Outbound investments may spell trouble for US national security. Can screening reduce the risk?

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Event transcript


Ben Joseloff
Corporate Associate, Cravath, Swaine and Moore; Former Senior Counsel and CFIUS Lead Counsel, United States Department of the Treasury

Sarah Bauerle Danzman
Assistant Professor of International Studies, Indiana University Bloomington; Nonresident Senior Fellow, Economic Statecraft Initiative, Atlantic Council

Jeffrey Fiedler
Commissioner, US-China Economic and Security Review Commission

Clay Lowery
Executive Vice President, Institute of International Finance


Julia Friedlander,
C. Boyden Gray Senior Fellow and Director, Economic Statecraft Initiative, Atlantic Council

JULIA FRIEDLANDER: Hi. Good morning, everyone, and welcome to the Atlantic Council. My name is Julia Friedlander and I’m the C. Boyden Gray Senior Fellow and director of our Economic Statecraft Initiative.

I’m pleased to welcome you all today for a very timely conversation [that] is at the nexus of financial market regulation, supply chains, and national security. And as you see from the title, this is about outbound investment from the United States into foreign jurisdiction, most notably China and Russia.

Now, we have an established mechanism to review inbound investments—acquisitions of US firms—through CFIUS, but there is growing consensus in both the executive and legislative branches that where the US capital goes also matters. But will this work? What are the options on the table, right? This is a complicated regulatory matter that has been subject to a longstanding debate.

We’ve gathered today an expert panel to take us through this and to give us a perspective of what’s in the realm of the possible.

I’d like to welcome Ben Joseloff, who is a corporate associate at Cravath, Swaine and Moore. He’s also the former senior counsel and CFIUS lead counsel, a colleague of mine also from the National Security Council, but his role at the United States Treasury is most instructive for this conversation.

Sarah Bauerle-Danzman, who is assistant professor of international studies at the University of Indiana Bloomington. She’s also the newest addition to our team as a nonresident senior fellow at the Economic Statecraft Initiative.

I’d also like to welcome Clay Lowery, who is executive vice president of the Institute of International Finance.

And Jeff Fiedler, who is the commissioner at the US-China Economic and Security Review Commission but will be speaking today in his own personal capacity.

First up, I’d like to just say a few ground rules here. This is on the record. Please give us your questions and thoughts in the Q&A function, and in about twenty minutes or so we’ll start bringing you into the conversation and to try to answer as many questions as possible throughout.

So, without further ado, I’d like to turn this first over to Sarah. She has authored a piece for us looking at the latest legislative proposal, Cornyn-Casey bill. I’d encourage you to all read it. It’s [an] instructive sort of cheat sheet as to what’s going on. She is an expert in all things CFIUS, at the nexus of academia and the practicalities of government. So, Sarah, I’d like to turn it over to you to start us off.

SARAH BAUERLE-DANZMAN: Well, thank you, Julia. And thank you for putting together such an excellent panel today on such a timely topic.

So, to just start us off, I wanted to—I mean, you’ve already provided quite a good laying of the groundwork of sort of what the policy kind of question is here—start by taking it back to the question at hand, there is this growing consensus, as you mentioned, in Washington—and everyone on the call, [all] our audience members are, of course, well aware of this—that there’s concern that the US government needs to be doing more to prevent the Chinese actors and other actors of concern from being able to access US financial markets, but also from being able to use their place in critical supply chains to enact leverage over the United States. And especially as supply chains became a topic of intense conversation during the COVID-19 pandemic, there’s more and more attention specifically on the problems that can develop in our economy and our national security when our supply chains are fragile. And so with this concern that threat actors could weaponize their place in these supply chains, and in the context of the fact that in the United States, as in other market-based economies, it’s really private firms that are making their own decisions about how they want to structure their supply chains, the US government is looking for more tools to shore up and make our critical supply chains more resilient.

And so that’s the kind of context behind this draft legislation, which would create an interagency committee chaired by USTR called the Committee on National Critical Capabilities. And this committee would be tasked with two new capabilities.

The first is what most people talk about in the context of this bill, which is the authority to review outbound transactions, which most people talk about in terms of investment, but it would actually also give the committee the ability to look at other types of transactions beyond just outbound foreign direct investment. And it would be to review these outbound transactions to countries of concern that involve critical capability supply chains.

But then the second capability would be the mandate for that same committee to systematically gather, define, and review national-critical-capability supply-chain data so that it could recommend congressional actions to support diversification and resiliency within and across these supply chains.

