Transcripts For CSPAN2 Foreign Investment In The U.S. 20171214

The chair is authorized to declare a recess at any time and you have five days to submit materials for inclusion into the record. This hearing is entitled examining the operations of the committee on Foreign Investment in the United States. I now recognize myself for five minutes to give an opening statement. The free flow of capital is a bedrock tenant of the United States economy. It ensures that the free flow worldwide has always been a bipartisan goal into that and im proud to serve as cochair of the Global Investment in america caucus along with our colleagues mr. Holding, mr. Heinz and mr. Meeks. Promotes Global Investment in the Global Economy and helps educate members about the importance of Foreign Investment. The United States is the largest foreign investor in the recipients of the greatest amount of Foreign Direct Investment. That capital has provided a good deal of the energy that has kept our economy vibrate, compensating for our notoriously low National Savings rate to provide the fuel for growth of us businesses and jobs. Today almost 5 of us workers in jobs related to Foreign Investments. Most of these jobs pay handsomely, far better on average than other us jobs. But if Foreign Investment is to be a force for good and must not be welcomed unthinkingly anymore than one might leave the front door of the house open around the clock. Investment that might weaken us is not good or welcome investment and we must guard against it. That investment might come from purely economic reasons but especially in this era of international turmoil, conflict and economic in certainty it can also come from individuals or nationstates that might wish to weaken our economy in comparison to theirs or try to spirit away technology or knowhow that could strengthen their military to gain an advantage over ours. To maintain a vigilant watch on investment the multi Agency Committee on Foreign Investment in the United States or sabias revealed investments to determine if they pose a threat to National Security. This involves rigorous scrutiny of proposals by inter agencies including a scrub by the Intelligence Community and the president has the power to Block Transactions or order divestment is such concerns cannot be mitigated by a change in the original proposal. Today we face the press on a number of fronts, not just the thought of a hollowed out industrial sector but also from terrorism from major nations that are economic competitors but also potential military competitors. Im referring, of course, to china. Concerns have arisen over the past years about chinas Companies Using that countrys vast financial reserves to acquire Key Technology with an eye toward taking the lead in the Industrial Market of the future. The chinese government, for example, has set aside 250 billion to be used in dominating the the semiconductor market. This is not a new phenomenon but just a new challenger and president ford thats in 1975 out of concern that the vast inflows coming through opec countries could weaken our economy. In 1988 among concerns that japan was seeking to buy Critical Technology Congress Gave president reagan the authority to actually block deals. That authority only has been used sparingly. Interestingly the first use came with president George Hw Bush blocked the sale of an airplane component measured to a Chinese Company. More recently president obama just before he left office blocked a chinese deal and president already has blocked a proposed purchase of Semi Conductors by Chinese Company. It is also approved Foreign Direct Investment conditionally approving a deal only when divestment of divisions was sensitive to technology or attorney has occurred. The statue under which it operates has not been updated in a decade and clearly we should think about modernizing it. Aside from chinas intention there are burdens on the process the volume and complexity of proposed deals there are about 40 more reviews in 2017 and then the 2016 and more than expansion in the number of chinese deal since 2013. That senator cornyn has spent more than one year studying the process and considering possible reforms. I commend their work. This hearing is the beginning of the committees study of sabias and will be followed by further hearings soon. And considering reforms the committee will ensure that it has the tools and the resources it needs to examine Foreign Investment. As members it is our duty to advance the National Security of the United States and at the same time we must aspire to the greatest extent possible a welcoming investment so that us companies can have the capital needed to grow. We need to be mindful that us companies is not compromised. To start that process today the subcommittee has a panel of witnesses with unique abilities to discuss the operations of and challenges that ziphius basis. This hearing and their testimony is propelled intended to prepare members to make conscious decisions on this vital topic. This should provide the beginning of a strong and double review. With that, i now recognize a member of the democratic side, the gentleman from washington, mr. Heck for five minutes for an opening statement. Thank you very much. I would enhance a letter that i sent you and the chairman of the full committee on december 8 requesting that a witness from the department of treasury be added to this hearing. Without objection. Why i look forward to hearing from todays witnesses i believe there is no substitute or hearing from the people who actually are administering ziphius. I have given treasury a hard time in this committee and some of you may recall it was a very hard time about this issue and past hearings. I want to make clear that they had begun to engage in what i would characterize as a constructive manner. I acknowledge that. I expressed hope, my hope, that the committee could benefit from their expertise during a future hearing and i would be happy to yield to chairman if you would like to respond. Yes, i appreciate the gentleman yielding and just to clarify this is the first of a series of hearings. We most certainly will be extending an invitation to treasury officials who obviously have a large role in the ziphius process to testify in you will have that opportunity. Thank you very much, mr. Chairman. Im glad to hear that i thank you again for convening this hearing. I believe the ziphius process generally works well for private, commercially motivated transactions but in the ten years since Congress First passed legislation dealing with this issue we have seen some countries gain the resources and education needed to pursue a comprehensive strategy to acquire Us Technology or dominate strategically important industries. Existing ziphius authorities were not designed and are not sufficient to deal with that kind of challenge. And many of our witnesses will note that this is a problem that every part of the Us Government will have to Work Together to address and i believe there are some aspects of this problem that can only be addressed through legislative action to close gaps in existing ziphius authority when i asked secretary nguyen about this in july he agreed this was a pressing issue and that we could not afford to do nothing. I hope we can all bring that sense of urgency to how this committee approaches its work on ziphius perform in a kind of urgency and unity which i know this congress can still bring to bear on issues critical to our National Security because here we are dealing with just such an issue. There are things we need to keep in mind as we move forward. Im glad many of todays witnesses have raised issues, will raise issues like the needed to improve information sharing and cooperation with our allies and partners. Many of whom are in the process of reevaluating their own ziphius equivalents. Glad many of todays