Senate Amendment in Defense Act Puts Restrictions on Outbound Investment into China Tech

Restrictions on investments in China tech are gaining prominence in Washington. Here are some examples from votes, both recent and earlier this summer.

By a factor of 91 in favor and only six against, the Senate voted in late July to restrict outbound investment into China advanced semiconductors and computing, as well as technologies that can have both civilian and military use. This puts venture capital and private equity on notice.

The amendment was put forth by Senators John Cornyn (R-TX) and Bob Casey (D-PA) as part of the Senate’s version of the National Defense Authorization Act, an annual defense spending bill.

On Tuesday, July 25, former Treasury Secretary Larry Summers cautioned against restrictions on outbound investments to China during an event at the Peterson Institute for International Economics in Washington. The Senate did not get the seemingly out-of-date message at this time.

The debate over outbound investment restrictions is far from over.

Six Senators voted not to restrict investment, which is mainly focused on China in what some have referred to as a “reverse CFIUS”. CFIUS stands for The Committee on Foreign Investment in the United States and is an inter-agency committee of the government that reviews the national security implications of foreign investments into the U.S. Those who voted against a reverse CFIUS include Sen. Mike Braun (R-IN), Sen. Mike Lee (R-UT), Sen. Thom Tillis (R-NC), Sen. Rand Paul (R-KY), Sen. Kyrsten Sinema (I-AZ) and Sen. Marsha Blackburn (R-TN). Although they did not give a reason for their no vote, it is likely that they are opposed, in general, to capital controls of any kind.

House Amendments Reject China Funding

Earlier this summer, on June 22, the House Committee on Appropriations had a markup vote on amendments to the $826.45 billion Defense Appropriation Bill for fiscal year 2024.

Rep. John Moolenar (R-MI) brought up a reverse CFIUS for Department of Energy-funded projects going to U.S. companies.  “We must proactively put up guardrails that will make sure American research benefits Americans and not the CCP,” Moolenar said.

In March of this year, an official from Gotion, Inc., a subsidiary of China-based Gotion High-Tech reportedly secured a contract with the Department of Energy’s Advanced Battery Consortium, known by the acronym USABC.

In April, 24M, a Massachusetts-based company, announced it had a $3.8 million contract from USABC. One of 24M’s business partners is a China-based company that licenses 24M’s technology to other companies around the world.

“We should not and cannot fund research only to have the recipients turnaround and work with China-based companies,” Moolenar said of the 24M example, proposing an amendment to bar any funding in the House Defense Appropriations Bill from being awarded by USABC to companies based in countries that have China-based business partners. “We cannot fund our competitors and hope for the best,” Moolenar said in his final pitch for the amendment. “We must have guardrails that protect our research dollars, our intellectual property, and the innovation funded by taxpayers.”

Rep. Marcy Kaptur (D-OH) opposed. “I rise in opposition to the Moolenaar Amendment and I just think it’s unnecessary,” he said, adding a closing caveat that he had “no use for China” but did not mind government funds going to U.S. companies outsourcing research or manufacturing to China for the very projects they are being funded for.

Rep. Susie Lee (D-OH) opposed the amendment as-is, but seemed open to changing her mind.

“Let me just first read the amendment to everyone, none of the funds made available by this act may be used by the Department of Energy to award any grant, contract, subcontract, award, loan, program, support, or other activity to any entity who enters into, maintains partnerships or licensing agreement with any entity of concern,” Lee said. “My concern is several fold. One is that this might place stricter requirements on the entities that partner with entities of concern than the actual entities of concern themselves. Entities who contract with entities of concern would not under this amendment receive any money from the Department of Energy whereas entities of concern would be prohibited from receiving just coverage support. So that’s my number one issue with this. I’m hoping we can work together to fix this.”

Rep. Ryan Zinke (R-MT) was against the amendment on supply chain grounds. Zinke named one element in particular – germanium. It is used in manufacturing electronics. He said if the U.S. is working on anything requiring germanium and got funding for it, there is only one place to get it.

“We are one hundred percent required to go to China for germanium,” he said. “So we actually give China the specs for germanium crystals. And they grow it for us, they grow it all. And then what we do is we receive the crystals back. Thank you, China, for growing our crystals. And then we slice it and we put it to work. All in this room would find it to be disturbing that our military is beholden to foreign sources for critical anything in this country. But that is where we are.”

Only one Committee member spoke in favor of Moolenar’s amendment with three speaking against it, but Moolenar’s amendment won the day.

Rep. Ben Cline (R-VA) followed and tested his luck, with his own amendment to prohibit taxpayer funds from going to any company that is owned by or controlled by a corporation based in a country identified as a nonmarket economy country (China) or a priority foreign country by the USTR in the most recent report (also China).

The amendment would impact any country with weak intellectual property rights and it allows the USTR to determine what is good IP protection and what is not. Companies can seek a waiver if the legal or financial connection to a corporation is minor. It’s also specific to an entity that is owned, controlled, or is a subsidiary of a company based in a country of concern. That amendment would ban funds from being used in government-funded contracts, subcontracts, grants, or loans related to certain entities. It is unclear if this would impact a Chinese company in the United States. Cline said he is still looking for “the right language”.

Kaptur and Lee rejected it again, but the amendment won anyway.

“There is a lot of China heat on Capitol Hill, but it often gets cooled off quickly and surprisingly,” said Robby Smith Saunders, vice president of national security for CPA. “One example is a vote by the Appropriations Committee recently to actually defund a rumored, pending Executive Order by Biden on outbound investments to Chhina,” she said, noting that the tough rhetoric and amendment votes don’t always translate into real policy action or new laws.

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CPA backs restrictions on private capital going to China – including banning venture capital and private equity firms from taking part in deals pertaining to companies deemed a national or economic security risk.

In a coalition letter led by the Coalition for a Prosperous America (CPA) in May, a group of national security and foreign policy experts asked President Joe Biden to establish a mechanism to review U.S. outbound investment to China in order to address the risks and threats associated with U.S. capital bolstering the CCP’s ability to modernize and advance its military and build other advanced technologies.

Earlier this year, CPA urged the House Financial Services Committee to crack down on U.S. outbound capital market investment to China.

The letter recommended outbound investment restrictions should:

• Cover as many “persons” as possible, including individuals, entities, and their subsidiaries or affiliates based on both ownership or control;
• Cover as many types of investments or transactions as possible, including any transactions, acquired equity or contingent equity interests, monetary capital contributions, or payments, that shift, relocate, or transfer critical capabilities or provide financing for adversaries’ critical capabilities – including passive investment in certain companies and industries providing capital to CCP-linked entities via investment products available in the U.S. such as ETFs, mutual funds, and other indexes or derived products;
• Cover as many industrial sectors as possible, not preferencing or selecting a narrow set due to the complexity and interdependency of global supply chains, the widespread nature of the multinational industries, and the constantly changing and adapting threats at-hand; and
• Cover the inclusion of future or emerging technologies, industries, investment vehicles, or sectors, establishing a review process or mechanism by which further information can be gathered to inform future changes to any executive action.”