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28–033 PDF 2018

S. HRG. 115–126 

EXAMINING THE COMMITTEE ON FOREIGN 

INVESTMENT IN THE UNITED STATES 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE ROLE OF THE COMMITTEE ON FOREIGN INVESTMENT 

IN THE UNITED STATES 

SEPTEMBER 14, 2017 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.govinfo.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JOHN O’HARA, Chief Counsel for National Security Policy 

KRISTINE JOHNSON, Professional Staff Member 

ELISHA TUKU, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Deputy Clerk 

JAMES GUILIANO, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, SEPTEMBER 14, 2017 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

Clay Lowery, Managing Director, Rock Creek Global Advisors, and Former 

Assistant Secretary for International Affairs, Department of the Treasury ... 4 

Prepared statement .......................................................................................... 29 

Responses to written questions of: 

Senator Brown ........................................................................................... 38 

Senator Menendez ..................................................................................... 39 

Kevin J. Wolf, Partner, Akin Gump Strauss Hauer & Feld LLP, and Former 

Assistant Secretary for Export Administration, Department of Commerce .... 6 

Prepared statement .......................................................................................... 32 

Responses to written questions of: 

Senator Brown ........................................................................................... 40 

Senator Menendez ..................................................................................... 43 

James A. Lewis, Senior Vice President, Center for Strategic and International 

Studies .................................................................................................................. 8 

Prepared statement .......................................................................................... 34 

Responses to written questions of: 

Senator Brown ........................................................................................... 45 

Senator Menendez ..................................................................................... 46 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement submitted by the Rail Security Alliance ............................................. 47 

Letter submitted to the Trump administration on Chinese Equity Caps Financial Services Sector .............................................................................................. 54 

China’s Technology Transfer Strategy .................................................................... 57 

(III)

(1) 

EXAMINING THE COMMITTEE ON FOREIGN 

INVESTMENT IN THE UNITED STATES 

THURSDAY, SEPTEMBER 14, 2017 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. This hearing will come to order. 

This morning, the Committee will receive testimony on the role 

of the Committee on Foreign Investment in the United States, or 

CFIUS, as it is known in the trade. 

The role of CFIUS is to review certain types of foreign investment transactions to determine if there is: a threat to impair U.S. 

national security; a foreign investor present which is controlled by 

a foreign Government, like a State-owned enterprise; or something 

that can affect homeland security or result in control of any critical 

infrastructure that might impair our national security. 

Yesterday’s rejection of the acquisition of Lattice Semiconductor 

by a Chinese consortium with a U.S. presence provides a good example of that role. 

According to press reports, the CFIUS review of the deal revealed that Lattice had valuable intellectual property that, if somehow transferred, would impair U.S. national security. 

The purchaser was a Chinese consortium with strong ties to the 

Chinese Government and its space program. Additionally, the importance of the semiconductor supply chain integrity to homeland 

security and the use of Lattice’s products by the U.S. Government 

was something that could further impair national security. 

The Lattice case sounds like it should be considered textbook 

CFIUS, and it is reassuring that the President made this decision 

based on the careful due diligence of the various Government entities that comprise CFIUS. 

Nonetheless, there are some congressional and Administration 

concerns over a broad-based set of potential risks arising from China’s steadily increasing use of foreign direct investment, or FDI, to 

acquire companies and their sensitive technology in the United 

States. 

We need to have a general discussion of whether or not the 

CFIUS process is functioning appropriately, to the extent that it 

2 

has sufficient authority to look at the transactions that are affected 

most by today’s evolving national security considerations. 

I look forward to hearing from the witnesses to what extent this 

concern is based on China’s 2025 strategy and if there are any specific instances where this strategy has threatened to impair U.S. 

national security. 

In that regard, I will be looking for the witnesses to identify and 

articulate the potential national security considerations at issue 

and their relevance to any attempt to address them through reform 

of CFIUS legislative or regulatory authorities. 

If CFIUS is not looking at or is somehow missing transactions 

worthy of its national security review, I would also be interested 

in learning how many and what types of cases it is missing beyond 

the 250 or so CFIUS filings this year and what human financial 

resources would be necessary to review such new cases. 

We should also discuss whether CFIUS is even the right agency 

to reform in order to address various complaints associated with 

China’s investment strategies today. 

The magnitude of any problem with CFIUS is defined by the 

intersection of U.S. national security with huge inflows of foreign 

capital supported by a world-renowned U.S. open investment policy. The United States—with $7 trillion in total outward FDI and 

$6.5 trillion in inward FDI—is the world’s number one investor 

overseas and the world’s number one recipient of foreign investment. 

FDI plays an essential role in increasing U.S. economic growth, 

creating highly compensated jobs, and spurring innovation and promoting exports. 

Generally, it is in the national interest of the United States to 

sustain an open investment policy. The administrations of Presidents Reagan, Bush, Clinton, Bush again, and Obama have all reaffirmed the open investment policy of the United States. Likewise, 

Congress is a firm believer, on a bipartisan basis, in an open investment policy. 

But with this unique position that the United States enjoys in 

the world comes a responsibility to assure that the national security of the United States is maintained against investments that 

may seek to undermine it. 

CFIUS plays a critical role and it is important to have a Senateconfirmed individual to set policy and work with Congress. The 

Senate needs to quickly confirm Heath Tarbert as the Assistant 

Secretary of the Treasury for International Markets and Development. 

Mr. Tarbert, who was voice-voted out of the Banking Committee 

in May, is the President’s key person to oversee national security 

policy at CFIUS and also maintain a healthy, robust investment 

environment for the United States. 

Senator Brown. 

OPENING STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, and I appreciate 

your comments always, and this panel will be very helpful to us. 

Thank you. 

3 

As you know, Mr. Chairman, I supported, as almost every Member of this Committee did, Mr. Tarbert out of the Committee. I 

hope, too, he can be confirmed quickly. I do want to remind my colleagues, especially Senators like Senator Perdue and Senator 

Schatz, who are newer to this Committee, that so far this year the 

full Senate has already confirmed 11 times the number of nominees 

from the Banking Committee as this Committee confirmed in the 

last Congress. So we have confirmed 11 times the number of nominees from this President than this Committee did last session. Senator Tester remembers that well. Senator Crapo remembers that. 

So just a note to make. 

Mr. Chairman, as is evidenced by the Committee’s focus on Russia, Iran, and North Korea sanctions already this year, national security issues are more important than ever. 

It makes sense that we should take a look at other national security issues in this Committee’s jurisdiction, like CFIUS. 

CFIUS is charged with reviewing certain foreign acquisitions of 

U.S. companies that potentially pose national security threats. It 

has been a decade since we have had a hearing, so I am particularly grateful to Chairman Crapo on this topic. 

The U.S. continues to be one of the most attractive markets for 

foreign investment. We know that. Our country welcomes investment when it is part of a straightforward business deal. When they 

are done right, these deals can create jobs; they can grow American 

industries. 

But we know it is not always that simple. Some transactions 

have national security as well as commercial implications. CFIUS 

has seen an increase in its reviews of Chinese acquisitions of U.S. 

companies. In the three most recent reported years, CFIUS reviews 

of Chinese acquisitions topped the list every single time. 

In 2016, Chinese companies invested a total of $51 billion into 

the U.S. through 65 deals, a 360-percent surge from 2015. This 

year, it is already clear that CFIUS’s workload has increased—with 

acquisitions from China and other Nations. 

I have serious concerns about many of China’s economic and industrial policies. That is not to say that every Chinese investment 

poses national security threats. Fuyao Glass invested in Moraine, 

Ohio, where there was once a GM plant. It is an example of a 

project which poses no such threat and is creating jobs. 

Some foreign investments pose national security threats, such as 

intellectual property theft and espionage from U.S. industries crucial to our Nation’s defense, as well as threats to the intellectual 

property of seeds potentially impacting the global food supply, and 

transfers of critical technologies. We have seen an increase in 

smaller private investments to obtain access to new technological 

know-how. 

We do not know yet who perpetrated the hack of Equifax—exposing the personal information of 143 million Americans, essentially 

half our population. It could be domestic, it could be foreign criminals. But we do know that some foreign Governments and companies have tried to gain access to sensitive information about Americans and pose other cybersecurity concerns. That has to be considered as well. I will not even go into all the discussion about the 

4 

Russians last year. These are the types of threats we hear about 

from the national security agencies and others. 

Today we have three people before the Committee who have extensive experience with CFIUS, with export controls, and with the 

other tools our Government uses to address national security 

threats. I look forward to their assessment how CFIUS is working, 

if its scope is appropriate—considering shifting national security 

threats—and if it has enough resources to review an increasing 

number of transactions and thoroughly investigate possible national security threats. 

I would like the witnesses’ opinions on the national security risks 

that I highlighted earlier, whether they believe it is, in fact, 

CFIUS’s responsibility to try to address these risks, or if there are 

programs at the other national security agencies—DOD, Commerce, State, and others—that are better able to do that. 

I do not think that CFIUS reform is the answer to addressing all 

of those national security risks, whether from China or elsewhere. 

But I am open to considering improvements to CFIUS if we believe 

there are resource concerns or gaps that are allowing certain investments that pose real threats to Americans to fall through the 

net, if you will. 

Any solution is likely to be multifaceted, involving trade, economic, and defense policies, export controls, some of that in this 

Committee’s jurisdiction, some of it outside. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Brown. 

And we will now turn to our panel for their testimony. We will 

hear from two former CFIUS officials: first, Mr. Clay Lowery from 

the Treasury Department, and then Mr. Kevin Wolf from the export control side of the Commerce Department. We will then turn 

to Mr. Lewis, who has long studied technology issues in the context 

of the CFIUS process at the Center for Strategic and International 

Studies, which published its 2-year review of the CFIUS process 

last December. 

I remind our witnesses that we would like you to keep your oral 

comments to 5 minutes so we have plenty of time for questioning 

from the Senators, and your full written statements are already 

made a part of the record. 

With that, Mr. Lowery, please begin. 

STATEMENT OF CLAY LOWERY, MANAGING DIRECTOR, ROCK 

CREEK GLOBAL ADVISORS, AND FORMER ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS, DEPARTMENT OF 

THE TREASURY 

Mr. LOWERY. Thank you, Chairman Crapo, Ranking Member 

Brown, and Members of the Committee. Thank you for letting me 

testify today on examining CFIUS. In my testimony, I hope to 

briefly just touch on the nature of CFIUS and its processes, its performance over time, and some thoughts on CFIUS reform. 

The easiest way to understand CFIUS is to know its mandate: 

ensure national security while promoting foreign investment. That 

is actually what the legislative language says. So when we read 

news stories about CFIUS, as will be the case today because of 

President Trump’s blocking of a transaction yesterday, we only 

5 

hear about protecting national security. But that is only part of the 

objective of CFIUS. Promoting foreign investment is a part of our 

national security. It is core to our economic growth. It is core to our 

increasing productivity and for creating jobs. Thus, any reforms to 

CFIUS that are being considered should be thought about in that 

context. 

CFIUS is an interagency Committee, chaired by Treasury, that 

includes a variety of members, including Defense, Justice, Commerce, the Intelligence Committee. It investigates cross-border 

mergers and acquisitions that could put our national security at 

risk. 

M&A parties file with CFIUS, and CFIUS determines whether 

the acquirer will gain control of a U.S. business. If control is determined, CFIUS does a three-part analysis: 

First, does the acquirer pose a national security threat? 

Second, does the asset that is being purchased make our national 

security more vulnerable? 

And, third, the consequences of permitting these threats and 

vulnerabilities to come together through this transaction, do they 

promote a specific risk to our national security? 

CFIUS investigates this question for about 30 days. If at the end 

of those 30 days CFIUS is not satisfied, they can go to a second 

stage of investigation, which is up to 45 days, an additional 45 

days. If CFIUS is still not satisfied, it can take the case to the 

President, who is the only one, not CFIUS, that can actually prohibit an acquisition. In the past 30 years, this has happened only 

four times, including yesterday. 

Why is it so rare that the President blocks transactions? The 

first reason is most of these transactions do not raise national security risks. The second is, if they do, CFIUS has the ability to mitigate those risks. And the third is that if the President makes a decision like he did yesterday, it becomes public and puts the corporate reputation at risk, and so sometimes if you know that it is 

going to be a negative discussion by the President, you will withdraw and abandon your transaction. 

In terms of mitigation agreements, these were put in place by 

Congress, and I view them as the pressure valve that enables 

CFIUS to find solutions to much more difficult transactions and to 

meet its mandate: welcoming foreign investment and protecting national security. Since Congress strengthened CFIUS 10 years ago, 

it has performed in an exceptionally professional and thoughtful 

manner. Scrutiny of cases is thorough. CFIUS protects information 

as well as anyone in the U.S. Government. And they have preserved the reputation of the United States to being open to investment from around the world. 

That said, there is little question that the investment landscape 

has changed dramatically in 10 years. By far, the two most important changes have been the rise of China, as the Chairman said, 

and also the potential of new sensitive technology being transferred. Both Mr. Lewis and Mr. Wolf will elaborate on these issues. 

These developments suggest that a close, sober evaluation by 

Congress, the GAO, and the Administration are in order, and as 

with any analysis, it is best to think of the potential reforms in a 

6 

cost-benefit analysis, including what are intended and unintended 

consequences. 

Beyond that, I would take three more steps. 

First, the CFIUS process, as Ranking Member Brown suggested, 

is currently under a lot of stress because of a significant increase 

in cases—many of them are complex—without a commensurate increase in resources. 

Second, as Chairman Crapo mentioned, this Committee passed 

through in its bill back in 2007 a new Assistant Secretary for 

Treasury to oversee CFIUS. President Trump has nominated a 

highly qualified individual in Heath Tarbert. He was approved by 

this Committee with near unanimous support. He should be supported by the full Senate and let him get to work. 

And, third, we should adopt a set of guiding principles to make 

sure that any CFIUS reform both safeguards our national security 

and remains the destination—keeps the United States the destination of choice for investment. 

I have outlined a number of principles in my written testimony. 

I would just say three right now: minimize the opportunity for politicizing transactions; keep CFIUS narrowly focused on national 

security; and, third, increase the scrutiny of State-controlled cases. 

Thank you very much. 

Chairman CRAPO. Thank you, Mr. Lowery. 

Mr. Wolf. 

STATEMENT OF KEVIN J. WOLF, PARTNER, AKIN GUMP 

STRAUSS HAUER & FELD LLP, AND FORMER ASSISTANT SECRETARY FOR EXPORT ADMINISTRATION, DEPARTMENT OF 

COMMERCE 

Mr. WOLF. Thank you, Chairman Crapo, Ranking Member 

Brown, and other Members of the Committee. Thank you also for 

convening this hearing to discuss an important national security 

topic. 

I was last before this Committee in January of 2010 when you 

confirmed me as the Assistant Secretary of Commerce for Export 

Administration, which is a role I served in until January 20, 2017. 

And in that role, I worked with my colleagues primarily at the Departments of Defense and State in shepherding the U.S. export 

control system. And I was also a representative to CFIUS during 

that time. 

Although I am now with a law firm, I am not speaking on behalf 

of any particular change or on behalf of anyone else. The views I 

discuss today are my own. 

Mr. Lowery described well CFIUS and the background, so I will 

get straight to my main point, which is that the U.S. export control 

system and CFIUS complement each other. CFIUS has the authority to regulate the transfer of technology when there is a transaction, however you define ‘‘transaction.’’ The export control rules 

have the authority to regulate the transfer of technology regardless 

of whether there is a transaction. This means that if there are specific concerns about particular types of technology or information, 

whether general or specific, whether as part or as a result of a 

CFIUS review or from any other source, then the focus, I respectVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
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fully submit, on addressing that national security issue should be 

on the transfer of the technology to the destination in question. 

The U.S. export control system is perfectly suited for doing exactly that. Yes, I recognize it can be complex, but it is specifically 

designed to constantly evolve to new threats as they are identified, 

to change as a result of commercialization of technology and realizations about the effectiveness of other controls. 

Now, in general, the most effective export controls are those that 

are multilateral—those that our allies impose to the same degree 

to accomplish a common objective. Unilateral controls—controls 

that only one country imposes—tend to be counterproductive because they create incentives for companies to simply do the work 

outside the United States, thus outside of U.S. control. 

However, the temporary imposition of unilateral controls, when 

there is a specific threat or a new threat or an evolving threat 

identified, such as during a CFIUS review or in connection with 

some sort of acquisition, can be and is a very effective tool. And in 

the regulations administered by the Commerce Department’s Bureau of Industry and Security, in coordination with the Departments of Defense and State, there is the ability to move quickly to 

respond to some of these threats, again, focusing on the technology 

itself to particular tailored destinations with or without any particular transaction, however you would define that. 

These tools also can work very closely in connection with law enforcement resources to identify situations when there is a front 

company in the United States. And we can get into more details 

on some of these tools as well as how they work with the multilateral regime process. 

So although I cannot get into specific cases, I can say that other 

types of national security issues created by foreign direct investment in my experience primarily were those involved with colocation issues, that is, acquisitions next to sensitive military facilities; 

those that create espionage risks; those that reduce the benefit of 

Defense Department technology investments; those that would reveal personal identifying information; those that create security of 

supply issues for the Defense Department and other parts of the 

U.S. Government; and those that create potential exposures for our 

infrastructure. 

And so, in general, the CFIUS authorities in my experience in 

the agencies were well suited and well equipped to deal with these, 

its dedicated public servants working very hard. And that last 

point is the key. As mentioned earlier, they are stressed. They need 

help. They need assistance. And this is important not only for national security, but for our economic security so that the United 

States is known as a place that welcomes direct investment and 

can review the safe harbor process quickly and efficiently. 

In my last couple of comments, it is focused on—when thinking 

about potential legislative change, my suggestion would be to first 

ask, What is there about the authority that cannot be addressed 

through changes in regulations or internal process, or if there is 

another area of law such as trade remedies or export controls that 

could be more suited to addressing the national security risks, or 

if the issue could be resolved through merely an increase in resources or change in resources in particular areas? If the answer 

8 

is no to those questions, then that is the sweet spot for statutory 

change. 

Those who know me know I have a 3-minute and a 30-minute 

and a 3-hour version of every topic, so I will stop here and look forward to answering your questions. 

Chairman CRAPO. Thank you, Mr. Wolf. 

Mr. Lewis. 

STATEMENT OF JAMES A. LEWIS, SENIOR VICE PRESIDENT, 

CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES 

Mr. LEWIS. Thank you, Mr. Chairman, and I thank the Committee for this opportunity to testify. You have heard about how 

important CFIUS is, so I will not belabor the point. But the Committee, while it has done well in the past few years, faces a growing volume of cases, increased complexity of transactions, and Chinese industrial policies that pose an increasing challenge. 

The U.S. created CFIUS in response to concerns that foreign 

competitors were acquiring strategic industries. CFIUS authorities 

were updated in 2007 in the Foreign Investment and National Security Act. That was 10 years ago. And it created new authorities 

for CFIUS and new timelines. FINSA is now 10 years old and faces 

challenges created by a changed global environment. 

The most important of these comes from China, as you have 

noted. China seeks ways to circumvent CFIUS protections. China’s 

goal is to end its dependence on foreign technology and to overtake 

the U.S. 

If China followed international practices in trade, its decisions to 

invest in domestic industries would be unobjectionable. But China 

has not hesitated to extract technology or concessions or to block 

competition to advance its own firms. China has a strategy to build 

a high-tech economy and is willing to spend heavily to acquire foreign companies and the know-how they possess. 

The fundamental issue for the U.S. is how to respond to a managed economy with a well-financed strategy to create domestic industries intended to displace foreign companies. 

China appears to be attempting to circumvent CFIUS and export 

controls. Some important ideas for CFIUS reform include expanding the scope of covered transactions, particularly in regard to what 

are called ‘‘greenfield transactions,’’ providing the Committee with 

extra flexibility for difficult cases by giving it the resources or support to better identify technology and business trends that create 

risk, finding ways to cooperate with foreign partners, and it is an 

indicator of how things have changed that now both Japan, Germany, and the European Union are adopting their own CFIUS-like 

processes. The Committee could use additional resources and information to make timely decisions. 

U.S. efforts to get China to follow global norms on trade are long 

overdue, but it will not work without a strategy to promote U.S. 

technology. Reports that the Trump administration will challenge 

China over trade practices are good news, but it needs to be part 

of a larger strategy that includes export controls and investment in 

R&D. 

It is important not to exaggerate China’s strength. China faces 

immense problems, including its huge debt burden, pollution, and 

9 

corruption, but it does have a strategy, as you noted, in China 2025 

to displace the U.S. and building globally dominant high-tech industries. However, China’s leaders are practical, and their behavior 

can be changed if the U.S. develops a coherent strategy in cooperation with key allies. CFIUS is not the only tool we can use in this, 

but it is the most important for dealing with foreign investment, 

and the Committee could use additional authorities and resources. 

I thank you for the opportunity to testify and look forward to 

your questions. 

Chairman CRAPO. Thank you, Mr. Lewis, and I want to turn to 

you first with a couple of questions. In your testimony, you identify 

a number of concerns relating to China’s industrial policy and 

transfers of U.S. technology. You also discuss how CFIUS may be 

improved to address some of the concerns while others may be better handled by export controls. 

In your opinion, what changes specific to CFIUS authority are 

necessary to effectively protect U.S. national security? And what 

changes to the export control regime do you find necessary to prevent unwanted transfers of technology and know-how? 

Mr. LEWIS. Thank you, Mr. Chairman. I think the most important issue for me remains the way that China has changed its investment policies to circumvent CFIUS, and the case that we all 

know the best is, of course, what we call ‘‘greenfield investments,’’ 

which is Chinese companies opening facilities or subsidiaries in the 

United States. Those are not always covered. The Department of 

Defense put a report out on this some months ago. It was unclear 

to me why it was classified since, when you go to Silicon Valley, 

it is sort of an open secret that Chinese firms are all over the place 

trying to acquire brains, technology, trying to get around export 

controls and CFIUS. So I think the most important thing to look 

at is what are we doing about the alternate methods China has 

found to acquire technology. 

Another good example might be Chinese companies, when they 

come to the U.S., do not face the same restrictions that American 

companies face when they attempt to do business in China. A word 

that the Chinese dislike is ‘‘reciprocity,’’ so I think looking at the 

ways they circumvent, looking at greenfield investments, looking 

for reciprocity in investments would be a good approach for CFIUS. 

For export controls, I recently had an unusual experience. I 

talked to one of the leading high-tech trade associations, and at the 

end of their briefing on their technologies, they said, ‘‘And we 

would like to see export controls strengthened.’’ I said, ‘‘Wait a 

minute. You guys usually say the opposite. What is happening 

here?’’ And they said in some ways the control lists we have, both 

at State and Commerce, have not kept up with developments in 

technology and need to be updated. So I think the biggest change 

here would be to once again take a step back and look at the munitions list, the Commerce control list, and say, How do they need 

to be updated to reflect the current technological environment? 

This would help CFIUS as well. 

Chairman CRAPO. Thank you. 

Mr. Wolf, expanding on Mr. Lewis’ response, would you please 

focus on any concern that transfers to China of foundational techVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
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nologies present and what Congress and the Administration can do 

to address this? 

Mr. WOLF. Sure, absolutely. The principal focus is to aggressively 

and with will think creatively about how to describe either in a 

unilateral fashion or a multilateral fashion the types of technologies that warrant control to China or other countries for these 

national security reasons. And the reason I put my emphasis there 

is because one should not have to wait for a transaction to occur, 

whether it is a covered transaction in the traditional sense or 

whether it is a joint venture or some other sort of arrangement. If 

there is a way in which some sort of foundational technology, even 

if broadly described, is going to be put to an end use or an end user 

of concern, then I would suggest using the authorities that already 

exist in the very flexible export control regulations to identify 

those. 

Now, that is very hard. That is very hard to do in many situations because it may not be—one may not be able to clearly articulate it. But that difficulty, frankly, is a check on the system so that 

you do not inadvertently impose controls that are broader than necessary and you thus affect collateral controls. 

By simply adding broader scopes to CFIUS to catch one situation 

of one type of technology with respect to really only one or a few 

countries of concern, you can end up harming the image of the U.S. 

as a country open to foreign direct investment more generally. So 

the direct answer is creative, clever use and aggressive evolution 

of existing export control rules. 

Chairman CRAPO. Thank you. And, Mr. Lowery, in your opinion, 

does CFIUS lack authority to review any category of transactions 

to fulfill its mandate? Or is it a resource question? 

Mr. LOWERY. It is a good question. My own view is that there is 

a significant resource question that they are going to have to address. It is just becoming very difficult to look at all the different 

transactions that are coming in and doing it in an efficient and effective manner so that we are still open to investment. 

In terms of authorities, it depends. I mean, I think that Jim 

Lewis talked about CFIUS does not have the ability right now to 

look at greenfield investments. I am not sure that it should because 

I think that the idea of CFIUS is to protect national security with 

an investment that is buying actual U.S. businesses. But if you 

wanted to go after greenfield investments, it does not have that authority currently. 

Beyond that, it does have most of the authorities. That does not 

mean that you could not make the regulations stronger. It also 

does not mean that they could—some of the guidelines—CFIUS 

puts out guidelines about how they think filing parties should be 

thinking about transactions. Those probably need to be updated. It 

has not been done in 10 years. And that could help make sure that 

we are capturing transactions that maybe we were not already capturing. But I think that in terms of the authority itself, it just depends on what you are trying to get after. One that Mr. Lewis said, 

it would need legislative authority to investigate greenfield investments. 

Chairman CRAPO. Thank you. 

Senator Brown. 

11 

Senator BROWN. Thank you, Mr. Chairman. 

To begin with, I first want to apologize. I have, as a number of 

people on this Committee have, conflicts today. We are working on 

the farm bill in the Ag Committee. I need to go there. And we are 

working on tax reform in the Finance Committee, so I will not be 

sitting here as long as I normally do with the Chair. Usually, we 

both sit through these hearings for pretty much the whole time. I 

apologize for having to do that. 

Mr. Lowery and Mr. Wolf, I want to start with you. Earlier this 

year, I raised concerns about potential conflicts of interest in the 

CFIUS process posed by a number of Administration officials with 

international business interests. So far, two matters regarding the 

Administration officials have come to light. It was reported in 

March that China’s Anbang Insurance Group, a company familiar 

with CFIUS reviews, as you know, had ended its bid to buy the 

President’s son-in-law’s Fifth Avenue property. Then in July, after 

Anthony Scaramucci was announced as the new White House Communications Director, it was revealed that his hedge fund— 

SkyBridge Capital I believe was its name—was in the process of 

being acquired by China’s HNA Group, possibly for more than the 

company was worth and was also under CFIUS review. 

I am concerned, as I know all three of you are, and I think most 

of the country is, about the national security implications of foreign 

acquirers, but possibly and particularly if they have ties to foreign 

Governments trying to buy influence in this Administration. So I 

have a series of questions, and, Mr. Wolf, I will start with you, and 

I will ask the three, and then you can answer as a group, and then 

Mr. Lowery. 

Do you believe Treasury and other CFIUS member agencies have 

a good understanding of Administration officials’ business interests 

and possible conflicts of interest? Is Treasury aware of the range 

of business interests and possible conflicts of interest? Could more 

be done to ensure that all those ties are disclosed? And, third, are 

processes in place for officials involved in CFIUS or the President 

himself to be recused if necessary? And I will start with you, Mr. 

Wolf. 

Mr. WOLF. Sure. On the first topic, Treasury as such, I do not 

recall ever asking those questions. The responsibility for compliance with conflict of interest rules are up to the individual, and 

they work closely with their counsel at their Department, and that 

was the primary driver. 

With respect to the second question, it could not possibly hurt for 

Treasury to collect that information and to ensure that the same 

level of conflict of interest review that is supposed to be done and 

was done with us in-house by our Department counsel is also provided to the Treasury Department as a double check on what 

should already be done internally within the Department. 

Senator BROWN. And that is not being done, to your knowledge? 

Mr. WOLF. Again, the responsibility lies with the individual and 

compliance with law, and we received regular briefings from our 

ethics counsel within the Department of Commerce, not just with 

respect to CFIUS but all matters that we were involved in to ensure that we did not have conflicts of interest both with respect to 

12 

the annual disclosure process and regular updates and ethics briefings that the attorneys would give to us. 

So, again, I do not know—I do not think that information is generally shared with the Treasury Department, but it should already 

exist within the Departments, and there could not be anything 

harmful in doing so because it is already existing information within the existing Department of the individual employee. 

Senator BROWN. Mr. Lowery. 

Mr. LOWERY. To my knowledge—I agree with Mr. Wolf. When I 

was working on this, I recall Secretary Paulson recusing himself on 

specific transactions, or there were others—he was not the only 

one—that sometimes it just happened to be something that they 

had been working on in their private sector career, and they saw 

a CFIUS transaction, and, you know, I would go down the hallway 

and say, ‘‘Hey, we have a CFIUS transaction on this,’’ and the next 

thing you know, he would call the General Counsel and say, ‘‘I 

have to recuse myself.’’ To my knowledge, that still goes on. I cannot obviously speak on the specific cases you mentioned, but I 

would assume that the individuals, as Mr. Wolf said, would basically say, ‘‘I need to recuse myself. I have business interests here.’’ 

And they have disclosed that to their in-house counsel so the inhouse counsel can also advise them on those issues. 

Senator BROWN. And are you satisfied that the information from 

the Administration and from the President’s family, that the information is available enough to you all—not to you all, but to the 

people in place now? 

Mr. LOWERY. So CFIUS is a very—I mean, the people that work 

on CFIUS transactions, they are very protective of the information. 

So there are lots of people within the Government that do not have 

much to do with CFIUS, and they do not understand what is going 

on. There are two reasons for that. One is the classified information. Obviously, there is lots of classified information. There are national security issue at stake here. But the second reason is because of a little bit the issues you are getting at, but really it is 

proprietary information. These companies are filing. They are putting forward a lot of proprietary information. There are competitors 

on the outside that are sometimes very interested. And so you have 

to be very careful. That is why I think CFIUS over a 10-year timeframe, over a variety of Administrations, has basically been very 

protective of information. People call it like a star chamber, and 

the reason they do that is because of how well they protect their 

information, frankly, better than a lot of other parts of our Government. 

Senator BROWN. Did you want to add something, Mr. Wolf? 

Mr. WOLF. The issues you raise with respect to transparency of 

information regarding conflicts of interest of political officials and 

career employees is not unique to CFIUS because every day—so 

there is nothing unique about CFIUS that addresses your point, 

and the success in ferreting out any concerns lies in the existing 

procedures within each of the departments as opposed to something 

that is CFIUS qua CFIUS to address. 

Senator BROWN. Did you want to add something? 

Mr. LEWIS. I would simply echo your point, Senator, that most 

transactions are without risk to national security, and so it is imVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
13 

portant to bear that in mind when we think about the deals that 

are being looked at. We have seen movie theaters, hotels, all 

bought by the Chinese, and that does not pose any risk. 

Senator BROWN. So while there might be conflicts of interest that 

might or might not disturb the American public, they are not necessarily national security concerns. 

Mr. LEWIS. I think that would be correct. 

Senator BROWN. OK. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Perdue. 

Senator PERDUE. Thank you, Mr. Chairman. Thank you guys for 

being here today. 

Before I start my questions, I would like to make one comment 

for the Committee since it was brought up earlier. Senator Van 

Hollen, Senator Schatz, Senator Kennedy, Senator Rounds, and I 

are new Members of this Committee, but we are totally capable of 

understanding the full historical perspective around confirmation 

of this Congress. I certainly echo the comments that have been 

made this morning about nomination and confirmation of this Committee, but I would like to put into perspective that we are sitting 

in a period with the slowest confirmation process in the history of 

our country since George Washington put his first Cabinet together. I think it is outrageous that the last day before we left for 

August break we confirmed 65 nominations in 1 day because of a 

back-room deal. Prior to that time, we had only nominated and confirmed—we had only confirmed 48. 

As we sit here today, this President has fewer than one-third of 

the confirmations that the prior President had. So I would like the 

record to show that some of us do have a full perspective on where 

we sit today. 

Mr. Lewis, thank you for being here today. I lived in China—or 

I lived in Hong Kong, worked in China, lived in Singapore, and the 

thing that always bothers me, China over the last 10 years has a 

net outflow—an outflow of capital of about $3.8 trillion, an inflow 

of about $1 trillion, 1.3, and then a net—that is a net outflow of 

about $2.5 trillion. I cannot track it. I have a feeling you cannot 

either. 

In 2016, the Bureau of Economic Analysis estimated about $10.3 

billion of Chinese investment in the U.S., and yet AEI and Heritage and others had it as high as 56. So that is a wide range of estimate. And the reason is when you get under it, BEA actually had 

Luxembourg as the top foreign investor in the U.S. and China was 

11th. 

With the network of capital flows in the world, how in the world 

are we able to track the overall net inflows from particular players 

outside the U.S.? 

Mr. LEWIS. That is a great question, and it is a very difficult 

problem. And as you noted, small Caribbean islands tend to come 

at the top of the list for foreign investment, not because they are 

wealthy but because they are vehicles for money laundering. Chinese capital is seeking to leave the country—— 

Senator PERDUE. And that is—I am sorry to interrupt. That is 

not just China. That is other people who have very nefarious intentions for the money, too, right? 

14 

Mr. LEWIS. Correct. But when you—that is true, and when you 

try to follow the funding for some Chinese acquisitions, it will lead 

you to some very strange places. So money laundering is a problem. 