witnesses will raise the need to provide more resources to ziphius which, i agree, are urgently needed to keep pace with the times, the demand in the need. Im proud that the United States is, in fact, a place that welcomes Foreign Investment. But the broader legitimacy and acceptance of that principle of openness which i believe in and the ability of the United States to stand up for a free and open Global Economy is, in fact, dependent on our National Security. Secretary nguyen affirmed doing nothing is not an option and i am confident that starting with this hearing we can find a bar partisan path forward. Strike that balance between those robust Foreign Investment which i think does serve our nations needs and economic prospects while at the same time balancing them again legitimate concerning concerns which are growing in number and velocity and in complexity. Sabia ziphius needs to be a reform. It starts here this hearing today. Mr. Chairman, finally, thank you again very much for convening it. Thank you. The gentleman yields back. Today we welcome the testimony of the honorable, Senior International council and former hail from 2,522,009 in the Service Equity deputy of the treasury he also served as the Reagan White House is executive secretary and general counsel from 1983 to 1985. 31997 he was a member of the National Defense panel and from 1998 to 2005 he was a member of the director of Central Intelligence National Security advisory panel. He served in the airport. Grade and retired as a Major General in the army reserve. He also served as a Us Ambassador to germany. Mr. Estevez is a National Security and logistic executive at Deloitte Consulting served for 36 years of the department of defense. From 2013 to january 2017 he served as the Principal Deputy undersecretary of defense Acquisition Technology and logistics. In this position he represented the department of defense at ziphius while Chinese Investments in the United States accelerated rapidly. Deviously he helped several key positions including assistant secretary of defense logistics and material readiness and assistant secretary for supplychain integration. The honorable mr. Wolfs apartment and from 2010 to january 2013 he was the assistant center of commerce for administration. He was primarily responsible for the policy and administration of the us and will use export control system and as a result of export control reform effort he helped lead part of the defense trade system. Also during this time mr. Wolf was the primary Commerce Department representative for ziphius. Mr. Stegall is the ira chair in emerging technologies and national securities. An expert on security issues, Technology Development and chinese domestic and Foreign Policy. Before coming to cfr he was an arms control analyst for the China Project at the union of concerned scientists. He has been a visiting scholar the institution at stanford university, Massachusetts Institute of technology, the Shanghai Academy of social sciences and the university in beijing. Mr. Clinton is president and ceo of the organization for International Investment in association representing the unique interests of us subsidiaries of Global Companies with a strong background in economics, her efforts focus on the Important Role they play in the American Economy that make the us more competitive location for direct, Foreign Direct Investment in job creations. Prior to be named president and ceo, ms. Mclaren was Senior Vice President where she focused on efficacy. Each of you will be recommended for five minutes to give an oral presentation of your testimony. Without objection, each of your statements will be made part of the record. The honorable mr. Kimmitt you are recognized for five minutes. Thank you, mr. Chairman. Thank you for your invitation to offer perspective on the committee of Foreign Investment in the us. This is one of those rare instances where advancing an age including three decades of service on ziphius health benefits. My experience with ziphius began in 1985 as treasury counsel under president reagan and secretary baker. As you noted mr. Chairman, ziphius was governed by an executive order signed in 1975 by president ford because of concern about saudi dollars been recycled by american assets. By 1988 concern is shifted to japanese purchases which led to passage of the exxon of boreal amendment and in 1992 concern about the state owned Companies Buying sensitive Us Technology led to passage of the [inaudible] amendment. In 2005 i returned to treasury as deputy secretary after deals involving Chinese National overseas oil company in dubai ports were blocked by congressional concerns Congress Passed the Foreign Investment in National Security act of 2007. Today growing concern about Chinese Investment particularly by state owned enterprises and especially in the Technology Sector has led to legislation proposed by congress, senator cornyn and bipartisan cosponsors. Unlike two other observations that may assist in your deliberations. Earlier this year this committee helped legislate the secretary of treasury as a dispenser for a member of the National Security council. Mistreating that us strength is tightly linked to our overall security. Foreign direct investments as both you and mr. Hackett noted makes an important contribution to the us economy. Almost 7 million americans will receive their paychecks this month from the companys headquarters overseas. Close to 40 of those workers are in manufacturing jobs and as you noted fbi jobs pay about 25 more than the economy wide average. More open investment policy is integral to us economic success and i urge President Trump to issue the traditional us open investment policy segment at the earliest opportunity. Initially in that statement is important to make clear that the Us Government must ensure Foreign Investment does not harm us National Security interests. Chinese investment has an improperly high priority for closer scrutiny. China seeks to compete strategically against the United States and multiple spheres. Military, diplomatic and economic. You they use all elements of the state including state owned enterprises in that competition. Current legislation provides significant authority to block troublesome chinese acquisitions. As you noted, the first exhibition by a president was under George Hw Bush in 1990. The acquisition of three com do not proceed under president george w. Bush and President Trump recently blocked the acquisition of Semi Conductor by a Chinese Investment group. As you consider new legislation i would be sure to address actual gaps in existing authority. There is particular concern the Chinese Companies may be using creative legal structures to conclude deals short of ownership and control that could nonetheless impair us National Security. I believe this is a very valid area for stricter scrutiny in the United States. I would be careful however about extending ziphius reach to transaction what occurs outside the United States. Ziphius is intended to give the president exceptional authority to the United States without superseding important authority and other statutes. For example, if a joint venture abroad raises concerns about Technology Transfer compromise the export Administration Regulations for International Traffic in arms regulations should be the first line of defense. Although additional legislative authority is warranted the greatest problem facing ziphius today is a lack of resources. As cases filed before ziphius climbed to 250 this year with prospected ziphius agency led by treasury could be involved next year in a major legislative regulatory implementation exercise. The increase in workload may begin to delay jobs producing investment that does not raise National Security concerns. I urge matching requirements resources continue to be a Central Point in your further