is why getting this right is really important.
So, I yield back, Mr. Chairman.
Mr. Latta. Thank you very much. The gentleman yields back.
The chair recognizes the gentleman from Kentucky for 5
minutes.
Mr. Guthrie. Thank you very much. And just finishing on
that, and not my line of questioning, but that is one of the
debates we have as the legislative branch. How much authority
do we grant? Because it is quicker to react regulatory than
legislatively and you get broad definitions, and broad
authorities, and you hope that the things go down the way that
Congress intended when you do that. But with the Chevron case,
it gets to the point where both sides, both have--and if you
are in the executive branch, you probably want to do that
anyway, taking a lot of liberty, I think, with what Congress
intended.
So, unfortunately, we are to the point that we have to be
more prescriptive than that because you can't legislate for who
is in power now. You have got to legislate for who may be in
power in the future.
So, Mr. Wolf, this is the first question to you. One of the
reasons cited for the current legislation is the need to deal
with emergency situations, such as when a foreign purchaser is
actively seeking to acquire U.S. technology.
How long does it take for the export control process to
work and is it suited for emergency situations?
Mr. Wolf. And that is the follow-on to my previous point.
And the key effort in this effort, in this debate, which I
think is very well laid out in a process point in Section 109
of Congressman Royce's bill, is the need to identify the
technologies of concern, the emerging technologies that are
being sought by countries of concern, identify and regulate
them, regardless of the nature of the transaction, whether it
is a joint venture, or whether it is a voluntary sale, whether
it is a telephone call. If technology is of concern, if it is
being sought to be acquired by a foreign government to our
detriment, it should be regulated and that is exactly what the
export control system does.
Now to the timing question. So I was so concerned about
this when, during my time, we created a process that was
referred to earlier, the OA521 process that allows the Commerce
Department to identify immediately and impose unilateral
controls, that is without needing the permission or
coordination of other countries over any technologies for any
foreign policy or national security reason.
So the legal answer to your question is it can be done as
quickly as a reg can be written and published, in a day. The
harder question, which is where the process point comes in from
Secretary Royce--or Congressman Royce's bill is to identify
those technologies that, historically, we are not familiar
with. And in this entire debate, artificial intelligence,
robotics, driverless vehicle technology, a long list of other
technologies are the target of acquisition.
And so my primary advocacy is that the Government devote
significantly more creative resources to identifying those
technologies, listing them, and tagging their ability to be
released to countries and end uses, and end-users of concern,
regardless of whether it is an investment, passive or
otherwise.
So, it can be done quickly. So the law is there to do it
quickly. The hard part is the brain power to think through what
really is of concern and without doing it in such a broad way
that you discourage investment in the U.S. or U.S. companies
from developing this technology in the U.S.
Mr. Guthrie. So the law doesn't prevent you from acting
quickly, the process, I mean doing the right thing correctly.
Mr. Wolf. It is a function of will, and creativity, and
intelligence, and collective efforts.
Mr. Guthrie. Up to the point where everybody agrees this is
right but we have got to wait so many days because of the law.
The law actually allows you to----
Mr. Wolf. The existing regulations with the broad authority
that Congress has given the Commerce Department exist to tag
and identify something immediately.
One quick follow-on. However, that shouldn't be where it
ends because the worst export controls are the ones that stay
forever unilaterally, that is, only the U.S. imposes, because
what that does is it drives that work, that technology, that
development to our allies and then we lose that work because
the U.S. is a more restrictive environment than our allies.
And so what I have just described as a short-term
unilateral fix but the regulation and also Congressman Royce's
bill lays out a process to make it multi-lateral so that our
allies are in the same boat with us, and achieving the common
objectives, and leveling the playing field with respect to
control of the technology of concern.
Mr. Guthrie. OK, thanks.
Mr. Lowery, is CFIUS equipped to review not only inbound
foreign investment into the U.S. but also outbound
transactions, such as the contribution of intellectual property
to a joint venture with a foreign entity?
Mr. Lowery. No, it is not. In the original FIRRMA bill
provided that authority and that is the biggest problem of the
bill. It should not be doing that.