There is a desire in China to move money out of the country, 

which may be kind of a vote of confidence. So we see a very large 

outflow into many, many sectors, most of which do not cause strategic concern. It is difficult to track, and that is one of the challenges for the Committee, is tracking the money back to its source 

to see if it is the Chinese State. 

Senator PERDUE. Mr. Wolf, with regard to the specific China investments that are of concern, obviously one reason we have been 

dominant militarily is the size of our investment, but China is now 

approaching that. So the technological innovation that we have 

benefited from, from private sector and military and academic research has always kind of kept us at the forefront. One of the 

things I am concerned about is that China, not only in the United 

States, but their investment in infrastructure in Africa and other 

parts of the world, they are leading toward investments of nextgeneration technologies, and that is really concerning, things like 

artificial intelligence, autonomous vehicles, augmented reality, 

blockchain, robotics. They are recruiting actively kids that are 

graduating from our colleges, our PhDs, our Master’s candidates, 

our scientists, our technicians, our engineers. And there is an immigration issue. I do not have time to get into that today with you 

guys, but what I would like to know is: How does CFIUS interact 

with the military, commerce players, and so forth to make sure we 

find the right balance of this foreign direct investment, which, as 

Mr. Lowery talks about, is very critical? When you have a $20 trillion debt, you better hope you can attract FDI. And we are the 

largest recipient of FDI in the world. Thank God. With the size of 

our economy, we need to keep that up. But there has to be a balance, and I am looking for some input as to things we need to be 

aware of as we consider this in any potential legislation. 

Mr. WOLF. Sure, happy to. With respect to the first topic that 

you asked Mr. Lewis about, the answer, frankly, is resources and 

aggressive use of intelligence resources to be able to do the deep 

digging and the deep dives into transactions. That was a critical 

part of every CFIUS case that we reviewed. It is what was behind 

the fund, what was behind the company, who were the parties behind it. And that is not always obvious. And that is just a pure 

function of manpower and attention and will to do the deep dive. 

And that is critical to the outcome. 

With respect to working with the military, the technical experts 

at the Defense Department were a critical part of the CFIUS and 

the export control process in terms of identifying the types of technology that were of concern. 

With respect to your concern about investment around the world, 

that is why working with our allies in the multilateral export control regimes is key, because the U.S. is not the only target for the 

very anxieties that you raised. And the existing export control system is precisely defined to do that. 

With respect to the topics at issue, it goes back to my main point. 

It requires the resources, the manpower, and the will to focus not 

just on technologies of yesterday or what is being used now, but 

15 

creative thinking on all the topics that you just listed to see if there 

is a way in which to identify the sweet spot of that part of the technology that is of concern without otherwise trying to interfere or 

get in the way of commercial development. 

Senator PERDUE. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman. And I thank all 

of you for your testimony here this morning. 

I was recently on a bipartisan codel to China, Japan, and South 

Korea, really focused on the North Korea situation. But while we 

were in China, we heard from a number of American businesses 

complaining a lot about the lack of reciprocity generally, especially 

with respect to Chinese curbs that bar American financial companies access, and that has been referenced here this morning. And 

while I agree that CFIUS is not the tool we use to respond to reciprocity issues, I do think it is important that we continue to push 

China really hard on that front. 

Let me ask you, Mr. Lewis, you talked about how China—and, 

look, we all agree that, overall, foreign direct investment has benefited the United States, but we want to make sure that it does not 

hurt us in our strategic interests, especially national security. The 

question is how we may broaden that to look at some key national 

economic security issues. 

You mentioned China buying up small firms in the Silicon Valley 

area, and my question for all of you is: When you have one big purchase, you know, you may very clearly be able to decide this is 

going to have an impact on national security or not. But do we 

have the tools to look at sort of a pattern of a purchase and say, 

hey, this one in and of itself, this purchase may not trigger a national security problem. But China has the ability, you know, it is 

not like a bunch of free market companies that are out there purchasing. They have got a strategy, you know, driven by the Government. Do we have the capacity to say, OK, this one by itself may 

not be so bad but, you know, if you go down the line, one, two, 

three, four, then you are talking about a serious national security 

issue? 

Mr. LEWIS. I will start. Thank you, Senator. That is a great question. One thing that has been touched on a couple times in all of 

our remarks so far and in the questions is the question of intelligence support for CFIUS. And to the extent this can be discussed 

in an open hearing, it would be beneficial if there were additional 

resources given to the National Intelligence Council. 

The U.S. relies on two sources of intelligence to track both money 

laundering and the kind of activities you are talking about: human 

intelligence, which faces grave problems in China, as you know; 

and signals intelligence, which also is pressed considerably by the 

Chinese. So we need to think of how to make resources and collection priorities evolve to reflect these kind of economic problems you 

have raised. 

We do not have the ability yet to adequately track these larger 

patterns, so CFIUS tends to be a transactional focus, and it would 

be beneficial if the NIC or some other body had the ability, the 

wherewithal to supply things on long-term trends in semiconducVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
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tors, artificial intelligence, cloud computing, hypersonic strikes. 

There is a whole range of things, so, yes, better intelligence support, better tracking trends would be valuable. 

Senator VAN HOLLEN. All right. I would be interested in any 

other comments, but also I would like to throw in there the greenfields issue. I take it from your testimony, Mr. Lewis, that you 

think we should expand the jurisdiction, the authorities here to include greenfields. Is that right? 

Mr. LEWIS. Yes. 

Senator VAN HOLLEN. And as the others answer that earlier 

question, if you could also respond to that issue. 

Mr. WOLF. Sure. The issue with respect to trends was very important to me when I was in the Government, and the first direct 

answer that is not really a CFIUS issue is just a straight up law 

enforcement effort. If there are a particular series of individual acquisitions that are all on their face benign but in the aggregate are 

used for an ulterior motive such as creating front companies in 

order to hide the ultimate objective, then using the existing domestic law enforcement tools of getting to that motive and pursuing intellectual property theft, espionage under existing statutes is absolutely critical. And that can be done without CFIUS. 

Within the CFIUS process, it is important that in the intelligence 

estimate that is provided with respect to an intelligence—or with 

respect to a particular case, an answer given as to whether this is 

an individual transaction or part of a trend or pattern, and that is 

absolutely something that we reviewed, and I would want to make 

sure that the authority exists to be able to block or deny or mitigate a case if the information exists that this is only one part of 

a whole. 

So your question and your concern about the trend is absolutely 

valid and something that we spent a significant amount of time 

looking into. 

Mr. LOWERY. The only thing I was going to add is that the trend 

is something that CFIUS does look at. In fact, actually in their annual report to Congress, CFIUS actually does try to point out here 

is where a number of transactions have actually happened, and we 

are now concerned that a specific country—and it would be a classified report, so Congress could see it; I could not see it—is able— 

is going after a certain technology. So this is done with CFIUS, but 

it is usually—Treasury leads the effort, but really it is the intelligence community and the Commerce Department that does a lot 

of the heavy work, as well as the Treasury Department. So there 

is a way of trying to get at that through CFIUS, though I think 

Mr. Lewis makes a good point about there are other things that 

need to go beyond that. 

Senator VAN HOLLEN. Thank you. I look forward to following up 

with all of you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. This has been an 

interesting discussion, and it leads me back into another responsibility. We all have multiple committees up here. I serve on the 

Armed Services Committee, and as such, I also serve as Chair of 

17 

the Subcommittee on Cybersecurity. One of my concerns about the 

increased foreign investment in the United States is what kind of 

electronic and cyber-vulnerabilities that increased foreign investment poses for our country. For example, there is already significant concern in Congress and the Administration that countries 

like China are acquiring intellectual property from American companies. I am concerned that foreign investment in our country 

would give potentially malicious actors a back door into the United 

States and leave us perhaps more vulnerable to IP theft or 

cyberattack. 

My question for you is: Can you discuss the nexus between cybersecurity and foreign direct investment? And is the CFIUS review 

process robust enough to account for vulnerabilities in this area? 

Or is it simply one part of a chain, and how does it fit into that 

chain with other investigations as well? Mr. Lewis. 

Mr. LEWIS. Thank you, Senator. That is a major concern, so I am 

glad you raised it. Let me just talk about the potential risk to cybersecurity. 

You have supply chain risk, which is that the components or the 

software that goes into critical infrastructure defense products may 

be contaminated at the source, creating cyber-risk for the U.S., 

military risk. This is no longer a hypothetical concern, so there 

have been some incidents. 

You have a critical infrastructure risk that the CFIUS Committee has been good at blocking acquisitions of critical infrastructure or in mitigating potential risk. So when you think about, say, 

Alcatel–Lucent, the conditions that the Committee imposed were 

sufficient to mitigate the risk. And following up on these mitigation 

agreements is an important part—an important improvement I 

have seen in the last few years with CFIUS. 

You have real estate concerns. That always sounds funny, but we 

know about the potential of the wind farm to be next to a Navy 

research facility. You have to think about real estate now. Ten 

years ago, real estate was not on the CFIUS agenda. 

And, finally, a new one is data. The access to huge swaths of 

Americans’ personal data by a foreign competitor could create intelligence risk. 

So I think there is a whole area where we need to think about 

how an acquisition will affect or increase the risk to cybersecurity. 

Senator ROUNDS. Any other thoughts, gentlemen? 

Mr. WOLF. Those are excellent points. Just to emphasize a significant number of the cases that we have reviewed over the years 

involved situations where the U.S. Government or its contractors 

or suppliers were consumers of critical infrastructure, telecommunications equipment, computers, et cetera. And to the extent 

that there was a possibility of foreign control over the content of 

the components or malicious software being installed surreptitiously, that was factored into our decision to either propose a 

block or aggressive mitigation, such as a requirement to spin off 

the U.S. side of the business for a certain number of years so that 

the U.S. Government, Defense and other departments, could find 

other alternative sources of supplies that were domestic. So that is 

a critical part of the CFIUS review. 

18 

The other part of it, frankly, with or without an individual transaction, is the regular cybersecurity work that the Government and 

its contractors do in terms of knowing who their suppliers are of 

their components and what the source of the information is that 

they are receiving. And that is in addition and separate to CFIUS, 

and, again, unrelated to particular transactions. But it was one of 

the most significant, most discussed, most critical elements of the 

cases that we saw in the last several years. It is a key point. 

Mr. LOWERY. The only thing I would add, just as Mr. Wolf and 

Mr. Lewis said, CFIUS has done this part extremely well, is my 

view. But some of the aspects go beyond CFIUS, and that is where 

there are other tools within the Government that we try to work 

on, but remember, CFIUS has on its Committee the Defense Department, Homeland Security, Justice Department, the intelligence 

services across the Government, which include the FBI, the CIA, 

the DIA, the Treasury Department’s intelligence services. So all of 

these folks are working together to try to see whether or not there 

is an actual risk because of a purchase of a U.S. business. 

Senator ROUNDS. Do you find that the focus, which right now is 

on the entity itself that may very well want to make a purchase 

within the United States, is there adequate focus also on the product itself or the different products, whether it be data, whether it 

be a specific product that is vital within another part of the chain? 

Do we have the ability right now and are we focused enough on 

both—not just the entity itself but the different products that may 

very well be the issue of concern? 

Mr. LOWERY. My view is that is what CFIUS is at least attempting to do the whole time, and I think that they have done pretty 

well. So they look at the threat, which is the entity that is purchasing. They look at the vulnerability, the product that they are 

actually purchasing. What is that asset? Does it have any nexus to 

national security or not? And then trying to figure out is it OK for 

those two things, the threat and the vulnerability, to come together? Or do you need to mitigate it or do you need to block it? 

That is what CFIUS is trying to do the whole time. 

Senator ROUNDS. Yes, sir? 

Mr. LEWIS. Thank you. The two agencies that provide the support to CFIUS in this regard are both the intelligence community 

and DOD. So we really rely on them to be able to say when a particular technology or product creates cybersecurity risk or any 

other kind of risk. 

Senator ROUNDS. Thank you. My time has expired. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. And thank you to 

our witnesses for being here today. 

CFIUS, the Committee on Foreign Investment in the United 

States, is responsible for reviewing the acquisitions by foreign companies to ensure that they do not threaten U.S. national security. 

And, unfortunately, this applies only to certain transactions, and 

our adversaries know that. 

So according to news reports, an internal Pentagon report issued 

last year found that China was making significant targeted investVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
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ments in cutting-edge American startups with expertise in areas 

like autonomous vehicles, artificial intelligence, robotics. These 

types of investments provide access to potentially sensitive technology, but they do not trigger CFIUS review. 

The Pentagon is worried—and I think they should be worried— 

about this. In June, Secretary Mattis told the Armed Services Committee he thought CFIUS ‘‘needs to be updated to deal with today’s 

situation.’’ So I wanted to start by asking you, Mr. Wolf, are you 

concerned about the national security impacts of these early stage 

investments in sensitive technology? 

Mr. WOLF. Yes, I am, and that is why I would put a particular 

emphasis on identifying what the technologies of concern are, and 

in addition to the CFIUS authorities, making sure that they are 

adequately described within the existing export control system. 

Senator WARREN. Actually, can you just say a bit more about 

what you would do by way of response? Can you expand on that 

a little bit? 

Mr. WOLF. Absolutely. So instead of waiting for a transaction to 

occur, however it is defined, whether it is a joint venture or a covered transaction or a greenfield investment, the Department of Defense, working with its colleagues in State, Energy, and Commerce, 

should identify the key sweet spot of those types of technologies 

that you described that are of national security concern and make 

sure that our existing export control rules govern them and, to the 

extent possible, work with our allies so that their regulations control the same types of technologies. That magnifies the benefit of 

the effort. 

Senator WARREN. Actually, that is very helpful. You know, as 

you know, a lot of today’s technologies look very different from 

what the world looked like back when we built CFIUS originally. 

And the defense technologies of tomorrow are going to look even 

more different. So we need an approach to it that keeps changing, 

iterating over time. And I think that means it is time to expand 

CFIUS’s mandate. 

But before we do that, we are going to need to deal with the fact 

that CFIUS has serious staffing and resource problems already. In 

recent years the number of cases coming before the Committee has 

skyrocketed. Both current and former Government officials have 

argued that CFIUS must be strengthened, but so far the opposite 

seems to be happening. President Trump has failed to appoint certain key positions in the CFIUS process, including the Director of 

the Office of Science and Technology Policy, which is kind of important here. And the President’s budget proposes significant cuts at 

some of the CFIUS agencies, including a 16-percent cut to the 

Commerce Department and a 32-percent cut to the State Department. 

So could I ask, what impact do budget cuts have on the positions 

at non-DOD CFIUS agencies? What impact will this have on the 

work of the Committee? 

Mr. WOLF. It is potentially devastating. It is all a function of resources and manpower and attention spent to complex situations, 

complex technologies, and difficult transactions. And you need lots 

of people or you need more people than are there now in order to 

address all the issues that you identified. 

20 

Senator WARREN. Well, thank you. I think this is urgent. It is 

about national security. We do not want to wake up one day and 

discover that our adversaries have components of our national security technology because Congress and the Administration were 

asleep at the switch on this. We need to modernize this process, 

but we also need to make sure it is fully staffed. 

Mr. WOLF. I agree. 

Senator WARREN. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. 

Tell me, gentlemen, what triggers CFIUS review? 

Mr. LOWERY. So CFIUS is technically a voluntary process, so if 

you are in an M&A transaction and it is in the national security 

realm and that realm is not defined, but there are a number of factors in the law that suggest what those national security issues 

are. So M&A transactions are voluntarily filing transactions. That 

is how you trigger a review. 

It is important to note that if the Government or CFIUS sees 

that a transaction has not been filed, they do have the power to 

compel a filing, if need be. 

Senator KENNEDY. What should trigger a review? How would you 

change it? 

Mr. LOWERY. The only way I would change it—so I think that 

that actually is a good approach, because there are lots of transactions that happen—in fact, the bulk of the cross-border mergers 

and acquisitions that happen are in areas that have nothing to do 

with national security, and so we should not be doing national security reviews of them because we just waste resources by doing 

that. 

But I think that it should be explored at least. One idea is—so 

right now CFIUS does high, high scrutiny of State-owned companies when they make a purchase in the United States. I think that 

it might be worthwhile at least exploring the idea of should those 

filings be mandatory as opposed to voluntary. And then you could 

through the regulatory process try to narrow that scope down because there could be State-owned cases or State-controlled entities 

that buy something, again, that has nothing to do with national security. So I think that is worth something to explore. That is right 

now not in legislation, so you would have to change the legislation 

for that. 

Mr. WOLF. One additional idea would be with respect to acquisitions or any kind of an arrangement next to a sensitive facility. 

Right now, the colocation issue that I described only gets triggered 

if it is a covered transaction as defined in the legislation. And I do 

not have an exact answer for you, but to the extent that there is 

a joint venture or a greenfield investment or any other kind of investment near a facility, there should be a Federal way in which 

to limit the access, proximity next to a sensitive facility by a foreign entity. 

Mr. LEWIS. And perhaps a final point is that Wall Street and the 

investment community knows in much greater detail the transactions that are underway or being contemplated, and particularly 

if it is a publicly traded transaction, we might have a publicly tradVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
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ed company, we will get some regulatory insight. But if it is not 

publicly traded, we may miss it. So finding ways to better take advantage of the knowledge on Wall Street and to look for private 

deals would be helpful. 

Senator KENNEDY. Well, what if it is not a merger and acquisition? I think this is Senator Warren’s point. Let us suppose you 

have a startup developing a pharmaceutical drug, and someone in 

China wants to put in $20 million for Phase I trials. Is that something we ought to look at? 

Mr. WOLF. Well, in general, that type of investment should be 

welcome, and we want to make sure that the U.S. remains welcoming to that. And the key goes back to the points that I was raising earlier, which is: Is there something about that investment that 

creates a national security issues or is it an economic issue better 

left to bilateral deals or trade remedies outside of CFIUS? 

So in that type of fact pattern, I would think about it, not waiting for a transaction, however you define it, whether covered or 

joint venture or just a flow of money, but identifying the information that is of concern and trying to address the information in any 

setting. 

Senator KENNEDY. But how do you know? Let us suppose the 

pharmaceutical drug is a vaccine for HIV, and it appears to work, 

so the Chinese just keep pouring money into it, and they get control of the company, and they take it back home, and they keep the 

vaccine and say, ‘‘We are not going to share it with America.’’ 

Mr. WOLF. Then that becomes economic and other issues. Then 

it really is a function of what our intelligence agencies can tell us 

about the intentions of the parties engaged in particular transactions. 

Senator KENNEDY. They are not clairvoyant, though. They cannot 

tell the future. 

Mr. WOLF. No, they cannot. And we can do what we can do, but 

there are a lot of very clever people who can think aggressively and 

prospectively about the types of technologies that, if cutoff or no 

longer able to be developed in the U.S., would create national security threats. And that should be the emphasis of the thinking. 

Senator KENNEDY. Let me ask one other question quickly, gentlemen, and any of you can jump in. When, if ever, should CFIUS be 

used as a sword with respect to reciprocity? I do not mean to pick 

on the Chinese. They are not the only ones. But they are beating 

our brains out. They are stealing all our technology. It is a condition of doing business there. 

Mr. LOWERY. So my own view on—should CFIUS be used as a 

reciprocity tool? My own view is no, and I have a few reasons for 

this. One is that if there is an investment that makes sense that 

is coming into this country, but American firms would not be allowed to invest in China, why should we penalize the company that 

is receiving that investment, when it is not a national security 

issue whatsoever, just because maybe some of their competitors 

could not go out and buy something in China? I think that, in essence, we would be importing the policies of another country— 

China—as opposed to using our own—the policies of what we want 

in this country, and the policies that we want in this country are 

to welcome foreign investment. So I do not think that CFIUS is the 

22 

way to get at reciprocity. I think there are trade tools that we can 

be using, and that is a much better way of approaching the problem. 

Mr. LEWIS. I disagree with that a little bit. I think we need a 

comprehensive strategy for approaching China on these trade 

issues. They have gotten away with things for decades, and you 

need to approach them thinking about CFIUS, foreign investment, 

export controls, trade provisions. You have to have the full package. And as a negotiator, you may not want to take anything off 

the table until you see if it is worth doing. So go in with the whole 

deck. See what they offer you. 

Senator KENNEDY. Gentlemen, I am out of time. Thank you. 

Senator SCOTT [presiding]. Senator Donnelly. 

Senator DONNELLY. Thank you. And thanks to all of the witnesses. 

My home State of Indiana is home to a big portion of the American steel industry, and it is an integral part of our national defense manufacturing base. Increased levels of foreign steel imports, 

particularly from China, and a lot of it is with dumping, illegal 

Government subsidies, it has weakened our domestic steel industry, and it has provided foreign companies greater access to our 

markets. So this is to all of you. When you review transactions, 

does CFIUS consider foreign industrial policy that weakens U.S. 

industries vital to defense manufacturing and critical infrastructure? 

Mr. LOWERY. So CFIUS would look at—if an investment, not an 

export but an investment into a company in Indiana or any company was actually harming maybe the supply chain for the Defense 

Department on steel or could potentially—by getting access to specific technology, could actually harm the United States’ national interest, that is what CFIUS would look at. CFIUS would not look 

at whether or not a country is dumping. That is something that 

would be done through trade remedies. 

Mr. WOLF. He said it very well. 

Senator DONNELLY. OK. Let me ask you this: Are there U.S. industries important to our national defense or critical infrastructure 

that have been particularly challenged by aggressive foreign trade 

policies? As you look at the national defense area, obviously one of 

concern is steel. What are other ones? And what do you see as the 

biggest challenges they face? I know that is a little bit to the side 

of what we are doing right now. 

Mr. WOLF. Sure. Within the CFIUS context, the evidence shows 

based on public filings of cases during the Obama administration 

and now that the semiconductor industry is obviously the hottest 

topic with respect to the issue that you raised. To the extent that 

it is a trade remedy issue, that is not the role nor does CFIUS have 

competence or expertise to be able to focus on that. It is focused 

just on the national security implications. But, you know, by the 

evidence, that plus issues involving foundational technologies for 

aerospace have been hot topics, absolutely. 

Mr. LEWIS. Generally, anything that you could label as high tech 

is a concern, and so avionics, not only semiconductors but the 

broad information technology industry, including robotics and artificial intelligence, these are all places where we have seen efforts 

23 

by China and a few others to acquire U.S. know-how in companies 

in ways that would harm our national security. 

Senator DONNELLY. Currently, CFIUS reviews foreign direct investment transactions for national security implications. Do you believe CFIUS or a process modeled off it should also review the economic considerations of foreign investments to see that the American economy actually benefits in any way, shape, or form from the 

transaction? 

Mr. LOWERY. So I think that there is a portion of that that 

CFIUS does, but not a big portion, and that is basically if there is 

a mitigation agreement—the Department of Labor actually sits as 

an ex officio member of CFIUS to make sure that labor issues are 

looked at carefully. But in terms of do I think that CFIUS should 

expand its mandate to go beyond national security to kind of an 

economic benefits test, a benefits-cost test, I do not. But that is because I think that we are welcoming foreign investment and we 

have to be very careful about how much we are dictating to companies about how they handle things. As long as they treat their employees well and follow the laws of the land, then that is not something I think CFIUS should be looking at. 

Mr. WOLF. I agree. I believe that CFIUS should continue to be 

narrowly focused on national security implications. The implications of expanding its scope to pure economic considerations runs 

the risk of politicization and overall harming the U.S. as a destination for foreign direct investment. To the extent that there are economic harms with respect to investment, there is an entire body of 

law dealing with trade remedies that is much more tailored, much 

more specific, much more robust to address that. CFIUS does not 

have the history, the expertise, the personalities to be able to address it, even if the authority were to expand. 

Mr. LEWIS. The dilemma of what you have raised is a serious 

problem, and so we do need to address it. But CFIUS may not be 

the right tool. There are other tools that we either have or that we 

need to deal with this because it is something that increasingly is 

affecting the American working population. 

Senator DONNELLY. You talked a little bit about the stretches on 

the CFIUS tool as it is, as the volume increases and complexity of 

transactions continues to increase. What additional resources, if 

any, such as personnel and information-sharing technology do you 

think CFIUS needs to process a higher volume of transactions and 

to be able to make sure they are covering what they need to do? 

Mr. WOLF. A significant number of more people involved in handling the mitigation agreements. After a deal is reached, often 

there is a condition of the sale that requires a lot of manpower, a 

lot of oversight. They last for a very long time, and there are more 

every day. And so the number of people that need to be focusing 

on that needs to be substantially higher. 

Similarly, the number of people who spend their days reviewing 

transactions, public and otherwise, to see if any of them warrant 

being pulled before CFIUS for consideration, that is a straight up 

issue of manpower and resources in reviewing data. Those are the 

two biggest resource constraints right now. 

Mr. LOWERY. I would only add one, which is—I agree totally, but 

it is important to get some of our political officials confirmed, and 

24 

the reason is because—look, the CFIUS people doing their analysis 

do an excellent job. But they are civil servants. These transactions 

by nature involve a lot of risk. There is risk. And so taking that 

risk is something that Senate-confirmed people are paid to do, to 

be frank. They are the ones that have to come in front of this Committee and answer to what decisions are made. It is much harder 

for the civil servants, who are doing an excellent job, to do that, 

and so sometimes having the resources to do mitigation agreements 

so that you can actually welcome that foreign investment and protect national security, but you then also need some of your political 

appointees who can provide air cover and make the tough calls. 

Mr. LEWIS. One agency we have not mentioned yet—and we have 

mentioned a lot—is the Defense—— 

Senator DONNELLY. Mr. Lewis, I apologize. I am out of time. 

Mr. LEWIS. Just let me say DSS, they are the ones who do the 

mitigation agreements. Give them a little more help. 

Senator DONNELLY. OK. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO [presiding]. Thank you, Senator Donnelly. 

Senator DONNELLY. See, I was doing your work for you there. 

Chairman CRAPO. I appreciate it. 

Senator Scott. 

Senator SCOTT. Thank you very much. Thank you to the panel 

for being here this morning as well. 

There is no question that South Carolina benefits from FDI. In 

the past 5 years, our State’s economic activity based on FDI has 

increased by 30 percent. Over 130,000 South Carolinians are employed as a result of global investment. 

That said, it is clear to me that bad actors are taking advantage 

of our system of trade. Senator Cornyn and others have pointed to 

gaps in CFIUS around the purchase of foundational technologies of 

AI and biotech. These gaps have allowed the Chinese to strategically invest in key sectors of our economy while stealing our intellectual property and eroding our military superiority. 

I will ask the panel and start with Mr. Lewis: What techniques 

are the Chinese using to circumvent CFIUS? The second question 

is: How can Congress fill these gaps in our protections? 

Mr. LEWIS. So I think we have talked a lot about the greenfield 

problem, which is that—this has come up a couple times. Our regulations are post facto. So if you have not invented the technology, 

it is not going to be caught. And so how do we deal with that? And 

the Chinese are looking to buy brains, right? And it is very hard 

to control brains, especially if they are in the country. So we need 

to think about how we track, monitor, and occasionally—not always 

but occasionally, because of the benefits you cited, occasionally 

block transactions where China is making bets in the future technologies. 

Mr. WOLF. On the intellectual property theft issue, that is much 

more of a law enforcement issue and attention and resources of the 

Justice Department to investigating whether it is a sensitive technology or otherwise that is being stolen or exfiltrated. So CFIUS 

may not be the best tool because if there is going to be IP theft, 

there is going to be IP theft with or without a transaction, however 

you define it, so focus the resources on the theft of the technology 

25 

in the traditional way, and that would be my suggestion for an emphasis on that question. 

Senator SCOTT. Anything to add? 

Mr. LOWERY. The only thing I was going to add is that if the 

technology is in an area that is concerning potentially for export 

controls, that is when some of Mr. Wolf’s comments from earlier 

come into play, I think, where looking through what powers and 

abilities through the flexibilities of our export control laws as opposed to CFIUS, which is there to—if there is an investment actually in a company or in a business that actually gets some of those 

assets that could be a national security concern, that is when 

CFIUS should play its role. 

Senator SCOTT. Thank you. 

Considering the topic of today’s discussion, I want to point something out that I think is very important. A majority of Chinese 

deals make it through our approval process. Yet American companies are not given that same courtesy in China. In fact, China dramatically restricts our financial services sector’s presence in its 

country. That does not seem fair to me, because it is not. 

That is not a level playing field that our President is advocating 

on behalf of. I was joined by Chairman Crapo—thank you very 

much—and 14 other Senators in asking the Administration to focus 

its efforts on the lack of reciprocity. 

Mr. Lowery, can you discuss the hurdles that American financial 

services firms face in China? 

Mr. LOWERY. Yes, this is something I had to work on when I was 

in Government. So it has been a problem for a while. I was glad 

to see the letter from the 14 Senators. I wish it was 100 Senators, 

because I think that it is a problem, which is that U.S. firms cannot actually—there are equity caps in insurance companies, there 

are equity caps for investment banks, there are equity caps for 

banks. The way that we have made progress on that in the past 

has usually been through dialogue, and so I recall back in 2006, 

2007, we were running into a lot of problems. Through a dialogue 

that Secretary of the Treasury Paulson set up at the time, we were 

able to make progress—not as much as we should have. Under the 

Obama administration, they also had a dialogue which also made 

even further progress on getting these equity caps raised. 

I think that that is something that the Trump administration 

should work on, my guess is they are probably starting to work on. 

But I think that that is a way to get at it. But your point is exactly 

right. There is a problem when in an area such as financial services where it makes very little sense for them to have equity caps 

that China still has those. But I think that through the force of our 

will and diplomacy, that is the best way to get at that problem. 

Senator SCOTT. Thank you very much, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chairman. Gentlemen, thank 

you for being here. 

China, I think, constitutes about 1.6 percent of our total inward 

foreign direct investment, so relatively small scale. A lot of what 

we are talking about here are things that they have done that are 

really outside of this that need to be dealt with, and I think probVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
26 

ably dealt with in a way that is perhaps outside of CFIUS. One 

thing, Mr. Wolf and Mr. Lowery, you both have said is that trying 

to keep the scope tight—I could be concerned with CFIUS scope 

creep moving into other areas that we probably should consider, 

but not necessarily within the lanes of CFIUS. 

Mr. Lewis, I want to talk about one of those. As China’s economy 

emerges and as it matures and as they try to build infrastructure 

for things that are not related to national defense—you know, pick 

an area, health care, insurance, whatever—they are likely to look 

at Nations that have mature platforms, the technology platforms 

that they would like to use to accelerate, you know, really actually 

rounding out an economy that is still growing. And if they do that, 

if they are to acquire somebody—you made me think about this because of a comment you made about maybe an acquisition would 

involve a company that has a significant amount of data on U.S. 

citizens, say health care information. How do we strike the balance 

between allowing that investment to occur, which may be needed 

by a technology provider that is in a mature market, to let them 

leverage their technology for purposes that are purely, you know, 

in this case let us say for the Chinese population, how do you do 

that in a way that does not create an impediment for companies 

that have data that we clearly want to protect but not necessarily 

disadvantage them as having a large platform and growth opportunity in a country like China? 

Mr. LEWIS. Thank you. Great question. China has gotten sort of 

a pass on the trade rules ever since they joined the WTO, and their 

argument was, ‘‘Well, you know, we are small and we are growing 

and we are poor, so it should not apply to us.’’ And that just does 

not work anymore. So part of it is we need to think about how do 

we get China to live up to its commitments under international 

trade. I am optimistic that they can do that. This Administration 

appears to be making an effort. That is good. But it will take a long 

time because they get so much benefit out of it. 

In the near term and on specific cases, I think this is one of the 

strengths of the CFIUS process, is the ability to impose mitigation 

agreements on the acquirer that limit the risk, and those have 

been relatively successful. There is this issue of tracking them 

afterwards, and that is where—— 

Senator TILLIS. On that, I have one other question I want to direct specifically toward CFIUS. But I think that so much of what 

we need to do to get China to a good place in behavior is probably 

not something that would come through CFIUS but would come 

through trade agreements, a number of other devices that we can 

use to actually incent them to exhibit good behavior. 

Now, with respect to CFIUS, I have had this discussion in Senate Armed Services on cyber. You know, what we seem to be focused on are the—you know, it is an artificial intelligence application, maybe it is next-generation communications technology, 

biotech. But what about the risk of focusing on those big rocks and 

missing some of the little rocks that if China had significant investment in could be disruptive? I always use the example of if I were 

trying to think about a way to disrupt the U.S. economy or the 

DOD, the DOD would be the last place I would attack. It would be 

27 

their supply chain. And it would be to the most vulnerable part of 

their supply chain, and I am talking about a cyberthreat. 

Well, similarly, I would make investments in companies that 

could ultimately be disrupted. We think about the end product. I 

think about the supply chain that gets to that end product. So to 

what extent does CFIUS take into account maybe seemingly innocuous minor investments in companies and technologies that ultimately play a very important role in that supply chain link to these 

other highly important technologies that we focus on? 

Mr. LOWERY. I think that the answer is that is exactly what 

CFIUS is trying to look at, so—— 

Senator TILLIS. How well do you think we are doing it for the 

fully supply chain? 

Mr. LOWERY. I think that CFIUS does a very good job of looking 

at companies that are part of the supply chain. The reason is because the Defense Department, some of the officials there—not just 

the Defense Department. It could be Homeland Security or the Justice Department. They know kind of where the supply chain exists, 

because actually some of the people that work on CFIUS are some 

of their procurement experts. And so they actually look at the supply chain and think—there are transactions that I know CFIUS 

has looked at which were tiny transactions, and no one would— 

they would never make it into the newspapers. But CFIUS actually 

goes out and says, ‘‘We need to look at that because that is a small 

part of our supply.’’ And that is something that—if it is a purchaser 

that is a threat to our national security, that may make it—either 

block it, get it to abandon the transaction, or as Mr. Lewis said, 

come up with a mitigation agreement so that you might wall them 

off from certain parts of that technology. 