And so we can get into a lot more specifics on the details of the draft legislation, but where I want to leave people right now is that this leaves open many questions about how broadly scoped the committee’s authority would be because it leaves to the regulatory process the task of determining which industries would be included in the definition of “national critical capabilities.” And because the entire supply chain of these capabilities would be subject to review, the committee would very likely have quite expansive review authority. And also, because notification of these transactions would be mandatory for covered transactions, a likely outcome, if passed, is that companies would interpret this largely as a ban on transactions within countries of concern. So it really could change global supply chains in pretty expansive ways.

JULIA FRIEDLANDER: Thank you so much, Sarah, for that overview, and there’s a lot to come back to, as you said.

Ben, so you were there with FIRRMA. I was sort of a bystander to all of your good work. Could you just, for your opening remarks, give us an impression of what that conversation was like and how outbound was treated then versus what we see how the conversation is developing now?

BEN JOSELOFF: Yeah. Thanks so much, Julia. And thank you to the Atlantic Council for hosting this conversation.

Before I jump in, I’d like to mention that I’m speaking today in my individual capacity and not on behalf of my firm or our clients.

So I’ll get to your question in a second specifically about FIRRMA, but I’d like to kind of just start by noting that I’d like to test during this conversation a little bit the theory that we need a new tool, right? I do think that there are some gaps in our system that need to be addressed, but I think that given my experience with the FIRRMA process, we might be more likely to plug some or all of those gaps by using existing tools in kind of new and innovative ways and by tweaking them slightly rather than by attempting to create entirely new ones. So I think it sounds like this might be a theme throughout the conversation, but I’d like to suggest that, before lawmakers design and implement an entirely new regulatory review process, they first focus on identifying specific gaps in the current system and then assessing whether our existing tools could be used to fill those gaps in a manner that achieves our desired end state.

And so, why am I making that suggestion? Well, as you noted, that’s largely influenced by some of my [experiences] during the FIRRMA negotiation process. Given my experience at NSC during that process, I suspect that there will probably be significant private-sector opposition to a new mandatory screening mechanism of the type proposed by Senators Casey and Cornyn, and I’m afraid that such opposition could jeopardize any meaningful action in this area. And there was a fair amount of debate during that process—in that context, the debate was whether it was prudent and appropriate for CFIUS to be in charge of kind of screening certain types of outbound investment activity.

Now, one of the things I think that is often missed in the conversation is that CFIUS already has the authority to screen certain types of outbound investment, specifically where a US business is being contributed to a foreign-controlled joint venture and other similar transactions that include the contribution of a US business to some type of foreign entity. And so CFIUS already plays in this space a bit. The question was: Should CFIUS’s jurisdiction in this regard be expanded?

And I think where I am today is if we want to start to adjust our tools legislatively, I think we should go back and look at some of the early proposals in the FIRRMA process that would have done just that, that would have expanded, in a narrow way, but slightly expanded CIFIUS’s ability to look at outbound investments rather than creating or attempting to create an entirely new tool which I’m not sure would be effective.

So happy to pause there and jump into more detail as we go.

JULIA FRIEDLANDER: Yeah. Thank you. Thank you so much for that.

So, given that context, maybe, Jeff, let’s turn to you next. Obviously, the commission itself has supported the new legislation and certainly the concept behind it. I was wondering if you might be able to walk us through how you got there and how you see those gaps.

JEFFREY FIEDLER: One, let me make a minor correction. We didn’t endorse the legislation. We have a practice of not endorsing specific pieces of legislation.

The commission considers this within the context of all [sorts] of policies that we have and the threats that we are facing. So we, number one, believed and still believe that we’re facing a different competitor, adversary, whatever you want to call it. And we came to the conclusion that you couldn’t entirely depend—you couldn’t even, maybe, perhaps personally, partially depend—on US business to consider national security interests when they make their decisions, but that their actions will have an effect on US national security.

To Ben’s point on tools, we believe that there needs to be a new tool. But I agree with him in the context of how the dynamic of the tools work together is extremely important and the normal dysfunctions of government may have to be addressed—and I don’t know that you can completely address those in legislation, right? There is a lot of executive decision-making that goes on in how to coordinate this.

So, for instance, FIRRMA was good work. We also considered that—after three years we haven’t defined foundational technologies and other things under the FIRRMA context and we were slightly critical of BIS for that. But there’s no question that we have a supply-chain problem, whether it be semiconductors, whether it be large-scale batteries, whether it be pharmaceuticals—which we did three or four years ago, our dependence on China for pharmaceuticals is extraordinary and dangerous, and the pandemic brought out some of the medical things.