That is, CFIUS should be about foreign investment into this
country. And if it is a concern about what is happening that is
being exported, whether it is in a joint venture or whether it
is just a regular sale, that is when you turn to the
authorities that Kevin Wolf just was talking about. That is
what the export control system is all set up to do.
That doesn't mean it doesn't need to be modernized,
updated, and maybe sometimes having a fire under the you know
whats from Congress. And I think that that is kind of what I
saw from Congressman Royce and Congressman Engel's bill.
Mr. Guthrie. OK, thank you.
And Dr. Scissors, can you please touch on the policy
motivations for H.R. 4311 that stem from the Made in China 2025
Plan?
Mr. Scissors. Sure. You know one difference in talking
about how quickly to move is that you know China has a declared
intent to acquire technology, to attain global technological
leadership. It is not just to acquire technology to make its
people better off. It is to be the leader, ahead of all of you,
everyone else in various sectors. And in some of those sectors,
we might think of OK, electrical cars. You know we don't want a
lot of combustion engines on Chinese streets for 1.4 billion
people. But other areas, like semiconductors, there is an
obvious national security component to that, as well as
strategic economic component.
So Made in China 2025 is not the first time the Chinese
have announced an industrial policy. It is the first time they
have announced an industrial policy at the high end, where we
are going to get technology at the high end. We are going to
subsidize our companies at the high end.
So the challenge to the United States has changed
fundamentally because China is now competing with us in areas
where we thought we were the undisputed global leader. And
their intent is explicitly for that no longer to be true, that
we will not be the undisputed global leader.
Mr. Guthrie. Ms. Drake, you were shaking your head a couple
of seconds ago. Do you have a comment on that, then?
Ms. Drake. Oh, I just, I agree with----
Mr. Guthrie. You were agreeing, obviously.
Ms. Drake [continuing]. Absolutely with those comments and
think that we have to adjust what we are doing to respond to
what China is doing, absolutely.
Mr. Guthrie. OK, thank you.
And I yield back.
Mr. Latta. Well, thank you very much.
And seeing no other members here to ask questions, first I
want to thank you all for being here. Your testimony has been
very, very informative. It is an area that I think this
committee is delving into and we have got to do something. So I
want to thank you for being here.
And before I conclude today, I would also like to make sure
that we submit for the record, by unanimous consent, a
statement from FCC Commissioner Michael O'Rielly.
[The information appears at the conclusion of the hearing.]
Mr. Latta. And pursuant to committee rules, we remind
members that they have 10 business days to submit additional
questions for the record and I ask that witnesses submit their
response within 10 business days upon receipt of those
questions.
And, without objection, the subcommittee will stand
adjourned.
[Whereupon, at 12:26 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Prepared statement of Hon. Greg Walden
Good morning and thank you to our witnesses for being here
today. Our hearing will examine the Committee on Foreign
Investments in the United States and the vital role it plays in
ensuring that corporate transactions involving U.S. and foreign
persons do not pose threats to our national security.
We are also here to discuss the role foreign direct
investment plays in growing the American economy and creating
jobs. Perhaps most importantly, we are here to discuss the
balance between encouraging global investment in the United
States, while preventing those who would do us harm from
exploiting our fundamental faith in the free market and the
free flow of capital.
Since 2007, the last time Congress reviewed the CFIUS
(Siff-ious) review process, much has changed. The types of
investments made by foreign persons in U.S. companies have
diversified; the role of foreign governments in attempting to
acquire U.S. assets through companies they partially or wholly
own has altered; and technological improvements have increased
incentives for other nations to attempt to acquire innovative
products and technologies created by American entrepreneurs.
These changes mean new opportunities and new risks. Under
the auspices of investing in an American business, a foreign
government could acquire a whole or partial stake in a U.S.
company that allows it to access critical information or
products that could undermine our national security. Some of
our colleagues believe the CFIUS review process, designed to
address such risks, has not kept pace with these developments.
At the same time, it must be recognized that much of
foreign investment in the United States is beneficial to our
country and economy. When a foreign-owned business invests in
the U.S., it is acknowledging the tremendous advantages that
come from employing American workers and operating in U.S.
markets.