Senator TILLIS. And, Mr. Chair, since I am the last one, I want 

to ask just one more question, if I may. To what extent does 

CFIUS—let us say that, again, with China only being 1.6 percent 

of the internal FDI right now, but they have great relationships 

and growing relationships with many of our allies that constitute 

a significant portion of that. To what extent is CFIUS instructive 

by the nature of the relationships that China has with other—let 

us say a company domiciled in Australia that is making a significant investment in a technology that would be subject to immediately flag if it comes from China? Is that all instructive to the 

CFIUS process. 

Mr. WOLF. It is, and it should be more so. One of the changes 

I would recommend considering that we often discussed is sometimes we were limited in our ability because of either classified information or proprietary information issues from sharing concerns 

we had with allies and getting information from them with respect 

to similar concerns by similar investments in their countries. And 

a serious topic, I would think, for legislative consideration would be 

expanding the ability of CFIUS to share information, both commercial as well as intelligence, with allies for exactly the purpose that 

you just described. 

Mr. LEWIS. That is an important area for reinforcement because 

when you look now at our NATO allies, at Australia, at Japan, 

they are all concerned about Chinese investment. They are all looking to the U.S. to provide them at least an example on how to reguVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
28 

late it, and CFIUS is an example. And they are looking for the kind 

of information and intelligence support that Mr. Wolf was discussing. 

Senator TILLIS. Thank you all. 

Thank you, Mr. Chair. 

Chairman CRAPO. Thank you, and, Senator Tillis, I will take one 

more question also. 

This will be the final question, and it is for the whole panel, if 

you have a response to it. In your opinion, are there any instances 

where a gap in CFIUS authority either could have or did result in 

a threat to U.S. national security? And if so, please discuss the 

CFIUS shortcomings that led to such a breach. 

Mr. LEWIS. So I believe the thing that we would all want to look 

at is the Defense Department report that talked about—and I hate 

to say it over and over again—greenfield investments in Silicon 

Valley, looking at advanced information technologies for robotics 

and artificial intelligence. The Chinese have been able to acquire 

technology in a way that circumvented the process. 

Mr. WOLF. So in my 7 years, I am confident that there were no 

unresolved national security risks with any case that we addressed. 

I would go back to the point I made earlier about activities outside 

of CFIUS authority with respect to colocation near sensitive military facilities. And I do not have visibility into that, but it would 

be something worthy of further analysis along the lines of your 

question. 

Chairman CRAPO. Thank you. 

Mr. Lowery. 

Mr. LOWERY. I am unaware of anything, any problem that has 

existed. I think the DIUx report does some excellent analysis. I 

think that some of their policy conclusions need more work. 

Chairman CRAPO. All right. Thank you. And, again, let me thank 

each of you for your written testimony and for being here and responding to the Senators today. This is a very critical issue, and 

there is a significant amount of interest and activity here on the 

Committee and outside the Committee here in Congress, and we 

intend to explore it, and we want to get it right. So we appreciate 

your help. Thank you for being here today. 

This Committee is adjourned. 

I should have said for the record that questions from Senators 

may come to you, and we urge you to respond to them promptly, 

and the Senators have until the 21st to submit those questions. 

[Whereupon, at 11:28 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

29 

1 United Nations Conference on Trade and Development (UNCTAD) World Investment Report 

2017. 2To be precise, the President delegated the investigative functions to CFIUS by Executive 

Order. 

PREPARED STATEMENT OF CLAY LOWERY 

MANAGING DIRECTOR, ROCK CREEK GLOBAL ADVISORS, AND FORMER ASSISTANT

SECRETARY FOR INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY

SEPTEMBER 14, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, I 

would like thank you for the opportunity to testify on Examining the Committee on 

Foreign Investment in the United States (CFIUS). My name is Clay Lowery and I 

am currently Managing Director of Rock Creek Global Advisors, a consulting firm 

that advises clients on international economic and financial policy matters. My testimony should be considered my own views alone. 

I served in the U.S. Government from 1994 to 2009, principally with the Treasury 

Department, although I also had a stint at the National Security Council. From 

2005 to 2009, I served as the Assistant Secretary of International Affairs for the 

Treasury Department, and one of my primary responsibilities was overseeing 

CFIUS during the last time substantial CFIUS reform occurred. 

I am pleased to be testifying alongside Kevin Wolf and Jim Lewis, both of whom 

I respect and of whose views and expertise I think highly. 

In my testimony, I will discuss briefly (i) the nature of CFIUS and its process, 

(ii) its performance, and (iii) some thoughts on CFIUS reform. 

CFIUS plays a critical role in protecting U.S. national security. I recognize there 

are gaps in the current system that must be addressed, but I would also counsel 

that CFIUS’s objective is to protect legitimate national security interests while promoting foreign investment, and thus CFIUS should not be used as an economic, protectionist, or overly broad tool. 

The most important aspect of CFIUS is to understand what it is trying to achieve: 

ensure national security while promoting foreign investment. These words come directly from the legislation that created CFIUS and has guided it for the last 30 

years. When experts raise concerns about national security issues that may have recently become more prominent and recommend that the best—and sometimes only— 

tool to address those concerns is CFIUS, my view is to evaluate those recommendations against what CFIUS was designed to achieve. 

Roughly 7 million American workers, or about 6 percent of total U.S. private-sector workers, are employed directly through foreign direct investment (FDI). These 

jobs are higher paying: providing average compensation per worker 24 percent higher than U.S. private-sector wages. These jobs are disproportionally in the manufacturing sector: 20 percent of all manufacturing employment is due to FDI. And, according to a recent Reuters analysis—two-thirds of the manufacturing jobs created 

from 2010 to 2014 can be attributed to foreign direct investment. 

In short, FDI is in the national interest of the United States. However, we should 

not be complacent. While the U.S. remains the largest destination for FDI, our 

share of attracting such investment has fallen about 40 percent in the past 16 

years. 1

Last, I want to note how this could be used against U.S. companies overseas. The 

United States has always been the leader in defining ‘‘national security’’ in a reasonable and fair way. I would remind the Committee that any actions we take are 

likely to be copied and used by other countries, potentially to the detriment of U.S. 

interests abroad. 

CFIUS Evolution 

CFIUS is an interagency committee established by Executive Order in 1975 with 

the Secretary of the Treasury as its chair. Its central purpose at that time was to 

monitor foreign direct investment in the United States. In 1988, driven by concerns 

regarding growing Japanese investment in the United States, Congress enacted the 

Exon–Florio amendment that expanded these powers significantly, including (i) giving CFIUS the responsibility to investigate foreign acquisitions of companies engaged in business in the United States, and (ii) providing the President the ability 

to suspend or prohibit a covered transaction that, in the President’s judgment, 

threatens the national security and existing laws are not adequate or appropriate 

to address the threat. 2 In 2007, following concerns that had been raised over a Middle Eastern investment in U.S. port facilities, Congress amended and further 

30 

3Several offices in the Executive Office of the President also serve as observers of CFIUS. 

strengthened CFIUS through the Foreign Investment and National Security Act 

(FINSA). 

A new Executive Order directing CFIUS followed in early 2008 and new regulations implementing FINSA were issued later that year. The key reforms resulting 

from those efforts include: 

• Increasing accountability in the executive branch as Senate-confirmed officials 

now must certify that CFIUS has completed its work on each transaction; 

• Broadening the factors that CFIUS may consider in terms of investigating 

cross-border M&A transactions, particularly in areas such as critical technology, 

energy, and critical infrastructure; 

• Raising the certification bar for cases in which the acquirer is a State-controlled 

entity; 

• Increasing CFIUS interaction with Congress; 

• Providing for a more formal role for the intelligence community; and 

• Clarifying CFIUS criteria for evaluating whether an acquirer is obtaining control of a U.S. business. 

CFIUS Process 

CFIUS is chaired by Treasury and is comprised of the Departments of Commerce, 

Defense, Energy, Homeland Security, Justice, and State as well as the Office of the 

U.S. Trade Representative and the Office of Science and Technology Policy. In addition, the Intelligence Community under the leadership of the DNI and the Department of Labor serve as nonvoting members of CFIUS. 3

Parties submit their transactions to CFIUS for review on a voluntary basis, although CFIUS has the authority to compel a filing if necessary. The statute prescribes strict timelines for CFIUS’s review, but parties are encouraged to pre-file 

with CFIUS to provide the Government with an opportunity to begin its analysis 

before the ‘‘clock starts ticking.’’ 

CFIUS officials are obligated by law, and subject to the possibility of criminal or 

civil penalties, not to disclose information regarding transactions. The rationale behind this rule is to protect both proprietary and intelligence information. 

Once a transaction has been filed, CFIUS first determines whether it has jurisdiction to review the transaction—that is, does it involve foreign control of a U.S. business in interstate commerce—and, if it does, CFIUS then undertakes a three-part 

evaluation: 

1. Does the acquirer pose a threat to national security? This analysis is led by 

the Intelligence Community. 

2. Is national security made more vulnerable by virtue of the acquisition of the 

U.S. assets? This analysis tends to be driven by the CFIUS agency with applicable subject-matter expertise. 

3. Do the consequences of permitting the threat and vulnerabilities to be combined through a specific transaction risk impairing national security? 

CFIUS investigates these questions in the first 30 days after it accepts the filing. 

If at the end of those 30 days, CFIUS is not satisfied or in most transactions where 

the acquirer is State-controlled, then CFIUS will undertake a second-stage investigation that lasts up to an additional 45 days. 

The process, the timelines, the composition of CFIUS, the protection of information, and the reforms of 2007/08 have all been designed by Congress and respective 

Administrations to protect national security and to do so in the context of maintaining the United States’ long-standing policy openness to investment. In addition, 

knowing that some transactions may raise national security issues, Congress has 

expressly authorized CFIUS to enter into mitigation agreements with the transaction parties to address those concerns. There are many different types of methods 

of mitigating a transaction. Examples include establishing special security procedures at facilities that can be verified by the Government, implementing certain 

passivity mechanisms, or even forcing a company to divest specific assets. In short, 

these mitigation agreements impose measures on the parties that address national 

security risks. 

These mitigation agreements are the pressure valve that enables CFIUS to find 

solutions to more difficult transactions—to welcome foreign investment and protect 

national security. 

31 

If at the end of that 75-day period, CFIUS cannot make a decision or recommends 

that a transaction should be prohibited—then the matter is referred to the President who has 15 days to make a decision. Only the President has the ability to block 

a transaction. 

In the past 27 years, the President has prohibited or unwound only three transactions. The primary reason that such activity by the President is so rare is that 

most transactions do not pose a national security risk or risks can be mitigated 

through diligent work by CFIUS. The other reason is corporate concern about 

reputational risk. When the President makes a formal decision on a transaction, 

that decision is made public. Companies that believe the President could prohibit 

their transaction are understandably reluctant to be subject to a public rejection. 

Accordingly, most companies will withdraw from the CFIUS process and abandon 

their transaction. 

How CFIUS Has Performed 

Since FINSA was enacted 10 years ago, CFIUS—in my opinion—has performed 

in an exceptionally professional and thoughtful manner. Congress and the American 

people should be proud of how well the group of individuals across the Government 

have carried out their duties. Their scrutiny of cases is thorough; they have protected national security; they have protected information as well as anyone in the 

U.S. Government; and they have preserved the reputation of the United States as 

open to investment from around the world. CFIUS in many respects has been a 

model not only within our Government but also for other countries; various nations 

are now considering how they can emulate the U.S. process. 

That said, there is little question that the investment landscape has changed substantially in those 10 years. By far, the most important change has been the rise 

of China as a direct investor in the United States. Ten years ago, CFIUS would review just one or two transactions a year that had involved a Chinese acquirer— 

today, it is literally dozens and dozens of transactions every year. While I believe 

we should welcome Chinese investment and that each transaction should be judged 

on its own merits, these transactions have more complex financial structures, sometimes are more opaque, and come from a country where the State plays a much 

larger role in the economy. Often, these factors and others, raise the threats to national security. I know that fellow panelist Jim Lewis is focusing his remarks on 

Chinese investment and the threats it raises so I will not elaborate further. 

The other development is the concern that technology is being transferred that 

could make our national security more vulnerable. I know that Kevin Wolf is an expert on export control laws so I’ll let him elaborate on the importance of these developments. 

CFIUS Reform 

As for me, these changes in the investment landscape as well as the fact that it 

has been 10 years since CFIUS was reformed suggest that a close, sober evaluation 

by Congress, by the GAO, and by the Administration is in order. As with any analysis, it is best to think of any potential reforms in terms of benefits and costs, including intended and unintended consequences. 

I would have three starting points beyond a cost/benefit analysis: 

First, I want to note the importance of providing appropriate resources to both 

Treasury and other agencies for CFIUS cases. The CFIUS process is currently under 

stress because of a significant increase in cases, without a commensurate increase 

in resources. While I strongly believe that we should set good policy on the merits, 

we also need to provide adequate resources to effectively carry out those policies. 

CFIUS reviewed over 170 transactions last year, which is the highest number 

since CFIUS was strengthened 10 years ago. As mentioned earlier, there is a much 

larger proportion of cases originating from China and that are structurally more 

complex. In 2017, my understanding is that CFIUS is on pace to investigate a much 

higher number than in 2016. There is little question in my mind that the individuals doing their jobs are under too much strain—they need more resources before 

we consider how to increase their work load. 

I am very concerned that a significant expansion of CFIUS will overwhelm the 

system and significantly impact its effectiveness and ability to function. So while resources are not the issue on the table today, I do not think you can separate them 

from the policy if you want the system to function efficiently and effectively. 

Second, as part of the new FINSA law of 2007, this Committee added an Assistant Secretary of Treasury to oversee CFIUS. The Trump administration has nominated a highly qualified individual in Heath Tarbert. This Committee approved him 

with near unanimous support roughly 4 months ago. Why he has not been confirmed is a mystery to me, but at a time when CFIUS is under as much strain as 

32 

it has ever been and when Congress is considering reforms that would expand 

CFIUS—it is past time to confirm the individual with the most direct responsibility 

for overseeing the system. 

Third, as we consider reforming CFIUS, we should adopt a set of guiding principles to ensure that the United States both safeguards its national security and remains the destination of choice for investment: 

• Minimize the opportunity for politicizing transactions. 

• Keep CFIUS narrowly focused on national security and resist the impulse to 

use it for broader economic policy goals. 

• Ensure accountability of the executive branch for protecting national security 

while welcoming foreign investment. 

• This means that the executive branch should find solutions by ‘‘working a 

problem’’ and use its authority to craft appropriate mitigation measures, 

which may mean additional resources—maybe paid by fees from the filing 

parties—for monitoring and verification. 

• It also means providing filing parties an opportunity to ‘‘make their case’’ directly to Senate-confirmed individuals so that parties to transactions are not 

faced with the situation where staff-level officials are deadlocked or uncommunicative and the next step is a decision by the President. 

• Maintain CFIUS’s focus on—and review should be triggered only by—foreign 

mergers and acquisitions of U.S. businesses, and not broaden the scope to sweep 

in thousands of commercial or licensing transactions. 

• Increase scrutiny over State-controlled acquirers, including the possibility of 

making the filing of such transactions mandatory. 

Thank you and I’m happy to field any questions. 

PREPARED STATEMENT OF KEVIN J. WOLF 

PARTNER, AKIN GUMP STRAUSS HAUER & FELD LLP, AND FORMER ASSISTANT

SECRETARY FOR EXPORT ADMINISTRATION, DEPARTMENT OF COMMERCE

SEPTEMBER 14, 2017 

Chairman Crapo, Ranking Member Brown, and other distinguished Members of 

the Committee. Thank you for convening this hearing and for inviting me to testify 

on this important national security topic. 

I was last before this Committee in January 2010 for my confirmation hearing 

to be the Assistant Secretary of Commerce for Export Administration, a position I 

held until January 20, 2017. In that role, I worked closely with my colleagues within Commerce and many other agencies in shepherding the U.S. export control system. I was also a Commerce representative to the Committee on Foreign Investment 

in the United States. 

Although I am now a partner with Akin Gump Strauss Hauer & Feld LLP, the 

views I express today are my own. I am not advocating for or against any potential 

changes to CFIUS or its legislation on behalf of another. Rather, I am here to answer your questions from the perspective of someone who has been both a Government policymaker and a practitioner for nearly 25 years in these critical and complex national security areas. I am happy to help however you see fit. 

My fellow panelists have already described well the content and scope of CFIUS, 

so I will get straight to my main point, which is that the CFIUS and export control 

systems complement each other. CFIUS has the authority to control the transfer of 

technology of national security concerns, but only if there is a covered transaction, 

however defined. The export control rules regulate the transfer of specific types of 

technology of national security concerns regardless of whether there is a covered 

transaction. This means that if concerns arise about specific or general types of 

technology—whether as part of a CFIUS review or from any other source—then the 

focus, I respectfully submit, should be on controlling the technology at issue to the 

destinations of concern. 

The export control system is already well developed and flexible enough to address exactly this issue. Yes, it can be complex, but its national security functions 

are not limited by the need for a transaction. Moreover, the system is designed to 

constantly evolve as new threats are identified, new technologies of concern are discovered, and wide-spread commercialization makes existing controls unnecessary or 

impossible to implement. 

33 

The most effective export controls are those that are multilateral—those that our 

allies and other countries also impose for common objectives. Unilateral controls— 

those that only one country imposes—are generally counterproductive because they 

create incentives for non-U.S. companies to develop the technology outside of U.S. 

control. The imposition of unilateral controls, however, can be an effective shortterm technique for regulating the export of technology—at any stage of its development—that is newly discovered to be sensitive in general or with respect to a specific destination. 

The Export Administration Regulations, implemented by the Commerce Department’s Bureau of Industry and Security, have the authority to impose such controls 

in coordination with other departments, primarily Defense and State. The descriptions of the technology can be as broad or narrow as the national security requires. 

The descriptions are generally connected to physical commodities, but do not need 

to be. The controls can be tailored to specific countries and to nationals of those 

countries. Law enforcement tools can be used with respect to domestic transactions 

when there is a foreign party using a U.S. company as a front. Using the export 

control process is also an excellent check on unintended consequences because it 

forces policymakers to describe clearly the information to be controlled. We can discuss the details of these tools and how they fit into the multilateral control regimes 

and the CFIUS process later as you like. 

Although I cannot discuss specific cases, I can say that other types of national 

security issues created by foreign direct investment include primarily those that (i) 

have colocation issues (e.g., acquisitions next to military facilities); (ii) create espionage risks, (iii) could reduce the benefit of Defense Department technology investments; (iv) reveal personal identifying information of concern; (v) create security of 

supply issues for the Defense Department, or (vi) create potential exposure for critical infrastructure, such as with the telecommunications or power grids. 

In my experience, the existing CFIUS structure, authorities, and internal procedures generally allowed for the resolution of these issues quite well. The Treasury 

Department was an excellent honest broker and well-facilitated consensus conclusions—often after lengthy interagency discussion and always with the terrific support from the intelligence community. The agencies were always respectful of the 

need for a whole-of-Government decision that took into account the particular equities and expertise of the other agencies. The career staff were and remain talented, 

dedicated public servants. 

This last point is key. Given the increase in filings, and the increase in more complex cases, the staff was being stretched thin when I was there, and I expect they 

are even more stretched now. They need help. They need more resources, particularly with respect to those involved in monitoring mitigation agreements and studying transactions. I make this polite suggestion not only for their benefit but for the 

sake of our national security. I also make the suggestion for our economic security 

so that the U.S. remains known as a country that welcomes foreign direct investment with the minimum necessary and quickest possible safe-harbor review burden. 

Thus, when considering changes to CFIUS to address apparent gaps in national 

security controls associated with foreign direct investment, the questions I would 

ask are (i) whether the statutory authority already exists to address the issue 

through a regulatory or process change; (ii) whether another area of law, such as 

trade remedies or export controls, could address the issue more directly and without 

collateral consequences on other investments; or (iii) whether the solution lies in 

more resources to the agencies. If the answer to these questions is ‘‘no,’’ then that 

is the sweet spot for consideration of change to CFIUS legislation. 

For each possible change in CFIUS’s scope, however, it is vital to weigh the costs. 

For example, if there is even a small expansion in the scope of CFIUS’s review authority, then some companies may be less willing to invest in the United States with 

the actual or perceived extra burden and time involved in closing a transaction, particularly if there is not a significant expansion in staff. With every expansion in 

scope, there will be a corresponding and exponential expansion in burdens and costs 

generally—more regulations lead to more words, lead to more analyses of those 

words in novel fact patterns, lead to more filings, lead to more reviews, lead to more 

mitigation agreements, and on and on. Also, if the legislation becomes too prescriptive, then it may limit the ability of the Administration and staff to resolve novel 

national security issues in a creative way. There were many such situations over 

the course of the last seven years that I suspect could not have been contemplated 

by the original drafters of the legislation and the regulations. 

On export control and CFIUS topics, I have a 3-minute, a 30-minute, and a 3- 

hour version. So, I will stop here with these general opening comments and look 

forward to answering your questions. Thank you again for spending the time to 

think through this complex and important national security issue. 

34 

1My colleague Scott Kennedy’s research initiative ‘‘Made in China 2025’’ explores this at 

greater length. 

PREPARED STATEMENT OF JAMES A. LEWIS 

SENIOR VICE PRESIDENT, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

SEPTEMBER 14, 2017 

I thank the Committee for this opportunity to testify. The Department of Treasury’s Committee on Foreign Investment (CFIUS) is one of the most important tools 

for protecting national security while also creating the conditions that enable a 

strong economy and an advanced technological base. CFIUS is one of three activities 

that protect national security related technology and the defense industrial base 

along with export controls and Federal investment in research and development 

(R&D). The CFIUS Committee has done well, but the growing volume of cases, increased complexity of acquisition transactions, and China’s industrial policies pose 

an increasing challenge to the CFIUS process. 

The U.S. created the CFIUS process to regulate foreign acquisitions of American 

companies in response to concerns that strategic industries were being lost to foreign competitors. The goal is to maintain an open investment environment while 

mitigating risk to national security. CFIUS’s authorities were updated in 2007 by 

the Foreign Investment and National Security Act (FINSA), which expanded the 

Committee’s remit to include homeland security, created timelines for review, and 

gave the President the authority to reopen and reexamine already completed transactions (known as an ‘‘Evergreen’’ provision). FINSA is now 10 years old and faces 

challenges created by a changing global economic environment. 

The most important of these challenges comes from China. China is a strategic 

competitor who seeks way to circumvent CFIUS protections. China’s industrial policies are the greatest challenge for CFIUS. The laws, policies, and regulations that 

were adequate in the past, whether for export control or for foreign investment, 

must be reviewed and reconsidered to manage the challenge America faces from 

China’s managed economy. China’s goal is to end its dependence on foreign technology and overtake the U.S., as it has overtaken other Nations. 1 This is not a military conflict, but it has deep implications for American security and for the prospects of an international system based on the rule of law and democratic norms. The 

fundamental issue for the U.S. and other Western Nations is how to respond to a 

managed economy with a well-financed strategy to create domestic industries intended to displace foreign suppliers. 

Although it is a member of the World Trade Organization (WTO), China does not 

follow WTO rules. Its public justification for this is that China is still a developing 

economy and should not be held strictly accountable, but this is nonsense for the 

world’s second largest economy. Compare the treatment of U.S. companies in China 

to Chinese companies in the United States. When Alibaba built a data center in Seattle, it was not forced to do this as a junior partner in a joint venture, nor was 

it forced to provide source code, but U.S. companies in China face these requirements. There are other countries that want to challenge the global institutions created by the U.S. and it allies after 1945, chief among them Russia, but the Russian 

economy is in steady decline and while Russia is dangerous in many areas, it is not 

an economic competitor. 

One reason that China has gotten away with this for so long is that many companies have been ambivalent about pushing back. They fear retribution from China— 

a reasonable concern, since China is not shy about retaliating against critics—and 

many do not believe the United States will take action to support them against such 

retribution—also a reasonable concern. China is a huge market that companies are 

reluctant to risk, but as the consequences of China’s industrial policies become 

clearer, company attitudes have changed and there is growing concern about unfair 

competition from the Chinese State. 

If China followed international practices, its decisions to invest in domestic industries would be unobjectionable. There would be potentially profound effects on the 

global economy, but competition is the nature of the market. But China has not 

hesitated to extract concessions or block foreign competition in order to advance its 

own firms. China’s 5-year plans lay out the strategic economic and technological 

goals that China will pursue and fund. These have had mixed success in the past, 

but a steady, well-funded pursuit of its economic and technological goals is one of 

the hallmarks of Chinese policy. China is pulling ahead because it has a strategy 

to build a high-tech economy and is willing to spend heavily and consistently to 

achieve this. We do not always want to take Chinese propaganda announcing techVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00038 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
35 

nological success at face value, but China commits to research and investment programs for decades, while our spending is often limited to fits and starts. 

China’s announcement of an indigenously produced commercial airliner illustrates 

Beijing’s intent to ‘‘move up the value chain,’’ build industries, and displace Western 

firms. China’s Soviet-supplied aircraft factories made shoddy aircraft. When China 

opened its market, Western firms rushed to sell aircraft. Part of the requirement 

for market access was coproduction, where Chinese companies worked with Western 

aircraft firms to make parts for Western commercial aircraft. Coproduction, over 20 

years, taught Chinese companies essential production know-how, and the quality of 

Chinese aircraft has improved markedly. Most of this transfer did not involve IP 

theft. However, the Chinese Government will be tempted to use subsidies, pressure 

domestic airlines to buy the new Chinese plane, and barriers to foreign companies 

to give their manufactures an edge in China and in the global market. These practices are not uncommon as Beijing seeks to promote its domestic companies. 

Semiconductors are another key industry for China and a major concern for 

CFIUS. Since the 1960s, the United States has been the leader in semiconductor 

manufacturing. A strong semiconductor sector is crucial for growth in key high tech 

industries and will grow more important as more devices are connected to the internet. Semiconductors enable a broad a range of industries and serves a foundational 

role for critical civilian and military digital technologies. Persistent Chinese efforts 

to acquire semiconductor technology, combined with changes in the industry, could 

create risks for the U.S. and opportunities for potential attackers. In the last few 

years, there have been a number of efforts by Chinese companies with links to the 

Government to buy Western semiconductor firms, using a multi-billion-dollar acquisition fund created by the Chinese Government. While the CFIUS process has been 

successful in blocking many of these efforts, China’s policy to end its reliance on foreign semiconductors manufacturers by creating its own companies has not changed 

and there will be continued pressure. 

Chinese policy seeks to extract technologies from Western companies; use subsidies and nontariff barriers to competition to build national champions; and then 

create a protected domestic market for these champions to give them an advantage 

as they compete globally. Huawei is the best example of a now globally dominant 

Chinese company built along these lines, but there are others. A senior Chinese official once remarked that if China had not blocked Google from the China market, 

there would be no Baidu. Various strategies are employed, using barriers to trade, 

security regulations, procurement mandates, acquisitions (both licit and illicit) of 

foreign technology, and through strategic investments in or acquisition of foreign 

firms. In addition, companies from the U.S. and other Western Nations have found 

themselves under pressure to make long-term concessions in technology transfer in 

exchange for market access. 

Intellectual property (IP) theft is no longer the most important problem. It is easy 

to overstate the cost of commercial cyber-espionage. While China’s policy has been 

to acquire Western IP from the start of the opening of its market, and while the 

high point of IP theft came from cyber-espionage between 2000 and 2015 (more a 

reflection of our lax defenses than of Chinese skill), the situation has changed considerably. Most of the estimates of the cost of Chinese commercial espionage, however, are exaggerated. A country could steal ‘‘$600 billion’’ in IP and not gain $600 

billion in value if it is unable to turn the stolen IP into commercially valuable products. It does little good to steal IP if you do not have the expertise to use it, and 

until recently, this was true for China’s espionage in advanced technology. What has 

changed in the last decades is that in many cases, China has the money and the 

skill to use much of the IP it has acquired licitly or illicitly. In other cases, China 

has realized that acquiring ‘‘know-hows’’ is more important than acquiring IP, and 

has turned to the purchase of Western companies as a key part of its new industrial 

policies. 

Because of past technology transfers through joint ventures and coproduction, and 

in part because of heavy, sustained Government investment in science and research, 

China has developed its own innovation capabilities. In some technology areas, 

China may even be the world leader. This is a good thing for the global market and 

competition, and it should help spur a rethinking of America’s relaxed approach 

when it comes to technology and innovation. What is not good is the Chinese Government’s policy of using unfair business practices to give Chinese companies an 

edge in marketing their innovations. 

In the worst case, stolen IP means that the victim company faces a new competitor. In China, this new competitor may have access to Government subsidies or 

benefit from a protected domestic market built with nontariff barriers to hobble foreign competition. Subsidized Chinese companies have an immense advantage operating from a closed domestic market and selling to an open international market. 

36 

Confronting China over these practices is long overdue, but the central issue is not 

IP theft but the unfair treatment of U.S. companies in China. The word that China 

fears is reciprocity—that they should be treated in the United States the way American companies are treated in China. 

Concern over technology transfer has been an element of the U.S.–China relationship for decades, but China’s growing wealth and sophistication poses a new kind 

of challenge U.S. regulation and policy. Moreover, China’s strategies for acquiring 

technology and, perhaps, for circumventing FINSA, are relatively agile and attempt 

to take advantage of this policy gap. The long-term viability of China’s managed 

economy model is an open question, but in the near term, it creates new risks for 

U.S. companies and for national security. 

One question for this hearing is whether the existing tools to manage risk are 

adequate. These include export controls and foreign investment reviews. Another 

question is whether a defensive strategy that seeks to block Chinese acquisitions is 

enough. The answer is both cases is that there is room for improvement. Improving 

the ability to compete and to create new products in the United States is an essential complement of maintaining U.S. national security and leadership in technology. 

We can review the question of the effectiveness of existing policy tools like CFIUS 

by looking at some of the ideas for CFIUS reform. The incentive for this review is 

that China appears to have looked for ways around FINSA regulations. This needs 

to be addressed by expanding the scope of covered transactions, by providing the 

Committee with additional flexibility for review in difficult cases, by moving from 

a transactional focus to better identify technology and business trends that create 

risk, finding ways to cooperate with foreign partners, and by ensuring it has the 

resources and information needed to timely decisions. 

Some recommendations, such as expanding CFIUS’s jurisdiction to review transactions that do not result in foreign control of a company but still allow access to 

technology, or expanding CFIUS authority to review overseas joint ventures, are 

better handled by export controls. The same is true for having CFIUS create lists 

of critical technology. The Departments of Defense, Commerce, and State already 

maintain such lists for export control purposes and while in some cases these lists 

need to be updated to focus on new and truly crucial technologies, another list is 

unnecessary. 

Similarly, while it may be helpful to the CFIUS committee to have access to lists 

that identify countries of concern and broader technology trends, these are competencies already found in the National Intelligence Council (NIC), which already 

has a CFIUS support group and is required by FINSA to review CFIUS applications. The NIC would require additional resources if these tasks were added to its 

portfolio, but one important goal for change should be to expand CFIUS’s current 

transactional focus. 

FINSA gives the NIC a statutory role in the CFIUS process, but it does not have 

a ‘‘vote’’ on the committee. This is appropriate and should not change, both because 

of our long-standing principle of not giving intelligence agencies a role in policymaking and because the Departments of Defense and Justice, who are member of 

the intelligence community (IC), already protect IC equities in the CFIUS process. 

CFIUS already has an implicit policy of greater scrutiny of transactions involving 

Chinese State Owned Enterprises (SOEs). These transactions already face significant hurdles, but it may be worth considering more explicit policies targeting SOEs. 

Adding new Cabinet agencies that do not have a national security as a primary 

mission to the CFIUS committee would be inadvisable. The net effect would be to 

complicate a process and dilute its focus on national security. Twelve years ago, the 

French Government blocked the acquisition of the yogurt maker Danone (known in 

the U.S. as Dannon) by an American company to protect a national champion. This 

sounds and was ridiculous. We do not want to find ourselves in a similar situation, 

nor would it be advisable to make the CFIUS process more complicated. This applies to the question of mandatory filing as well. One authority provided by FINSA 

was the ability of the President to return to any foreign acquisition and reverse it. 

This ‘‘evergreen’’ provision creates a powerful incentive for filing. 

The most difficult issue in considering how to expand the scope of covered transactions is whether to expand CFIUS authorities to cover ‘‘Greenfield’’ investments. 

This is a difficult issue because many entrepreneurs, researcher and companies welcome Chinese investment in advanced technology. American companies maintain 

many research facilities in China. Finding a way to better grasp the potential risks 

of Chines greenfield divestment would require knowing the extent to which the 

source of Chinese investment was actually Beijing, ensuring that export control regulations are being observed, and giving CFIUS the scope to intervene if considered 

necessary for national security. 

37 

The U.S. would also benefit from a more formal cooperative mechanism. Informal 

cooperation exists now but this could be strengthened. Japan has adopted new regulations on ‘‘inward investment’’ and the European Union is drafting regulation to 

provide guidance to its members. All of them are motivated by the same challenge 

(although they do not say it publicly), that challenge being China’s industrial policies. There is a good opportunity now to increase formal information sharing and 

cooperation in these matters to ensure that if an acquisition is denied on one country that others are aware of the denial and the reasons for it. 