So the definitions of national security are also up for discussion here, the traditional definitions, and they’re changing in the Chinese context. I’m not going to address the Russian context much, although the Russians and the Chinese getting together would be a strategic problem of the first order.

So I think that the time is now, and I think that the legislation will go through the sausage-making process and not look like it is today, and I think this discussion will help that process along. And I’d be glad to answer any other questions about the commission’s thinking specifically.

JULIA FRIEDLANDER: Sure. Thank you, Jeff. And I apologize for misrepresenting the commission’s stance on particular legislation.

I think that’s a very important point that you raise about how are we actually going to define the boundaries of national security in this context and my thought is whether outbound investment and supply chains are necessarily linked, right, because we also have the—

JEFFREY FIEDLER: Let me make a comment on it that I forgot. Outbound investment has rarely been regulated, OK, and it was the third rail of free marketeers. And Trump started it with military-related companies. President Biden has rationalized that somewhat and continued it, and I think it’s a fait accompli. Now the question is how extensive.

JULIA FRIEDLANDER: Mmm hmm. Fair enough. No, exactly. And part of what I’d like to discuss also is… how those other mechanisms play into this one.

But let’s turn to Clay now. And we’re grateful for his participation to give us a little bit of an impression about what the market context is on this. How would regulators view it? And honestly, how would investors view it and how will they respond?

CLAY LOWERY: Well, thank you for having me, Julia. And let me also, like Ben and Jeff, say the same thing, which is I’m going to be speaking on behalf of myself today, not on behalf of my organization or any of the member firms in my organization.

So besides the fact that I’m at the Institute of International Finance, I also used to run the CFIUS process so I know a fair amount about it. Well, at least I think I do. I would say, well, Jeff is totally right, which is—assuming this legislation has a chance­­—there’s going to be a lot of sausage-making and hopefully a lot of real discussion and debate about it. But let me just give you three reasons why I think that we should be a little careful here.

First is from kind of the perspective, I think, Julia, you were asking about a little bit on the financial side, which is you’re going to have to be really careful about how do you actually come up with the terms and what exactly it is that we’re trying to do because almost assuredly you’re going to create vagueness and bureaucracy, and you’re going to create almost a guessing game: What is it that the investor can do and can’t do? And is it going to be a situation where the government will be in a—basically, we’ll know it when we see it [situation]? And that is going to be an issue in how do you get that done in a legislative context.

So Jeff rightly points out that the Trump administration and the Biden administration basically have put on some holds on different [types] of investments. Now, they’re being very specific. This is not specific at all. This is very general and it’s a vague thing, and basically, how are we going to deal with some supply chains for some specific industries that could be fairly large industries.

Second issue, frankly, the interagency and the inefficiency of government. So Ben knows this from his perspective and maybe it was different for him than it was for me, but the US government is not the most efficient thing in the world and an interagency group is even less efficient. You’re going to put the US Trade Representative, which is a tiny agency—and, by the way, a White House agency—on top of this whole organization, and you’re going to be dealing with national security. Now, let’s remember what the words “national security” mean. You’re asking people to make a decision that could affect the national security of the United States. So, in essence, they can’t miss it. [They’ve] got to get it right. So if every time we got to get it exactly right—which, of course, you never will—but if you say that, let me just tell you that is not a recipe for efficiency. So, from a governance perspective, you have an efficiency problem.

Third is national security. OK, so one of the things that [were] part of the Trump administration’s statement on National Security Strategy—and I believe the Biden administration, I don’t think they’ve put out their National Security Strategy yet, but they have talked about the importance of competitiveness. So what are you actually doing here? Well, what you’re really doing in some respects if you’re creating this supra export control regime. We have an export control regime. You may not like it. That kind of goes towards Ben’s point about how do you fix it. I’m not sure that putting CFIUS, which kind of Ben was suggesting, in charge of an export control regime makes a lick of sense, but all right. But that might be a fix you look at. I actually don’t think that makes sense.

But then you’re thinking about competitiveness. What is it—you’re going to create a unilateral regime in which the United States is not allowed to have its private-sector industries invest in certain businesses that are kind of vaguely formulated in a world in which, let me just be honest, not all the smart people are in the United States. Not all the technology is in the United States. Not all the good innovations and so forth is coming from the United States.

And, by the way, a lot of US firms are working with lots of firms all over the world on these [types] of technology breakthroughs. Their concern about the export control regime is they’ve taken three years to define what is a critical technology and new emerging technologies. Why is that? It’s hard. It’s really hard. And so because of that, we’re now going to create a system in which we’re basically going to have a judgment on these regimes. This is going to hurt our competitiveness. And that, in my mind, would harm our national security just as much as basically whether or not we do actual business with China. So why don’t I stop there? I have a bunch of other points, but I think that I’ve talked way too long. So I’ll stop.