Many U.S. companies with foreign ownership not only
manufacture their products in the United States, employing
American supply chains, but also export these U.S. built
products overseas.
According to the most recent U.S. Commerce Department data,
majority-owned U.S. affiliates of foreign entities exported
$352.8 billion in goods, accounting for over 23 percent of
total U.S. goods exported in 2015 \1\. These types of ventures
reduce our trade deficit while creating jobs for Americans.
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\1\ https://www.commerce.gov/news/fact-sheets/2017/10/foreign-
direct-investment-united-states.
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In that same report on Foreign Direct Investment in the
United States, the Commerce Department noted that the United
States had an inward FDI stock of $3.3 trillion in 2015 and
$3.7 trillion in 2016. The largest investors in the U.S. came
from the United Kingdom, Japan, Canada and Germany, countries
with whom we have a close and cooperative relationship.
Welcoming foreign investment in the United States has
yielded tremendous benefits for our citizens. It is important
that we do not make the opportunity to invest in the U.S. so
burdensome or uncertain that we discourage a vital source of
economic growth.
It is also critical that we remain aware of the reality
that not everyone in the world shares our values or is content
to see America succeed. The CFIUS review process has
historically struck a balance between encouraging investment in
America with protecting our citizens from harm. It is our duty
to review that process to ensure CFIUS has the tools it needs
to continue to strike that balance in a changing world.
I look forward to hearing from our witnesses today on
whether H.R. 4311 correctly strikes that balance, what changes
or improvements can be made in the legislation, and what
equities policymakers should consider as we undertake this
process.
Thank you and I yield back the balance of my time.
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Prepared statement of Hon. Frank Pallone, Jr.
Today we are here to review the CFIUS process. CFIUS, the
Committee on Foreign Investment in the United States, serves as
an important check on our generally open investment climate.
Simply put, CFIUS reviews certain transactions to ensure that
they would not result in adverse national security consequences
for the United States.
Investment in American companies, whether foreign or
domestic, is a major component of the U.S. economy. It can spur
innovation and create good jobs for American workers.
However, some foreign investment is more beneficial to the
U. S. economy than others. For example, research has shown that
the benefits of investment by acquisitions are ambiguous. In
addition, investments that are made based on incentives given
at the state or local level can foster a ``race to the bottom''
among jurisdictions.
And regardless of the potential benefits, foreign
investment must never cause harm. Therefore, we need to ensure
that such investment is not creating risks to our national
security.
Over the last several years, there have been calls to
update the CFIUS process, particularly as the global market and
our national defense posture evolves. Most recently, a
bipartisan bill the Foreign Investment Risk Review and
Modernization Act, was introduced by Representatives Pittenger
and Heck, which we will discuss at today's hearing. I look
forward to exploring this legislation with our witnesses and
hope this bill works its way through the process on a
bipartisan basis.
It is imperative that CFIUS is always ready to respond to
security threats from any power seeking to have a strategic
edge over our nation. CFIUS must be reviewing the right
transactions and making sure that our critical infrastructure
and intellectual property are being protected. The number of
investments that need to go through the CFIUS process is on the
rise so a review of the process now makes sense.
While we do not want to drive investment dollars to other
countries, we need to protect our technological edge and
military readiness. And unfortunately, there are other
governments seeking to take away that edge. Recently, Chinese
President Xi Jinping reiterated his vision of China's future as
a technology power. In a speech this past weekend, he
acknowledged his goal of having Chinese companies collaborate
with the Chinese military in that pursuit, what some have
called civil-military fusion.
I understand those who are concerned about access to
capital. U.S. firms and universities do need capital to grow
ideas. I agree, and strongly support efforts to increase
funding for research and development. For our nation to
maintain its technological and strategic edge, we in Congress
must work to ensure federal dollars are committed to emerging
research and improving our infrastructure
Mr. Chairman, it is no wonder why the United States is the
number one destination for foreign investment. Companies come
here because of our workforce, infrastructure, and consumer
base. They recognize that it is a great place to do business. I
look forward to hearing from our witnesses about how to best
strike the balance of strengthening our national security
review and maintaining our title as the investment capital of
the world.
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