The decision to locate CFIUS in the Treasury Department was made to show that 

the goal is to encourage foreign investment while mitigating any risk to national 

security. This decision remains sound. It would not be useful to impose a ‘‘net benefit’’ or ‘‘reciprocity’’ test on foreign investment. These considerations are best left 

to the market, which takes these factors into account in its pricing mechanisms. The 

goal in any measure to strengthen CFIUS should be keep this open investment environment. 

U.S. efforts to get China to follow global norms on technology, trade, and investment is long overdue, but it will not work without a strategy on how to move ahead 

in technology. The United States has innate advantages, with the strongest scientific base in the world, leading technology companies, and an innovative culture 

that others find difficult to match. Strengthening and revitalizing the partnership 

among companies, universities, and Government can reignite U.S. innovation, but 

it will require a willingness to invest seriously in growth. 

Reports that the Trump administration will challenge China over unfair trade 

practices are good news, but this needs to be accompanied by policies to accelerate 

the creation of new goods and services in the U.S. Innovation has become a 

buzzword and everyone is for it. Innovation means creating new products and services, either by improving existing products or by taking advantage of scientific discoveries. Companies spend heavily on developing new products, but very little on 

developing new ideas. A lack of support for research limits American innovation and 

economic growth. 

Everyone agrees that innovation is essential for America prosperity and security, 

but America lives in a post-innovation environment of its own making. The Nation 

that is coasting on the science investments of the Cold War, and underinvestment 

in research slows growth in income and productivity. For developed economies, innovation is the best way to grow, by finding better ways to use existing resources to 

produce goods and services. There are many reasons why productivity growth in the 

United States is flat, but underinvestment in scientific research is one of them, and 

this creates a self-imposed disadvantage in military and economic competition with 

China. 

The innovation ecosystem is complex, interconnected, and global, but it is ‘‘payto-play.’’ Restoring U.S. strength in innovation requires investment, both by encouraging private sector investment and by Government spending in those areas, like 

basic research, where private sector spending is likely to be insufficient. China has 

allocated billions of dollars for investment for research in and acquisitions of advanced technologies that are key to future economic growth, including semiconductors, 5G telephony, artificial intelligence, and super computers. The United States 

allocates millions for the same efforts, meaning we are being outspent a thousand 

to one. We do not want to take media hyperbole about a war over AI or supercomputing too seriously, but we also do not want to watch as others pass us. 

There are other areas where policy changed could improve American innovation 

and economic performance. The recommendations of the International Monetary 

Fund for the U.S. economy include tax reform, less regulation, increased infrastructure spending, deficit reduction, educational improvements, and improved trade 

agreements. These can be contentious issues, but a decision to match China in investment for science and technology should not face the same debate. 

It is important not to exaggerate China’s strength. It faces immense problems in 

Government debt, life-threatening pollution, mismanagement, and corruption, but 

under its current leaders, it intends to displace the United States and building globally dominant high tech industries is a part of this strategy. China’s leaders are 

practical, however, and its behavior can be changed, however, if the U.S. develops 

a coherent strategy in cooperation with key allies. CFIUS is not the only tool we 

can use in this, but it is one of the most important. I thank the Committee for the 

opportunity to testify and look forward to any questions. 

38 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM CLAY LOWERY 

Q.1. In light of recent news that 143 million Americans’ personal 

information held by Equifax was hacked, and past incidents, like 

the OPM breach, in which millions of Federal employees’ personal 

information was obtained by a foreign State, it seems to me that 

protecting Americans from cyber-related threats is more important 

than ever. 

In your experience, if a foreign company that may have ties to 

a foreign Government is trying to acquire a U.S. company that has 

access to the personal data of millions of Americans, what national 

security concerns CFIUS would consider? How would CFIUS be 

able to mitigate those concerns? 

A.1. When investigating a foreign direct investment (FDI), CFIUS 

examines (i) the threat of the acquirer, including its relationship to 

its home Government and (ii) the vulnerability of the asset being 

purchased. Increasingly, a key vulnerability for CFIUS to consider 

is the accumulation of substantial personally identifiable data. In 

most cases, CFIUS should generally be able to mitigate such concerns if they present a risk to national security. In fact, I would 

argue CFIUS has the obligation to try to find mitigation in such 

cases in order to meet its dual mandate: protect national security 

and promote foreign investment. In cases when the national security risks cannot be mitigated, CFIUS should, if necessary, recommend to the President that he block the transaction. 

Q.2. As I mentioned in my opening statement, I think we need to 

keep a close watch on how much of the research capabilities in agriculture, particularly R&D relating to seeds, is owned by our adversaries. I believe additional oversight of our country’s agricultural assets is critical to protecting our Nation’s food supply. Do 

you believe that agriculture and food security are important to U.S. 

national security? In the case of CFIUS reviews of foreign acquisitions of agricultural assets for national security risks, is USDA appropriately included in the process? 

A.2. I do think food security issues can rise to the level of being 

national security risks and transactions may need to be reviewed 

by CFIUS. CFIUS has had the ability to bring appropriate expertise throughout the Government, when necessary. In my experience, USDA has been brought into CFIUS transactions when necessary and appropriate. I would, however, suggest caution with regards to the proposal to make USDA a full member of CFIUS, primarily because the vast bulk of current transactions that go 

through CFIUS have little to do with USDA expertise and could be 

a poor allocation of scarce resources. 

Q.3. In your testimony and at the hearing, you suggest that CFIUS 

could use more resources. If its resources were increased, how 

could those resources be most effectively used to better protect national security? Should it be allocated to monitoring M&A activity, 

reviews, investigations, mitigation, or something else? 

A.3. CFIUS has been overloaded for the past couple of years and 

this has harmed its ability to conduct its investigations in an efficient and thorough manner. While having more resources for mitiVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00042 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
39 

gation monitoring is probably necessary, this could be outsourced 

to trusted private sector service firms. The investigation and disposition of transactions, however, must be done by the Government 

and this seems to be the more immediate need. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM CLAY LOWERY 

Q.1. Last year, due to increasing pressure from Venezuela’s economic crisis, PdVSA, Venezuela’s State-owned oil company pledged 

49.9 percent of its shares in U.S. oil company Citgo to Russia’s 

Government-owned oil company, Rosneft. Citgo is owned by 

PdVSA, and it operates pipelines and oil refineries throughout the 

U.S. It is my understanding that Rosneft may have also acquired 

additional ownership shares of PdVSA on the open market, which 

could bring their ownership potential to more than 50 percent. Respected market analysts have predicted that PdVSA could default 

on its debt to Rosneft in the near future. If such a default were to 

occur, Rosneft would then acquire at least a 49.9 percent ownership 

stake in Citgo. 

If PdVSA defaults on its debt, Rosneft would acquire, at a minimum, a near-majority ownership stake in Citgo, which has 48 petroleum product terminals, three refineries in Texas, Louisiana, 

and Illinois, and nine pipelines throughout the United States. In 

your opinion, would such an acquisition generate national security 

concerns? 

In your opinion, should CFIUS review any acquisition of Citgo by 

Rosneft? 

Are there any statutory limits that constrain CFIUS’s authority 

to review foreign acquisitions of U.S.-based companies that are 

owned by foreign companies, as would be the case if Rosneft were 

to acquire Citgo? 

A.1. It is hard for me to comment on this transaction because I do 

not have any insight into the specifics. In general, however, under 

the regulations (see Section 800.303 and Section 800.304), CFIUS 

may find a convertible debt instrument to be an instance of a ‘‘covered’’ transaction as defined in the regulations. 

Q.2. To my knowledge, CFIUS does not have a process requiring 

members to recuse themselves from a review if they have conflicts 

with a particular transaction. 

Would it concern you if members of the CFIUS had prior employment engagements, personal financial holdings, or other interests 

that served to impede their ability to objectively review transactions? In such cases, do you believe that CFIUS members should 

recuse themselves? 

In your opinion, should CFIUS establish a recusal process governing member participation in the event of potential conflicts? 

A.2. CFIUS is essentially a committee of individual agencies in 

which the Treasury Department chairs. It is not an established bureau or other legal entity of the Treasury Department. The ethics 

requirements and regulations of each agency are applicable to the 

employees of those agencies so members should be recusing themselves when appropriate under current law. In my experience, indiVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00043 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
40 

viduals within CFIUS recused themselves from transactions 

based—I believe—on the ethics rules and commitments that they 

had with their respective agencies. During my time at CFIUS, a 

number of officials from different agencies did recuse themselves 

from transactions, even in cases where the connection to the purchasing or targeted firm was tenuous. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM KEVIN J. WOLF 

Q.1. In light of recent news that 143 million Americans’ personal 

information held by Equifax was hacked, and past incidents, like 

the OPM breach, in which millions of Federal employees’ personal 

information was obtained by a foreign State, it seems to me that 

protecting Americans from cyber-related threats is more important 

than ever. 

In your experience, if a foreign company that may have ties to 

a foreign Government is trying to acquire a U.S. company that has 

access to the personal data of millions of Americans, what national 

security concerns CFIUS would consider? How would CFIUS be 

able to mitigate those concerns? 

A.1. I agree that foreign Government access to or control over PII 

of U.S. persons, particularly Government employees, can present 

national security concerns warranting CFIUS mitigation or other 

action. If, for example, as part of its espionage activities directed 

against the United States, a foreign Government were to acquire 

large quantities of PII about U.S. Government employees, it could 

mine such data for compromising or embarrassing personal information that could be used to coerce employees to engage in activities contrary to the interests of the United States. Examples of 

such information could be indications of a child’s drug problem, 

extra-marital affairs, gambling problems, or large financial debts. 

Often people would like to keep such personal information confidential. A foreign Government could trade on this general desire 

to motivate such employees to engage in illegal or unethical activities in exchange for a promise to not release the comprising information. In my experience, CFIUS has been able to mitigate such 

issues. Although the applicable laws prohibit me from referring to 

any particular case, there are, in general, ways of mitigating such 

concerns. For example, CFIUS could require as a condition for 

clearance that a U.S. company be created and then managed and 

controlled by U.S. citizens. This would ensure U.S. person control 

over all U.S. person PII involved in the transaction. The foreign 

buyer would still receive financial gain from the transaction and 

engage in other activities unrelated to the PII, but would not have 

the ability to access the PII because of the U.S. person intermediary that was established. Although every transaction is different in terms of risk and financial considerations, other mitigation efforts could include audits of how the PII is being secured. 

Q.2. Which agency, or agencies, are best equipped to identify 

threats from the transfer of critical technology, dual-use technology 

or early stage technology know-how, intellectual property theft and 

espionage, and cyberthreats, to name a few? 

41 

A.2. No one agency is, could, or should be solely responsible for 

identifying such technology and know-how. The technologies are 

too varied. Issues warranting technology control range, for example, from bird flu information to Artificial Intelligence software to 

robotics technology to advanced semiconductor production technology. There are hundreds of other examples. Different agencies 

have different equities and expertise, which makes them better 

able to identify more precisely technologies and threats of particular concern. 

The Commerce Department’s Bureau of Industry and Security 

(BIS) is, however, the best single agency to lead and coordinate efforts to identify and control such technologies. Indeed, the primary 

purpose for its existence and the regulations it administers—the 

Export Administration Regulations (EAR)—is to be responsible for 

such efforts. It has a staff of experts in most areas of technology, 

a licensing system to regulate the control of dual-use and commercial technologies of concern, policy staff to revise and update the 

controls, and, unlike any other export control agency, its own enforcement officials. 

The list of dual-use and commercial technologies, which include 

know-how, that are now controlled for export is the Commerce Control List (CCL). See: https://www.bis.doc.gov/index.php/regulations/commerce-control-list-ccl. It is a lengthy, complex list that is 

the result of decades of interagency and allied efforts to identify 

dual-use and commercial technologies that warrant control for national security, foreign policy or other reasons. The list primarily 

implements controls agreed to with our multilateral regime partners to regulate the flow of commercial technologies and other 

items that also have military, nuclear, biological/toxicological, and 

missile applications. It also contains some unilateral controls on 

items of particular concern to the United States, such as commercial satellites and related technology. It is relatively easy to update 

and can be revised without the need for new legislation. 

The difficult part is identifying new technologies of concern, 

which is particularly challenging given the fast evolution of commercial technologies. (This issue is a large part of what is motivating consideration of whether to expand the scope of CFIUS reviews.) During the Obama administration, Commerce worked closely with the Defense Department, State Department, and other departments to substantially revise and update the list of military 

and space items warranting control. This effort, which affected 

hundreds of thousands of military and space items, took all available extra time of hundreds of U.S. Government experts to complete over the course of 7 years. Indeed, we only published our final 

military and space reform regulations in the weeks prior to the end 

of the Administration. 

This reform effort was done on top of the existing and generally 

well-run interagency effort to update annually the existing lists of 

items controlled by the multilateral export control regimes. Regardless of what happens with the FIRRMA bill, I strongly believe that 

Congress should ask of, and provide support to, a massive Administration effort to identify the emerging critical technologies of concern that are not now controlled but should be. No one knows precisely what these technologies are, but BIS exists to lead such an 

42 

interagency and whole-of-Government effort to identify and control 

them. There is no need to create whole new systems or agencies to 

do exactly what BIS is already specially designed to do. BIS and 

the agencies it works with will, however, need additional resources 

to create the regular process for researching, analyzing, and defining novel technologies identified in FIRRMA that are of concern. 

They are not as easy to identify and describe clearly as technology 

for use in traditional military, nuclear, biological/toxicological, or 

missile applications. 

With respect to the second part of your question, BIS is not the 

right agency to lead efforts to stem the theft of intellectual property, acts of espionage, or cyberthreats. Although BIS can certainly 

provide support to such efforts in several ways, such issues are better led by the Departments of Justice and Homeland Security. 

Q.3. If a foreign company is engaged in any of these activities and 

is acquiring a U.S. firm, will CFIUS consider this as part of the 

review or investigation? 

A.3. CFIUS indeed considers export control, IP theft, espionage, 

and cyber-issues when deciding whether to approve, mitigate, or 

block a proposed transaction. If another area of law can address 

the concern, such as export controls, then CFIUS does not act. If 

another area of law cannot, then CFIUS factors the threat into its 

analysis of what action it should take. 

Q.4. Are there areas were CFIUS should play a larger role or have 

additional authority to address national security threats? 

A.4. Yes. CFIUS should have more authority to: (1) control real estate transactions near sensitive military or other Government facilities; (2) share information with allies as part of its or common 

considerations of transactions, taking into account business proprietary and classified information sensitivities; and (3) address 

changes in existing relationships, such as through bankruptcies, 

that would create national security concerns. More importantly, 

CFIUS needs massively more funding and staffing to review a significant increase in covered transactions—and covered transactions 

that are more complex. The agencies can barely handle the workload they have now, which harms both national and economic security because of the uncertainty and delay it injects into the system. 

CFIUS also needs more resources in various departments to research and investigate covered transactions that are not filed with 

the committee. 

Q.5. As I mentioned in my opening statement, I think we need to 

keep a close watch on how much of the research capabilities in agriculture, particularly R&D relating to seeds, is owned by our adversaries. I believe additional oversight of our country’s agricultural assets is critical to protecting our Nation’s food supply. Do 

you believe that agriculture and food security are important to U.S. 

national security? In the case of CFIUS reviews of foreign acquisitions of agricultural assets for national security risks, is USDA appropriately included in the process? 

A.5. Yes. Without commenting on any particular case, acquisitions 

in the agricultural sector generally do not create national security 

threats. It is conceivable that a large enough one or one with a hosVerDate Nov 24 2008 08:26 Feb 14, 2018 Jkt 046629 PO 00000 Frm 00046 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\09-14 ZDISTILL\91417.TXT JASON
43 

tile buyer though could present national security issues. This is 

why CFIUS has the authority to—and indeed does invite—agencies 

not normally part of CFIUS to participate if they have particular 

equities in the matter. In my experience, USDA and other similar 

agencies are routinely invited to participate in cases involving agriculture or food security, and their expertise is given great weight 

by the committee as part of the CFIUS review process. 

Q.6. In your testimony and at the hearing, you suggest that CFIUS 

could use more resources. If its resources were increased, how 

could those resources be most effectively used to better protect national security? Should it be allocated to monitoring M&A activity, 

reviews, investigations, mitigation, or something else? 

A.6. Yes. CFIUS needs help in all these areas. Each of the agencies, particularly the economic agencies need more people with 

business and national security backgrounds reviewing transactions 

that occur but are not filed. They need an ever-growing number of 

people to be involved in mitigation arrangements. Without such 

staff, mitigation will not be considered an option and the committee 

will effectively be forced to recommend a block rather than a resource-consuming mitigation arrangement. Every agency needs 

more subject matter experts in business and the technologies at 

issue. Now, the staff are taken from existing resources. As hiring 

freezes and budget cuts delay the recruiting of new staff, the problems compound. As the cases become more complex and more cases 

go to investigation, more staff are needed. Treasury and the other 

departments can give you a better assessment of resource needs, 

but, in my Government and private sector experience, resources for 

a significant number of new career officials is needed even without 

an expansion of CFIUS’ scope. If it is expanded, it will take a significantly larger allocation and recruiting effort to get the staff 

needed to handle the hundreds or thousands of new cases that 

would come in. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM KEVIN J. WOLF 

Q.1. Last year, due to increasing pressure from Venezuela’s economic crisis, PdVSA, Venezuela’s State-owned oil company pledged 

49.9 percent of its shares in U.S. oil company Citgo to Russia’s 

Government-owned oil company, Rosneft. Citgo is owned by 

PdVSA, and it operates pipelines and oil refineries throughout the 

U.S. It is my understanding that Rosneft may have also acquired 

additional ownership shares of PdVSA on the open market, which 

could bring their ownership potential to more than 50 percent. Respected market analysts have predicted that PdVSA could default 

on its debt to Rosneft in the near future. If such a default were to 

occur, Rosneft would then acquire at least a 49.9 percent ownership 

stake in Citgo. 

If PdVSA defaults on its debt, Rosneft would acquire, at a minimum, a near-majority ownership stake in Citgo, which has 48 petroleum product terminals, three refineries in Texas, Louisiana, 

and Illinois, and nine pipelines throughout the United States. In 

your opinion, would such an acquisition generate national security 

concerns? 

44 

A.1. I do not know enough about the financial arrangements to be 

able to opine. My experience with complex cases such as this is 

that they require a significant amount of analysis and detail before 

coming to a conclusion that there are no unresolved national security risks. 

Q.2. In your opinion, should CFIUS review any acquisition of Citgo 

by Rosneft? 

A.2. I do not know, but, based on the information provided, it 

seems as there would be foreign ownership or control of a U.S. 

business. 

Q.3. Are there any statutory limits that constrain CFIUS’s authority to review foreign acquisitions of U.S.-based companies that are 

owned by foreign companies, as would be the case if Rosneft were 

to acquire Citgo? 

A.3. I do not believe so, but would need to research the issue to 

be certain. 

Q.4. To my knowledge, CFIUS does not have a process requiring 

members to recuse themselves from a review if they have conflicts 

with a particular transaction. 

Would it concern you if members of the CFIUS had prior employment engagements, personal financial holdings, or other interests 

that served to impede their ability to objectively review transactions? In such cases, do you believe that CFIUS members should 

recuse themselves? 

A.4. Yes, I would be concerned. The question describes a conflict 

of interest. Yes, if such conflicts exist, they should recuse themselves from the matter before the committee. If such a person refused to recuse himself or herself, I would speak up and ask that 

deliberations stop until the conflict issue was resolved. 

Q.5. In your opinion, should CFIUS establish a recusal process governing member participation in the event of potential conflicts? 

A.5. Although the idea is worth discussing, it is probably more efficient for the individual members to work with the ethics counsel 

at the departments for which they work to ensure their understanding of and compliance with applicable ethics rules. CFIUS is 

a committee; it is not a stand-alone agency. Thus, it does not have 

the infrastructure of a regular bureau, agency, or department to 

provide support to the members. Also, conflicts for Government officials do not potentially arise only in CFIUS matters, but also in 

many other aspects of their day-to-day work. Thus, it makes more 

sense for ethics education and compliance to be a focus of the employee’s department. That said, your question suggests the existence of an issue that I do not know about. A reasonable response 

by the Treasury department CFIUS leaders if there is a possible 

issue would be to remind the staff and political members of the 

committee of their ethics obligations and that they should work 

with their department’s counsel to understand the scope of their 

obligations. 

45 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JAMES A. LEWIS 

Q.1. In light of recent news that 143 million Americans’ personal 

information held by Equifax was hacked, and past incidents, like 

the OPM breach, in which millions of Federal employees’ personal 

information was obtained by a foreign State, it seems to me that 

protecting Americans from cyber-related threats is more important 

than ever. 

In your experience, if a foreign company that may have ties to 

a foreign Government is trying to acquire a U.S. company that has 

access to the personal data of millions of Americans, what national 

security concerns CFIUS would consider? How would CFIUS be 

able to mitigate those concerns? 

A.1. I have recently written a CSIS Commentary on the risks of 

foreign access to data through the acquisition of American companies. Here is the link: https://www.csis.org/analysis/understanding-ant-big-data-and-cfius. 

The gist of the essay is that CFIUS was created to protect the 

defense industrial base; homeland security and critical infrastructure were added by the FINSA reforms of 2007; now it is time to 

add access to data as a consideration. Legislation is not necessary 

to do this, but adding language on data to legislation would send 

a clear signal. 

Q.2. As I mentioned in my opening statement, I think we need to 

keep a close watch on how much of the research capabilities in agriculture, particularly R&D relating to seeds, is owned by our adversaries. I believe additional oversight of our country’s agricultural assets is critical to protecting our Nation’s food supply. Do 

you believe that agriculture and food security are important to U.S. 

national security? In the case of CFIUS reviews of foreign acquisitions of agricultural assets for national security risks, is USDA appropriately included in the process? 

A.2. That probability is very low that nations seeking to use force 

or coercion against the U.S. does will exploit food as a vulnerability. The one area where consideration of agriculture may have 

merit is in the acquisition of advanced research or genetic manipulation techniques. CFIUS, in these cases, could consult with USDA 

to consider the risk from the potential loss of intellectual property. 

Q.3. In your testimony and at the hearing, you suggest that CFIUS 

could use more resources. If its resources were increased, how 

could those resources be most effectively used to better protect national security? Should it be allocated to monitoring M&A activity, 

reviews, investigations, mitigation, or something else? 

A.3. Better tracking of M&A activity in the U.S. and abroad, including trends in research and development that could lead to new 

companies or products, would be useful, as would additional resources to the Intelligence Community entity that supports CFIUS 

(which I occasionally advise). Monitoring of risk-mitigation agreements are best performed by the Defense Security Service (DSS) 

and an expanded workload would require more resources. 

46 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM JAMES A. LEWIS 

Q.1. Last year, due to increasing pressure from Venezuela’s economic crisis, PdVSA, Venezuela’s State-owned oil company pledged 

49.9 percent of its shares in U.S. oil company Citgo to Russia’s 

Government-owned oil company, Rosneft. Citgo is owned by 

PdVSA, and it operates pipelines and oil refineries throughout the 

U.S. It is my understanding that Rosneft may have also acquired 

additional ownership shares of PdVSA on the open market, which 

could bring their ownership potential to more than 50 percent. Respected market analysts have predicted that PdVSA could default 

on its debt to Rosneft in the near future. If such a default were to 

occur, Rosneft would then acquire at least a 49.9 percent ownership 

stake in Citgo. 

If PdVSA defaults on its debt, Rosneft would acquire, at a minimum, a near-majority ownership stake in Citgo, which has 48 petroleum product terminals, three refineries in Texas, Louisiana, 

and Illinois, and nine pipelines throughout the United States. In 

your opinion, would such an acquisition generate national security 

concerns? 

In your opinion, should CFIUS review any acquisition of Citgo by 

Rosneft? 

A.1. CFIUS should review this acquisition. 

Q.2. Are there any statutory limits that constrain CFIUS’s authority to review foreign acquisitions of U.S.-based companies that are 

owned by foreign companies, as would be the case if Rosneft were 

to acquire Citgo? 

A.2. I do not believe there are limitations if some link to the U.S. 

can be demonstrated. The legislation proposed by Senator Cornyn 

would help make clear that CFIUS has the authority to review 

such transactions. 

Q.3. To my knowledge, CFIUS does not have a process requiring 

members to recuse themselves from a review if they have conflicts 

with a particular transaction. 

Would it concern you if members of the CFIUS had prior employment engagements, personal financial holdings, or other interests 

that served to impede their ability to objectively review transactions? In such cases, do you believe that CFIUS members should 

recuse themselves? 

In your opinion, should CFIUS establish a recusal process governing member participation in the event of potential conflicts? 

A.3. CFIUS members represent agencies and do not act in their individual capacity. Agency positions go through an internal clearance process, and the CFIUS process itself works against self-interest. If an individual representative has a conflict of interest, he or 

she would normally be replaced by another individual from the 

agency in question, but in general, what is being presented is an 

agency view. 

47 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STATEMENT SUBMITTED BY THE RAIL SECURITY ALLIANCE 


91417001.eps
48 


91417002.eps

Introduction 

The Rail Security Alliance (RSA), a collaborative of American freight rail manufacturers, 

suppliers and other interests, appreciates the opportunity to submit testimony to the Senate 

Banking, Housing, and Urban Afl'airs to highlight the urgent need for reforms to the Committee 

on Foreign Investment in the United States (CFIUS). As the Committee is aware, CFIUS has 

long served as an important tool for protecting U.S. national security interests from being 

compromised by foreign investments. However, the evolution of digital technologies, increased 

use of murky financing by foreign investors, and a changing international landscape since the 

last CFIUS update in 2007, among other things, suggest that the CFIUS is very much in need of 

an overhaul, as it is often ill·equipped to deal '~ith these new risks to economic and national 

security. 

China and Chinese state·owned enterprises have particularly, and troublingly, exploited these 

gaps in theCFIUS process to strategically entrench itSelf in the U.S. freight rail manufacturing 

sector. Allo\\1ng China to continue to target and do harm to the stability ofU.S. freight rail 

manufacturing not only threatens roughly 65,000 American jobs, 

1 but also has the potential to 

severely compromise our economic and national security. Freight rail is a core component of 

U.S. critical infrastructure, according to the Department of Homeland Security.

2 With nearly 

140,000 miles of railroad covering the United States, freight rail regu.larly transports sensitive 

materials such as oil and nuclear waste that are integral to American defense and economic 

infrastructure. Yet freight manufacturing-which offers Chinese interests an opportunity to 

offioad excess capacity of both freight supplies as well as steel and other raw materials - has 

increasingly drawn Chinese government investment activity in the United States. Today, Chinese 

state-owned interests are using circuitous and anti-competitive tactics to build freight rail 

manufacturing capabilities in ihe U.S. market that are undennining U.S. industl)' and raising dire 

concerns about the economic security of the United States. However, despite the intent of 

Congress when it first established CHUS over 40 years ago, the CFIUS process as we know it is 

not equipped to address these urgent challenges. 

As Congress examines possible refonns to CFIUS to address these gaps, we ask the Committee 

to consider these critical facts: 

• China is strategically targeting the U.S. freight rail manufacturing sector, first with 

aggressive and anticompetirive early moves into U.S. transit rail that have nabbed four 

U.S. metropolitan transit contraCts thus far, and largely through anticompetitive under· 

bidding practices. 

• With China's government picking up U.S. transit rail contracts, the Chinese are now 

using their rail manufacturing capabilities to take on the U.S. freight manufacturing 

sector. 

' Oxford Economic~ Ifill ll't Derail US Freight R.o//ing SIQC!r Produaion?. May lO 11, at S. 2 Depann-.:11! of Hometaoo Secnri~·. Transpor11111on Sj>lenu .'kctl)l' Ownifll', July 6. 2011. 

l!nps:ll• '"' dhs.gov}rnnsponj!!ion§lJ!tms·seqor 

1341 G St NIY6"floorl Washingtol!, DC 2(X105(20l.. 466. 8)00 
49 


91417003.eps

• This activity is a pattern for China's state-owned rail sector: Over the last nine years, it 

has systematically wiped out the entire freight rail manufacruring capability in Australia. 

Without proper government oversight, the same thing could all-too-easily occur in the 

U.S. market. 

• The upshot of such a catastrophe would be felt not only by the U.S. manufacruring sector: 

Forcing America's industrial, milital)', and other government interests to rely 

significantly or wholly on Chinese government-made freight rail cars raises grave 

security concerns. 

• CFIUS has thus far failed to recognize these concerns or been able to address the 

implications of having the Chinese government closely involved in a core sector of our 

nation's infrastrucrure. 

China's CRRC Targets U.S. Freight Rail 

The "Made in China 2025" initiative, a key component of China's 3~ Five-Year plan,

3 

identifies the rail manufacturing sector as a top target for Chinese expansion and has driven 

strategic investment and financing acti\~ties of the China Railroad Rolling Stock Corporation 

(CRRC) in third-<:ountry markets and the United States. CRRC is wholly owned by the 

Government of China and it has 90 percent of China's domestic market for production of rail 

locomotives, bullet trains, passenger trains and metro vehicles. 4 In 2015, CR.RC rep011ed 

revenues of more than $37 billions-significantly outpacing the entire U.S. railcar marke~ 

which had $22 billion of output during the same year.6 According to Chinese state media, CRRC 

plans to increase overseas sales to Sl S billion by 2020, about double the level of export orders 

in 2014,

7 and the U.S. market is a prime target 

The dangers to allowing CRRC's anticompetitive actions are evident in Australia, whose rail 

manufacturing sector CRRC entered in 2008. In less than 10 years, CRRC effectively decimated 

the sector, undoing the other four manufacrurers in that country, which Jell only CRRC 

standing.8 CRRC leveraged financing from its own government to help customers acquire its 

product at costs well below the market Today, almost no meaningful Australian freight rolling 

stock manufacturing exists9 - CRRC' s Australia footprint is almost e.xclusively that of an 

assembler of Chinese-made parts and a financier of purchases from CRRC. 

'U.S.-Chioo &onomic are Security Rc\icw Conunissio!lZ0/6 Report to Cong=. November 2016. at tOO. 4 Langi Chiang. Chma's largtst train maktr CRRC Corp annowre<s 11.2 billion J"an in tXNitradS, South Ctina 

Morning REPORT. July 23, :Wt5. 

' Macquane Rcscatth. CRRC Corp !Jd: Too brg ro roll too fost. May 20.2016. at 3. 6 0xfotd &onornics. 11111 U't Derail ~'S Freight Rollmg SJocJ; Productron?, May :W t 1. at 2t 

· Bttnda Go h. China Trammakrr CRRC 10 budd more plants abroad m <>'JXliiSIQn plrm: Chma f).,ly, RaTERS, 

Dec. 5. 2016, hllll:llroJ11 reutergon!lanicle/us<m:=exoo!§jgn1!)USKBNI1UOEI 

' Jd. 

'!d. at tl-16. 

1341 G St N\Y6"Floorl Washingtol!, DC 2<XI05120l.. 466.8100 
50 


91417004.eps

In the United States, we have since 2015 witnessed CRRC establish rail assembly operations in 

three states, along with additional research and bidding operations in three others. By beginning 

with a business strategy to take market share in the U.S. tnlnsit rail manufacturing sector and 

deploying near-limitless financing from its home government to help lower the below-market 

bids for new U.S. metropolitan transit projects, CRRC has quickly established itself as an 

unbeatable force in U.S. transit rail competition. 

Several recent cases involving CRRC bids for new transit rail projects serve as compelling 

examples: 

o CRRC bid SS67 million- roughly half the next highest bid (from Bombardier, a 

company with a longstanding U.S. manufacl\tring workforce and footprint)-to 

111n dte contract with the MBT A in Boston in 2014.

10 

o In 2016, CRRC won a contract to provide transit rail for the Chicago's CT A, 

bidding $226 million less than the next-highest bidder. 11 

o In early 2017, CRRC bid $137.5 million for a contract with SEPTA in 

Philadelphia, underbidding the next-largest bidder by $34 million.

12 

o In March 2017, CRRC finalized a contract with the Los Angeles County 

Metropolitan Transportation Authority for its transit rail system that could be 

worth up to $647 million,

13 reportedly leveraging below-market financing to 

enable them to undercut other bidders. 

Faced 11ith the outcomes of these anti competitive tactics, transit rail manufacturers in the U.S. 

market are feeling the pinch and many have already begun to downsize U.S. manufacturing 

facilities and workforces,

14 with the prospects of more wori<force reductions to come. 

Anticipating the opportunity to unseat other manufacturers here and take advantage of the 

opportunity that these U.S. job reductions are likely to create, CRRC most recently announced 

10 Bonnie Cao .. 4jler II Inning .IIBT.4 Contract, Chino Trainmoker CRRC PIMs Ameri/Xlll Expansion, Boston Globe, 

Sept. II. 2015. hllps:/6nnvbos!ong!obe conybusjnessl201j,!)91! l/allcr·\linnint·mb!a=Wrlract<li'P1minmaker· 

crrc-pl:ul'>.americlln-expansioM!ISltU7uHIVFGR?gjWniDEjM/stotv.ltml 

II Cori~ n Shropshire, FJTSt Step to A'ew C7A Roil Cars: Build the Fac1ory m Ch•cogo. Chicago Tribune. Mar. 16. 