deliberation. Todays hearing in your future actions are also being watched closely overseas. A particular concern, the European Commission in brussels is establishing investment review mechanism even though under european law the commission has no authority or jurisdiction on National Security matters. The new ec review may become a political screening process that creates a new barrier to Us Investment into that important market of over 300 million consumers. In conclusion, im more concerned today about growing investment protectionism then trade protectionism. We want to grow wellpaying jobs in the United States Foreign Direct Investment we must send a clear message to the United States is open to investment except in those instances where a ziphius process focused squarely on National Security determines an investment must be blocked. I know you will strive to strike that impacted the balance. Thank you. The gentleman time has expired. The honorable mr. Estevez you are not recommends five minutes. Distinguished members of the committee thank you for the opportunity to appear before you today to discuss the committee on Foreign Investment in the United States or ziphius. Im now at deloitte and i want to be clear that my views today are my own views, not those of my firm. I believe it is important to review white ziphius is critical to the National Security from the deal deep perspective. The remaining reserves is the finest military in the world and most apparently the men and women who volunteered to join that course. However another reason is the technological superiority of our military force that we have over our adversaries. Ziphius is one of the tools that helps our military retained its technological advantage. Based on my experience the ziphius interagency process not only works wellin protecting National Security of the United States for those cases where ziphius had jurisdiction over. I never signed off nor did i ever asked the deputy secretary of defense to sign off, ziphius resolution that would imperil National Security. The dod always achieve mitigation terms that we asked for or received 20 support proposal block for those cases in which medication was too risky. When i assess the National Security risk involved in each transaction i use the construct which i call the three cs plus one. The seas represent country, company and commodity, commodity including technology. Plus one was co location when a Foreign Company was buying a company that was located near a sensitive military installation. Framework lurked like this. For country assess of the country with potential adversaries of the United States or the country was lax in his protection of technology or personally identifiable information. In assessing companies were determined at the company for the state owned a prize or if the company had been created for that specific deal or if the company or ownership was reliable and stable. Through commodities and Technology Review the criticality of those technologies to dod weapon systems both current and future, how cuttingedge the technology was and whether the technology was already globally available. If we had concerns with two or more of those sees my experience was that such cases were heading to medication at a minimum or potentially a block. Id like to now turn to areas where i believe ziphius needs expanded authorities. I recognize that there were proposals currently being reviewed by congress in my commerce are based on that specific piece of legislation. The first area is a joint ventures. While the vast majority of joint ventures do not threaten National Security some joint ventures they put National Security at risk to technology or intellectual property transfer. The graffiti is another area where believe we need to expand authority. Bankruptcies of us companies especially those involved in cuttingedge technologies could end in a sale of technology or intellectual Property Assets to countries or companies of concern. The final area i believe we need to assess with regards to ziphius authorities is called connecting the dots. During my time as the dod, ziphius repetitive we notice trends for specific countries and companies were engaged in multiple transactions involving industry segments. Most times the company and technology being purchased for relatively small they were not stateoftheart and they were not critical to National Security. Nonetheless i believe to some point too much of a fictional industry segment was under foreign control and put National Security at risk. The last area i would like to address is resources and the reality is the process, manage and mitigate the cases of the current workload, ziphius needs more resources. The case is becoming for the committee are growing in their complexity and resource are outdated to do Due Diligence and to assess and adequately perform oversight. I think the committee for holding this hearing. This is a critical topic for the continuing longterm viability of our technical superiority. I look forward to your questions. Thank you for the gentleman yields back. The honorable mr. Rove is not organized for five minutes connect thank you, mr. Chairman. Thank you for inviting me and holding this hearing on an important topic. Although im now a partner and my views are my own and are not speaking for or against any particular legislation but here to answer your questions about how the ziphius in export control system works. Im also not going to speak about any case that al and i and others worked on. The other panelists have already described very well how ziphius works will get into that i want to get street might mean a point which is that ziphius and the control system complement one another. Ziphius has the authority to control and regulate in block the transfer of technology of National Security concerns if there is a transaction however defined. The expert control system, the very purpose, is to regulate the transfer of technology regardless of whether there is an underlying transaction. This means that if specific concerns arise with respect to any particular type of technology whether part of a ziphius review or any other activity of Us Government that the control system, the rules governing the flow of goods, technologies, software and services out of United States should and could control that technology of concern through specific destinations, specific users and specific inducers. I realize that describing the Technology Particularly dual technology that is both benign commercial applications as well as military and other applications is complex. I also realized that the control system itself is very complex. However, the system is designed and created to constantly evolve to address new threats, new technology, new issues, new areas of concern. In particular the export regulations have the bureau where i was for the previous eight years have the authority to impose these controls and alter them in coordination with largely the department of defense in commerce. The descriptions of technology can be as broad or narrow as the concern arises in the scope of the controls can apply to specific entities or entire countries or they can apply to particular and users. Most of the expert regulation implement multilateral controls that are controls that are agreed to by between 3040 other allied countries with similar concerns. This is a reflection of the fact that multilateral controls, controls or allies all working together, are the most effective because they achieve a common objective. It is also a section of the understanding that unilateral controls, controls imposed only by one country, generally tend to become effective because they result only in harming the industry of the country imposing the controls and dont actually block in the end the technology to the country of concern. Recognizing these two pain structures and