White House supports investment legislation in key sectors in China

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The Biden administration says it supports congressional action to require U.S. companies to notify the government before investing in critical sectors in China, endorsing in its first public statement on the issue a bipartisan push for transparency that pits commercial interests against national security.

After more than a year of debate, the White House has reached consensus among affected government agencies on an approach to legislation that mandates notification but empowers the president to go further: craft regulations restricting and even prohibiting this which officials see as a wide range of investments in a narrow range of sectors that he says undermine national security.

The issue comes as the pandemic has exposed Western reliance on Chinese suppliers for essential items such as surgical masks, ventilators and drug ingredients, and as concern mounts in Washington over China’s military build-up and its efforts to overtake the advance of the United States and its allies. in critical technologies.

While the US government screens foreign investment in US companies that could harm national security, it has no corresponding program to screen US investment in countries of concern, such as China. The fear is that such investments could help China produce key technologies and weaken the United States, leaving the country dangerously dependent on Chinese imports.

After several years of false starts, a somewhat unlikely coalition of Democrats and Republicans in both chambers has drafted a proposal — with input from the administration — that would require US companies to disclose their plans for investing in Chinese sectors. in development, such as semiconductors, quantum technology, artificial intelligence, critical minerals and materials, and high-capacity batteries. Lawmakers also want to give the president the power to include “any other sector” he considers a “national critical capability” based on its importance to national security, according to a June 30 draft obtained by The Washington Post.

“The administration supports Congress’ bipartisan, bicameral effort to provide greater transparency about U.S. investments in China and other countries of concern, particularly for transactions in critical sectors that could harm national security. by blunting our technological edge or undermining the resilience of our supply chain,” National Security Advisor Jake Sullivan said in a statement.

And if Congress passes notification legislation, “we also think it’s important to have the ability to limit narrow categories of investments that raise national security concerns, using regulation that would involve a wide variety of stakeholders,” Sullivan said.

The legislation is called the National Critical Capabilities Defense Act. The editors say the bill is essential to keeping factory jobs in the United States and preventing China from overtaking American industry in emerging technologies.

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“Of [masks and ventilators] to computer chips, the pandemic has highlighted just how vulnerable American supply chains are,” said Sen. Robert P. Casey Jr. (D-Pa.), a member of the finance committee that introduced the project. bill last year with the senator. John Cornyn (R-Tex.). “When we export American expertise and know-how to China, we cede our manufacturing power to foreign adversaries, which hurts American families and our economy.”

But the effort faces headwinds from free-market Republicans and the business community, who say it will hurt American competitiveness. “In order to be competitive in today’s economy, businesses must be able to invest internationally,” said John Murphy, senior vice president for international policy at the United States Chamber of Commerce. United States.

“The idea that the U.S. government might start vetting how and where a company can invest is concerning,” Murphy said in an interview. “This is potentially a completely new and onerous set of constraints for companies doing business globally.”

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

“I have yet to be convinced that the existing export control laws fall short,” Toomey said. “Furthermore, I fear that what might start as a ‘notification’ will soon turn into a new federal agency with sweeping powers to dramatically disrupt and shut down the free flow of trade and investment, risking slowing economic growth. and raise prices for consumers.”

The prospects for the legislation, which looked pretty good last month, have been caught up in a largely unrelated political tussle in the Senate over Democratic attempts to try to pass a scaled-down version of Build Back Better – President Biden’s package for reduce health care costs and fight climate change. If Democrats go ahead, Senate Minority Leader Mitch McConnell (R-Ky.) has pledged to scuttle a major bipartisan package of Chinese legislation that includes the Outbound Investment Bill.

The threat of inaction, lawmakers say, is real. They cite US semiconductor software design leader Synopsys, which has invested in Chinese chip-making software company Amedac. Such investment, they say, essentially fuels China’s ability to replace American chip design software. Synopsys told the Post it was a “small minority investor” in the company, but company registration records show it has a nearly 20% stake and is the largest. shareholder.

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Lawmakers note that U.S. tech giants such as Microsoft have set up labs in China dedicated to artificial intelligence research and that Microsoft, for example, has collaborated on research into “deep neural networks.” with an army-run Chinese university that was on a Commerce Department export blacklist. . But being placed on the Commerce Entity List does not preclude such US research or investment. “We really don’t have anything at this point that can solve the outbound investment issues,” said Emily Weinstein, a researcher at the Georgetown Center for Security and Emerging Technologies. Microsoft declined to comment.

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

Sequoia Capital pointed out that its US entity is led by US and European investors, while its China entity is led by Chinese investors.

In recent months, the scope of the bill has shrunk from more than a dozen sectors to a handful. The types of transactions covered, meanwhile, now also include joint ventures and “new” investments in which a U.S. company opens a facility overseas, according to the draft.

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

“We expected to see export controls in these areas,” said Matt Turpin, director of China’s National Security Council in the Trump administration. “Trade has had four years to act with little results.”

Jeanne Whalen contributed to this report.

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