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Another plot twist occurred last week in the U.S. government’s journey toward establishing an outbound investment screening mechanism. On July 25, by an overwhelming 91 to 6 vote, the Senate approved a bipartisan amendment to its version of the National Defense Authorization Act (NDAA) that would create a notification mechanism for certain U.S. business transactions in China and other countries of concern. This outcome demonstrates congressional unity on the perceived threat China’s economic rise poses at a time when very few topics garner support from both sides of the aisle. Although the amendment is scaled back compared to previous proposals, it nevertheless represents a potential new chapter in the way the United States government conducts oversight of business activity abroad and signals a sharp change from Washington’s longstanding open investment policy.
The Outbound Investment Transparency Act, (OITA) cosponsored by Senate Finance Committee members Bob Casey (D-PA) and John Cornyn (R-TX), would require U.S. entities to notify the Department of the Treasury about covered outbound investments, acquisitions, and other business activities. Designed as an information-gathering tool to obtain a fuller picture of U.S. investment activity in China, Russia, North Korea, and Iran, the mechanism focuses on fewer industries than previous congressional proposals and does not provide authority to reject outbound investment into those industries. The six technology sectors outlined in OITA deemed critical for national security encompass advanced semiconductors and microelectronics, artificial intelligence (AI), hypersonics, networked laser scanning systems with dual-use applications, satellite-based communications, and quantum information science and technology. The activities subject to OITA oversight include, among others, active and passive investments (which would place portfolio investment under the scope of the mechanism), joint ventures, and joint research that transfers intellectual property. While the amendment enables the Treasury Secretary to define the sectors falling under the scope of the proposal, it does not appear to give the secretary the ability to expand the list of covered sectors or countries of concern. Additionally, the amendment is prospective and thereby does not apply to already existing business activities.
The amendment, according to its sponsors, simply seeks to ensure that U.S. persons conducting covered business activity in the above-outlined technology sectors of countries of concern disclose the subject activity to the Treasury Department no later than 14 days before the expected completion date. This would enable the United States to acquire data on these activities and thereby better position itself to make decisions on protecting critical and emerging technologies in the future. As such, the bill does not give the government authority to require limiting investment; instead, it simply offers a tool for gathering information.
An outbound investment screening mechanism has been under discussion for five years. As CSIS has previously written, such a review mechanism first appeared in U.S. discourse during the Export Control Reform Act and the Foreign Investment Risk Review Modernization Act congressional debate in 2017 and 2018. Those proposals would have given an outbound investment screening authority to an interagency committee similar to the Treasury Department’s Committee on Foreign Investment in the United States. While that proposal and subsequent revisions of it that still contained authority to reject investments never crossed the finish line, heightened concern about the strategic threat China presents along with the Biden administration’s announced decision to create a similar process by executive order (EO) enabled this more modest OITA notification mechanism to gain Senate approval.
The Senate’s action occurs as the White House nears finishing an EO that proposes to restrict new U.S. outbound investment into select strategic technology sectors in China. Having worked with Senators Casey and Cornyn to encourage them to scale back earlier versions of their legislation, the Biden administration will reportedly focus its EO on an even narrower set of critical technology sectors than those which OITA covers. And, unlike OITA, the EO is rumored to include an outright prohibition on a limited set of investments while standing up a reporting mechanism on a broader range of investment activity. The EO is projected to inhibit U.S. investment that comes with know-how and expertise into China’s AI, semiconductor, and quantum computing sectors.
There has, however, been debate within the administration over the scope of the mechanism. National security officials, led by National Security Adviser Jake Sullivan, have supported a robust outbound investment EO for months. By contrast, the Departments of Commerce and the Treasury have been pushing back, arguing instead that new rules would dramatically reduce new U.S. business in China and put U.S. firms at a competitive disadvantage to Asian and European firms that would maintain access to the world’s second largest economy. White House action may face further delays as officials wait to see how Congress handles Cornyn and Casey’s amendment.