JULIA FRIEDLANDER: No, that was extremely, extremely helpful. We have some great questions coming in from the audience, so we’ll get to those right away, I think. But, again, maybe I could just ask those of you who would like to answer this—I think all of you have an angle, right—exactly what critical gap is this intending to fill when we have, again, the entity list and Commerce Department authorities, when we have, Clay, as you said, the not only draft legislation but implemented by the SEC and the PCAOB regarding PLA-linked firms. Where does—where in this sort of ecosystem of regulation does this sit? And then that’s one question for me.

And the second is looking at this sort of national security question, are we really sort of saying here that we do not trust US firms to act in the “interest” of the United States, right? And is that even something that the government should have jurisdiction over? And how do we then begin to communicate what those interests are to a financial sector that lives in, quite frankly, a different universe of efficiencies and a different concept of what leverage even is? So those are sort of two central questions that come up a lot during our conversations similar to this one, but also within the Atlantic Council.

So maybe Sarah, just going back in order, but please jump in as you like. But, Sarah, maybe we’ll come back to you to address some of that.

SARAH BAUERLE-DANZMAN: Sure. I mean, it’s a really good question. What are we trying to do here, right? And how I would think about this is most of the other authorities that the US government already has are more kind of end-user based kind of authorities, right? So when we think about entity listings, these are end-user based. When we think about CFIUS and how CFIUS determines risk is it’s about the vulnerability and the threat actor and the interaction of those two things, right? But it’s very much based off of determining if specific actors and specific transactions create such a problem for national security that the US government needs to intervene. And we also know that CFIUS is a tool of last resort. And so it’s not designed to be kind of throwing its weight around as much. And sometimes that gets lost in the shuffle because over the past few years it has been in the news so much more.

What’s different here is, I think, the focus specifically on the supply chains. Because this is about reshaping supply chains fundamentally, right? And there are good reasons to be concerned about US supply chains and potential national security concerns, as well as just fragilities broadly. Not necessarily because of threat actors but just because sometimes supply chains get too fragile. But at the same time, then the question is how do you deal with those vulnerabilities and those risks? And this legislation’s gambit here is that the best way to deal with this is to basically have the US government come in and make decisions about what should be allowed and what shouldn’t be allowed.

And you’re right that this would be a very big extension into the decision-making processes of firms. And what I think is the most interesting and useful component of the draft legislation as it stands right now is more on the data collection, to help the US government make some decisions about how it can more proactively help to develop more robustness within supply chains by giving some resources in those areas. What I find most concerning are the potential negative effects of having firms need to go to the government every time that they are making a decision about moving some aspects of their business overseas.

JEFFREY FIEDLER: Let me add—look, firms are already making decisions that affect national security. Right? Unintended or intended, OK—I mean, largely unintended, right? And the government has a responsibility to protect national security, not Intel, right? Intel has a responsibility as a citizen not to contribute to endangering national security. The governance of the dynamic in the face of a more sophisticated threat than the United States has ever faced in a power rival, in China, I mean we never faced this problem with the Russians in as comprehensive a way as we face it with the Chinese.

And it’s going to be a dynamic process. I mean, innovation and technology change. So critical supply chains will change vis-à-vis national security on an ongoing basis. How do you deal with that? I’m sorry for all of you former government officials who decry the inefficiency of the government, but I don’t have an alternative to the government. And so, Ben.

BEN JOSELOFF: Not on that specific point, but I just was going to jump in. Jeff, I don’t disagree with you at all that companies are already making decisions that affect national security, right? And I think that—and, sorry, I didn’t mean to interrupt your point, if that’s—if you wanted to keep going. But I thought that was a great chance to come back to this question of what exactly are we trying to have this legislation do, right? Or what behavior are we trying to change here?

And the way I think that we’ve been talking about broadly—not “we” here but “we,” in the broader context have been talking about, outbound investment—is kind of amalgamating several different [kinds] of risk scenarios, right? One is kind of a joint venture, out-bounding some type of transferring or contributing some type of technology to a foreign party, but where there is no effect on the US business’ kind of ability to provide those same products or services in the United States, right? It’s a pure kind of technology transfer. And that’s an area where I do think CFIUS plays a role today. It could play an expanded role potentially, if you look at some of the early FIRRMA proposals, export controls obviously play a role.