2017. lttp·/1"" 11 .chicago!ribune.ro!Mlosiocss/ct<ta·ne\1 -rrubr-olati-4)3J(..bu·20170315-stol\ .J•ml 

" Jason laug ~in, Mass. ~d wnpany •·ish Chinese Bad:ing BealS /.QCO/ Group for SEPTA Car Contract. The 

Philadelphia Inquirer. Mar. 21. 2017. htto:!/"""·ohilh oomlphi!h!busiB:ssltranspon31joniM.'lSS=basedso!l!!)ilm· 

with-Chinese-baclsing-!x;atS:()DI·Iocakro!l):for-SEPT A-gt<O!!Ilj!C! lvml 

u KeithBarrow./,osAngelesOrdersCRRCMetro Cars. lrlermlional Ra h1~y Jourml Mar. 2~. 2017. 

htto/11'"" oultouJml ooJII'ip;!c,' p!nlmnb=america!Jos<mgclru>n!wsm;:meJ!!>s!us him! 14 5<¢ ()PD. IT£: G£ closmg 3 fonner Alstom plmJIS m Chauanoogo. WRCB, June 21. 

20 t6.h!1D'{ilun1 l1Jtb!l.comls!onll21S6()6J/ppdate-geslosjng-Ho!!WI'ills!Qm=plams·inshanaoooga: GE mal:i~tg 

layolft at Salem p/0111: WDBJ7, Mar. 2t 2017,l•ID//uwll' l1dbj7 oom/con!ertlnews{GE·mkjng.J310!M!·Sa!e)!t 

o!an!-1 J7Q.I.l68lllml 

1341 G St NIY 6"floor[ Washingtol\, DC 2(XI05[20l.. 466. 8)00 
51 


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!hat it is developing a 204,000-square foot plant in Springfield, Massachusetts, where it will 

assemble railcar components shipped from China to the United States.15 

CRRC: A Case Study for CFIUS Reform 

In 2016, CRRC announced a joint venture with Majestic Legend Holdings Limited and Vertex 

Rail Technology to create a new railcar manufacturing enterprise, Vertex Rail Corporation. This 

initial fonnation appeared to be structured as a greenfield investment, avoiding a CFIUS review, 

though this is mostly optical, as the company is effectively a way to enable the Chinese 

government investment in a subsidiary of Vertex Rail Technology. Public reports from Vertex's 

general counsel indicated that ownership would transfer once the company produced several 

hundred freight cars. Due to this takeover by the Chinese governmen~ 55 Members of the House 

and 42 Senators raised concerns about this transaction and urged CFIUS to investigate. 

Nevertheless, Vertex announced in late 2016 that CFIUS would allow the deal to move fOI\vard. 

Given CRRC's existing stronghold in U.S. transit rail, the Vertex deal now provides CRRC with 

the opportunity to rapidly expand into the freight rail sector where additional national security 

risks come into play. 

Implications for National Security 

Unlike the U.S. maritime shipping industry, whose security is protected by the I 00-year-old 

Jones Act - a measure that requires vessels transporting goods between U.S. ports to be U.S.-

built and majority U.S. -owned- freight rail in America has been left comparatively unprotected. 

Yet the Department of Homeland Security (DHS) deems the U.S. rail sector as part of the 

nation's critical intTastructure, 16 noting that 140,000 rail miles enable U.S. freight rail to ron 

through every major American city and every military base in the nation. Freight rail transports 

not only military freight and industrial products, but also nuclear material and hazardous 

chemicals that can be safely and effectively transported only by rail. There are very real 

concerns, DHS has noted, about freight rail vulnerability, including through cyber-attack. As 

DHS reported in 2010, 

With the merger of information system techiKifagy and transportation infrastructure, railroad 

operations have become increasingly relialll on information systems and COIIIIIIllnications 

technologies. Rail companies hare made growing 11se of onboard-compulers, local tu·ea 

nelll'orks, automated equipmelllldemifiers, global positioning sys1em (GPS) tracking. 

autonralic reporting of work orders to headquarters, car scheduling and train order systems, 

and two-way wireless communicalions. ... Nearly all .. . rail cars are lagged with automalic 

" Jim KiMC). CRRC .\fA Sprmgjield p/hm has dtallo build sub•·ay mrs for U!s Angeles. MAssLII'[, Dec. 22. 

2016.1tto·lbmw masslrl'e.col1llbusii1Css-ncwslindeus020t6/12/cm: o!ans fiml assemblv of los angeles htmt 

16 Presidellll31 Po6CJ Directi1~ 21 (PPD·21) identifies 16 critical infrastnx:twe sectors. io;ludi•'8 "Transponation 

S)stems." The Ocpanrnent of Homcl1nd Security defines "Freight Rair as o~ ofth: seven kCJ subseaors. S.e general~·- PPD-21, Crilloot Jnfrastf11Cturt Security and Resilience. Feb. 12. 2013, huosii\\Jl'V)I hi!e00use.J!OlhbeD!W1lffiq;12013Jll2/lltpresjde!JiiaJ-oolicy1brec!jyo<riljcaJ.jnfmsructUJe:SOClWD:Qrki=RS!I ark! Tmnsponatwn 

S;'S/ems Sector, Dcp ·,of Homeland Sec., Mar. 25. 2013. l!!rpt/"'"" dhuoy/!l!lnspo113!io!!=SI SleJ!!S-l\lClOl. 

1341 G St NIY6"floorl Washingtol\, DC 2<XI05120l.. 466. 8)00 
52 


91417006.eps

ide/1/ijicatiolltrtmspouders. which automatically record ami report car location as it passes 

a WQ)~ide detector. . .. Vte railrood's growing dependence 011/hese ce/1/rali:ed monitoring 

and comrol systems, including Cemralized Traffic Colllroluenvorks, prompts concerns of 

possible cyber-attacks upon these systems.

11 

That assessmen~ written seven years ago, did not account for substantially more complex digital 

capabilities that have since evolved, or are in developmen~ for U.S. freight rail cars and freight 

train operations. Yet the assessment underscores the clear danger of a foreign country, and 

panicularly the Government of China and its state-owned enterprises, having undue control of 

freight manufacturing in the U.S. maikel. 

Already, there are repans of Chinese manufacturers investigating the production of their own 

"telematics" technology to allow the monitoring and control of their freight cars.18 Needless to 

say, as China's CRRC becomes more dominant as a U.S. rail manufacturer, there are urgent 

questions we must answer regarding whether a growing presence of- and reliance on -freight 

cars from the major state-owned Chinese rail enterprise could compromise the security and 

safety of industrial, military, and other U.S. freight shipments 

Recommendations 

This hearing is an impanant first step to amending CFrUS to enable the U.S. Government to 

tackle this pressing challenge. As Congress debates this issue. we reconmtend the following 

updates be made to CFIUS: 

• Expand the Committee's jurisdiction to cover greenfield investments where an investor is 

a foreign sovereign, state owned enterprise or is financed by such a patty. 

• Expanded definition of"control by a foreign government" to include the access of the 

buyer to below-market loans and other financing directly or indirectly from government 

sources. 

• Systematically increased scrutiny of investments by from cenain countries that pOse a 

significant threat to the United States. 

• Greater review of transactions where the company being purchased or invested in is an 

induslly that suppans the manufacturing of critical infrastructure. 

Conclusion 

We appreciate the Committee's interest in addressing these issues. The strategic targeting of our 

nation's infrastructure by the Govemment of China and its state-owned enterprises pases a 

fundamental threat not only to the econontic and security of the United States, but to our 

country's standing as a global pawer. Addressing these concerns will not follow any single 

1

' Dcpannltln of HomcL'nd Security. Transponation SJ Slt tns Scclor-Spccific Plan: An Anne.x to lite National 

Infrastructure Protection Plan (20 10), at 285. 11 Cluna pt011$ 'snran trams' to la/ie on glo/Nrl roil companitS. CHNA OAI~ Y. March 10, 20 t6. 

l!np;/Wish.chimmil.com.rnlne"J<I!lnnels/2(!16-03110/comern 695227 I 2.h!m. 

1341 G St NIV6"floorl Washingtol!, DC 200051202..466. 8)00 
53 


91417007.eps

solution, but we believe refonns to the CFIUS process are an essential part of protecting U.S. 

infrastructure from being compromised by foreign influence. To that end, we support eftorts 

being led by Senator Cornyn to pursue needed changes to the CFIUS law, as well as other similar 

efforts to bolster lhe Administration's ability to track and protect U.S. economic interests relative 

to investment activity by SOEs in the rail manufacturing sector. 

Thank you again for the opportunity to submit testimony and the men1bers of RSA look fOI\vard 

to hearing the solutions put forward by Congress to address these threats. 

1341 G St. NW 6"Fioorl Washington, DC 2o:Kl5l202. 466.8700 
54 

LETTER SUBMITTED TO THE TRUMP ADMINISTRATION ON CHINESE 

EQUITY CAPS FINANCIAL SERVICES SECTOR 


91417008.eps

tlnitfd ~ratts ~enatc 

The Honorable Wilbur Ross 

Secretary of Commerce 

1401 Constitution Ave., NW 

Washington, D.C. 20230 

The Honorable Steven Mnuchin 

Secretary of the Treasury 

1500 Pennsylvania Ave., NW 

Washington, D.C. 20220 

WASHINGTON. DC 20510 

September 5, 2017 

The Honorable Robert E. Lighthizer 

United States Trade Representative 

600 I -ph St., NW 

Washington, D.C. 20508 

The Honorable Gary Cohn 

Director of the National Economic Council 

1600 PeliDSylvania Ave., NW 

Washington, D.C. 20500 

Dear Secretary Ross, Secretary Mnuchin, Ambassador Lighthizer, and Director Cohn: 

A$ the Trump Administration continues to review our nation's economic relationship with China 

as part of the U.S.-China Comprehensive Economic Dialogue (CEO), we ask that you continue to 

address Chinese trade and investment barriers that harm U.S. financial institutions and their ability 

to grow the American economy. 

U.S. frnancial services providers, including those in securities, banking, and insurance, face 

significant restrictions in the Chinese market that limit their in•1estment and market access. China 

prohibits certain types of foreign frnancial services companies from establishing wholly-owned 

operations, requiring them instead to establish securities joint ventures subject to a 49 percent 

foreign equity cap. While the current cap that applies to securities firms reflects an increase from 

33 percent, which China agreed to in 2012, U.S. companies are still required to partner with local 

Chinese entities that retain a majority interest in the joint venture. The life insurance foreign equity 

cap has not been raised from 50 percent since it was put in place in 2001, when China joined the 

World Trade Organization (WTO). 

Such restrictions effectively block U.S. fmancial companies from owning and controlling their 

inVestments as they do in almost every other market in which they operate. They also harm U.S. 

companies in other sectors of the economy, like manufacturing, thai rely on the scale, scope, and 

expertise of U.S. financial services providers to compete with Chinese competitors. 

By contrast, Chinese frnancial services companies face few, if any, barriers to entry when doing 

business in the U.S., other than meeting prudential requirements set by Congress and our financial 

regulators for all financial sector participants on a non-discriminatory basis. 

We understand that the Chinese have indicated a willingness to address financial services equity 

caps in the context of a bilateral investment treaty (Bil). While we applaud this development, we 

ask that the Administration prioritize work through the CEO to seek a more timely solution to this 

problem and garner a commitment from China to allow U.S. fmancial services companies to own 

I 00 percent of their Chinese operations. The Administration should continue to negotiate for the 

elimination of these barriers to entry so that U.S. institutions will have the same opportunities to 

do business in China that Chinese institutions have in the U.S. Doing so will level the playing field 
55 


91417009.eps

between the U.S. and China, promote domestic economic growth, and ensure the protection of 

U.S. economic interests abroad. Thank you for your consideration of this important matter. 

David Perdue 

United States Senate 

Sincerely, 

-r~a. Tom Cotton 

United States Senate 

L~ Thorn Tillis 

United States Senate 

Rob Portman 

United States Senate 

~d.~ f:Jtfd &Jf!. rfi[;J._ .. ;r:-__ 

United States Senate United States Senate 

Cf:..evf:?._ John Thune 

United States Senate 

Steve 

United 

Daines 

States Senate 

~J&~ United States Senate 
56 


91417010.eps
57 

CHINA’S TECHNOLOGY TRANSFER STRATEGY 


91417011.eps

Pre-Decisional Drajl /.0-Far Discussio11Purposes Only 

DEFENSE INNOVATION 

UN IT EXPERIMENTAL 

Silicon Valley I Boston 

China's Technology Transfer Strategy: 

How Chinese Investments in Emerging Technology 

Enable A Strategic Competitor 

to Access the Crown Jewels of U.S. Innovation 

Michael Brown and Pavneet Singh 

February, 2017 
58 


91417012.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

Executive Summary 

This report exploitS China's participation in I'Cnture deals' financing early~ teclloology compatm 10 assess: 

bow 13!plthe orernU im"eStment is, 111lether it is yowin& and wkuteclloologies are the focus of im·estmelt. 

Cbinese partitipation itl l'entu""blrled startups is at a morel ltl'd of 7-10% or Ill l'etllll re dHis done and bas 

yown quite rapidly in the past fn·c years:. TilC teclloologies China is inl'esting in are the same ones tbat we expect 

11ill be fouroalionalto foture innorooon in the U.S.: artificial i11tlligencc, autonomous rehicles, augmcntodMrtual 

.wily, robotiG and blockchain technology. Moreorer, these are some of the same teclloologies of interest to the US 

DefcllSIC Deparunent to buikl on the tcclrological superiority of the U.S. mililal)' today. 

Because the U.S. economy is open. foreig11 inl'estors, including those from China, are oole 10 inl'est in the Dell 'eSt and 

most re~'3111 tcclloologies we are developing for the fUillre and gain experience 11ith those tcclloologi(s at the same 

rate as the U.S. does. The U.S. gll\ emma~t does 10t tui'I'CIIUy monitor or restrict renlll re inreSiing ud the 

potential tm sfcr of eariy-Siage technology know-bow. The primaty tool 1he go~ emment bas to block or mitigate 

foreig11 im·estmeot is 1he Commiltee on F~g~~ nl'cstment in 1he Ulited States (CFIUS); bowem, since CFIUS 

~e~ ieln specifiC deals on a case-lly..:asc basis (mtb:rtkut systematicassess~neru of acquisitio~ or ;~Cqllirers) and 

only deals tbat inrolrc a controlling interest by foreign im"eStors (usually mergers and acquisitio~~ CFIUS is only 

partially efTectilund allowscoooeming activity beyond its jurisdictioo. The other priocipal tool to inlibit 

teclrology lransfer ise.'port CO<lmls. E.'l)Ort controls are efTectilt 31 detening e'-ports of f"'duc/s 10 undesirable 

countries and can be used to prerent 1he loss of advanoed tedlnok>giu but controls \l"l:rt not designed to govern 

early-stage tcclloologics or inrest~rell actirity. lmponallly, 10 be efTectirc, expon co11rols rtquin: coUabomtion with 

illemational allies. which is a long process where cooperation is not guaranteed. 

This repon swfaocs some of 1he more coooeming im"eStmcnt llalds by Chinese entities in the U.S. early-stage 

tccmology cc~ ent There is funher detail on the Sln:ngths and weaknesses of the U.S. go1~mmeot s exiSiing 

tools and speci(IC recommendalions on bow to stem the lnlnsfet of teclloology and technical know-bow from this 

asset class. For the Dtpar1111ent of Ddeast, in partitular, tbe rtport bigltligbts a series of actiou to tal<t from 

de>·doping a uitital tedtnologies 6st to restricting Cbinese in•·estments in ech o~ on that lis~ etlhiiiCiog 

cou.aterinteHigen.ce efforts 111d inerealing investment to stim~la e technology de\·elopment througb DARPA. 

Howe~~ , while these findings are concerning, vellure im'esting is only a small part of China's im·estmeot in 1he 

U.S.-whicb iocltxlesaU fonnsofilii'CSUilelll and im·estortypes. lm'estingis itself only a piece of a largerstOI)' of 

massirc tedmology IJ'ansfer from the U.S. to China wlich bas been ongoing for dcClldes. This repon places rcn!Urt 

im·esting 11ithin 1he larger come.~ of China's long~erm, systematic effOn to attain gloOOl leadership in many industries, 

partly by transfening leading edge technologies from around the ~~~rid. Therefore. the recommendation for tbe U.S. 

govenment is to es:paad tbc scope of CFIUS to include uy commercial activity that could resuh in tecbnology 

tl'lnsfer such as ,·enture inl'eSiing tmd to restrict in•·estmtats and acquisitions of U.S. companies that on 

technologies tile DOD identifies as uitiu lto national secu rily. 

IUJlOdance JO tl!; DepanrneJl ofDefe!l'!e l!loDl 

U.S. milital)' superiority since World War U bas relied on both U.S. economic scale and technological superiority. 

U.S. technological ~mineoce enabled 1he series of offset Slrategies whicb io::loded being 1mt with nuclear 

weapons (tb: Firsl OO'seO and 1he electrollicHnabled weapons of night vision, laser-guided bombs. stealth and 

jamming tcclloologies as weD as spaced-based militaly communicatioiiS and nav18ation enabling the U.S. to dominate 

a battlefield (the Second Offset). Much of this technology came from rescan:h sponsored by the U.S. go•~mmcm 

2 
59 


91417013.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

and the Dd'ense 0¢panme111 spccilically. However, the technologies which will ete31C the Third Offset are being 

del·elopcd by early-siage ~logy companies wilh iaJge commercial marl<eiS. If we allow China access 10 these 

same teclmlogjes coocum:llly ,lhcn 001 only may we lose ""' technological Sllpcriorily btl! ~~~ may e~ en be 

facililatlng ChiM technological Sllpcriorily. 

That China will grow to be an economy as large as ours may be inevi!able; lhat we aid their mM:amiliSI Slrategy 

lbrough fll't trade and open investment in our rechnology sector is a choice. As a result while Ibis sualegic 

competilion with China is a loog-lcnn lhreat IOOrr !ban a slxln~enn crisis, prcsening our teclmlogjcal superiori1y 

and economic capacily rccpires wgell aclion IOday. 

Key Svpoortjng Points· 

• China is mwting a m•lti-<l«ade plan to transfer technology to lncrel!t the size and rUle-add of iU «''n Oily 

from its basel! thewortd's2nd largest «ooomy. By2051l,China w~J be 1~% thesi1,eoCthe U.S.' (with the 

goal of being dooblt the US ecooomy by that time aad decrease U.S.' relcnnce globally)'. 

• This technology transfer to Chioo occurs in p311 through i~ng lel-elsof inrestmcll aod acquisillons of U.S. 

companies which an: at record lerels IOday. China participated in aboaliO% of aD rcnture deals in 2015 up 

from aS% amage partlcipatioo rate duriog 2010-WI6. 

• China iJ inre!ling in thecriti<al future technologies that will be foundational forf•ture innovations a.:ross 

technology both forcommertialand military appHcations: trtirl<ial intellige~~tt, robotics, :wtooomoos 

•·ebicles, augmented and •·irtual tUfity, financial technology and gene editing. Tile linedenwta~ing products 

desig~Mld for commercial •-s. miliw)• pll]lOSCS is blurring in these new technologies. 

• lnvestmeots are only one means or tecboology tnnsfer whi<h al!O OCCU!'I through the following licit and illkk 

rebitlts where the cost of stolen illellectual p1!peny has been estimated at $300 billion per year.' 

o I!XIuslrial espionage, where China is by far the moSI awessi•~ count!)' operating in the U.S. 

o Cyber thell on a mas:sire scale deploying hundreds of trousands of Chinese anny professionals 

o Ac:.demia, since V. of S11'M grnduale studctll are Chinese foreign nationals 

o China's use of open souroe infonnalion Ca13loguing fo~gn illiJOvation on a large scale 

o Chinese-based technology llansfer organizations 

o U.S.-baled associations sponsored by the CbiJlCSIJ gn•'CIIlDient to recroit tale Ill 

o Techuical espeniseon how 10 do deals leam:d from US finns 

• China's goal! are to be #I in global market sbre in key industries, to reduce reliance oa foreign ter~nology 

and 10 foster indigenous innovation. Through publislxxl docWllClls SIJCh as Fire-Year Plans aoo Made in China 

2025, Cbin~'slndutrill polic)' and oational !oats 01 inncwation are tltar. 

• 1'bm are clear exmples of Cbine!e indigenous innovation when: China is doing much more !ban copying 

toclmlogy. 

• The U.S, does aot h•·e a comprebcnsn·e polity or the tools to address this massive technology transfer 10 

China. CFIUS is one of the only tools in place today to govern foreign im~ btl! it was not desig~Mld to 

protect sensitire technologies aoo is only p31tially cffcctirc. 

• The U.S. gorernment does aot h•·e a holistit •it>~· or how fast th~ technology transfer is oewrring, the lel·d or 

Chinese investment in U.S. ltchnology or •·hat tecbaologics we sbould be protecting. 

• DoD has SCI'tr.ll areas or risk resulting from the scale of China's im'estmcJU aod its technology trnnsfer. 

o SupplycbaillSforU.S. mililal) equipmentaodse";cesare~owned by Chiuese finns 

1 A<conli~oollo r-om;,. II>< U.S. GDPrilbo SOII 1ril i<o~2051 odO.ioo's GDPwillbt 051rillioo. "lqTct111!ba""""""i< fOI",.._Key 

T"""'I02050. 7lot /~U..., tln l5~ 

1\c U. I> c<-«<wdlo•-~ri,'ll 1hll eoullbt llrz<rillooils ... n-iel50)""'· Midloel llllobuiy. 71otH,..;..S.rt4rM..-_ 

~cw\'~ Sl. l f.lrlin's Grill',.,·lOt6) 

'"Tht lPC-islion R<pod: 1\c R<podoo lbo 'lbdlof-~ ftq>aty.·- -or Aliso R-.il (May. lO ll~ R<cri<wda 

Wn wwwP,.mmem 
60 


91417014.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

o China's ~Ed in\'estJnerus to close the~ in C311Glbilities ben•~• its milil31)' and tbe U.S. in key areas 

~Ueh as jet engine design. 

o lnduslrial espionage and cyber theft mean kcj• defense designs and plans are in Chinese hands. 

o There is no agJtCd upon list of technologies to pro!eCI for the fu!urc !hough an eft' on exiSis today 10 

delib:a!e technologies critical10 Cl1l'lCU acquisition programs (lAPEc'). 

Thcapproprialt policy rtCOmmendations depend on assesSillCntS of the urgency and imponanceofthe stnllegic 1lueal 

lllat Chim poses; 

• A minimaliSI action would be to de\'clop tbe dala collcclion and analysis capability to bcller assess what is 

~og. DoD slvJuld im'CSI in deltloping the critical technologies list we need to pltl4ect for the future. 

• Defensive actions 10 slow the leebnology trnnsfcr include rcsuiding Chim's im'CSimell in and acquisition 

of technnlo&l' companies by reforming CFIUS and modifying bod> e.<pon cord!Ois and !llJdent ,;sas to be 

consist ell uith protecting aglted-upon crilicaltechnnlogies. More inrestmel• in coullleri~emgence and 

cyber pltl4ec:tion would deter future illellectual property tren. 

• To be fully effecti\'e the U.S. gol'ernmell~a-whole needs to change its policy to rcftect m-. Chim has 

beeotne a Slrntegic competitor and engage the prira~e sector and academia. 

• Any or these defensh-e approacbes slvJuld be accompanied by an im-eSiment program to proacth-ely 

rei n!OLtt our Slrcngths in techmlQ&l' del'dopment and innovadon. 

To respond to this smuegic competitil'e threat reqoin:s refonuing crrus as weD as a long-term and consislem 

gol'ernment-wide plan and, morc like~ . a llilliona.l straltgy to engage the private Sector and academia to pm·ent the 

transfer of sensith'C technology. E.<isling US policy and process:s grt\'CmiQg the acquisition or sensith-e technology 

and facilities by potellial ad\trsaries do not regul<ite '~ im·CSiment. Nor does tre U.S. gnvemment hal'e 

the C311Glbility to restrict foreign im·CSimell in specific 1echnologits on national security grounds, such as artificial 

intelligence and semiconductors that are so foundational to future milital)' ad\'31ll3ge. Dereloping and ilf!)lemelling 

such a ll3tional sln!IC&l' goes well beyond what DoD alone can do to slow tlls techoolo&l' tmnsfer. In this report. 

!here are rtCOmmendations 10 respond Ill China's im'CSU!lents bw lhett Muld nctd Ill be additi~oal stud)' 10 fiJJly 

address the slnltegic threat m-. goes well beyond DoD's rcsponsibilities. 

China's Growing Investment in the U.S. & in U.S. Technology 

Cbioo's G!ollal ;md !! S hm;s!ment 

Chin~'s global forcign dirtel investment (FDI) le.·el is growing rapidly ud is at a rtronl Je.~l in a rangt or 

$200-250 billioo. nilh $213 bi!Uon in annouocM aoquisitk>~ in 20 16.'' China's FDI in•·t.llment io the U.S. in 

20l6~·asS45.6 bilioa andauoolativeFDI in the U.S. !inre2000 nowucecdsSJOO billion.' Cbina'sin,'CSiment 

Slcmsfroma"ariety ofmoth a~ions. AsCbina'seconoDI)' has grown iotbewo~d'ssecondlargest.there is a 

comruereialintercst in e.\"(131X!ing 10 other mattets and this also provides some di\'etsifocation for colf!)<lllies and 

indh;!blals who would like to di\-ersify their im·esunerus both geograpbically and from a currency Slandpoint. Witb 

the recent concerns~ devaluMion or treamency !dath-e to tre u.s. dollar. the Chinese hal-e trode more 

im·CSintents OI'CISC3S and this bas led 10 an irma!M Je\~l or capital COI'diOI~' 

1 loCnil<qOsiloo,_"1ion&F.xpl>ii•""Cdl.cbcnWoop.tlofillir...,... 

• lifi#IIC We~ -c:bim ls:wios 'Sirir:t to.rols' oe~O•;Q'SCU bwestmcrll," Jf111r Sueefl~ (Non:mt-.:r 26. ~)16). Rctric\'td lll'dtp;_ "''m.wsoom 1 1111iJoQioo's&toboiFDiha!b«opio&•Jl'i OlUIIdly .... lllli3,o lcoclio&Qioolbd:1M1k"l""'&ioltoiFDIIOd«ti1Xio71l7101 kvdciooetiO 

Wlllllh'dlbdowSlOObiliou.l..iogliogW<i. "CCiM's O\"""'floodi~ooShrint.·w.a -"""'""l'-l'l4,lll11) 

1 Thilo-ood o.id--c.;,.,.,.,_ ;,w u.ikds-:tto:"" T-oo<llile r.&1 Ape~~' -~RtportjD«mba9. 

2016). Retrlt\·ed• bntr w~rhtssm 

• n.:..""il>l.-~oodlbestow«p1h""of""a.m...""""'l' .. bh~ priauoy"""'r .. t~t<r~a.ioo&toboLFilfoo.S.:&n.mJOn. 

4 
61 


91417015.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

CbjM 's U.S. Tcd!po!ogy ID\"0!111¥:0! 

Cbina's tocal im~lll in U.S.tcchoology (elecuooics. infonnation & COIIlllllDicalions tcclmology, biotccb & 

energy) for !he pas! OOc3dc 2006-2016to!akd aboul $35 biltionaro in 2016was abool $3.58.

10 Since !he U.S. is a 

global leader of ICdlnological innoration. il is logical lim China would seek 10 make increasing invesbnetls in U.S. 

teclmlogy companies. While il is likdy lint C1tina's invesbnetl in tcchoology is ctm·en in pan by commeteial 

irteres!S, il is unlilce~· this is th: sole reason giren China's explicittechoology goals. lmt~~m:li is one ofth: 

means for China to aeco~lisb ils teclmology bansfer goals." Both b teclmlogy goals alXI China· s muhiple 

,·chicles for technology bansfer are described in wer seaions. 

CbjM'$1J 5 Eld)\.S.IttTtthiQiogyi!M§!Dm 

CbiJiest inrestmeut tttirity in W'l)· 5t11f:t ttdtno/Qgy I!Ws Is also gro .. ing rapidly tnd pea!<cd ia 2015 111285 

deals \'alued at $12 billion, almo!l 10% o( the V11ue of all ~ethnology I!Ws in thll)'tlr ($137 bilJion).

11 This 

n.teanS tllat China inl'esled on !he order of $34 billion in cady ~ ''entwt deals. Th: lllCCific aJtaS of technology 

w"here these imt~~m:ll!s OCICtli1Cd are covered in !he rest section. 

Th:se im~ms are consisleli ~ith Cbina 's goals made clear in PresideJt Xi Jiq>ing's Slatem:lis. soo:essive 

Fi\'e Year Plans, Made in Cbina 2025 and Project 863,

0 name~·. to: 

• Establish China as one of the most innovatil~ countries by 2020 alXI a leading inllO\'aor by 2030" 

• Become a leading global scieooe and tcchoology power by 2M9-lhe IOOlh anniversary of lhe PRC 

• DcMible down on R&D of core info mat ion aad communications (1C1) tecbologies..to develop 

technologies on its on, aCf{lliring txpttlist from abroad u*m btlfgm1111s deo'tiDplfltlllls n« possible. 

Th: ym'ing im'CSimeniS in U.S. technology orerall and earlj·-!lage '-entures in particular. comprise a pan or 

Cbina's plan to aoquire e.'J)Crtise from ooroad alXI to de\~Jop indigtoous inno>~tion. 

China's Investment in Critical Future Technologies 

lm~~ from mainland Cbina-based11 im"estors into early-stage U.S. technology tornpalliescootinue to grow in aD 

Sectors and are dispersed a:ross aU the stageS o( the im·estmern lifecycle. N Some notable inrestmeli data include: 

• Cbina-based im"esfors partieip31ed in I ,002 finarx:ings in lhe U.S. from 2010 to 2016 contributing to roughly 

$30 billion in renture-backed fUJlding. Ol·er the same period, o-.-erall funding inlo stage technology was 

rooghl)• $620 billion, indieilling tbal ChiMSe ilveston ptnicipalcd ill 5% of owrall deal vtlue duriag tbit 

period (2010-2016) growing to a1m011 10% in 2015. 

It Chinalm·atnxdMmii«.Rilocli\III~Jaur)·l7 2017;~'<d.a& h!tp: ~'"-wtfi&OO!I'I 

II '"Thii"""J) """'IOI<in<lulio&Jyllloaomtiodlo~<thiodiA)' •idoct>inae""""""'m.11<ioJio\_10 ... up"""1ictt<Moi"'"" 

npobiliti<s. Wcaloa!booclsdullbcyCIII lbolob-." Aao S.-"'ood bill: Olinco<Tccllc...p.ia .. ,..,.o,._,. "CKGSBC"""* 

{Apil20, lOU). l«ttO'Cd 11 !mr- \r!.?wltdgrd.rh(ftm1'1l1S"C}!10fr:,n"NN"'d.jrwolmsmf9!&.~kl:lr<'wrnn~\~ m'(M'\: 

11 "lbtRioeofC...,...,..,_iiii.S. Tod>Stotupr"CB/m!g!uBI<>g (D."'"'I<rl.lOI6~ l!tlritwdJih!!P· ~ .. ,.........., ... <.,... 0 Projo<tl6lis~(crlllonmh(]l).t.tb ond )'nr(19!6)•bcao ... inn>eh>xdbyChio.t'stt..li,s.....PwnpoospicocmtoO..SX""'""-

Th<I""P"''•M_.<d ondS<Md•CIIina'•~'adiaai-1 R&D-. Onportnlym....,ioJ<I«isioomakq101< ......... toj>ipol01d""' 

<Oi~bot1ti\.:"'""'"&dot-procao:in""'""intniniogol!ccllni<ale:<p<~~>:llld<l<"lopi>g"'luloloai<s•f""'ogj<vWe. 

u "XiS...Targ<1Sf«Chim'sSci<oxo, T«luoolog)'""""""X"""'•(l016,M>rlOJ. Rttrin-.dah!r> """ '""""""""' 

"r.rw..._otlliJioquily,C~Dobooolio•""'""lu<l<"''"'""lioei"'""""'Cilina""' u""Konc. 

" f<rthe .,.._ottllisAUcly. ••idtotil'lldoll9uooiqu< "'""" &omebmathatf>l"io>""" iadot UnikdSIM&.cn2010102016. Th«<in'"""' 

...., r .... v.midual ,.t ;..-.. a.,_...m.. ..... ;.,. ;,...-,.,.,0<!> """'-""'"""ioool'....,.....,ut r ...... ~bonb.""' 

lt<dl<lilldsul:inta..,;,<.ul<"io"'l)'.....,"""""'" llwfulllistofa.iotstiov..--.hi.'l<~l"'io.'t>d<dilldotCB""""'-...;""*­

-...o"""'"'or.V-<CopiOI:C..........,C"J""''V.,..<Pri'.,.£4uity,Ait<liln«•I_,M_IloldiocC..,ponr.Att&<IID\-. 

..,..,_ Bd:; S...,.;p W<>ldt fwod:AnJ<l hn-(Golop); H<d*' f....t; .W.iJoly. 0..-Dnmil'lld Finon<i.\1 SU\*"; M-Bd:; 

llllil)'OOke;Dd>tA~F'-&iotssl'boCocnpt<Jt;, 
62 


91417016.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

• Actil'ily (ll)m Chii1C$t im•estOrs pe:i:ed in 2015 participating in 285 deals valued a1 $12 billion. In 2()!6, 

retlcct11g Ill: broader decline in I'CL111m capilal fironci1J8S, CIUD:se illl'eSIOrs participated in 1% of deals '~lued 

atS8.4biltion." 