recognizing that the multilateral system can move very slowly because its a need for consensus with our allies to decide which technologies to impose we created, during my time, a unilateral process to tag and identify technologies of control unilaterally to be able to address the threat quickly and tailor it to the concern. There are many additional tools and expert regulations that can be tailored, such as the process of informing particular companies about particular technologies in particular users again regardless of whether its an underlying transaction that is of particular concern. I focus on Technology Transfer issues but with respect to ziphius you need to keep in mind that National Security issues we looked at our co location issues, transactions involving those the create espionage or vulnerabilities or to reduce the benefit of Us Government investments transactions that would reveal personally identifying information those that would create supply issues and those that would implicate Law Enforcement issues and create exposure for the critical input structures such as delicate medications and each one of these individual topics as their own issues and warns their own hearings. Im here because i have a three minute and 30 minute and three hour and a three day version and i will stop here with the fiveminute version and be available for your questions over the course of the hearing. Thank you for inviting us. Thank you mr. Wolf. Mr. Siegel you are now recognized for five minutes. Ranking member, members of the committee, thank you for inviting me here today. Pull your microphone toward you. My purpose is to provide a context for chinese activity and what the motivation and challenges might be. I will make three points. The first is that china has a copy of the strategy to move up the value chain and develop high technologies for National Security and economic interests. That strategy involves many parts and it involves increased investment. In particular, policies focused on his Semi Conductors, Artificial Intelligence and what is called made in china 2025 which is the use of the internet of things and automation on manufacturing and it has its own investment regime which forces Foreign Company to transfer technology and failed to protect i pr and is involved in cyber and industrial espionage and finally involved in foreign acquisition. The policy that china has adopted is brought in, massive and us response will similarly have to be brought in copy and. Second, as a number of people have already noted the Investment Decisions behind chinese firms is also often opaque and who the actors are is often opaque and they may say they are private and they may in fact be private but they still receive significant support from state owned enterprises and they may have tight connections to local or provincial governments and so the source of the money in the motivation of the money are often unclear. They may be strategic and the baby economic and they may be hiding money from corruption gain. The problem is compounded by the fact that president she has accelerated a process and of Civil Military fusion and that goal is to tightly link the civilian and military economy so that any benefits brought specifically are turned into military strength as well and that means that in this context any advantage can also be brought to the military. Third, and final, while i support many specific forms that have been mentioned about increase capacity and increase information sharing and other points, it is extremely important to do out that the us and Chinese Technology platform and systems are increasingly integrated. We have seen that in Information Technologies where it is very hard to draw a line between where china starts and where the United States starts. We see a massive flow of people back and forth and we see investment and we see a huge amount of co research and co writing research papers. When chinese scientists look for a coauthors they look to United States with over 40 are us authors. This pattern is going to be reproduced in these new areas of frontier technology. We already see this in Artificial Intelligence. The two systems although right now are often capped as competitors is running a race against each other they are going to be tightly integrated and googles announcement yesterday that it was setting up an r d center inside china is just the most recent example of how tightly link to those systems will be. That means that for any type of either expert control or ziphius reform there is a high degree of chance that that could hurt ourselves and that we would be affecting Scientific Technology that beats back into your system and drives us companies and drives at us innovation. Thank you very much i look forward to your questions. Gentleman yelled back. Chairman, ranking member, other distinguished members of the subcommittee, thank you for your invitation to testify this morning. Im nancy and i have the pleasure of being the president and ceo of the organization for International Investment. The only Business Association exclusively comprised of us subsidiaries of International Companies. Our members represent a wide variety of industry from companies headquartered all of the world including lego, samsung and the ae. I applaud the subcommittees effort to take the time to examine the economic importance of Foreign Direct Investment for americas economy and the effectiveness of the ziphius process. The admission is to ensure the United States makes is the most attractive for outside investment. 6. 8 million workers in the United States take home a paycheck from an International Company including 20 of the Us Manufacturing workforce offering 24 higher compensation than the economy wide average. It is somewhat counterintuitively International Companies manufacture in the us, not just for our consumption but also for worldwide consumption. In fact, us workers at International Companies produce about 25 of all us exports. International companies are also tied to their communities. They provide worldclass training and worldclass training and strengthen the communities in which they sustainably operate. For example, toyota with kentucky plant is the largest manufacturing facility in the world and applying its manufacturing knowhow to help childrens hospitals reduce infection rates with neonatal intensive care unit, decreasing infection rates by 80 . A Japanese Company in kentucky, the largest manufacturing facility they have in the world. Historically the vast majority of flows into the United States through mergers and acquisitions in line with other advanced economies. The vast majority of that crossborder investment flows into industries totally unrelated to National Security. For example, royal successes have been achieved by their Strategic Acquisitions here. They have expanded their footprint in the United States to include research, manufacturing and distribution facilities across 13 states. In fact i recently had the opportunity to go out to a facility in little rock, arkansas that was the result of an acquisition of a maybelline facility. Now the facility is the largest cosmetic manufacturing facility in the world in little rock, arkansas, a French Company manufacturing for consumers all around the world. Indeed examples like royall demonstrate that when goebel cut companies merged with us companies they often raise the industry and become industrial anchors, making Large Capital investments in reinvesting us earnings into their operations here. Without crossborder art economy would not receive the full benefits that International Companies provide. A critical factor in the attraction of the us to Foreign Investors is our countrys commitment to the role of law and the stability of the regulatory environment. The result of extensive deliberations in congress laid the foundation for success. Importantly, in 