The second kind of risk scenario is offshoring, right? And this could be done where there is no new foreign person in the picture, right? And I think this is an important point. It could be simply that a US business decides to decrease manufacturing in the United States, right, and increase manufacturing at one of its wholly-owned existing facilities outside the United States. And I think that presents a slightly different problem in terms of what tools would be appropriate to address it. And I think there’s been, obviously, a huge focus on resilient supply chains both before the pandemic [and] obviously during the pandemic. And [there have] been hundreds of pages of government reports about the tools that could be used to change the underlying conditions, right, that caused US businesses to make those decisions in the first place, right? And so I think there’s a place where I’m not convinced that kind of a CFIUS-style outbound screening tool would be the most appropriate.

The third risk scenario I think is kind of a pure capital, right? Capital flows, where a US firm is investing money, right, in a foreign firm, and not transferring technology, or operations, or manufacturing, or anything like that. It’s kind of a pure monetary investment. Of course, there are benefits that the recipient receives beyond just the dollar value. The benefit of being associated with a big-name US financial institution carries some weight. And there I think, to your point, Jeff, both the Trump and Biden administrations have already used IEEPA to start prohibiting those types of investments into specific PRC companies. So I think that there could potentially be different tools necessary to address each of these types of behaviors. I just wanted to make that point.

JEFFREY FIEDLER: Look, the array of tools and how they’re used together is up for debate, and should be, OK? And the definitions of what are critical—for instance, going back to Ben and FIRRMA, we have had a great deal, apparently, of difficulty deciding what are foundational technologies. And so because it’s difficult doesn’t mean that it’s unimportant. And we have to come to grips with the difficulty and create the dynamic, eliminate your inefficiencies. Now, I’m an old man, so it’s not going to happen in my lifetime. But this is real. And I am extremely uncomfortable leaving this to the market, OK? The integration of the Chinese and American economies [has] created a different set of problems than we have ever faced. And it seems to me that it requires a different set of tools and/or a different dynamic in the use of the tools.

JULIA FRIEDLANDER: I’d like to bring Clay back in here if he’d like to respond.

CLAY LOWERY: No, look, I mean, I get what Jeff’s saying and what Ben has said. And I think Ben asked some really good questions about what risks to think about. Look, we just have to figure out… if we’re going to go with a pure decoupling from China, how is that done and what is the best way to do it? I’m actually not convinced that’s what we should be doing and that should be our policy. So far, we have gotten these vague statements from two different administrations about it. And so right now that doesn’t seem to be the policy.

So in terms of firms, I mean, obviously, look, the firms are doing joint ventures around the world all the time. And they’re doing them with—sometimes with Chinese partners, sometimes they’re doing them in China—and they’re doing them, it’s probably much less so, and Jeff pointed this point, in Russia. Which I assume is the other country of concern. But we have to try to figure out… if it is technology that you are worried about, specific technology, then let’s have it put on an export control list. And let’s try to multilateralize that.

But if it is a vague term that we’re going to just create a regime so that we can just have the government step in, is that—I’m not sure what that really gets you. I mean, are we looking for industrial policy? Are we looking for putting government making decisions on behalf of [the] private sector, whether they’re private sector companies or investors, to basically say: This is what we should do? Now, it makes some sense on a very specific national security issue, on a specific national—where it’s a firm that you’re saying we should not invest in that. Which is sort of what, again, the Trump administration, the Biden administration did.

But I think that this goes well beyond that, as Sarah’s analysis kind of suggests. And so I just think that we need to step back and figure out, I guess, the question all of us have asked a little bit, which is: Well, what is it exactly we’re trying to do here? And so—and I don’t know that I actually have the answer to that, because right now I’m hearing there’s a supply chain problem and China’s a really bad problem. OK. All right. Then let’s get a little more specific about the solution set. And the solution set we’re coming up with is a fairly broad one, which is sort of vague. And so I’m just not sure that’s the way to go.

JEFFREY FIEDLER: Let me address your comment on industrial policy. I’ll just give you an observation of my experience of late, in the last three or four years. My Republican colleagues—and not just on the commission but elsewhere—are coming more towards industrial policy fixes than they ever have. OK? Which is cracks in the free market as a solution to all problems. And so the process, a process of determination and then implementation is really what we’re talking about, right? Definitions and how to implement whatever actions that we determine are in our national interest. So the legislation should create that process.

CLAY LOWERY: Good luck.

JEFFREY FIELDER: I know. I know. We’re jumping from micro to macro. But, I mean, does anybody disagree that there’s a problem?