Chart 1: Chinese Investment in U.S. Venture Capital Market, 2010 - 2016 

$30.4bn 1,002 

, ....... · .._ .. _. ,._ c:ca ..J!" 

.... · 110 

'!" - •lOCI 

·-

·- · 1!0 

'!1 

•· .... . ... ...... ,._ 

" ... 

• ,""'*"'......,.."' ~ 

-·- -·· ....... 

32. ~ 25.17'11. 18.70% 13.29~ 6.23% 8.11 ~ 

SI.55M SI2.5M $28.61.1 $42.4M S55.5M $185.7M 

Table 1: Dispersion of Chinese Investment in U.S. Venture Capital Market, 2010-2016 

• A majorily of1be im·ts~mem ooat!!td in lhc Soed/AJ1SCI Stlgt (276uansactions and 33%of all deals), followed 

by Series A (214 lransacUons and 25% of an deals).• This contSpOnds with lhc =•• iB:rease in Chi..:se 

inresllllefll ineru!y-llage lothnology deals 800 indica1es lhal Chinese inl-es~ors:ue ille~ed in eruly looks at 

ibe 111011 promising (CI~R if )ei Wlpll)\'ell) itehnologies. 

• By country, China illl'eSIS mo.e in early suge ioehnology companies than all)' olh:r(l()wtlj' excep~lll: EU as a 

block. (Dclails on 11m comparison aid a pie chart by oouoey :ue in Appendix 1.) 

"Th<Ris<fiCii,...lo<-i>U.~ To.'II~"CB/.,.,lliog. 

"s...trAneol""' io~~~l)'lh<fmm,_, io• NI<•bd'"'~Midu ap!OI ... w.na.""""'-dloool.,...,.,..,., ..... lloooi&IU lr.-i at. !I_. \'tdlft rollOIS(typiall)'cbolcd by a ktlersuch as ~A ... ""'r. de.) ~'CQpJI mott prl)\"'tn icSca orbusiDcss model 

6 
63 


91417017.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

ln•·estmeat in Critiu l Tttbnologies 

Chill3.00sed invesrors are panicularly aan-e in the~ technolo8Y scaors or Artificiallntdtigence(AI), 

Augmented Rtalii)'Mnool Reatity, Robo4ics and F'tmncial Tcx:hnology.ln 2016, Chinese im·cstntell in this 

portfolio of technologies represerucd approximate~· 16% of theirormD investm!m." 

• Arlijitiallnltlligmce: During 2010-2016, Chinese inl'estors panicipGicd in fdly-one AI financings, 

contribuling to the rou~· $700 million 13ised. Participation accele131cd in 201 S aoo 2016, wilb Chinese 

im·estors panicipatcd in twcnl)'-nine deals aoo $410 in flll3ncing. 

• & bofi<J: Chinese inl'estorscollributcd $253 million in foll3neing in Robo4ica stanups in 2010·2016. Deal 

actil·il)' peaked in 2016 .-ith Chinese panicipation in fifteen deals and $80 mlllion in illl3ncing 

• A•fP"""Itli RtJJfi¥1"111••1 &.lily (ARIV11): Chinese illl'tllors panicipated in $1.3 bDiion wonh of deals 

during tbc period 2010-2016. In 2016, anna.based inrestors pGAicipated in fdlcen deals, collributing$1.06 

billion in tOCal funding \'alue. 

• F'm1111tWI Toclmology (Fmttdl): lm'eSime1ltS in Firuecb, iocluding bloctchain tcehnology, continued tbcir 

rapid poce in 2016witb Chinese im'tSiors panicipating in n1-enl)'-one de3ls, valued approximately at $730 

million. 01-erall, Chinese investors ha1-e panicipatcd in $2.8 billioo in funding for Fintcch companies during 

2010-2016. 

Two imponant Utnds stand out aJOOog the new 11~v-e of tcehnology being funded. Firs4 the line dm~ rtating 

products designed and used for oommercial rersu1 mUiUry purposes il b.,rring for tlle!t e11~ g 

tccbnologies. for example, VR for gilllliog is at a similar level or sopllistieation as ihe VR used in simulators for 

ourarnted forttS." Facial recognition and image detection for social nenrorlting and onti.ne shopping has real 

~ication in tracking terrorists or other threats to ll3lioll31 securil)'; and llllCb or today's commereial autooomous 

•·chicle tcchnolog)' and drone technology solutions fioo their genesis in DARPA 8J31l1SOI'er the last two decades 

wbeo the Department orDereose so ~ todC\-elopautonowy forwar-6gbtingpurposes. 

The Implication of thls trend ls that th: curreru expon control system, and policy ~us for •~tting forelgn 

imt~~ment in the U.S., which an: bolb designed to keep sensiti\'e technology, companies, and infl3strucmre out of 

the hands of our ad\'crsaries, is built on a framework of being able to clearly distinguish the dual uses ofa 

tecmology. This beconte1 a lot tougbc"' beo the technolog)• itself is de\ -eloped for oommereial purposes and bas 

widespread potential use as a f undantelllal technology building block sueb as artificial intelligence." Wilh Ole 

blurring of the line bol\\-ccn cilqlian and mitital)' use, faster dC\·elopment CJ'Cies and the increasing mobilil)' of 

lwmaneapital globoUy, our CllllCill C>'q)Ort control system becomese\'en more problematic as a tool to mamge oow 

and where technoiO&l' transfer ocrurs, 

Sttond, tlle!e technologies-from artificial iatdligenoe to robotia and li.rtual rtality-wDI he fou datioatl so 

that many appiM:ations or end-tse technologies will he built upoa them. These foundational technologies \\ill 

be component technologies for l'uture imovations much the sam! ~Y !bat semicoodOClOIS ha•-e been oompooouts in 

all elecuooics, teletommunications and computing in the past !t'~ml docadcs. This is especially tl\IC in the r~eld of 

anificial intelligence. where the U.S. ~·ernment is actil~ y making invcslmells to create the third \1~1~ of AI 

tetmolo&l' 10 achiere a future where machines ean e'plain themseh-es to humans; where macbines ean create causal 

models, not just correlations; and where machines ean lala: \\'brulbey learn in one domain and apply the leami~ to 

a oompletely differeru domain." The brealnhroughs that oome with lbese new technologies \\ill be the building 

It O.Woliii<Cbintodn,._acthil)•inill<#f .. ..mi<Jik<lloo!opto.,io~londotl!dd<tbf«!OI4m...,.;&dinApp«<lbl•lli<ll 

i!Juma~aOiiu's ae..WJocyfocw ilt,~in'"tSliQe.. 

" Mljorl«mll)-"VVnu.IR<.olly S<4o Tnills.lditn iotN<w ;nillil&Sim~•«:U.S.AnoyN..,d:J..,_(All!lOII l01l~ Rtlrioi..S3t 

!rtf;,· vrnami\'.J!I l.wtl( t~~J 

11 E4Fdo•nondT<ni>L- "tb<-'oRq>ol1,.1htF">nolMif•-iolllltl"-:1171iNH...,.Biog. ().1obcrlll014 

ltctrie\'td at!Jne: IDf::! 1\t.Jdx!gtcjM\ hlgg '19!§ 10 )2 .mKtn!!SI!Ml'S!NJ·!jglfNI'!JftrltJ.sn!dh*£M 

7 
64 


91417018.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

blocks for inno1oations in the d«adcsabead. There is liktly 10 be an internction benreeo the new capabilities dlat 

~available (through imovalions in robo4ics. 311iftc:ial ilielligence a!XII'irtual reality) a!XInew ge!Giions of uses, 

applications aiXI prodUCIS. Th: same pbenomeooo occurred w~ faster microprocessors, more stmage or higher 

nctworkiJ18 baJXIwidlh became availlmle a!XIled iO future i!\11)\'alions sucb as cloud computing, IOObile phones aJXI 

consumer applications for GPS. Qlnsequelllly, il beeomes even lllOit criticallhal C.'IJlOIU, foreign owncrsllip, aiXI 

tecmology parm:rsllips with foreign emties do not beeome coJXIuits for technology tJansfers dlat will directly 

enable key means of foreign mililaly advaooige. What is a1 risk for the U.S. is not only losing an edge in the 

fouJXIatioml technology, but also in suetCSSi1'C generations of uses, applicalions aiXI products ~ the fouJXIational 

tecmology ewmles. Aeeording to Adam Siege~ a specialist in emerging technologies aiXI natioml seauity al the 

Qlwd on Foreign Relations, "The Chlnese ~hip is increasingly thinkingabom holv 10 ensure they an: 

compct~n'C in the ne't wa\'e of iOehnologics."" 

There are multiple ~·a s Otinese iorest ill U.S.Icdloology fimJ: 

I. ltrestmml.l in U.S. l'tnture-bad<ed surtuPJ tbroagb 1·enture firms. In the past 10 )'tal$. ChiM's 

im'CSlmcnts in U.S. ICdlnology finns wm limited 10 j<lilll \'Cillun:s or acqu ~ions, but now then: are an 

iooreasing number of green field im·estmellls" in 1'CI\Cure-backed stanups (bod> as linliled part~~:rs of U.S. 

renture rums a!XIthrougb Chili:SC 1'CW!re finns) as well as im·estmelliS through Otinese private equity fimlS. 

E.xamp!es of Chinese I~IW!U'e fums include West Swnmil Capital, Westlake Vclllures (01VIi:d b)' lhe Hangdloo 

go'-emntc:lll). GGV Capital. GSR Ventures. ZGC Capital. Ha' aiXI Sinovation. SillO\·ation (fonnerly kll0\1'11 as 

China's Innovation Works) pnll'ides a great wmple of anacli\'e Cllinese vclllute flrnl inl'esling in the U.S.: it 

~>'35 founded in 2009, manages three fulXIs of$1.2 billion in !Oral captal and has im·ested in almost 300 

stanups-including 25 in anilicial illleRigence. Asevideoo: of its govenunent sponsorship, Sinovation has 

=il·ed awards by ChiM's MiniSIJ)' ofScieoo: & Technology as well as the Municipal Science & Technology 

Committee of Beijing where the finn is headquanered. (An 0\~n iew of Sinol'3tiona!XI Ha~ aJXI their 

inrcstmcnts are profiled as case !looics of C~ rcnturc capilal firms in ApjX:IXIix 3.) A sample listing of 

go'~mntc:lll-backed vcmue fiRDS am thcirsouJtCS of capilal an: provided in Appendi.' 4. 

2. l.ll'estmml.l by Otinese rompalie!. Increasingly, Chinese illlemet companies sucb as Baidu, Teoo:nl, 

Alibaba aJXIJD.com an: aggressn-ely inl'esti~ in renture-backed iOehnology deals. In 2015, these companies 

participated in34dealsworth$3.4 bUilon, upfrom?dcals in2012 ~orth$355 million." Tencem is by far the 

most actn-e (~11h 2x the deals in 201 S lhao the others combined) ha•1~ started earlier with its inresting but 

Bmdu and Alibaba are 001 far bclind. Some Chinese illlemet companies are championing lm·estmentS in 

specific tecmologies; Baidu, for e.'<3mple has a clear im'CS!nlent focus in 311iflcial intelligence. The chart~ 

follows soows the growth of im'CS!nlent from 20 l3Jo 2016 from these Chinese internet companies. IS 

" kiul~l.wlolhnd)IIIIJxwR-""lo "Qio>Gains "' ,_ .S ioll>oiWi.oUJflllt~Amolli>«." '171tii« Y..t71""(F<bowryJ,lOt7) 

Rctrf.crtdatll!l!rr '"'"'m111D>~OO!I. 

"o-.l'lddil\-t)p..lly"r""""'''""'""""-',_itm,,.....,.,I"''Y'""""""itaf.....,""""Yboilliandtt'"""'op.. 21 "l1><RistofCitill.1'•1o•-ioli.S. T"'Sinpo,"CB/uw.IUB.I>g 

" EliZJbdbD.-<ISkit, "CCWbflooclio&Si&.:.oVIIkynhM,"II'GJ!IJtpoP .. """"' 6. 2016~ 
65 


91417019.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

China Is flooding Silicon Valley with cash 

In recent ~ars. Chinese companies have Invested heavUy In U.S. start-ups. 

Here are some hi~file deals rnvoiVIng BaJdu, Allbaba and Tene&nt, often 

referred to as tho Googlo, Amaton and Fa<:ebook of China. 

Funding round 

:W13 

Baidu 

Allt>aba 

T&(lcent 

0 Chinese wnpany was lead Investor 

... 922 

TonsoS280M A M&&lc 

~ e • 5M LvrtS1BFabS150M • 

3. Printe cquit) (PE). Chinese pm~te cquity is e'-paoding u n unpreccdenled pace 11itb the number of 

globally actil'e funds at672 (2013-2015), the higbell in; )eaJS. T01al •~lue ofChirese PEdeals in 2016 

(through Jure) is at a record $18 billion worldwide. This rear Chinese PE firms panicipated in the S3.6 billion 

ial:eom of Lexmark, tl~e S2.75 billion pwtbase of Dutch chipmaker NXP SenlieondUCLOJS and the S600 million 

acquisition of Oslo-based Oper.LL Software's web brow~r business.,. Examples of Chinese pril'ate cqui~· firms 

includeAGlC. Legend Capital arc! Golden Briek Capital and theseofienpanncr11itb U.S. pril'ateequil)• fi~ 

such as TPG (im·oh'Cd in acquiring a s~1ke in Chin.1 Jruemational Capital in 20 12) and Carl) Je (inroh·td in 

purth!tsc of Focus Media Holding in 2013). Ore of the lOOSI globally active China PE im·es10rs is Yunfeng 

Capital Stancd by Alibaba Group founder lack Ma. 

4. Special pu ~-l'tbicles. There are also e.xamples of spocial purpose itli'CSUllelll 1ehides like Cru~ on Bridge 

(an e:Qlllple of Chirese c:apil.11 ard U.S. managetrell e.xpenise combilled) which are solely fonntd 10 pwtbase 

a company aoo obscure the sou~tt of capital for a foreign acquisition, in this case. Lattice Semiconductor. 

Presulll3b~ . a spee>11 purpose \'Chicle is fomled to enl\1nce le possibilit)lhat the llansaction would be 

approl'ed by CFIUS. 

5. Acquisitions. Chinese acquisitions cmninue to increase dr.unaticaiiJ with the brgest gkloolly being China 

National CllCmicars proposed Lakeol'er ofSyngema (S11 iss peSticides) for SH billion. China's acqu~i ions of 

foreign eompanks are now equal to U.S.' acquisitions of foreign oompanies. In the U.S .. tb: laJgeStlttt11l 

China-based acquisitions hal'e been Lb: electronics diStributor, Ingram Mlt!O (S6. I billion) and the U.S. OO.el 

OllllCf, Strategic Hocels & Resorts-o11 ners of the Waldon· Astoria Hotel ($8.1 billion). 

As long as U.S. policy supports open im'CStmert by all natioos.IIC can e''(>CCL increased im·estU!ent from China 

through a broader number of l'tbides. son~e del'erly desigred to obfuscate ChiJ!ese capital and 011 Jle!Ship. The 

imestn~ent actil'il) be)ond 0Cfj11isldOtJs is nottr.ded by the U.S. govemment and we bal'e limited risibility illlo tb: 

imesto~ the technologies im·ested JO. or the tncrease or decrease of invcSiment Oo11 ~ except through 11 hru JS 

tr.dcd by pm·ate data soum:s. Howe~ er. c•cn these private d.1ta sources are 001 eo111(11t ~ens l'e l' tracked b) 1he 

U.S. gol'emmemto assemble a holistic picrure of11bat is happening. 

9 
66 


91417020.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

China's Economic and Technology Goals 

China has dtl'elopcd a leading global teonomy faster 1hao aoy coolll)' in modem histOI)'. This UllllSformatioo began 

~>ilhthl reformandopeoil1gofCbioa'scconomy wxlerDeog Xiaopiligin 1913. By201S. China's GDh11S$1U 

trillioncompartd tolheU.S. 31 SI81nllion. Holl~l'er inpurohasingpolltrparil)'(PPP), China is already slightly 

r 1hao 1he U.S. This repJeSells 1he firsltime 1he US has not beallhe Ia~ tCOllOIIIJ' sina: it overtool< 1he 

U.K. in 1872.11 Sina: 1he US CCOOODI)' is growing at 1-3% and China's is growing at 5-7'/~ 1he 113jeclol)' is clear in 

nano11ing 1he GDP gap (some projections show China's GDP c.xteeding ours within the next dtt:adet The time 

scale during which Ibis gro•1h OtCUm:d is stunoiogas China'sccoDODI)' has grown from IO%oflhe UStennoDI)' in 

the 1970sto thesocond Ia~ global tCOllOIIIJ' io just flliyyem. Analogous growth io the U.S. tennomy 10 global 

lea<l:rship took a cerouy 10 achiel'e. 

From this point forward, Cllina plw to funhertran!fonn itsOOJnomythrough a national focus oo 

ttcllnology and indigcDIMIS io.non tion with a goal to rtdatt U.S. rdtvanoe and bt dooblt tbesizeof 1M U.S. 

teonomy by 2050." To 31le0mplish this, China aims to displace 1he U.S. in key i~Xhlstries using its ~e mart<et 

size 10 promote domestic champioos which can btcome global leaders tlJmtJ8h slate subsidies, acoess to low-cost 

capital and limiting China's domestic market acoess 10 foreign companies. China already leads 1he wolld in maoy 

key industries ilrluding 01~rall mawfacturing (31le0ullling for almost 25% of globallll3lllfacturin in 2012), autos; 

higlHteh products, 11bem China produoed 2.5 tilllC$1he l'alueof goodsthatlhe U.S. produoed in 2012:·" and 

e-eomme~" Beijing is home to 1he mostllitial Public Offerings (IP()s)(2x 1he dollamlue of1he U.S.) and is 1he 

wolld's a~ e-eommeroe retail martei.n In fact, China has 1he po~clllialto lead in all intemet-bascd industries 

aided by disc:riminatol)' domestic policies SitCh as data locali1.ation requimnellS. foroed telm o~· ll3nsferand 1he 

Great Firelt'all. Chinese domestic champions such as Baidu, T eneent and Aliboba enjoy privileged mart<ct access in 

China and are .mrtet leaders domestically, while also btcoming leading global ti!Chnology companies. 

Cllina'sleaden recognize that to achim iU etOnomic goals, thttennomy mUll tran!fonn ..., fa>ter in the 

fuiure tbaa in its reaut pill. The Cllioese government wants to "tel'iutlize the nalion d110ugh seietX:e, ttehool~· 

and iono1~1ioll-" President Xi's Slllllegy is for China to de\~ op its own induslries to be leading globally, de\ 'Clop 

more cyber talent, double do1111 on R&D especially of core ICf teeboologies and ll3nsform China to be a 

powerbluse of innovation. Ore area China has ~ed for global lcadeJShip is 1he design and pmdodion of 

semiconductors. "China's Sll3teg,· relies, in particular. on truge.scalespendill& ilrluding$150 billion in poblie and 

st<te-influeneed private funds 01·er a IO.year period aimed at s005idizing investmeu and a:quisitions as weU as 

purchasing technology."" Several olt!Cial SOUJtt doeumells clearly Sllpport these long~enn ten nomic and 

ttelmlogy goals. (Summruy descriptions of lhree documents ate listed here 11ilh more doewnents and descriptions 

prol'ided in Appendix SJ 

B<oc.n., ·~cmn.·s&>ooonoyRtollylht~iotloeWo<ld BBCNns(D<-~•t6,2014) 

")blcolmS«>CuodCmSII!l. "OW and clio U.S.: Taltol'!l<ooa.."-"'"· Bi>ooobtlrNm()layll. 2016) 

" PIIIIN)o. llloH""*""'Yw.l/.....m... 

lt ltlillce<b~in ... UJ<.,dd'"""b) cllrWcrldBod:•p<O<b.'UW;.higfoR&D~tysudlos-.-.---t<icoclfK 

"*-"'anl•lectricolmod>""r 

" J<ITI)ojaldils. "Q;,,.uoiudSUI4: ATat<ot'!l< -...s, r...,C.,;r.rr•(Onob«t~20tl) 

n By20tO,CIU"'alr..tykdlllt•-crld;.,..'Cnl""""""'rind""""•l>md><USJI'nioWrkd"""""ffi("idob•OOIC(>ol).-......,.,,bc<r. 

""'""' 11 E-)brblct · .""": "CDu I'd"" lht U.S. 10-lilt World'ol..qal toCoa>rn<m )IM • R.n.•...t • 

p · ~--~ £!!'1~d«m!! MiflcO,jntEdiml'S·fkwN;\\'«ilk-bmg.£tt!ii-M!k !O!•W(Aagust lt ltll6) 

""XiS<tsTq<tsrora.;,..·,s.;....._ T«<looooJYIIalla)'".ll-()11)'30. 2016~ 

11 r...;•LoasT.,. U.~~;,~ t-OIT.:c.Cclo<r.u;olool,rr.s""''' C-a.CMicm"'so-ATc<lllotocY. 

Jarmry.1011. R.nrie\~• ?~~ »tlktrrwrm"mmtl!.JS 

10 
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• Made in Chlna2025 is a pilln designed to align State 8JII pril'ate effons 10 •fish China as lhc world's 

fm-<:min:DI ruawfacturing power by 2()19 CIJ1)basizing lhc integrntion of information teclulology. Key seclO!S 

prioritized irx:lude advaoocd infonnalion tochnology, automated macbioe tools aoo robotics, aerospace aoo 

acronamical cquiptnell, maritime cquipme018JII hi gil t«h shipping, biophanna aoo adl'anced medical 

products, 300 new CllC'X)' 1~bicles & equipmc.-." 

• lltll Fil'e Year Plan o£2016-2020 "tntel'lld Plus"" which deepens refonns 300 priorities called fotinMadt 

in hin<~ 2015 8JII e~basizes stronger control by lhc goH•'Iun:nl 01~1 1131ional netwolks as China conlinues 10 

control tbc illlernet domestically 8JII gains acctSS to global re~• olks b)' controlling key component 8JII 

telecommunications teclulologies. Key aspeas irx:lude ": 

o Focus onca1apolting China imo a leading posilion in "adl'anccd indusUics'" including semiconductors. 

chip materials, robotic:s, 81>iation equipment and salcllites; 

o Decreasing depeodence on imports and imol'ation; 

o Increasing R&D spending to 2.S%ofGDP (up from 2.1% from 2011-2015t, 

o Creating a S-1.4 billion fnnd to im'CSI in startups and new teclulologies: 

• China'sM~ Projtd Priorities are 16ManllltlllJ).Styleprojects" tofocusonspeci!icinnol'ations. Tbcscare 

analogous to what isenl'isioned b)' ThUd Offset c:apOOitities. In China these projects receil'e a natiaool (not just 

a mititruy) focus. Here are some selected C.'<llll1)1es (a complde list is in Appendix 6): 

o Core electro nits, ltigknd gc«ml chips. basic software 

o Ne.1 gcnetation bl'll3Ciland wireless IOObile comruunic;ations 

o Quantum communications 

o Classified defense-related projects (possibly satellite nal'igation 8JII inertial confinemenl fusion) 

Today, there are clear examples of Chine5e indigenous innontion sbo~ing thai China is doing 11IICb 100re than 

copying ledtnology-makingprogresson President Xi's goal to become oreoftbc most inno1 ath~ economies by 2020: 

Miciu ~anhm OlmputiogSateUite. Tbc20161awdloftbc MiciusSatellitesuggest.sanaggressil'epush 

imo quantum communications; c.~isc in QUillliUm computing may ~malay ciiOOic the caj)OOility 10 break all 

t.'lisliJ1g encoyption meiliod~ 

San way Taibu Lipt Sapercomputer. lnJun:of2016, China introduced lhc world's fastest sqJeroompoter, 

the Sunway TailloLight capable oflhcoretical peak peofollll3II:Cof 124.5 petallops. The TailloLigllc is lhc first 

system in the world to e.~ceed 100 petaflops (quadrillions of lloating-poili opemtions per second). More 

importantly, lbc pre~ ious 1~nion of this Chirese superoomputer UIOO Intel microprocessors but tbc Sunway 

TaihuLigbt uses Chinese designed and manufactured microprocessors." 

Long Rangt Anli.Sbip ~liuile(LRASM). A croisc missile syswm 11ith a higll·lel'el of artirocial intelligence: 

a "sctni-autonomous· weapon ba"ing lhc capability to 8\'oid defenses and make final ~ting decisions 11itb a 

goal of deswying latgcrships in a ftectlike airemft 4 

Con!Umer Drones. JDI's (Dajiang lnnol'ation) marltet leadership in low-cost. easy-to-fly drones and aerial 

plxltogrnpby systems which hal'e made this company tbc st8JIIanl in consumer drone technology 3<XCUI1llng for 

70% oftbc worldwide dron: maoltet. 

AutO$. In the auto ioxlnsuy, China plans lo take adl'lu~ge ofh\1) paoadigm shifts lo furtlrrilS lead in the 

" S<oa Kau•dy, "Ctib.:at Qoc.,; .... M.s.;.c.m.llll5. ·em .. for ShJ<tic..S _.,. Snad<s" No\._7, l0t6. lklrimd • 

ht!p:· ~ww.riun !!&b.,rc !!!!k:sbm-2015. 

" "CCIioo U..<ils Itt'""' ~"' A<lioo Pbn ,....., 0.0.11o, "'111< Sl>lt c-iH<nllo P«Pk's R<polilic ofO.ia .\'Wor4( ... 1y .. l0t!) Rdri<Yol• l!!!p· <'flgll'l'h.tw.mP.-ticK-s 

"Lulua.oc. "CCIioo~ioesa.IA<~ti'YPc.ll<d"'-Pl"" ~TI<Ods()J•<U,lOl6). R<IM'«~• Is!•· '"'SI!!!!l!m!!!S!!!\ 

" )fiohodR""'-"Sciaaif~ln""aioo..SCbioa'oMiillryM~·llw/lfpboof (Scpcmb<rl.lOil~ R"""""•ll!r· """ ~""" 

l'llrict~ "'.'linotloildsW<rid's-~'!"'«•-U.S.CII\><." C~d(-""<lO.lOt6~R<trci'..S* 

hn£' 'VI""'.omtmm\'SI!'!d oom 

" klmM..tc.lfiiiCI~Il<lh<wR.....tocrc. 'amllainsoolh<U.S.islh<Aitif'.W lakti ..... Amssll.oct," TlwNwT..tr-(Fdonwyl,lj)tl). 

II 
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world'slatgeSI manufacruri~ indusll)': auto no moos ~hicles and electric vclticles China is im·esting in an 

electric ~bic e suiJilly chain including baUery technology and aims to ha\-e .lO% of lhe world's ekdric •~bicle 

production and 90% of global battery production capacity." 

Ac:oording lo Tangent Link, a U.K.·bascd pro-·iderof defense reports. ·oneoflbeenduringmyths in mall)·Weslem 

CEO-suites is lllatlhc Chirese an: great at COp)ing and Slealing, but will ha\·e difficul~· 'Otll-im-euting' lhc West 

This arrogant and outda1cd hypolhcsis is aumbli~ fast "' 

By some measun:s of imo1•ation, Clina has lakeo the globqlllcad bill without question China's capacity 10 inno'~te 

is rising: 

In pateli applications, Cbina already swpasscs lhc U.S. 11ilh over 1 million patell applications received by lhc 

Cbina SLate htellectoal Property Office in 2015 (up IWoyearoreryear) corupared to589,410 patem 

applications n:ceil'cd by lhc U.S. Pateoland 1'llldcmarlc Off'.ce(up 2% yearoreryear)." 

In academic resean:h ~IS. ChiiiiSC authorslip or arocles in peer-~C~ iewcd illemational scic~ journals 

ill:n:aS>:d such that China is now in 2nd place (2011) up from 13th place just a few years cartier.

0 

China spell 1.6% of GOP in R&D in 20 II but has a Slated goal of spending 2.5%of GOP R&D by 202G-about 

$350 billion." Combined U.S. b~ and federal go>-emm:ll R&D spending is 34% of GOP. 

China awmdcd I ,288,999 Science, Technology, Enginceri~ &. Mathematics (STEM) degrees in 2014-mon: 

tban double lhcdegn:es lhc U.S. awarded at 525,374 degrees." 

To assess the COOlJlill3tive innovation.iUI)' beh•-een China and the U.S .. McKinsey recently analyzed the 

indUSiries when: China has an innovation k.1d and when: it lags. 4 In !13ditional marufacturing indUSiries when: low 

COStS provide a competitire adl-antage. China leails by lel-eragi~ a cocx:enlr.llcd supply base and expertise in 

auomation and modular design (~'C3lllples: electronics, solar panels, collSIJUCtion cquipmcm). In consumer marlceiS, 

China leads giren iLS marlcet sil-.c ~les: smanpbones, household appliacx:es). In enginecri~ marlceiS, China 

has mixed n:sulLS k.1ding in high-speed mil but not in aerospace, IIIClcar power or medical equipmeoL In 

sciencc4laS>:d indUSiries such as blandcd pbann:.:cuticals or satellites, China is behind lhc U.S. but Chill! is 

im·eSiing billions or dollafflto catch up. (fbe McKinsey analysis is pro-'ded in Appendi' 7.) 

Many or tile critical ftture ltchnologics attncling mlure fOCli.S today !Ucb u ll1ifJCial i.ntd6gentt, 

augJDa~tcd rttlil)• and autono1100s vebides are lil<dy to hm large ronsumer-baS>:d m.arucs implying !btl 

China will apply its adrantages both ia eff'ocitncy-dm-m and customer·f~ industries to thesetttbnologies with the poltntW 10 ltlld iJr inmnwion llltd be glob4/ marktt slriJTtleodm. The suoccss of 101 in 

the consumer drone market with 7il% worldnide share is consistent nith this McKinsey analysis. In arlifocial 

illelligeooe, lhc 13Ce between the U.S. and China is so close lllat wb:ther lhc Chinese "will quickly catch lhc U.S ... is 

a maner of intoosediscussion and disagteetllCill in the U.S. Andrew Ng. chief scielli~ at Baidu. said the U.S. may 

be too myopic and self-confoderu to nnde!Siaod lhc speed oflhc Chinese compelilion."* Arxl in lhc field of 

adracx:cd indu.luial Jobo1ics, China is lel-eraging ils marlceund im·estmeJicapital!O ultimately k.1d in the design 

.Q Wlnt.o.;lutSL "'C•Wa Brijiog'sWilni~~&Pbi"NCI\'CIObtr,~l6. 

""Qooo ... Wf. \l\os.;sc"""c-H•<~~ra...p«.wSt....,...tGP!l!UpM&l(<l<td><rt~lOt6). r,..LW< 

.u ""Cbirrl\'I.U.S.PikdTrcrllk: UowOolbtGimStxkUp!', T~& httllRestlfdl. driri't411 hllp~ •••·.!!!rinld'n1bonalg 

" u..na.,Cil,.llldloofol~.a.pd 

" u..na., CIIilooll!d!utlia/Esp/alag• Ollptrhod "!be U.~ lnols lbt W«<dm R.tDSpcnoiof, Th:c.put a...pc...p.u.s()hy9 016~ 

Rt!M"«tac'mp· .,_..w,ht..:ac!t!hdsrf()!!! 

Joctkl:non..~ood .lonifcrC...."SSol;,;,o(!btM,.,.: ~ondS<...,.Il<p«~byC....,-.NottCOI/IIC.,.,oo-owl 

dtr~(May%7 2016).RI:Irintdll Mtrr""""'"Yorc 

4 Etii:R«h.konpnio~-WO<fU~ ~illtSltOI!'I>o(CIIin<s<tono.'llion.".l/cK-~(O<t* lO ll~ 

"J.mM.m.lfoodMd!<.-R"""""& "CCINGainsoolh< U.S.islh<Aitif.W laktF--.Amssttoc.." TlwNwT..tt" .... (Fd>nwyl.lOllj. 

12 
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Pre-Decisional Draft 1.0-For Discussion Purposes Only 

and mamfiiCiure of robots." G~~n lbere are many indusuies where China already leads O.e world in illllOVation and 

gil'en Cbina 's massire scale and national focus on SCiellCI: and ledmology advancemem, it would be foollwdy to 

bel against China· s continued progress Cl'en in lbe areas where they do 001lcad today. 

Implications for the Department of Defense (DoD) 

U.S. militu supcriori~· siDC~: World Warn hasrclicdonbolh U.S.economicscalcandtcchnological superiority. 

The sire of lbe U.S. economy allows DoD 10 spend S600 billion per ye3r (while rennining only 3% of GOP in 20 16) 

ll'hicbcquals the defense spending of the nex18 latgCS1 nations combined. In 2016, China •1s lbe second latgCS~ 

speoder31S21Sbillion, up47% from lhepl!ll'iousyearwhilethe U.S. spending rennincdDat." U.S. technological 

preemineDC~: eM! led tile series of offSCl !1131egies which included lbe Firs! and Second Offsets and now DoD is 

currettly working to mailtain technology superiority in its Third Offset SUlllegy. 

