Congress ramps up pressure on outbound investments and “strategic competition” with China

The $1.7 trillion government funding package passed by Congress and signed into law by President Joe Biden just before the new year includes a provision calling on the Administration to move toward establishing a mechanism for screening American outbound investments “in certain sectors that are critical for U.S. national security.”

While the provision does not single out any particular country, proponents of enhanced scrutiny over outbound investment have consistently cited China among their foremost concerns when it comes to international destinations for American direct investing.

Now, in one of the first acts of the newly sworn in 118th Congress, a dedicated forum has been created to further increase the pressure on China over a broad array of issues relating to trade, intellectual property, defense, foreign policy, technology and human rights.

The House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party will have authority “to investigate and submit policy recommendations on the status of the Chinese Communist Party’s economic, technological, and security progress and its competition with the United States.”

The legislation to create the Select Committee (H. Res. 11) was sponsored by the Speaker of the House, Kevin McCarthy. Representative Mike Gallagher (R-WI) will chair the new committee. Significantly, the vote to establish the select committee was bipartisan: 146 Democrats – including former House Speaker Nancy Pelosi – joined with 219 Republicans in voting for creation of the committee.

The outbound investment initiative similarly enjoys support on both sides of the aisle.

Worries over the economic, technological and military ascendance of China are increasingly influencing and shaping US policymaking. The recently passed government funding bill also imposes new restrictions and limitations on Chinese entities trying to buy US tech companies as well as a ban on collaboration between American and Chinese government agencies in key technology sectors.  The CHIPS and Science Act of 2022, which provides $280 billion to bolster US semiconductor manufacturing and R&D, among other objectives, was clearly framed by its Congressional champions and the Administration as a way to counter China on technological innovations and control over the supply chains that underpin their production.

Agencies put on notice

Tucked into the Explanatory Statements on Commerce Department and Treasury Department funding accompanying the massive fiscal year 2023 Consolidated Appropriations Act is legislative language regarding outbound investment. It represents the latest salvo in an ongoing Congressional drive to create a review process intended to protect the US supply chain from countries deemed to be adversaries, notably China, though Russia is also often cited as a country of particular concern.

Approximately $20 million has been included in the massive spending bill to begin standing up an outbound investment screening mechanism if the president orders its creation.

As discussed in this DLA Piper Alert from 27 June 2022, legislation known as the National Critical Capabilities Defense Act (NCCDA), which has bipartisan and bicameral support on Capitol Hill, would set up a whole-of-government screening process for outbound investments and the offshoring of critical capacities and supply chains to identify vulnerabilities. Efforts to attach the measure to other major legislation (such as the CHIPS Act) have thus far been unsuccessful. The bill’s sponsors have pledged to reintroduce the legislation in the new session of Congress that began on January 3.

Meanwhile, in conjunction with the legislative push, top Congressional leaders have also called on President Biden to issue an Executive Order to accomplish many of the same objectives. Senior Administration officials are reportedly laying the groundwork for just such a move.

The provision in the funding bill directs the Commerce and Treasury Departments to submit reports to Congress “describing such a program including the resources required over the next three years to establish and implement it.” The departments would be required to submit their reports within 60 days of enactment of the funding package, or by February 27.

Although the provision does not mandate any specific policies or actions by the agencies beyond preparing the report, its inclusion in the must-pass end-of-year bill to keep the government funded through fiscal year 2023 is indicative of a broad consensus among both parties and both chambers of Congress that there is a significant and growing need to scrutinize and regulate outbound investment.

The bill includes approximately $20 million for the initiative if it is established via Executive Order, according to a December 26 statement issued by Senator Bob Casey (D-PA), one the sponsors of the NCCDA.

“Reverse CFIUS”

As we noted in our June 2022 Alert, the US has long maintained authority to review inbound foreign direct investment for its impact on national security, a process that is led by the Committee on Foreign Investment in the United States (CFIUS). The NCCDA would establish an interagency federal commission (the National Critical Capabilities Committee or the Committee) with authorization to screen certain forms of US outbound investments to increase oversight of supply chains that run through certain countries of concern and prevent the offshoring of “national critical capabilities.” The proposed Committee has been referred to as a “reverse CFIUS.”

Sectors that would be covered under the proposed law include energy; medical; communications, including electronic and communications components; defense; transportation; aerospace, including space launch; robotics; artificial intelligence; semiconductors; shipbuilding; and water, including water purification.

Countries of concern include China, Russia, Iran, North Korea, Cuba and Venezuela.

Executive action anticipated

In September 2022, a bipartisan group of senior lawmakers, among them then-House Speaker Pelosi and Senate Majority Leader Chuck Schumer (D-NY), sent a letter to President Biden urging the “Administration to move forward with executive action — which can then be bolstered by statutory provisions — to safeguard our national security and supply chain resiliency on outbound investments to foreign adversaries. This is how the oversight of inbound foreign investment was initially established—Executive Order.” (CFIUS was first established under an Executive Order by President Gerald Ford in 1975, initially to study foreign investment. In 1988 Congress passed the Exon–Florio Amendment, which empowered CFIUS to reject deals.)

Administration officials have expressed support for the goals of the NCCDA. Officials from the Commerce Department, National Security Council and other agencies have been meeting with industry leaders and other key stakeholders as they develop a new oversight regime, particularly focused on China, governing sensitive technologies not already covered by export controls or other existing tools.

Action by the Administration had been expected by the end of 2022, but as of now it is not clear when executive action will be announced.

Industry may be not on board

Last June, when it looked like the NCCDA was on the verge of enactment, a coalition of business councils and trade associations, led by the U.S. Chamber of Commerce, urged Congress to slow down and make additional changes to the legislation. The industry coalition letter argued that the legislation was too broad, covering “nearly every sector of the U.S. manufacturing and agricultural economy – and the services sectors that critically enable them,” creating compliance burdens for business and government alike, complicating efforts to coordinate with allies, and disproportionately burdening smaller companies.

A sweeping reassessment of US relations with China

Outbound investment will be one of the many areas of focus for the newly created House Select Committee on China. Rep. Gallagher, chair of the new panel, was recently quoted stating, “If the story of the last five-ish years was enhanced scrutiny of Chinese investment in the U.S., the next phase of this is going to be enhanced scrutiny of outbound investment into Communist China.” Whether through executive action or legislation, or both, measures to regulate outbound investment based on national security concerns are “inevitable,” Representative Gallagher said.

The congressman’s view is widely shared in Washington. US businesses that operate in targeted sectors and countries of concern should be prepared.

Representative Gallagher, a member of the Armed Services and Select Intelligence committees first elected to Congress in 2016, said during House floor debate on creating the new committee that he hoped it would function in a bipartisan manner. The 16-member committee will include nine Republicans and seven Democrats, with the House Speaker and Minority Leader as ex-officio members.

Addressing concerns raised by some of those who opposed creating the committee, Representative Gallagher said, “We need to have a united front here in Congress to counter the Chinese Communist Party, and in so doing, at every step along the way, we must make sure that we are drawing a distinction between the party and the Chinese people with whom we have no quarrel and who are often the primary victims of CCP aggression and repression.”

We will continue to monitor developments on these initiatives and provide updates as events warrant.  If you have any questions, please reach out to one of the authors or your DLA Piper contact.