SARAH BAUERLE-DANZMAN: Well, if I can jump in here because I’m monitoring the Q&A and I think that there are a lot of really interesting questions coming out about specifically multilateralism. And I think that this is really important because I think there are definitely concerns, right? And the question is that the policy tools you use to deal with those concerns—it’s important to get them right, right, because what we’re hearing more and more is just so much more comfort with going in with government authorities that, have been verboten for a very long time and could have major effects. And so we need to make sure that we get the balance right.

So often when I hear legislators and policymakers talking about kind of national security threats in the context of private business, so often I hear them focus really on the side of, well, private business creates national-security concerns. And that is true. But private business also generates positive returns to national security when these firms develop advanced technologies that contribute to the US being the leader in so many technological capabilities, right? And so we need to think about that balance because we don’t want to return too far—we don’t need to become the competitor in order to deal with them, right?

And in the case of multilateralism, this is really important because there is a gap between what we might like to do and what we are really able to do, what our capabilities are given the nature of the global economy. So there’s a lot of questions about, well, what is the US going to push Europe and other allies to do, right, because there’s one thing about trying to strengthen our supply chains. But if one of the things that we’re concerned about is capabilities in countries of [concern], if we are putting more boundaries over that relationship, if European partners can’t, there’s a degree of substitution that comes in here.

And going to the concern about BIS and how it has not really gone as far as many people would like in terms of defining emerging and foundational technology, well, part of that is because in order for export controls to really work they usually need to be multilateral. And so there’s a whole process around that. But it’s not just about what rules the US can put in place to govern its companies and its place in the global economy, but also how we need to work with partners and allies if we want to be truly effective in a lot of these areas. I’ll stop there.

JULIA FRIEDLANDER: I’d like to bring Clay back in, just because we’re about to lose him, and just for a final thought. And I believe that Jamieson Greer has a question for you specifically about attracting [technology] in the United States.

CLAY LOWERY: Yeah, so I was just trying to figure out the Q&A. So I apologize. So, I don’t completely know totally Jamieson’s question. So I apologize. I think it sounded like it was about a lot of origination of investment flows comes from the United States. And so I assume that therefore provides leverage, particularly around the dollar. So a few points. One is that that may be so. Obviously one thing I would warn is be careful because obviously, you could, while you’re trying to punch somebody else you punch yourself right in the face.

And so if we, the United States, become an unreliable source of financing because of strange rules—if you want to make an investment from the United States, or if you’re a US firm, into a place because of some vague rules, then what it will require of you is to basically make sure that we hire Ben to actually go through a fair amount of legal documentation until we can make that investment not for the financial reasons that you would usually hire Ben for, but for these reasons, while your competitors are not doing that at all. That suggests to me that actually instead of helping create innovation in the United States, it actually could drive it outside the United States. I’m not sure I totally answered Jamieson’s question because, as I said, it was a long question, I wasn’t exactly sure how to use the Q&A, so I was trying to read it on the fly. So I hope I got it roughly right.

So, anyway, thank you very much. I apologize I have to go. I just have a hard stop, and so I just have to do it. But thank you. And I do want to thank Ben, and Jeff, and Sarah for your very excellent comments. I do reflect on what you guys were saying.


JEFFREY FIEDLER: Let me make a comment and, Ben, you can jump in on the FIRRMA question. We had testimony from the BIS that essentially—I mean, I’ll oversimplify it—that the inaction that we were complaining about is the result of the continuation of multilateral negotiations to that point, OK? And so the—but in my mind, the question is when do you stop the multilateral negotiations and say, hey, we got to go?

BEN JOSELOFF: Yeah. I mean, it’s a very good point. And I think the delay or the length of time that it’s taking to define emerging and foundational technologies has come up a number of times in this conversation. And I think it’s kind of important to address. Jeff, to your point, in the FIRRMA context, I think one of the reasons that CFIUS’s authority to address outbound investments was not expanded, one was certainly private-sector pushback. But I think another reason was because even within the US government at that point there was a fairly wide-held view that kind of pure technology transfer should remain the purview of export controls, right?

I think that what we’ve learned over the past several years is that when it comes to things like specifically emerging and foundational technologies, as Clay put it, it’s very hard to define those things, right? And doing so kind of across the board takes a long time and is difficult. And therefore, you may need some type of tool to be able to address, on a case-by-case basis, specific situations. And that’s why I think there might be an appetite now to revisit the narrow expansion of CFIUS’s authority that was included in some of the early FIRRMA bills. Just my thought.

JULIA FRIEDLANDER: I’d like to sort of combine two questions here. And I think this also has to do with the interaction between the government regulators and the private sector.