2008 congress engaged in an equally thoughtful process to implement svn essay. Based on publicly available information and anecdotal experience of members it is clear that the ziphius process is under stress and there appears to be more investigations and mitigation agreements through all the cases of lengthening theory of revolution. Our members report that all ziphius members continue to impress their long hours in attention to unique circumstances resource constraints are straining the ability to handle its current workload. Such delays increase the risk of foreign own bidders in an emanate auction process potentially forcing them to play a premium. Let me underscore the International Business Community Supports the effort of ziphius to ensure america remains safe and we are full agreement that National Security should be paramount. I costed that ziphius should not be viewed as a panacea to address all the concerns that have been raised. Government has a wide variety of tools at its disposal ensuring fairness, predict ability, efficiency initial security reviews must remain the tenets of the ziphius process. Any changes to the process need to be done properly with full awareness of the economic state. Once again, thank you, mr. Chairman and i look forward to answering your questions. Thank you. The chair now recognizes itself for five minutes for questioning and i pity the witness outstanding testimony. It was illuminating and educational. Mr. Kimmitt let me start with you because of your background in the development of evolution of ziphius in your expertise. Obviously, as it was pointed out Foreign Direct Investment is critical to the us economy. She mentioned toyota in kentucky but in my home state of kentucky, Foreign Investment sports 117,000 jobs, little more than 7 of the entire employment. At the same time, as many of the witnesses pointed out today National Security of our country is of critical importance and fdi, if not carefully watched, could enable our enemies to the time, not just on our economy, but create a whole lot of National Security concerns. China appears to be conducting a campaign of commercial espionage against us companies involving the Cyber Espionage and human infiltration to systematically penetrate the Information Systems of us companies to steal intellectual property, the value of them and acquire them at dramatically reduced prices. The central question of this hearing is how can we balance both the desire for strong Foreign Investment and strong National Security and can you give us a little guidance on that . Precisely striking the balance that not only you as a subcommittee and committee seek to do but put the members of the administration do on a daily basis. I think it is important to reiterate that the us is open to investment for the reasons you and others have mentioned. At the same time, no one serving in Public Office has a higher responsibility for protecting the National Security. But we start with the plane to of you to attract investment but not at the cars to park u. S. National. What interests me about this issue is why there are not robust Capital Markets in the United States to provide alternative sources of capital for startups or richer companies in financial distress. Is there an alternative to Foreign Direct Investment why do we not have Strong Enough Capital Markets in the United States to provide that capital as an alternative. I would start with the fact we dont want to close our borders to Foreign Direct Investment so even if there was a way to figure out howto funded through the Capital Markets here we dont have all the answers. They bring world class workforce training and in new ways to do things and we see that in the auto sector. Idle think it is a desire to think or to adjust contain it here. Many people on the panel talk about the amazing benefits of Foreign Direct Investment. Observers had said the role of the pentagon on the decision to cable to outside influences can you elaborate on that . I will. I dont think that is true we bring in a the pertinent parties from military services for National Security agency concerns for example, and that was that the Senior Leadership level. We always went into a case i believe with Foreign Direct Investment to make sure we are protecting National Security to have the full gamut of the of pentagon resources. And china was always the case regardless of the next that. Then when we went to the committee. I appreciate the members indulgence. The gentleman from North Carolina the author of the Foreign Investment modernization act and author of the legislation that made the treasury secretary and member of the National Security council and i yield to my friend of North Carolina. Thank you for your commitment and leadership with your expertise and background i am for North Carolina we have the largest hog Processing Plant in the world in my district. 5,000 jobs. With of big textile plant owned by the chinese for i have a real interest in chinese and Foreign Investments of having said that she read the statement regarding his clear vision for china they have been focused on that since 201420 of which have been in the United States. That breedings in burmas concern by any other leaders that support the attorney general session say it is not effective enough. Did it has great potential. But it is outdated and needs to be updated with todays situation. Director rejoice significant review bin the nsa director we need to assess the process does anyone disagree with those perspectives . Eight you for your service as assistant secretary of commerce and at that time and what they imposed in 1999 following the massacre. And those that are reduced to lead to massive Chinese Military modernization. But if because frankly i believe even these efforts and by to have the chinese of those actions to sell to north korea and iran with 5 billion so i would just like to know from you what about this process given the lapse of what has occurred. With respect to that case that was two years of my life pursuing the matter. Actually we were extraordinarily aggressive. And with the reform effort is to make it easier to trade with allies. To you do me resources to focus attention and in respect of the embargo to china. Who provided chinese access and the the greater capability as a result of what occurred or did not occur . That is what we intend not to do in the bill. And to block off all Chinese Investments. It doesnt require them to have reciprocity. It does not cover all joint ventures they are a concern but not all of them. Or any list of countries that no country is named in this bill. Does require any list of technologies by the export control system or specific technologies to be safeguarded. So that consideration for what needs to be dead or should not be done. To convey to this committee. With america is interest to be gravely threatened. My time is gone. The chair recognizes the gentleman from arkansas. With that effort to evaluate how we egest cfius resource statement as well as balance those new challenges i appreciate my friend from North Carolina to take a role in the topic as well. To talk about of challenges as opposed to outright acquisition k you reflect on that how it is reviewed in the process . I will differ. But what i would say is there is no definition of National Security with existing law or the new bill. That is wise because the dynamic is quite different today than the cold war. To meet is the salvation of for defense. It is all intelligence base so when the cfius Committee Members come together they have those responsibilities and regulations to protect National Security and of particular of licensing issues that are proceeding on another track that were brought into cfius on the fact that particular case. It is important to note that cfius should not substitute for the work it has done on