China's goal to be lbe pn:elllinm global ccooomy coJitincd 11ith its emphasis on tteboology transfer and 

inoo\'alioo constitutes a major strategiccompelilion with the U.S. There are semal areas of coooem: 

I. Cbina's transfonnalion 10 be lbe marufi!Ciurer for the world means more supply chains are owned by anna, 

11ilich creales risks to U.S. miliuuy tecboolog)• and opcr3lions. For eauJ1liC, the A1'iation lndUSII)• Corporation 

of Cbina (A VIC) is a CJUnese.swe owned aerospact and defense company which has oow plOClmd key 

compooc~ oflbe U.S. milital)' aircraft supp~· chain.~ Addllional~·. as lbe U.S.-bosedsemicooductor iodllSII)' 

focuses on high-end designs and tOO>~ older, low-end designs offshore. the Chioose semiconductor indosuy 

oow coJtrols a signifiCant pen:mage of tbe supply of older chips used in Jmilllaining U.S. milituy aircraft and 

equipment designed 40 years ago and Slill in service. 

2. China bas wgetcd SCI'Cral key technologies such as jet engine design • bicb will reduce currclll U.S. miliuu)• 

superiority and is acri•t~· worlring to a:quite colllJlQnics that 11ill close this gap. 

3. Cbina 's indUSirial espioooge and cyber thell eiTons continue without adequate U.S. invesuueut in manpower 

and programs to tll\1'811 these eiTons. This aUows technology 1131lSfcr at 311 alaoning ra1e." 

4. Cbina's im'CSU!le11t stra~ gy (!hroogb l'ellure and prirate equity inl'esuuents as weU as acquisitions) includes all 

of the fundamClllallecboologics which will likely be lbe SOU1ttS of iJIIOI·31ion for the nc.<t SCI~ml decades: 

artifiCial iD!elligcnc:e, autonoroous vehicles, robotics.llUglllCnted and virtual reatity, gene editing, etc. As a 

result, China bas access to the U.S.-bosed inooratioo in the same areas and at the same time wliicb could negate 

Third Offset advalllagts fonbe U.S. Funher. when lbe Chinese make an in1'CS1me111 in an early SlagC company 

de\'elopingadvaoccd tccboology, there is 311 oppoltlmity coSI to tbe U.S. mthat C01J1l311Y is poleuially 

off~imiiS for purposes of working with DoD. 

S. Beyond the Oue31 from ~ alone, China 'm!lioml focus on mega projects (analogous 10 the U.S. space 

prop in the 1960s to not only dc\tlop ledmology but crt11te dtmand for the techno log)·) complements tl~e 

increase in milital)' spending as China gains C.\]lCriellCI: in marufiiCiuring and ~tfming lbesc new ttehnologies 

forp13CUeal usc. 

6. The Defense Depallmelll does 001 currently llll\~ an agreed-upon list or critiealtccboologies tbe U.S. must 

protect although there has been extensive "oJt on c.'pon conuols to procect ledmologics from being shippod to 

U.S. ad'>'ersarie~ 

lt Fn• IIojoo. li:<Rol>oi•QUAp ·n..Ncw crilllotJ( IOUII)'lfi lO l). 

" l016F><tSb<d.Sto<llloba-P-Rmordl l.o!1iluk(Sll'll)IOd'1l>elfilioaly Babn«", l"""'"'"'l- f«Sni<!><Snoli<s(IISS) 

1016. Rdrie\'tdaa.,1r· ""1\'.m.t!l"*ms<h;tm 

"I OO'Amcric>' «-Ar<Aidin&Cllioa'o lti ",~~ IGI'SJ R,..,u o..,.,l lOl6. r...,!Aik. 

" TholPC..."""""R<poot (lOll) 

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Do begande\~lopinga Hstofcrillc:altecllnologies in2016 inaneffortkoownaslh:Joinl AoquisitionProteaion 

& E.'ploitalion Cell (JAPEC). The mission of JAPEC is to "i.-egr.ue piO!ecUon cffoi1S across tile DcpanmcntiO 

proactively mitigale losses and exploit QppOrtwlities to deler and disrupt ad\ maries which !lueaten U.S. mililal)' 

advanlage_ • JAPEC is wo~ to identify crilical aoquisition programs and technologies !hat require protection as 

well as= ·~lner.lbi ities associated 11ith known IO$$CS and ilq>lemelll advanced protection mccbanisms." 

llowC\~ , gi•'Cillh: relative ncwooss of this effort, lh:re is mucb wodt left to do to oonsolidalc lh: technologies 

across DoD requiring protection for Cuntnl aoquisition progr.uns. The illlegr.uionof tile teChnologies crilical to the 

Thin! Offset str.ttegy is only beginning. The JAPECeffort oomplements lb: governmelll's robust system of e''J)Oit 

oontrols which are designed 10 oomply with trade agroell'l:lliS. cni>asgoes, sanctions and other political measures to 

meet U.S.ootiorol security and foreign policy objectives. 

firolly, lh:re is no technology landscape map to b:lp DoD wxletstand lh: fwldatnenlal component tcehnologies 

required to prolCCI applications or cod-use te:clmologies embedded inaoquisition programs. For e.~lc, 

sentioooductor ICChnology is a fWldall'l:nial oomponerutcehnology today !hat would be required to protect 

capabilities inb:relll in almost all aoqoisition programs. This is likely to be the case in tb: fulUre with such 

fWldall'l:nialitehnologies as artifiCial irteUigence. robotics. atilonomous ••ellicles. advanced ma1erials scienoe. etc. 

With an agreed-upon list of critical teclmologies and a technology landscape to clarify lh: value-added ltllp of 

technologies (from compollCiliSto et'd-useappl cations~ lh: U.S. govenunc11 can be mtlCb clerueraboot what 

aoquisitions to de~ through a refomlcd rnus process. what foreign im·estments we should not allow and where 10 

allocate resources to th11 1n industrial espioooge or cyber lh:II. 

China's Multiple Vehicles for Technology Transfer 

Given the authoritarian llillure of China's go•~rnment, China is able to focus resources from a •'3rie~· of differenl 

sources to enable a broad uansfer of scieml'IC kno111edge and te:clmology. Additiooal~·. China ooonlinates lh:se 

different souroes to ac~-c a la1gcr impacl through a wcU-anicnlated industrial policy documented in iiS five-Year 

and other plans. The principal \~lliclesdiscusscd so far are investmenlS in e:arl)•·stage teChnologies as well as 

aoquisitions. Wben vic~~td ioohidually, some oftbese practices may seem commonplace and not unlike tllo!c 

employed by olh:r oounlries. However, when vie\\~ in combination, and with lh: resources Chioo is applying, tbe 

rom polite picture iUustratrs the iottol, drsign aad dedicltioa of 1 me focucd on tedlnology transfer at 1 

IIISSi\'t 5Uie. 

The following tableoompares lh:se uansfer•-thicleson a relath·c scale of the level of aeth·ity forChioo in lh: U.S. 

oompared to clber coonlries. This illustrates !hat what differellliates China from other oounlries' activities in tb: 

U.S. is lh:><alt of Cbina's effons Natul3lly, the most lroliblesoll'l: of alllh: •-ehicles are lh: illegal ones-clle 

onlrigll tbeii of tecbno.logy and intellectual p~· which is \~1)' oost.effeah-c for China. In fact, Cbiro views 

borrowing, stealing and leveraging in efficiency tenns radr:r than in moral terms." 

• lloUo D .....,.._ """*''lioJii.U Gib)"oTo:boicaiA<h- 1'"...-.tao l!x 1101"-'l~lltAS)~""' ~c..r..,...;,Spinifid6, 

VA. C>.1*f11.1011 ~'tdtlh!!Pi !'f('fU+'9celmil 

"lbmas.au../ ...... al~ 

14 
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Vehicles for Chinese Technology Transfer from the U.S. 

Legal 

Illegal 

Low Activity 

ChiC!a-basec research centers 1n US Fore.gn students sent to US 

Ch.,a·baseo tech Lomsfur orgs rn U.S OpEn-source ~aclwlg of forergn 

Profess1~1 aswoatlons 1nnovat on 

Leverag '9 U S deal expertrse Requrrement of JVs for US oorr.pames 

dorng bus.ness m Ch '• 

a~ -stage investments 

Acquisrt10ns 

Medium Activity 

China's Activity in the U.S. Relative to Other Countries' Activities in the U.S. 

The 8 princi~l sourttS and methods for eclloo o&~lrallifer in atklmon to im't.!lmtn/.1 Gild acqviSIIions are: 

I. Industrial espionage 

For year;.lh: Chi= hare been engaged in a sophisticated industrial espionage progJllllllllrgeting ke) technologies 

and imcllectual property to enlnnce conureltial enterprises and support dom:slic champions." This has recently 

bocn on t~ rise as R.mdall Coleman, AssiSianl Dirttror of !he FBI's Couruerintelligcnce D~ision ohserYed in 2015 

that espionage caseloads are up 53% in the past ~'o year; and thai in an FBI survey of 165 companies. 95%oft005e 

eom~nies cite China as the pe!pCtr.nor. "Chin.1's i.ruclligcnec services are asaggressht no" as tllC) \c C\trbecn" 

undelscoring the pen·asi\-e nature of inlellectual properly and trade secretlh:ft." The FBI reports that China pays 

Chinese natiOnals to seek empiO) mem in targeted U.S. technology fim.s (n here !here is selliiti\-e ICCbnology that 

China idcmifies itrlCCds) to allo" these "iosiders" to more readi~· e.xfiltrate '~hl3ble iruellectual propcrt). 

Fortunate~ . com ictions of 01ioese nationals and namralized citireos for industrial espionage are also on lh: rise. up 

lOX sirec 19&5•. 

Despite the rise in comictions.there is no "ay 10 know ho" big this problem real~· is. The scale of the espionage 

(tluough some of the metllOds descnlled below) conlillll<"S to iOCIC3sc and il would be diffK:Ult 10 quanti~· this 

problem without mort resouroos applied by both the FBI and the Defense Departmcr¥ ·s "llrioos eouruerintelligence 

agencies. The FBI Silicon Valley office. for e:<ample, only emplo) s about 10 individuals in tlis 11odc 

"tllt6/lep<YlroC""8'Wofrhl~bl .. eco.....c&s.....~·R"""C..."'-<~onbo'. l016) ...SII .. .,,c& .. t"""'noi~ C1upl« * 

f.' ~arutHIIris, "FBIPnlbn: 'lt'lllldnd:s' of'C'IIinaSp) Cascs"',TW~ Dai~Boort(July 1J,20 ) Rt'lncrtdll hnp· """~ thtdabk3.¢£C!!! 

• ~""£romlricf~~& ._IOds.I:Thtdi~C411occi"""byloo<plrP O'Ntill,f"'*YMonbo', N ..... lolt~U1li,'Cnily,~-lt 

lOllS. 

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2. Cyber tllefr 

Cbina's t)ter capabili~ are among lhesuoogest in lhe world probably only e'cecded by Russia and lhe U.S. 

ahlnugb some bal'e argued lhlt China's cyber successes to dale demonslrnle more abour U.S. S)'Stem 111lneromilil)' 

tmo Chine!t capabilities. Regardless. tJ'benheO is an ideal iool for China gh~n this asymmetric l'tJloernbitil)' of 

the U.S. (gil-en bow IOOCh information is digjlally accessible) and the plausible deni:ililily gi\'en the diflicuJJy of 

million in cybetallacts. $c\ cr.~l documented high profile cybcr lhdl inciderus are described in Apperoix 8 am 

may be the tip of the i<:eberg in temlS of (he numbe~ of hriderus and their scale. As form:r NSA Director General 

Keith Alc.~r famoosly told Congress in 2012, this reprcscrus the •grearcstlmnSfer of wcallb in bislory". Allhlt 

time, n was cslimalcd lhat U.S. companies lose $250 billion per year ibrough intelleclual propcll)' rhen and arother 

$1 14 billion due 10 cyben:rime,IOraUng $338 billion of impact each year. ·Thn's our fututt disappearing in from of 

us, • warned General Ale-'ander." 

As repor1cd in the IP Com.miSsioo Repon of2013, Vcril.on worl<cd wilh 18 pril a~c i.nstitulions and gOI'emmelt 

agencies to estimlllc rmt 

• 96%ofthe world's cybercspionageoriginated in Chioa 

• $100 billion in lost sales and 2.1 million in lllSijobs resnh from this lhdl 

• $300 billion woM of inldlectual propeny is SLolen .ado year• 

Whar really distinguishes China from other narion-S131e ac10~ in cyber auac-ks is the sheer scale of activil)' as China 

dedicares a massive amoUJI of lllallpO\'~r 10 iiS global cyber acthities. The FBI's formenlepu~· director for 

courueri~telligtnet reponed in 2010 that lhe China deploys bel"~ 250,000 and 300,000 soldic~ in the People's 

Liber.~tion Anny (3PLA) dedicated 10 cyber espio• Within another pan of the anned fOteeS, 2PLA has between 

30,000 and 50,000 IItman spies working on insideropcrntions'' Clina's cyber acth'il)' is ool solely focused on a 

national S«UOI)' agenda. In facl, mueh of this acWity can be deployed 10 support China ·s wncmic goals in 

Slcaling 1'31urble iruelleclual propeny to support China's technology tr.u&er. Additionally. Cllina recently passed 

two lawHll: anti-terrorism law am the eybe~ority law-which aseof concern since they could be used to ga~ber 

sensith-ecomm:rtial information from U.S. companies le~lly." 

3. Academia 

For man)')'erus, Cbina has selt an iocreasing number of SIUdeniS to the U.S. In 2016, there were 328,000 Chinese 

foreiylnationals studying a1 U.S. colleges and um-e,g~ (~of all foreign studmls). Chinese foreiyl nationals 

represeru of all foreignapplicarus." TheU.S.oducational sySieru hascoruero re~ onl~fmancialcoooibutionof 

these foreign SIUderus. 

It .lolbRopo. ");~Cbicf:Cyb<taio<~lbc'GtoleotT....r«oiW<>IihioHiaooy'"fcn!goPc>ltqM.,.,...(July,lOil~ Rdrimd• 

tar www fmig!M!S) rem • Th<IPC..,..;,;.,.Rcpon(lOI)) 

• loshlao Phiipp. "ltol> oiCii"'SJ>l C>s<o-.aS~l\'JI .... ·, 1M £pool T-(Ap;ilS,l016). Rdri<-'«1 • 

lr!rr www!~CM! 0 Aol lf-bwposstdio~ lOIS•tidoplbcCIOI<st p-bn>ad"""'IO"-"lricaliof<llllllilollldd«r)J'ilo-w""'""' 

I«Witrl&"l•danondil'or;.-~orpm'CIIIiog""""""- Tt""""-k...,llldbll<n<U<I'i«!W'id<n"shollprov;d<odm.-.Jill«fclo.'l)'""'ododxrllduli.'ll"l'P"'and"'-.. ··m r<qaUt.I. Ciris&tky, "OlmJ p..., Anliltm>ri5nll.a•·lbol Crili:sF••MoyOI..,..... J'M 

A'tw J'cdTIIMI(-.y6,2016). Rt1ritndlll!1p "••.ft\1~.PCf!l. 

~rit)· IIWpsscd inNO\'Cilbo'. 2016to~~U~insl'afPC ~timed II Jm'Cf&in&~'<d inns10Citbat •«aidRquhU.S. ~$Ul01 

EMir ltdtnolosY. pos~~'blyir"'th.&fOI.I\"tcodc, loS<~.-,dy lC'\icwl wilt a.iDC:StotriCials. Tbm m•t:cpaiw. list of~t~.'tl.ln&r.ltd • part tiO.iu·s 

crilcalilforw~ioeinCnllslna~nsu.,ilasttt«oc:-:n~m...,ar.~Warmtio.sa"ricts:aadt'iii*)Ctalr/whidt•wlclbt ~kl 

t«Wityrc\~ s. 'lbellwdoesoocSI*iry"U.auaarilyrC"o~ ~ilftllil. Se'~U.S.~an~aboultkincreascdC'OSIJofdoiog 

busbssiiOina • wtJiaslhtntied.topro'lidtcorn!*l)'SUl$:irh't inlornwioot41be C).~y AlbillliMlionotQina IOJifO\'tihiL!tW~ 

to~~ .... ...topmo;oa. .. ut. JooiiC10n od£nlloo, "Chiao'• N ... Cjl><n«uriiyl.aw Rlnlol r.,.,;pT•:h ..... "lfa/1--(l/OI .... b<rl, 

l016). Retrk\·edll hll!r "'~wm 

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SWlslics on U.S. STEM progrnms Jlghligbt the~ proportion oHoroign srudeas: 

• S4%offorcignstudems in Pli> programs were studyi~ in scieooe &engjno:cring (2001-2011)" 

• For docloral progr.uns, .17% of ~ooeril1g, .13%of compuler science am SO% of math and SWiSiics eandidales 

wen: foreign; balf of!rese are Cbirese" 

• .14%of (liiiCfliS issued by unntrsities include foreign studem's wod<" 

• 45%ofSTEM Wldergmduatesareforeignand IS of!researe from Cbina" 

Fromtbisdata. wec:aninfertbat25%ofthegraduate sill dents ill STEM foddsareChincseforeign oatioollt 

Since .res.: gJllduales do notlm-e visas to remain in the U.S7 nearly all 11ill take their knowledge and skills baclt 10 

Cbina. Academia is an opportUJJ: emironmeut for learning about scie~~:e and technology siru the cultornl values 

ofU.S. educational institutions reflect an open and free excoongeofideas. As a result, Cbincse science and 

engineering studems frequently mastertechnologics that later become critical to key mililal)' systems, amouoong 

01-cr time to wilteltional violatious of U.S. export corlrollaws. Th: phenom:na of gr.Jduate stndeU resean:b 

io:reasing~· having ~ional securi~· implicatious 11iU inevitably ia:rease as the distinction between milita•r and 

ci11lian technology blur.;. Further, since there are close ties benreen academia and U.S. government-sponsored 

resean:b-inclmingat our ~ional labor.~tories-ensuring thai foreign nationals are not wod<ing on sensitive resean:b 

paid for by the U.S. go~=m:m (ia:luding DoD) uill become iJmaSingly important. 

Cbinese companies are alllO approaclling U.S. academic institutions 10 promote joim research and a1lr.ICI fwure 

talent. As an c:aunple, Huawei bas partnered 11itb UCBed<cley 10 focus jointly on artifJCi.11 inlelligeooe research. 

Huawci made an initial commitment of$1 milUon infundingtoCO'I~rareassuehasdeep lc:aming reinfon:ea 

learning, macbine learning, natural language processing and computer vision." More recellly, Huawei bas 

appJOaCbed MIT 11ilh an offer for a grnnt 10 build a jo ~t resean:b facilil)'. 

4. Cllina'sultohp!!l JOOI'tt! li'tddllgfortign illnovttlon 

Cbina bas made collcl:ting and distributiJJgscience and technology infonnation a national piorily for decades. "By 

1985. t~re were 412 major science & technology intclligcooe institutes natiomride (in Cbina) ... employing ... 6C,OOO 

II'Od<ers..ime!ligating. collecling. anal)'ling. syrtbesizing. repackaging. benclunarking and te\'c~ engineering.~ 

In 1991, the book, So~rcts and MethodsofObtoining National O.jeme Sciena & Ttdurology lntelligmce, 

@~lied a tOmproheusi\'e ac:ooum of Cbina's foreign mililacy• open-sollltC collection (l<nown as "Cbina's SPl' 

Guide") collecting an pes of media (including \'erb:ll information prized for its tim:liness over written 

infonmtion) am making them m•ailable in dalabase fonn. The National Internet-based Scm & Technology 

lnfOI!llMion Servi¢e S)'lltms (NJSS) makes 26 million holdings of foreign journals, patems and repons 3\>ailable to 

the publie around thee lock. Cbincse exploitalion of f01tign open-souroe scicncc am ICelmology information is a 

systel1100e am scale operation making maximum use of di\~.sified SOOitleS: scanning technical titerntwe, a~zing 

(liiiCIIS, e~ engineering produel samples and c:ap«uring com'Crsations at scientifiC mceUl1gs. This cin:wm~ms 

the eost and risk orindigenous lt$l3!Cb. ~ 

""Sor\<yofGtolool<s..!aluJOd P•••docl•nl<siiS.......,.,l~",N«iaoo/Sdtnt<F-Novanbcr.lOU. 

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"NabooaiS<i<oct-SW\·ey,N.,'<IIbcr,lOtl 

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" t ....... Oiillo/-<ti~O...,..t .ll. 

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5. Chint~e-ba.'led tothnolog)·tl'lll!ftrorganizttiolll 

AI tile nationalle>~l. Clina bas more !han a dozen organizations lbal seek 10 aclleSS foreign rechnologies aro the 

scierosrs who de\dop tllem (rot cowling tile daroestine services, opcn-soon:cs, aro procwcmcnt offH:CS). Th:se 

organi731ions are led by tile Slllle Admini!Uatioo of Foreign E.~ns AlTai!$ (SAFEA). SAFEA's suoccss is e>idctlt 

in lhe 000 foreign espc11S woddng in China anrually. Complementing SAFEA is tile State Cowx:U's 01= 

Chinese AffaiJS Office (OCAO) which provides overseas Chinese (whelher tlley 113\-e lived in China or rot) 11ilh tile 

opponwlity 1o suppon their ancestrnl coonlly. The Mini.s1Jy ofl'monnel (MOP) is im·olved heavily in foreign 

mcruilm:tt aro foreign rechnology transfer including the 0\·crseas Scholars aro E.~11S Scn·ice Ceroer 10 ittclllCI 

with Chinese Slndctlts srudying ooroad. The Mlni!lly of Science & Techoology (MOS'J) also dedicates signif~calll 

resotJJteS 10 acquiring foreign tccbnolog)• including 135 declared pemnnel in 01~rscasentassies aro consulates 

The ().~rscas Scholars aoo E.~ Service Cetter sponsoJS associatioos at many WJivemlies wbic.b sen-e as an 

organized lllC<IliS 1o transfer tccbrology to Cltina. Many of the nalional programs also rove oomp~ 

provincial aiXi IWnicipal organi731ions spocifiC31~· focused on tile skills aiXi 1alem !han can benefit a local area. 

These Ollli!nizrcions make avaiiOOic dcl>ricfing 100111$. free translaiOrs. pelllOitllCIIO make tral'tl anangemctts, 

dedicated "transfer centers" aro face-to-face meetings beh1-een technology espcns aro Chinese company 

represtntalil'tS. 

China also promotes "people to people" exchanges tluoogh a nehvork ofNGOs (e.g., tile China Science aoo 

Technology Exchange Center aoo the China AssociOOon for tile International E.,change of PC1110nnel) tl'clt insulate 

01~rscas spccialiSis from the potential risks of sharing tcchoology cfuecdy with PRC go•~mmcot officials." 

6. Cbinete ruurdl ttttters in the U.S. to atteSS ttltnt and knowledge 

There are row increasing examples of Chinese ltrmS seuing np research cemers to aooess U.S. ralelt and 

tecillology: 

• In 2013,1Wdu sci up the II!Slitutc for Dcql uaming in Silicon Valley 10 oompctt "ilh Googlc, Apple, 

facebook aro others forlalent in tile artifiCial intelligeoo: field. 11 Baidu recenly hired fonner Mlcmson 

exccutil'e Qi Lo as its group president aoo chief operating off~cer. Lu was the archi!CCI of Microsoft's strntcgy 

for anif!cial intelligence aiXi boiS. 

• Arolhere.umple is tile ZboogGuu Cun (ZGC) la.nol'ltion Cellteropened in May, 2016 in Silicon Valley. 

• Arolher ~-pe of rt~earchcemer is Tech Code wlich is an enlrepreneuJS' nehi'Ork "oonwliued to breaking do1111 

gcogrnphie barriers and eliminating po~croal inequalities of ill(emational oooper.!lion" according to ils website. 

As a nc111m of entrepreneurs, Tech Code is a system of incubatoJS ("Siartups 11itbont borders") worlch1idc: 

(Beijing, Sl'clngro~ Shew.hcn, Gu'an. Silicon Valky, Seoul. Tel A1iv and Berlin) th3t Je>·c<ages an online 

de\-elopmcnt platfonn for projects focused on China's de\·elopment aoo funded by lhe Chinese gol'erm>Cii." 

• In addition,lherc are a number ofrescarchcettcrs promoling a sustainable ernironmcrt and olean energy 

including lhe U.S..Cbiu Clean Energy ~arcb Center (CERC) =~· c:cpaOOcd aiXi promoled together 

by President Obama and Pn:sidctlt Xi. 

7. U.S.-based usociatiolll spouored by tbe Chinese gorernment 

Then: are many professional am scholar associations which bring Chinese engineers rogcthcr such as tile Silicon 

Valky Chinese Engineers (6000 mcmbel$1 tile Hoa Yuan Sdeoo: & Techoology Association (HYSTA) aro the 

Chinese Association for Science aiXi Tcchoology (CAS'!). The IMgest concertr.nioo of China ·s scic:nc:c aro 

tecillology adl'ocacy groups in lhe U.S. are in C31ifonia aoo Silicon Valley in (l311icul11r. ••The Valley' is grouoo 

" ......,c"'"''""""'""~ CI\opc<r4 n l.iY- "CCiila R-IOT'PMif.a.Jilldli-".ll'ii/IS7ttt""""'(Adpll-1,2016) 

n ~llioo .. £romlhtT(I.-heodr:wdUc, lgr Yf'M l££hmdcmn 

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91417029.eps

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(ltro( for ... legal, illegal and quasi-legal practict$ lhat fall just below ~.e lllresholds set by U.S.Iaw."" 

Wilb b professional and scholar associations being w tugel.thc Chintst hal'e implemented a raridy of 

programs such as w "Thousand Talems Program" to bring Ibis tecllllology home by recruiting Chir.=se engineers 

" ilboiTeJS of ca=advancemerl, increa5ed compensation, w opportunil)' do basic research orto lead lhcirown 

development labs in China. China set a goal ofbrir@.ng back 500,000 Chii"IC$t overseas Sludenls and scholars from 

abroad by 2015." Another e.wnple is "Spring Lighl" which pays o\'erseas Clincse scieol&s and engineers to 

return home for shon periods of Jucratn•c setl'ice that may include t~hi~ academic exchangllS, or working in 

governmem-sponso!OO lab~ In addition. "Spring Ligbl" includes a gtooal dal3base of Chinese scholars 10 matob 

specific tecbnology roods to pools of overseas lalem.~ 

The Chinese diplomatic missions 10 w U.S. diJeClly suppon teeboology lr.lnsfer as embassy or consulate ofTJCials 

faeilitatt a wide ~~riel)' of l'tMCS and forums supponcd by U.S. ill\'CSIOrs and local governments 10 promote 

Chii"IC$t inl~ Se\1:n examples of these are (descriptions of these forums are in Appendix 9): 

• Sitioon Valley IMOI-1ltion and Eom:prencurship Forum (SVIEF) 

• DEMOChina 

• Sitioon Valley .China Fmure Forum 

• China Silicon Valley 

• The Global Cha!OOer San Francisco (GCSF) 

• U.S . .China VC Summit & Slallup E.1'J)O 

• Chinese Amerioan Semiconductor Professionals Association (CASPA) 

The messaging for these associations arxl programs isoltenoomrollcd by w "Unhcd Front• whioh is a propaganda 

arm forw Chinese go> ent~n:nllo promote a positi1't image of Otina and Chinese rulrure around w world. n 

8. er1ging lechoical e.~pertist of U.S. prirale eqa~y, venture firms, in1·estment baaks and law firms 

As Clina bas cbne more imesting, its e;~ni~ bas been c~ by working with U.S. inl ~ banks or law 

firms who benefit from increased business. As Cbina works wilb U.S. pm'3te equil)' and renture finns 10 invest in 

deals, these firms bencfitthrougjl w increased l'aloe of equi~· Sl¥cs in these investments. Many U.S. law firms 

h;n·e built a practioe in advising Chinese companies on how to slr\JClure deals to increase w likeUhoodofCFIUS 

~roral for transaclions. Consulting organilations hon-e also buill a practice in SUUCIUring mitigation agreemclis 

IIIII wiD be more likely to gain CFIUS approval. As China's illl'esl.rnenls have rnmped up dramatically in the p.S13 

yeaJS. w e~·el of deal expet1ise has incRased oonsider:i>ly. 

How are these multiple rellicles used together for coordinated impact! 

Betause the Chinese Communisl Pany is much more im·oh'td in p!Mning economic actil;1y and supporting 

companies (ool only lhrougjl stale·owu:d-entcl]lrises but also in favoring ootional champions it suppons globally 

like HuaweQ.thcre is a ~t deal more coordination ofinvestmert along with other rehicles ofttcllllology transfer 

to accomplish the larger economic goals specifiOd in China's cloeumented pia~ The scale of w Chinese economy 

is so Ia~ lballlOl CI'CI)'lhing is ooordio.-ed ccrtrnlly. However, the ilnpOnance and degree of political oomrol by 

1

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lbe CommuniS! Pany enwres lblt invC$1lllelll$ SIJppOn mt~Ml go.'lls and me not purely guicbl by eommeroial 

ill~ The goals of many of the g01-emment-fuoooo Chinese vemwe c:apilal fmns m focused on experience with 

advanced ICChnologies and recruiting lalell- 001 simply making morq. 

There are not eooogb examples to dcfmitil~ty say lbere is a Slandard pi3) book of aU tbe vehicles used in 

combillll~n. However, lbere are a few c.<a~nples where SCI'cral of these technology transfen'ehicles are used 

togelber. Doaunemed examples are lalgeled cyber anacks 1o ~ lbe scope of technology and illelleclual 

property of 1'8100 and where thtt resides wialin a COl1lJl3lo/ fol 011~ by cybcr tbdl or industrial espionage to SICa! 

thttiCChnology." In anolher ~'<alllJlle, Chinese cyber anaclren manipulaled COl1lJl3lo/ sales figwes 10 •~aken lblt 

compall)''s view of usclf and make it mon: likely to accep1 a purchase offer from a Clinese co~. In a 11riation 

oo tllis a.eme, a Cbinese QJSiomer placed large ordeiS \li th a public compall)' and lben canctlled it to weaken a 

company's rcsuhs as a market surprise. Final~·. there is lbeexamplc of Silicon Valley stallup, Quixey, who relied 

on a large investor, AlibOOa, as one of its moSI imporl3ll QJSiomciS promising access to tbe Chinese market. 

Howem, Ah'b:N refused to pay Quixey for a cuSiom conuact to provide specialized technology to scan:b 1vitllin 

apps in AlibOOa 's operating sySiem. Alib:N Slbscquemty took advantage ofQuixey's eash squee~t to negotiate 

f3\ o~le f~na~ring tenns whidlpo!s Alibaba in a better position 10 later make an offer for lbe technology or the 

company." Thus. through a combination of these ICChnology trnnsfer vehicles. Chim ean achit~ e mon: than it can 

1vilh a single ,·chiele. 

Bdorc lbe U.S.-Chim &anomie and Securuy Rt~ ielv Comntission. a ronner forensic auditor and 

coonterillelligencc 51 testified that Chilli is executing a series of campaigns targeting specifiC induSiries be 

studied including telecommunications & network cquipmcll (to benefit global champ~ns Huawei and ZTE). 

infonnation security, semicondootoiS, media &emerlainmell and fill3JI:ial technology. He ollllincda process that 

invoh'es many oflbe \'ehicles descnbcd ben: as key technologies an: targeted, studied, stolen and applied wilhin 

Chinese companies. He chlracterizlxl lbese as cybcr-«<oomic campaigns wlich "arc persisteD!, illense, patiellly 

executed and ittltxlc the simullanooose.ucotion of sucli a lalgt and dil·ersc SCI oflegal and iUeg;tl meth:lds, 

individuals and o~ons.there 'slitat chance tlte targeted U.S. competiloiS ean erTCdi,~ly defend or compete 

in the fUIUre 1rilhotn sipm!CaN support of the U.S. go1-emmem. •" 

U.S. Government Tools to Thwart Technology Transfer 

(I) Tk Com mill~ on Foreign llii'C!tmenl in the U.S. (CFIUS) is one or the oaly tool! in place today to go•·em 

foreipl investments that (QUid be used to transfer sensitive ledlnology to adrersaries, bul il•-as not desitned for 

this pu rpoJe u d is oaly partially e!Tctlive." CFIUS was es!Ziisbed by $1abde in the Foreiyl lm'eSimell and 

Natioml Security Act of2007 (FINS A) whieb Connally 83\'C an interagerq working group the power 10 m·ielv 

national security implications of foreign im-llls in U.S. companies or opernlions. The Treaswy Department is the 

lead agency among 14 participatingagelries. The nine I'Oiing member agencies arc Treaswy, State, Commeree, tbe 

United Sltlles Trade Represczutive, Office of Science ct Technology PolicY, Defense. Homeland Security, Justice and 

EneJEY. While transaction reponing is voluntal)', CFJUS eanand does rnonitor transactions beyond lhole that arc 

voluntarily Slbmi ~ and ean initille a re1ielv of any of these. CFIUS is required to provide clear.u~:e for e"~ 

transactions on a short timeline: witllin 75 d3)·s unless a Presidemial m'ielv is required and in that case, lben: arc 90 

11 "APTI: ~gO.. ciO.ia'•C)tcr ~tiaa",M""'*""RIJ"",:IOil R..OO·.S 11 

btt:p ~6ttt)t)'M\OM!i1!l4:tmfrfrt\£•\\'I\"\\Sffi'§pdf' 

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20 
77 


91417031.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

da)1 fora rel'iew and a Presirknlial lllCOmmeodation. 