And I’m trying to combine two questions, one from Karen Sutter and one from Jeremy Mark, from the Q&A. And that is, to what extent do we know exactly what these capital flows look like? How much information do we actually understand emanating from US entities? Again, these things are traded at lightning speed. And how much is that reflected then in Chinese response, right, in implementing similar restrictions? And to what extent does the public sector, either in China or in the United States, really know what’s going on and have the ability to understand how to inject itself, quite frankly?

JEFFREY FIEDLER: The gaping hole in US data is private equity investments. I mean, there’s commercial data available, but there’s no requirement for disclosure to the government about what you’re doing. And frankly, it’s perhaps the most dangerous thing going because all the technological innovation is happening in venture capital and in private equity. And it’s unmolested, if you will, from a governmental point of view.

SARAH BAUERLE-DANZMAN: Well, CFIUS now has jurisdiction over those investments because of FIRRMA. But I would also say that just—

JEFFREY FIEDLER: But they have to know what they are.

SARAH BAUERLE-DANZMAN: Yes, and there’s a large non-notified process that is geared towards finding problematic investment. So at least there’s a structure that could be further invested in. But there’s already a structure in place as well as government authorities over private equity in critical technology.

But [there’s] the kind of broader question of how much visibility the US government has. It’s not just about investments. It’s also about these supply chains themselves, intra-firm trade and so forth, licensing and so forth, and that is, largely, a blind spot and that’s why I think that the kind of components of the draft legislation that focus on bringing these data in would be helpful because if the US government is going to devote resources toward shoring up certain supply chains that it cares a lot about, it would be useful for the government to really know what is going on in those supply chains so that any interventions would be very focused on the underlying problems.

One area of the bill that, I think, is particularly interesting is that it would require entities that the US government uses for procurement to do a pretty thorough supply-chain review and to provide that information to the US government including information about how much of its supply chain goes through countries of concern, and that might be an area in which it makes sense for the US government to have more authority specifically over its procurement chain, and understanding that and understanding where do we have vulnerabilities and what might we be able to do through government procurement to strengthen supply chains in particular areas is one of the places that, I think, it’s a little bit more promising in terms of a way forward on some of these issues of concern.


JEFFREY FIEDLER: Let me—oh, go on, Ben.

BEN JOSELOFF: No, just a quick response to Sarah. I was going to say I think it’s a great point about utilizing some of the other tools either that are suggested in the draft legislation or that are already available beyond kind of the pure outbound investment screening mechanism to address some of the supply chain issues and others.

JEFFREY FIEDLER: The government and people, generally, in local governments always make ultimate decisions in crises. So, in other words, the local example is you don’t put up a stop sign at the intersection until a child gets run over. The national security context here with China is what are we going to do if there’s a conflict with Taiwan?

Forget what the military response is going to be. What’s the economic impact of a disruption in trade to the US economy and US national interest and critical supply chains? That is not an unreal scenario playing out in front of us and we’re not prepared, in my view.

JULIA FRIEDLANDER: What I think there is as a bit of a disconnect, I think—and we talked about this earlier in the conversation—is between the potential for US capital to be sort of drawn back into investing in domestic production, right, or even mandated to do so through—


JULIA FRIEDLANDER: Right, right. Exactly. So there is a conflation here, potentially, between domestic industrial policy, right, and providing domestic incentives for US actors to invest at home. And I think that’s a bit of what Jamieson is getting at, and also I think there’s—our colleague from CNAS, Emily Kilcrease, is also sort of getting at here, too, and what—and she’s asking about not making sure we incentivize offshoring, and how we tell private-sector actors not to chase immediate profit overseas, right, and—those are inherently and can be two different things, right? And for me, that’s a bit of the problem with the draft legislation.

But I think that maybe we can talk a little bit more about how we see the future of how the US government should be involved in the direction of capital flows writ large. This is a broader question. There’s a project that my colleagues have undertaken. It’s called China Pathfinder Project. We’re trying to understand what capital flows in and out of China look like. You know, we’re doing our best there. Maybe my colleague can drop it in the chat.

But I think that that’s really what we’re getting at here is about global governance of international capital flows and how much can the United States steer that on its own. Again, going back to what my colleague from the European Commission said and our colleague from ECFR, Jonathan Hackenbroich, said, too, how much, again, is this a US decision-making process or is it really a question of international markets.

BEN JOSELOFF: Yeah. If I could just briefly respond to that, Julia.

I think picking up on a theme that Clay was espousing, right, it’s important—we need to recognize the problem, right. We need to start there, and I do think there is an issue. But we need to keep in mind the substantial benefits of innovation—as Sarah said, free-flowing capital, deep and liquid capital markets, right—and that these are all part of our competitive advantage and we need to strive to maintain those benefits, right.