licensing and export control and other areas but need to make sure it isnt in the area of a status offense. That is my point. We should be controlled of the technology. Regardless of there was thin acquisition of licensing arrangement and then to identify dualuse technology with respect to the underlying anxieties and we should do that to do specifically created regardless of the nature of the transaction. And then to have broader impact on investment. Into effect the entire ecosystem. They cannot solve all problems but if there is a technology concern issue to identify that through the system. That gives you that ample authority . The of legislation that is not a statutory issue. What is the bigger challenge . Foreign direct investment of sensitive assets are just outright theft of intellectual property . That Foreign Direct Investment is not the issue but the underlying transfer the you are referring to that can occur in many circumstances. Five or 10 that is just sheer theft of intellectual property from europe and the United States. I dont know the percentages but that seems reasonable. With cybertheft as a major concern we put in some rules and then to have that minimum standard of protection that we do business with the department of defense. So since intellectual property in Data Security that True Protection not just the trademark mickey mouse but all of the above. Does that adequate coordinate the executive branch process . What did shoreview recently centuries ago we did not even have email. I agree with the senses the essence of your question to made to the effort of identifying those technologies. My time is expired. Said gentleman from ohio. Thanks to the witnesses we appreciate your expertise in this matter for National Interest and i truly appreciate the appreciate Foreign Direct Investment counter to National Security interest with Foreign Direct Investment i became concerned about this and in 1993 when of the first things the administration did was transfer the release authority from the department of defense to the department of commerce and we proceeded to sell the accused the capability to launch multiple satellites from the launch vehicle that seemed tantamount at the time this was a commercial decision but a bad thing for national u. S. Security so we are grateful to those that have tried to address the of modernizing of legislation for reforms. One of the big concerns is where are the gaps even with this legislation . What is left to be done . Talking about licensing is Startup Companies and Venture Capital and we spend a little bit of time talking about china. Were not only concerned about the relationship is on balance with that trade relationship with some real concerns of the trade policy so those kinds of mechanisms that we may still need to address. You raise a number of important issues with a variety of of Security Experts are of the panel i do think it is important we dont put herself into a false sense of security and then we risk being vulnerable to other areas and we risk discouraging investment from this particular country to benefit the u. S. Economy. I would say that your point beyond normal m a activity that remember the current law applies not only in the cases of ownership but also control and cfius looks very closely at investment including startups where in a Foreign Company or investor would have enough Equity Ownership or rights and special Voting Rights so that cfius cover that transaction rule having spent two years myself in Silicon Valley we need to do a better job in our technology have been to know that they have to be careful that it does not rise and tell the of level of control that would trigger cfius so for example, if they said of the Investment Fund lets make sure any Foreign Limited Partners are truly limited. Thinkpad is an area that cfius looks at fairly closely with the start of community it is not as clear of an understanding as there should be afford investors with a maligned purpose. First call i agree on that point also the negative implications starting off with Cool Technologies and i dont want them not to certainly because he put a fence around them. Correct. My time is expired but the point is that a lot of the early stage people did not even realize the nationalsecurity implications of a brilliant security has applications for the economy or the Global Economy i yield. So a company that happen to be owned by the government supporting international terrorism. Should we have any cfius lot in prevention to say you explicitly must take into account whether the host government and to support terrorism whether or not is a statesponsored terror. Does anybody think that we should not take into consideration with u. S. Assets that supports terrorism . Even though that cfius process those comment that might be a Wonderful Company to be based in teheran. There is nothing in though lot you can point to there is nothing specifically but from those dubai ports there was much greater scrutiny point on the state acquisitions by the statecontrolled entities. But you would find that specific language that was issued by the president for state sponsors of terrorism in closing the iranians and others. I would say both. You say it is rejected just on the basis . If the company was based in to run it would be rejected outright. But i would point out maybe you are looking to nearly with ownership or control of a company to have seats on the board. To have a terrible situation in the weak position with china. Unless you make that use the live here to china. They dont own stock but they control corporate decisions. I dont know that poses a risk to National Security and once we consent to a situation where a country could have a huge trade surplus that you cannot even sell your products here. Unless you build this plant here for the patents are located here or the Computer System is located here. To need corporate control. To control those corporate decisions but it is important to know if dad this bad decisions are made by cfius they can be reversed under the International Emergency economic powers act. It is extraordinary and is never been done before but they were aware of that act that could be used. To reverse a bad decision. And i yield back. Thanks to the witnesses. Set to go back to the opening talking about how does cfius balance the actual security from Foreign Direct Investment . And what they said there is no definition of National Security so what is the priority for cfius when your reviewing the transaction . National security or Foreign Direct Investment . Which comes first . And passed a balanced against the other. Talking National Security, we will start with the ambassador. My point was that National Security is the dynamic sabean the post cold war period and the important thing is that cfius which exist only to screen investments for National Security with agency that is responsible for safeguarding National Security interest of the United States. So the Defense Department might bring their concerns to move military technology for example, like mr. Sherman mentioned or congress would bring concerns about export controls and doj brings a different set of concerns so basically each of the agencys is looking of the investment in the open n investment policy and the reason they are there is to say even though we are open to investment are there any elements of this transaction is concluded to raise concerns from our department or agencies perspective . If so they need to be identified and addressed the or mitigated or blocked. It doesnt look like it a total of 770 transactions over the last six years . When i go back to the honorable us the best reviewing something inside the pentagon there is a case i tried to look up back from 2011 or 2012 involving airplanes in duluth minnesota a Chinese Company but a Purchase Agreement together with all