While national security officials have been advocating for a more encompassing mechanism, industry representatives and experts have proved more skeptical of the idea. The Semiconductor Industry Association earlier in July stressed that any broad unilateral—rather than plurilateral and multilateral—measures to restrict semiconductor sales threaten to diminish the U.S. chip industry’s competitive edge and will prompt countermeasures from China. Think tank scholars have also argued that the U.S. plan to restrict investment in China necessitates a multilateral approach to succeed. Should the United States pursue a unilateral approach, China could sidestep U.S. investment opportunities and instead secure investors in other countries, thereby undercutting U.S. businesses as well as disrupting de-risking efforts between the United States, its allies, and partners.
Nonetheless, U.S. allies and partners seem to be gearing up similar frameworks. The recently published European Economic Security Strategy recommends that the European Union embrace an outbound investment screening mechanism, along with an enhanced dual-use export control regime through improved partner coordination and a reevaluation of the scope of inbound investment screening that would include all member states. A major obstacle for the Europeans, however, is that the bloc must reach agreement across all EU member states, a challenging feat. Germany’s new Strategy on China itself also highlights the usefulness of such a mechanism. Likewise, as CSIS’s Emily Benson has previously written, the G7 Leaders’ Statement on Economic Resilience and Economic Security issued in Hiroshima, Japan, in May pointed to an outbound investment screening measure as potentially useful, as did the ensuing EU-U.S. Trade and Technology Council Joint Statement.
It is unclear how China will react to OITA and the forthcoming EO. The People’s Republic of China’s ambassador to Washington recently warned that Beijing would “definitely” respond if Washington further escalates technology curbs. Even so, experts doubt Beijing would have much room to maneuver in light of its long history of government control over both inbound and outbound investment. Earlier this month, China announced export controls on germanium and gallium, two critical minerals for making semiconductors and other electronics. The measure is supposedly country agnostic. Prior to that, Beijing had issued a ban on the sale of select Micron Technology products in China. After these two actions, it is unclear how much more is in China’s countermeasure toolbox, particularly given its strong predilection to avoid steps that would harm its own economy.
The NDAA itself is facing a tortuous road. The House passed its version of the bill along party lines after adding controversial provisions related to abortion, diversity, and other social policies. With the current text, the Department of Defense (DOD) would be unable to fund military personnel travel expenses for receiving an abortion, rescinding a Pentagon memo from last October issued after the Supreme Court’s overturning of Roe v. Wade. It also prohibits gender transition procedures as well as the establishment of any new diversity, equity, and inclusion positions or filling vacant DOD positions. In addition, the DOD could not take adverse actions against or refuse to enroll an individual at a service academy based solely on their refusal to receive the Covid-19 vaccine.
All of these features make the current NDAA one of the most contentious in years, giving it a good chance of being vetoed if it arrives on President Joe Biden’s desk with the House provisions—a rarity that has happened only once before. As a result, neither the current House nor Senate texts should be considered final. Nevertheless, the overwhelming approval of the outbound investment notification amendment shows the political will behind such a framework: it likely will eventually find its way to the Oval Office. Moreover, the White House will undoubtedly view last Tuesday’s vote as a green light for a potential EO.
The United States thus continues its policy of conflating national security and economic policy. An outbound investment screening mechanism would represent a significant shift in economic doctrine, and the health of U.S. businesses is becoming increasingly secondary to security imperatives. Despite arguments that this tool is only an information gathering exercise, it constitutes another indication that the U.S. government is ready to curtail economic activity in countries it deems hostile, no matter how beneficial that activity is for long-term growth. The proposal is more limited than previous mechanisms in terms of the powers given to the Treasury Secretary to expand on the list of covered sectors and countries of concern. Nevertheless, it will have a chilling effect on outbound investment for potential investors, sending a definite sign that Washington is willing to influence their ventures abroad. The amendment is also another sign of a deteriorating relationship with China, as Beijing will see this step as another effort to curb its rise.
Thibault Denamiel is a research associate with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Eric Meyers is an intern with the Scholl Chair in International Business at CSIS. William Reinsch holds the Scholl Chair in International Business at CSIS.