And part of that, I think, is appropriately tailoring the types of regulatory mechanisms that we’re talking about today. And I guess just to come back to my theme, I think that we are most likely to achieve that tailored balance by adjusting some of the current tools that we have and utilizing some of them in kind of new and innovative ways rather than trying to set up an entirely new mandatory regulatory mechanism that would be making decisions about where capital is flowing.

JEFFREY FIEDLER: I think that we have long recognized that trade through our export controls is dangerous, we have recognized that inbound investment is, potentially, dangerous, and we are now recognizing that outbound investment and money is dangerous and that we are less well-equipped to deal with the latter problem than we are with the former problems.

That’s what, politically, is going on, folks, and I understand the push back because the push back is all about making money, and so it’s going to be an interesting dynamic and I hope we resolve it before we find—before we feel the real impact of the problems that are recognized.

SARAH BAUERLE-DANZMAN: So I’d just like to add in here that while oftentimes we think about, you know, Julia, your setup of the kind of domestic industrial policy and then what’s happening globally, I think what we’re seeing is that industrial policy and all kinds of authorities that regulate these types of interactions globally, whether it be inbound investment, trade, outbound investment, these are becoming more tightly interconnected.

As the US government invests more in semiconductor capacity, it will also want to make sure that that semiconductor capacity stays in the United States, right, and same with Europe as Europe pursues its interventions into semiconductors and, again, the issue here is going to be finding a way to shore up supply chains without becoming too insular.

I wouldn’t characterize outbound investment as dangerous. I would say in certain circumstances it creates national security concerns and that the US government does want more authority here.

But, generally, what has driven US prosperity as well as its national security has been an open economic environment and so closing too much would also generate a national security concern. And then one other thing that I’ll say here is I think that Ben is absolutely right that we should be thinking about how to further authorities that we already have rather than create new processes.

There are a lot of questions in the chat that were bringing up the fact that there are other places in which the US government is starting to, especially in commerce, gather data on supply chains, and it is important that we do need more understanding of these supply chains, more data. But if we have all this information in lots of different places throughout the US government, it will be harder to do anything useful with that data. So managing that process and locating it in the right place is of great importance.

JULIA FRIEDLANDER: Thank you, Sarah. And we have two minutes and I know you have to teach a class, so we’re going to be timely here. We have—some of us have dramatic precision.

Ben, I’d like to start with you then for [a few] final comments, right. So what would be your preferred legal regulatory fix that could get at this, because you’ve given us ample reason to question whether we need more?

BEN JOSELOFF: Yeah. Thank you. So, I guess, coming back to what I see as the three main risk scenarios, right, because I do think it’s kind of appropriate to talk about the tools for a specific problem, I think for the outbound kind of JV scenario—technology transfer—I do think, as I’ve said a few times, it’s prudent to go back and look at some of the proposals from FIRRMA to narrowly expand CFIUS’ ability to look at some of those transactions.

With respect to offshoring, I think [there are] a lot of tools being explored right now, everything from Title 3 of the Defense Production Act to DPAS to the tax code and incentives, and I would like to see more done in some of those areas rather than setting up kind of a new screening mechanism.

When it comes to the pure financial flow—the monetary investments—I think that both administrations used IEEPA for a reason and I think that some of those orders and the lists could be explored to expand further, either the firms listed on them or the types of securities or other things, but using that existing authority of IEEPA rather than doing it through a regulatory-screening process.

JULIA FRIEDLANDER: Thank you, and I think that was mentioned in the chat as well.


JEFFREY FIEDLER: Look, I am personally not wedded to any single currently proposed solution. But I do think a comprehensive look, which is what the Congress seems to be attempting to do or we’re urging it to do, to look at outbound investment in a new way is necessary.


Sarah, first word and last word?

SARAH BAUERLE-DANZMAN: I’ll just end by saying that I think that it’s important to be careful to get the balance right, and I think that this particular legislation as it’s currently structured, first of all, is not going to get through Congress but also it does end up putting a huge regulatory burden that maybe should be dealt with through other means.

But I will be writing probably more about this at the Atlantic Council. So I guess I’ll end by doing your job for you, Julia, by saying, stay tuned.

JULIA FRIEDLANDER: Yes, absolutely. I really want to thank all of you. Thank you, Sarah. Thank you, Ben. Thank you, Jeff, and to Clay, for this enlightening conversation. We’re going to save the Q&A. I apologize that we couldn’t drill down into each of these questions. I think that just reflects the interest in the topic but also the outstanding questions and how complicated this really is.

So, yes, stay tuned. We are going to be drilling down into this much deeper in the months to come.


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