kinds of red flags because the argument is they will buy this Interesting Technology to reverse engineer in china so it is great to walk this Foreign Direct Investment but mr. Sherman had a great point with the outright theft what happened . The remember the case im talking about . There were 20 the notices were withdrawn after the investigation. Being a member of the committee we dont really want to talk about specific cases because of the confidentiality of the of process helps us to dig into those companies but the reality is i dont recall that specific case. [laughter] i respect that. But before i forget it would be very helpful if at some point down the road if you think it is in hot where policymakers can actually see some of these cases and those deliberations go through it could help us understand how he might negative cfius is working. There is Economic Security absolutely and we would discuss that also when we would discuss cases but we look at the technology and say is this state of the art, useful militarily . To a finance their capability . And if there was any doubt about that i would be arguing we have to put control around this or if we would trust them or arguing for a block. And say i was usually theyre pounding the table. Overruled . Never. The gentleman yield back recognizing the man from illinois. Is it your testimony mentioned things like source code as one of the things that is hard to keep under control with investment so are their investment models that allow us to except money but keep the intellectual property here or is that a lost cause once you have a significant investment . Is there a workable model once you have someone who has a 20 stake they want to see a review of the technology to have people injected into the company to see the future and Technological Developments . Any way to keep that from happening . That specific case refers to investment in side of china. It was just an example of intellectual property that is hard to keep in one place. Going back to the point investing in a start ever other Technology Company what percentage of control the terms and the access are often n individually negotiated bringing to the attention of the source code is there retrospective look how successful those have been keeping technology from escaping or this is a onetime decision and then five years later you look back to see if the technology is not . We always look at the technology how that would impact adversarys capabilities. And not only the technology itself but the process although some companies are better than others we dont want the secret sauce to my grade overseas. We would consider all those things and proposed of mitigation on how to wall off the fact there was for in cash. If we did not think we could do that we would propose a block. Do you have a process in place to review . We would enforce that an agreement in perpetuity. We would assess how that is working go with that said there isnt enough resources it seems easier to catch up and develop new technology that doesnt exist so we will be in the medium long term with europe bin asia. So the question is do we have a structural disadvantage or is it easy for us to invest to get their technology in the areas where they are ahead of us . Or should we start negotiating now to make sure we dont have a structural disadvantage as code . In particular with the case of china we want to insist on reciprocity. There are some that are still offlimits for u. S. Investment the amount of openness and access to u. S. R d and universities that did not exist in the chinese case as china becomes a more capable player it behooves us to insist on greater reciprocity. In addition to absolute cutting edge technological spaces those applications will be like drones swarms massive numbers of security cameras so the mass production of very large numbers of relatively lowtech including cover cameras official recognition. Is there a lot of concern even though the Technology May not be leading edge but that high volume manufacturing where we could fall behind to protect technology . I will address that very briefly. Looking at technology if it wasnt cutting edge we believe innovation more imported from the military perspective for those men and women in our forces constitute an advantage of the use that technology. The chair recognizes mr. Hollingsworth. I appreciate all the witnesses being here today it is an interesting topic. My colleague brought up some ongoing monitoring and answering those questions i wanted to get back about the monitoring agreements in how vital it is what we put in place and those guardrails our look back and updated the mnuchin resources are problem but what about previous issues with resources what apparatus we have in place or needed in place to fill in the of color with the ongoing monitoring agreements . Was talking to the general to let my colleagues over specifics i spend a lot of time working in government. Most of the energy and resources go to the upside with the policy decisions legislation enacted but we dont give the attention and resources to the implementation side that is very important you have got to drive to get results. Lets make sure we have resources on both sides of that equation and if in the middle is a mitigation agreement make sure there is as much energy to implement and oversee that as there was to negotiate that. That is where we run into real resource problem we have barely enough people to address todays cases. Then if you have an increase because you pass new legislation and then the place that will lose and is continuing to watch those mitigation agreements making sure they are faithfully executed and that we connect the dots that is the resource constraint. As time elapses some of the staff has turned over so i really concerned about institutional memory. Both of your comments are thoughtfuthoughtfu l to ensure that ultimately if we make a certain decision we need to have those resources to enforce those decisions and then be faced with many more resources they are barely enough for is up probability greater than zero those resources can be allocated for goes specifically also want to ask was there ever a time you felt you didnt have enough time to adequately review and agree arrive at the right decision . No. I a agree we never cleared off a transaction with the National Security threat there were withdraws and refiling with terrific support from the Intelligence Community we made it to the right outcome to refer to a comment earlier we were never balancing investment with National Security of there was an unresolved threat we would mitigate we did not balance. The answer to the question is no speech tells people sleep better at night so i appreciate the comments so more broadly as an epidemic to spend too few of our resources of the enforcement of a decision and with that i yield back. Just picking up on the point just made it is important to understand the Critical Role the Intelligence Community plays in the cfius process. It is sent to the director of National Intelligence Free Community widened the gap decades and i say particularly with those s p considerations that need to be looked at closely then to come back with that assessment low or medium or high it helps to guide with the committee does then almost all of the major cfius agencies have their own intelligence elements inside it is almost two bites out of that apple. Looking ahead of five years to make sure we implement correctly we rely on the Intelligence Community not just on the listing concerns of those transactions but what are those trends to be concerned about . The gentlemans time is expired birkenau the gentleman from texas. Thinks the witnesses for appearing today. Is exceedingly important hearing and i am very much concerned about assuring ourselves were on the right course. You have indicated unilateral action may not be sufficient there is something mower we must do to protect science and technology would you give additional intelligence on this . The fundamental issue is there are very few if any science and Technology Issues the United States still monopolizes. So any technology it has decided there represents a dual use to have a narrow range of technologies with issues of cybersecurity or Computer Science and technology the chinese are sending delegations and while the israelis are more aware of concerns of tool used dualuse it is not in the same way. So unless you have the of fairly broad set of agreements it is easy for the chinese doctors to find most technologies in other markets. With reference to partners, are there certain institutions that can validate a partners position that we can feel more comfortable as opposed to someone who is not affiliated with the institution . I will defer by a suspect they have cooperated to share information. To the extent of the entity of National Security or Foreign Policy concerns to have the authority to identify publicly to which other transactions are red flag and then and to provide and then we factored that in to our decisions. What about a membership in nato as a country absolutely vitter freed each company is not of a concern. So when we review natalie the country of issue but the personnel for those who made be behind it just because it is germany or france doesnt mean there are no concerns. How effective are we act spotting companies that have investors that may have ill intentions such that they are in a position to take advantage of the of knowledge that day acquire notwithstanding that they look legitimate . That is one reason for my emphasis on technology of that is of concern and warrants review period regardless of the party before the licensing process giving the government the opportunity to dive deep as opposed to the other way around. The Intelligence Community does a very good job to dig out all the facets of the Company Including the investors that may not be good actor. We have some sensitive areas to be developed to be kept under wraps. Do we have any concerns about people locating businesses around these areas . My time is up. The time is expired in with the witnesses indulgence we will have a vote on the house floor the we will take the liberty to ask one final five minutes round of questioning with members agreement. Although the u. S. Capital markets are the deepest in the the most liquid in the world in and of themselves they are not sufficient to provide the level of financing that startups and other Companies Need with Foreign Direct Investment is a critical part of financing of our companies in this country in case of Foreign Direct Investment with other assets other than just capital. We also heard today there are legitimate National Security threats and we need to strike the right balance so could you each briefly identify one policy recommendation in to improve for modernize the current cfius review process what would that be . I would go back to the common theme to make sure we have adequate resources for the identification of potential issues and the review and adjudication and implementation of any agreement that might be reached. I think it is important going back to the point of the number of senior officials talking about the need to reform cfius i would just say i hope those senior officials themselves get involved in the process to empower their people to deal with these cases expeditiously on behalf of the american people. There are many areas of the bill where resources need to be addressed but also cfius is one tool in the toolbox looking at the gamut of the of legal capabilities and reciprocity we may want to rule in force across the board with their dealings of four nations. Cfius it is one way to get that a significant massive government that is creative to dig into the types of emerging technologies that are in commercial applications sensitive and discussed today that requires a lot of agencies and resources whether broadly that is my policy recommendation so to address those of reciprocity as well as battling back of the Chinese Industrial policy. To tap into the expertise between one and two years from now with those agreements they think right in the future. Let me just echo the important need for resources it is hard end of what the gaps are of they dont have the resources. If we expand the scope we risk leaving ourselves vulnerable to take the eye off the true National Security concern. And i dont think we mentioned the deals block is an indicator of it is working you have no idea how many deals dont even start because cfius exist so to say it wasnt punching properly but i do not emphasize the need for resources and only for National Security but to be competitive because foreign based companies are concerned with the length of time to get the review for i cannot emphasize that enough as well as looking at other tools that cfius cannot be the one and only thing to focus on to protect National Security in this space. A bite to yield to the gentleman from North Carolina. Thanks for being with us today i would like to enter into the record statements of support to include former secretary of commerce and secretary wilbur ross spent also senator cornyn has ben remarkable they have worked very hard on this has been an honor also secretary mnuchin and treasury have played a significant role to write to this legislation and chairman per. Everyone that has participated in a significant way to make sure we have a good perspective going forward. Thank you. I yield back. I want to thank you and apologize for the attention Deficit Disorder of congress on this issue so i thank you for attempting to remedy that because this is something where progovernment and nation suffers from the lack of a longterm vision that you do see in china that lot of investment models focused on quarterlys profits verses the tenure performance so you dont invest as strategically as we should and i hear you very clearly with the lack of resources will rehab of less like the ebola crisis there is a temporary spike of funding the neck gets in the way until the next crisis but this has been an ongoing crisis for more than a generation. One thing that occurred is that intellectual property violations. One of the reasons we have to depend on foreign for venturecapital if you have a really Good Intention then it is pirated in other countries you dont have that investment capital. Do you see that as an important area to be a much smaller problem with an increase of Venture Capital available simply because we do not have our inventions ripoff on offshore . There was 150 billion Chinese Investment into startups. That is probably small compared to the amount of software that is stolen for example, in china every few years. We have to keep our eyes on that very strongly. Also thanks for having the hearing it is a big deal. Has you yield back things to the witnesses for their testimony today it was very educational illuminating for the members we will continue to review the process and have several more hearings at the beginning of 2018 and we invite the continue to engagement of these witnesses and others as we review and update the process to echo the comments we do hear you loud and clear that was unanimous. Without objection all members have five legislative days to submit additional questions that would be forwarded for their response please respond as promptly as you are able. We are adjourned. [inaudible conversations] and [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] cnet this is the place where grant then his memoirs 1885 he was dying of throat cancer and his family was facing serious financial problems of the end of this point in his life he was trying to take care of his family. 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