As I005e im·oh'OO in the CFIUS process readily actno11 ledge, CFIUS is a bl\ml tool no/ designed for the pwpose of 

slowing technology transfer. CfiUS only it1o~ somt ofthe rdel'lnt transactions b«Juse lnnsactioos that 

do noc l'tSillt in a fortip ron trolling iaferut art beyood its jl risdiction. There an: many tmnsaction typeS sucb 

as jo ~t l'entum, minority im-esunentS and PJIC!ud assets from bal*l\lllCciCS ~tare effcctn'C for transferring 

teclllology but do no1 result in foreign collrol of a U.S. em~· and art. therefore. outsideofCFIUS' jurisdiction. 

The workload forCFIUS is increasi1J8 rapidly. CF!US rel'iells about ISO ll3nSaaJoos per year but this is on the 

rise. At the same time, the number of trallSaelioos •'llich ha\'e national security i~ticalioos is also rising as 

Cbinese )IUlthasesofU.S ~ companies or assets now represent the I~ IIWJlberof CFTUS re~iews. 

Corwess has no1 provided dedicated funding for CFIUS reviell~ which means that this critical process miiSI be 

handled withine.,isting ~~ bll<lg& A revieu· of the strengtl\!i and weakh:SSCS of the current CFTUS process 3111 

ill:luded as Appcor!L• II. 

(l) Export rootrol.s are designed to pre~-m sensitire t~hnologies or products from being shipped to adl'crsaries." 

In praetiee, there are 51:\eral problems that may result from using e.'PC)I1 controls 10 thwan technology transfer 10 an 

adreiSary. Fi~ export comols arc often bacl<ward·looking in tennsof specifying the t«hnologjes that are critical 

sill'e most controls focus on pmduas rather than broad technologies. Seoond, there is diffused responsibifity for 

expon collrols since some 3111 controlled by tbe State Department and some by the Commette !Xpanmelll "ith 

DoD in an adlisory role." Third, with the ~eehnologies that are the focus of 1~nture im•esting (far in advaoce of 8ll)' 

specifrc produc1s produoed or military "'Capons), export controls have not been traditionally e!fectn·c. From the 

U.S. gDI"CIIIIllent's pe~il'e, this bas la!gely been a fDil'lion ofha1ing the foresight 10 plare these ttchnologies 

on an cspon control list and the political will to do so. In other wools, the authority is in place forefTeetivec.'pGn 

controls if there is agreement 3100118 DoD, Slllte and Collllllelte about what technologies to protect. From the 

private g;aor's pcrs!XXffit, sioce undclllanding and oompljing wilb cxpon oomrols is a oomjlllty's n:sponsibility 

there is a question of whether early ·SI,.ge technology eo<q)allies understand the comrols and hal'e the resooroes 

within a trade compliance function to handle this compl~•ity. 

While the restJic1ed export lists (EAR and ca.") can acconunodale the regulation of software-based t~bnologies 

such as artificial inteiUgcll'e, oontrolling a broad t«hnology will be bigllly contiO\'C!Sial 11ithin the l'tllturc and 

teclllology comnnmi~· where the • markels are for benign. eommen;ial purposes. In fact, there is gmt 

pressure to specify ttchnologies as narrow~· as possible when 11Titing c.'pon contrOls to facilitate more U.S. C.\'))011$ 

especially if the technologies are available olllSidc the U.S .. As the 1-emwe im-csuncnt <Wa indicates, the 

regulations do 001 pm~Jt (or even deter) foreign im·estment in seed orearly·stagc companies. Additionally, it is 

nol lhe PJMtw of the e.'PC)I1 control enforeemem authorities to proactively sock out COftl)Xtlliesdcrtloping new 

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........ t.co~ 

21 
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91417032.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

tet!nllogjes or to i111'CS1igate lhe reiBiionship bel" ten ill\'eSIOJS and employees of a startup. I.asaly, expon controls 

are going 10 be much more elfec:tire if lhere is an illlema1ional elTon to protect lhe technology; otben\ise, lhere may 

be an unintetxled consequence oflhc technology dc:l-eloping faster outside lhc U.S. aided by foreign ill\-estmeot 

tluough an allied counil)·. If and when a dual-use iec:hnology is dccmod wonby of control.lhc U.S. g!)ltmmcnt ean 

im~ uti~cntl controls 11 bile it uodenakes an elTon to have lhc tetln>logy cootrolled internationally through lhc 

multi~cral expon control regimes but tbis proeess ean 13l<eup to three years and may oot be suceessful 

(J) VlSA.I for Chinese foreign mtional stlldcnts studying in lhc U.S. an: coni!Olled by the Sl<ic Dcpanmcnt and not 

serutitized for fields of srudy witb lhc protec:tion of critical technologies in mind 

Recommendations 

The recommendations are divided imo ~ro sec:tions: The fli'SI oudines adions DoD ean l3l<e to dcler Cbim's 

tetln>logy llllnsfer, and lhc second identifies an:as when: lhc whole of U.S. go>-emment needs 10 coordimte actions 

as pan of a cohettm poUcy. 

Retommwdations for DoD: PROTECI!NG CRITICAl. I ECHNO!.OG!F.S 

I. Dc\~lop dutt lists of critical techaologies which must he maintained dynamicaDy: 

A. Technologies (including fundament.'ll cootponetl tethnologjes) supponing CIIJTtnt acquisition prognuns. 

This is wbat JAPEC is designed 10 dn but JAPEC is hindered by a lack of resoon:es and a single leader to 

accomplish lhc mission. 

B. FuJurt technologies which will be lhc soon:e ofinnovatioos fo r decades to come such as anificial 

illclligence, autonomous •>chicles. adl·anccd ota1crialsscience, Clc. 

C. Dtfonsil'e tethnologies ll'bich deny Cllina lhc ability to dose the gap witb cumru U.S. mili!aly capability 

(such as 3dl·anced semiconductors, jet engine design, etc.) 

D. lll\'eSI in the capability and process 10 maintain lhcse listS on an ongoing basis. 

E. Decide on lhc resooroe and leadeiShip modeiiO accomplish this. 

2. Del-e lop a technology la•iscopt map to ideoofy lhc risl<s of key end·use and componenllec:bnologies mol'ing 

oiislme adding to lhc government's undcrs1anding of what to protect. Ibis "ill help ensure that critical technology 

lists are fonvard-looking. 

3. lncrease lhe cou.nterintelligtntt eiions to deter Chinese foreign n:tionals from stealing intellecrual propcny and 

tecln>logy from start-q>S c!Mioping critical technologic~ 

4. Apply lhc DoO~ed criticaltecbnologies ~st as lhc basis for CflUS trnnsaction denials and export controls. Sin:e 

lhcn: is no agreement on dis list across dcpanmcntslagencies today, DoD should pannenvilh the economic 

agencies (Commeroe, USTR, Treasmy and oihen) inslming tberationaleoftecbnologjes to be protected. 

S. Rel'iew export controls to recommend to Commeroe and Slate fuJtberlinlitations on Clllire classes of technology, 

products, tools and equipment consisteu with lbc criticaltochnologics we "run to protect. 

6. De\~lop an intdligeo« 9aring ll«hanism oitb allies in reviewing foreign tethnology im'eSitneniS. To 

Jlrei'Cit China, for example, from acquiring a critical technology, we need to share lhc list of critical technologies 

and de\ 'Clop a lllCChanism to coordinate witb allies facing similar decisions regarding foreign im-estJnect." 

22 
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91417033.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

7. Requestlhatlbe iruelligence coiiiJJlWliay collect ard analy1.e the iarelligence regarding Cbina's<:apOOililiesas a 

str.negic ccooomic competitor on a regular basis. 

8. lnacase the new technology capabililics of DoD d1100gb focused tll'ons like the a:ar-tcnn Slralegic Ca]Xililities 

Off' JOe (SCO) and lbe longeNenn Third orr sea strategy 10 stimulate the ~nd for new tethnologjes aoo gain the 

experience of refining these for miiU31)' pwposcs 

9. Allocate 100re budget to DoD-spoasored researcb such as DARPA progmns as well as creating lbe demard for 

tbesc adl'aneed ICdtnologjes (pemaps lhrougb new weapons programs) 10 ensure DoD ard lbe supponiJ1l induslrial 

base gelS lbe e.~rienee 11ilh refllling ard producing lbe new technologies 

II. Co,.iooe fast prototyping u d pilot proj«ts tbrougb lhe wor!( begun by DIUx to ensure DoD benefits from 

too latesttechnologjes de\doped. 

Recommendation for U.S. Government: RESTRICT CHINA'S INVESTMENTS IN CRITICAL 

TECHNOLOGIES & EXPAND OUR NATIONAL TECHNOLOGY STRATEGY 

Given too sualtgic competition undctway 11ilh Cllina, ~~~propose reslritting inl'esl- 1.! and acqubiooas by 

Cbina in the critical tecbnologies idenlifoed by DOD. Since lhe vast majority of technology de\·elopment today 

comes from too colll!OOt'ial sector (nnher than from gcwcmmelll resean:h) ard so many of lbese technologies are 

dual-use (such as autonomous 1-tbiclecapabitil)' which bas conuneroial as ll'tll as mild31)' applications~ resiricting 

illl'eslmelliS in a critical technology is lbe clearest ard easiest policy to implemerualber than attempting to 

distingllisb ~n commercial technology ard milital)' lecllnology where the difference is Jillgdy lhe fleld ohJSe. 

To becO'ec1ive,lhe restrictions soowd com all transaction l}peslla enable technology lr.lnsfc.-mr an exparded 

CFIUS jurisdklion (oot only accpisitions but new illl'estments, and joint 1-enCures-wootbcr Joca(cd in the U.S. or 

abroa~" 

To engage effective~· with lhe private sector, lhe U.S. govenment must be williag to acknowledge tbe strategic 

competition underllay with China and cbugt its po cies regarding open inl'e!tment u d free tnde in the 

technology S«tor. Tlv: U.S. IIIISI be willing to ackrowledse lbe straltgic threat from equal access to U.S. 

teclmlogy,lhe unfair uading pr.lCiiees Cllina comes in and sbat't evidence regan!ing tbc cl:gn:e ofirdlstrial 

espionage and cybcr theft. With this change in policy, rationale aoo disclosure. the U.S. go.·emment can enlist the 

private sector ard academia to fwtber lhwan lbe technology lr.lnsfer 10 China. 

I Dia eo]lec!ion &. amb·sjs g p<tjljty. Since there is oo comprehensive souroe on fomgn ilmslm:m across our 

eoooomy, at a minimum, the U.S. go.·emmcne sOOuld de\-elop a data oollection &. analysis ~ly for real-time 

visibili~· ioto foreign im'esllllC11S 11itb a priority on coulllries wllicb are a natioml security concem. DoD is not a 

1131ural bo.me fortliscapabilil)'. 

2 Co!§i@ra lead agenev fora new U S goyc.-rune!!! Chimrolicl' To coordinate all tbc depallments and agencies 

wilh a coberelll. well-.1ltiwlatcd policy,lhis effort may need to be a National Security Council priority. 

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c..m.;.,;.,r>"rricuo....,.,......s~OlUSaobort'llincoc-.....lt!lltlp<iscstioal"""""'".-otfin&..,.U.S.~elooa 

itmti>slllisao~....,..;.,. n..c-;,;.,......,~~u~lht .S.dloutolbtcnocl!'""'"'"'~""'ChillisabO!U..by;,.biblml..s 

llldilacnl-iodo!U..•ilhlbt ~'10. Thisc-"""'l'")""'ba•-lbt ~..Sibt publie...,.lbtaedloolosYinOi(<niOCbiu 

ellbtunl'u""""iC"pn.1iocsol't,...""""'"'-.ellbtClriocs<.SO'-.XII6!JSCii,..£,...,.;,&Sc:ruiryC...,;-R<port 

23 
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91417034.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

3 Btfonn Cf!US· expaad jurisdictioa to review all tttbnology t1'81Ufer tnmactions u d re!irict 

in eotmeo~ ts in and acq~~ sition of criticil td JIOiogy compuies by 1d1-ersaries. 

A. MandaiOry reponing requirementS of foreign im~above acenain tlutshold (e&., $1M); 

(I) This does not imply that all of tN:se invcstmerus will be reviewed or:1pproved; 

(2) Hone~~r. if the im"eotmerus ~in companies wolking on the ayeed-upon list of critical technologies 

and the inl'estment is from a ooWlll)• that represc11S a national security COIX:Cm, these inl'cstniCilis will 

be tballenged by CFIUS. \Vbile the private sector will not like tb: mandatory reporting requirement 

300 potential review by CFIUS, this alone will be enougll of a deterrent in the cellainty of closing a 

flll3ncing round that most startups nillavoid foreign capital 

B. E.'J)aOO CFIUS' jurisdiaion to iJlclude alltechnoiCI8J' ll3DSfcr t~ns: joint l'entures (wb:ther located in 

tb: U.S. or abroad because teclmology ll3DSfcrcanoocurwbcther the joint venture is in the U.S. or abroad~ 

8JilCR f.eld im~nts, assets pwtllased from bankrup~cics, rm~~~: n~ergers, etc. 

C. Del~lop a more fonnal 300 ll3n!p3I'Cill risk scoring of ll3DSaetions (discriminating by OOilllll)' 300 by seciOr) to 

facilitate tb: review of more transactions; strive to accept low-risk ll3DSaCtions quitkly " bile dedieating more 

resowteS for the high-risk ll3DSaetions 

D. Pro\idc the security agencies (Dcpanment or Defense. DeJl!rtment or Justa. Depanment or Homeland 

Security) thefonnal authority to rejcc:t uansactions based on national security ooneems arising from a fonnal 

risk sooring approach am "ben tb:re is agreeroem among them 

E. Gi1tn the oost 300 ~act or JlfO\~ effttti,.eness or miti~ting agreements, stril'e to minimi~t these 300 

staOOa!di~t the ones that are needed; if mitigating agreemerus cannot be simple, CFIUS should deJiy the 

transaction 

F. Allocale budget for CFIUS participating agencies to ensure sulliciem resources to review a laJge mnnberof 

Ua11S3Ctions (e.g., 1500 per year or lOX the current lc1~l) 

G. Formally eollabor.lle witb our allies in developing a ooordinated strategy (especially witb respect to China) that 

ll:ldrcsscs ittemttionalltttllity" 

H. Allow for a longer-time frame than 90 days if tbe complexity of the national security ooocems wamnts funb:r 

inl'estigalion 

4 Increase lbe FBI comterimemwnce n;soun:es ;mljql Wolk coll:tornlil~ly betweco DoD 300 tre FBIIO not 

only Ullllclstaod beller tlr: scalcoflb: industrial espionage problem but set the goal of stoppiQ& the tbell before it 

occurs as a measure of suce<:ss in ll:ldition to the number of successful cases prosecuted. Be more proaQive in 

canceling VISAs for Chinese agc115engaging in industrial espionage. 

5 O!!Jreacb 10 prjvaJe moe lm'CSI in education 300 awareness in an otllreach to U.S. busiJlcsscs 300 the public. 

A. Shrue tb: scale or China's iodiiStri.al espionage 300 pl.'lllS for global economic dominaoce: ~e~tal cases of 

malket manipularion, oompromiscd supply chail6, 300 espionage to make the= for eoonomie losses rOO!er 

than rely pure~· on privale sector's patriotism 

B. Del~lop a "Know Your Eq>loycc• program to edocate oompanies working to dc1~lop sensitive tedmologies to 

mitigaae the riJ1<s of e.npiO)ing foreign naiionals 

C. Del-elop a •Krow Your lm es~or" progmm witb outreadlto the VCoommunio· to akn them 10 increasing 

folcign im-s in critical technologies 11ith the potential for technology ll3DSfcr or injellectual property 

tb:ft; shrue wta we koow from coontcrinleUigenee effons 

D. Increase() belli:Cllrity protection of the technology sector. Since Ibis is a SOWtt ofl~ry oost-cireclive ineji;il 

11 ThisMtt!5clnotuodcrtakca~\--e.Wysisotbawdbcrcousiriesttric:• fott pitwesllnc:JQW •-e&ol.'ncM·IIutl$omtCCIUidritslu.,'tan 

tSbblidlcd mechmiun lor Ibis and «hen do 110t. HO'Il-c\w, sintt ltdudosY lniiSf'cr 10 China is a llllllliruli:lftlt is:wt-. it m~· d:cs: sc:osc 10 to«dina1t with 

ooralDesiaokl<trintlilis. Th<U.S.isu..d)·•'Orlio&•ib-alli<ci&O'-"'' IimiofOIIdioC"'""bosisbut,.*-"'dfc<li•......,•• 

thouldnut.illoar<SJllarondf.....t,....... 

24 
81 


91417035.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

tecllllology transfer, the U.S. g\)l~mment should consider what incentil'es ami assistance il am provide to 

ensure thai tecmolo · companies (and even early -!~age technology companies) implemem best pr.!ct;;es to 

pm•e11 cybct theft. On: idea might be for the Depanment of Hom.:Jand Security to consider tccllllology 

compani¢s as pan of its critical infra$Uudure programs. 

6 Ovt)tii'h JO ag!emja· Work "'lh the Slate Oepanment to ensure that student 11s:ls are appm)lrialeb• scrutinized 

ami used as part of this c~ in policy. 

7 Crea!e a mljoml focus lo gjmu!aJe rechmlogy deyelopmeq and jnnoya!joo w;th the goal of creating an UJ!Crt 

national focus on U.S. leadership in treseareas wbich havebeeo traditiooahtrengths. This would build ~nand 

tlq)aod the ·~d< outlined in the current U.S. 2151 Cei'Clll)' Science. Tecbnology & lnno1•ation Str.ltegy." Fmma 

humaneapilal Slaodpoint, this would indutle an increased e~hasis on SlEM gl:ldnatcs in the U.S. ami should 

consider immigrntion monn SllCb that the Ia~ rooters of foreign grnduale students can Slay in the U.S. after 

gl:lduation to coruribute to our COO DO Ill)'. This also impli¢s alasge increase in the basic rescarch budget by 

govcmment and the appmpriate incentil~ (e.g .. through tax policy) for the pri11tescctlr. The U.S. should consider 

naming national illlOI•llion priorities and funding some moon soots to Slimulate oureffons. • 

Alternatives to these Recommendations 

1. Do Nothing. E1~n though this is the de facto applOIICb today. the cost of doing nothing is e~.rordinarily high: 

tbe loss of$300 billion wonh of Slolen intcUoctual propetcy· each year, $300 billion in lost U.S. sales lt$lllting 

fmm this lheft and 2.1 miUion U.S.jobs." 

2. Restrict imslnlents on a ta-by-wt bl.lis. This approach puiS too much faith in the ability to appmpriale~· 

discern which im'CSUilCDI.S are pmbl¢ m~tic and which aJt benign Given our recent ~en:e with lhe 

semiconductor induS1Jy where there can be so many single trnmactions before the panem emerges, this is a 

risky approach. There is mo~cenniMy and cf!iciency in the pril'llte sedor ami in gorcmment fmm a broader 

bot simpler policy that all undeiSiand. 

3. ltrrwod diplomacy ud iOttOtives to rtquire China to mort unifonnly adhere to fair trade. The 0051 o( 

iOC!eaSed teellllolo~· transfer is too high to waitlhe yea~S that would be required to know if this diplom~tic 

approoch is11~dcing. Gh~nlhecxpericooeoftbe past 15yaussinceCbiDil became a member of the WTO, 

there is suff~eielll e.1dence already to kD.lw that there are many Chinese violations of fair uading practioos and 

China is unlike~· to put suppon of lhe ittlemational COOD.lmic order ahead of its own economic interests as it 

continues to puiSne a mereantiliSI stratcg)•. 

4. Focu on U.S. ktbnology derelopment iiUiead of restricting Cbiltcst inreument. In fact, SllCb a focus is 

what we aJt moommending (see 11 abol't) bot fed this strategy alone is not a substitute foreffcct~-edcfensil'e 

Sleps to slow lhe techno leg)' tr.msfcr underway to Chillil. A more suocessful policy is liKely to combine what 

we can do to fosrer itiDO\~tion and technology while we also deter further techno leg)' trnnsfer. 

" •A 'lht Coi~SciM.."'t, T~'*log)· Alnno\'XioaSitl1eg,yfor iWcri:a·s N.-Sccuriry .. 

• lnrac~,llis• u=••D<Odo!R<UIII)'f«dlt-"""""Ybyll><l'!uidml'sc-itot.o\lh-"'sa..,.aT .. 'In>io&)'~-"P"'IO 

ih<Piaiclan io l~l0t7. w, .. _il&•muoh""""'focqo(fml<dloolojy.te.'dopaeoi"""'""'""""'""""''"""'DIIo!lry. " ThoiPC...miotiocllkpOit (lOll) 

25 
82 


91417036.eps

Pre-Decisional Draft 1.0-For Discussion Purposes Only 

Costs and Implications 

A complete 3SSt$SIIlCill of both the implications and game th::o~· of potential mons "ould JtqUire a OIJCh more 

sjpfJCam analysis but an outline of the major areas of COittlll follow~ 

I. Cbjoa mfrictM jnyeytmeat in U S. tcchiQIQn aettor 

a. For the prii':Wescclor, the costs of reporting foreign investment :move a rertain threshold iel'l:l ($1 million) would be 

minor. The possibility of a CFIUS review "ould be the bigger burden if an eady-suge eompany is colllcmplating 

foreign capiiJII; Ibis would like~· reduoe some of the foreign capiiJII investmell siooe companies would oot be willing 

to undertake the risk of a time-delay in a finarring. 

b. Limiting Cbina's investment in U.S. tecbnology companies would reduoe the capiiJII thrt Cbina ~Illy 

contrlbutes to the \'eoture roonds offJil8llcing and reduce the capital31'3il3ble for U.S. ~and 

acquisitions (M&A) but the impact would be minor. Clina only participates in 10% of 1'l:llure fioancing 

and the Cbinescconuibutinn is probably 2-3o/oofthe total $137 billion in U.S. 1-emtreinvestmclll.• There 

would be a similady mioor impact on the U.S. tecbnology M&A market which is omoutl2%ofthe total 

U.S. M&Amatkct Cbina'saoquisitionofU.S. companies totaled$50-'Xl billion in 2016orl-3%ofthe 

total U.S. M&A mru:ket of$2.25lrillion." Ho"-e~-cr. the impact to an indil'idual company could be 

signifJC3111 as there are examples ofweakereo~s"here 1he only reason.ille acquisition offer is from a 

Chinese compall)' imCltS!cd in the technology for str.negic reasons. 

2. (hina re!aliatjgn iP trJdc. 

a. Crtating frktion. According to carty reports, Cbina is ptqlaling to create sondriction for U.S. 

companies"ith opcrntioos in China as a fiJ$1 step if the T~ Admini5113lion po11sues 3!1)' tr.lde war 

tactics as ha\'e been promised in 1he C3Dipaign. These tactics would inclnde more scrutiny through 

im'estigations fotta~ COI!Iptianct, anti<lwq>ingand allli-IJUSI p!Obes. Cbina would also scale back on its 

go''clllJllell purchases of pro<b:ts rrom U.S. suppticrs.~ 

b. Tr.1dt di1t11ption. A likely outcome of 1he recommendations to restrict China's tochnology im'C!Iments 

and ~isitioos would he disruption of 1he trading flows 11ith Clina potemially limiting importS and 

increasi~ tariffs. There could dearly be nl3ll)' examples of U.S. businesses which migll be damaged by 

· chain disruptions especially in the technology sector and 1hesc 11ould be diflicult to estimate. 

Howe.-er, in tcnns of the macroocooomi<: effect. a disruption in tr.lde would disproportionately ncgatil'e~· 

affect the Chinese economy in a ratio of 4 to I. Tolal Chinese C''POI1S to 1he U.S. lltre$498 billioo in 2015 

(18%ofCiina'stoealexpons)and 4%oftheCbinescGOP. U.S. exportS to China were$161 billion in 

2015" (7,oofU.S. total exportS and l%ofU.S. GOP). Given1he impo<WCCOfgtOIIth to China's 

coonomy, it would be a painful decision for the Cbincse goltlllllCDI to irnplem:lll a policy which would 

reduoe its taJgtt growth rate of7%. In the e.<treme case, if China II'C!e to Stop Ill/ exportS to IC U.S, Ibis 

would reduo: China's tl~get GOP g1011th rote by 4 poi11s to 3o/~ E\'J)Orts play a mnch Slooller role in the 

01mU U.S. coonomy and represcllll2.5%ofU.S. GOP while expons represcm21%ofChim'sGOP as 

China is the wodd's Wgesl e.')l<lllcr. 

e Hlgbtr prittd imports. The othet signif!C3Jt impact to the U.S. coonomy of fewerimpons from Chim 

would be cost increases for imported goods. Given 1he lowo(()St of marufaciured goods from China. the 

resulting 1.0- 1.5% higlrr prices paid for substitute goods would result in increased inflalio~ p!C$lllre for 

the ecooomy and profitllbility p!C$lllre for U.S. businesses." Gi1tn the low inflation envirocunent we are 

" "Th<Rio<oiC!Ii_ln,._io U.S. T<dtStno!o",CB/IIItgllaBk>r, 

tJ ""4\tA.Ai•flc U.S.•,I4JiifJd•for!I~ AQ)IIUilfO!U&.4Artancu. Rdrie\'Cd.dhrl£' ••wigw-jngjtam 

" su-v.., "CDS.i4toMol~oi S. Finns lfT""'''5Uns F...r.B~A...,t.loowry6, l017 

» "U.S . .cbirlalrtDF-.'ti" Otfl(:fo(lbtl!r*dSlMTra6tR~'"t 20l6.1tdrie\'«<a hgn """'"dW' 

"·U~Ifl<t.lS. .Q;,TndtRtb~ r..,.,..tf«lh<U.S . .am.&smcssc..natb)•Chfml!'.mlomios(lanuoy,lOI7) 

26 
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Ctlll\!ltly enjoying, lhls risk would not be as signifiC8ll as the potential disruptions in global supply dlains. 

While 1 !i&J~ifJCant judgmmt n O, !be costs o( these mommmdationsm ootwtigbed by tbe beoefiu of a 

!lroager U.S. ec:onomy ia tbe long.n~n buoyed by increased ionoration and reduced risk of technology 

tn~mfcr. As history shows us repeatedly, 1 strong. global~ ~eading cc:onomy is the on~· llltW to ensurt 

loog.ttnn natiooll security. 

List of Appendices 

Appendix I: China Investment in Critical Technologies 

Appendix 2: Select Chinese Venture Deals in 2016 

Appendix 3: Case Studies of Chinese Venture Capital Finns: Sinovation and 

Hax 

Appendix 4: Chinese Government-Backed Funds in Silicon Valley 

Appendix 5: Chinese Economic and Technology Goals 

Appendix 6: China's Mega Projects 

Appendix 7: McKinsey Study on Industries Where China Leads in Innovation 

Appendix 8: Largest Chinese Cyber Attacks 

Appendix 9: U.S. Events with Chinese Sponsorship 

Appendix I 0: Private Sector Largely Una1vare of China's Technology Transfer Threat 

Appendix II: Strengths and Weaknesses of CFIUS Process 

Appendix 12: Consultations 

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APPENDIX 1: Chinese Investment in Critical Technologies 

Compared 10 olher soun:es orim-eSim:lll, Chinese cllilie:s mnked only behind dom:slic U.S. soorteS ($469 billion) 

and Europe ($76 billion), bul•'tll ahead of Japan ($19 billion), Rtlssia (S9 bil6on). Israel ($65 biUion).lndia (S5 

biloon), and Korea (S3.3 billion). 

Chart 2: Chinese Share of U.S. Venture Capital Market 2010-2016 

28 
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Chart 3: Chinese.lnvestment in U.S. Artificiallntelligence Companies, 2010-2016 

$708.3M 51 

.... 

-

-· 

-· •• a.:.::' ~ 

...... ~ ... ~-- ~ .... '--'=- ~ 

Chart 4: Chinese Investment in U.S. Robotics Companies, 2010-2016 

S235.3M 35 

·--..... c: a 

-

-.... 

-

-.... 

... ~ ii 

""' ... -

_ .. _ . ... 

---... 

., 

.. .... 

-· 

.. 

-•• 

29 
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Chart 5: Chinese.lnvestment in U.S. ARNR Companies, 2010-2016 

$1.26bn 27 

• ,.AI .. 

., .. 

Chart 6: Chinese lm•estment in U.S. Fin Tech Companies, 2010-2016 

__ 

$2.78bn 70 ,. 

c:ca 

""' 

.. 

- .... 

-·- ~~ ... 

----· 

.. 

_,. 

,. 

-· 

~· -

30 
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APPEND LX 2: Select Chinese Venture Deals in 2016 

Illustrating Technology Focut 

S1lll Abtle<lloo4> &i0Ju~ 

lilt AIOf'W1nas 

"'' Clft-C«pctaoon,Fleesfu'd 

LllAAoensorletlrlciogy .,,. Bad~ 

VRconlent Ill cmc Ger.~, Ne&so C8clial. a... 

As1e!stwrgs,O.IC~ 

G-.~*--- "' ~l.iaiscolderadN& 

Ill Bad~ 

AIJpnt!d lnlily ... ...,..., ..,..~ IMgboGC!i, 

llori!or6Ve<Ues,~C8!1GI 

" CBinsights d:na 

... ,. - ~~~~'" _.. 

.. K '** 

"tK ,_ 

.. K _.. 

..... C*D 

-~ -

~ _.. 

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Appendix 3: Case Studies of Chinese Venture Firms: SINOV ATION and HAX 

Sinovation Ventures 

Sioovation Yell~ is a eruwe~iral finn domiciled in China llith an office in Sili(oo Valley. The fum was 

fowxled by Dr. Kai·Fu lA:e in Seplerliler2009 arxl invests in early Slag( companies (Series A arxl Series B) in the 

United Stales arxl China. The company foeuscs on the follo"'ing im'CSUne11 areas: lntemel of Things connected 

derices. del loper tools; aod onlire education. Sinol'atioo ·s portfolio iD:Iudes co•nies del·eioping artificial 

intellig¢n::t, robotic$, Gnarcial technology and ARNR tochoologics." 

Some sample portfolio companies include": 

• S.M: S11ivl owred and ope111ted by Satari~ is the maker or a p¢JSOnal c:amcr.llll3Jl robotic ,;deo de' ice. SwM 

turns an iOS device ilto a p¢1S0nal cameraman with 11ireless micropbooe. 

• &bby: Robby mawfactures self-<lriling delil'el)' robots that can autonomously nal'igate sidewalks to the 

coosumc(s door. This can rcdoce the COSIS for the on-<temand meal, gro<:el)'. arxl pacltage dclil'tl)' indusuy by 

eliminating the high cOS1s ofllnnan delil'en:JS, "bich can ultimately lead to lower COSIS for the coOStJJDCr. 

• D«p VISion: Deep Vision is a deep learning co~ lhat is del~lopill8 computer vision for can, robots. 

drones and machines or all type. Deep Leamiog-po11~rcd breaklhroughs an: ushering in a rel'olution in 

compurmision whichcombire big dala Sds arxl powerful dara centers. 

• SPACES: SPACES is an independent 11rtua~arxl mixed-reality company based in Los Angeles, CA. SPACES 

is wodcing \lith such com!Xlllics as Microsoft, NBCUnil·eBSI, Big Blue Bubble arxl The Hertcma Group, among 

others, to develop arxl prodoce a wide 111oge of projects across all VR arxl M~ platforms arxltochoologies, 

iiXIOOin& Oculus Rift, HTC Vive, Miaoson Holol.ens, Samsung Gear VR, PlayStation VR arxl GoogJe 

CardbooJd. 

Sinovation Yell~ has inl'ested in alntOS1300 stall·ups so far, including many weD-known internet companies 

suchasZhibu, Dian.'Cin. Umeng, ToogbuNdworlt \Vandoujia, AnquaOO:!o, Kuaiya. QingtingFM, Yaoclllfa, 

Weichc, Moji Weather. Ele.<. Klikao, Bao200 Comics, face++, VlPKlD, Boxlisll U17, SNH48, lmllaTV, Molbase, 

Ebest. Maihaoche, EALL. The ONE Piano, Zaiji<l, loY Run, Horizon Robotics. Niu, PlaneJaJy Resoon:es, etc. and 

Meitu which iSC.\-poctcd to go ptJblic on the HoogKongStoek E~R8¢soon. • 

The finn oombires incubaoon arxl im'CStmenl offerings to faciluate the gt0111h of companies that suit the Chinese 

madcetplacc.lt hasbecoawarded as a Clllti~~e "Nalionai·Lercl Technology Company lncubalOr' by China's 

MilistJy of Seience and Tocbnology (MOS'I). It has alllO been recognized as an ·'Incubation Base for SUategic 

Emerging lrxlustries in Beijing" arxl a "Zbongguancun Nalional·LereiiMO\o'lllh·e Model of Incubator for 

Indigenous Ernn:pn:ncu.Wp' by Municipal Seience and Technology Committee of lltijin& where the Finn's 

headquaneri is based. Sinovation Ventures has est<illished itself as a top-tier I'Cntorecapiial finn in China arxl has 

beco backed by leading im'eSIO!i around the wodd. It atmlllly manages thn:e U.S. dollar funds arxllll'o Rl.m 

funds, with a total asset under UWllgemcnt of SL2 billion (or OOc>ut RMB 8 biUion)." 

" !Qg \ol•,njMuu.mmrnmm 

" Do• ldritv«<mCBioslii*-

~~~~po>\\nl1t.....,_ _'o<pn_lioo•-*,_IY 

" llid. 

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Hax 

HAX is a hardware accelerator that has helped over 30 companies lamch in the~ 2 yean. Based in Shenzllen 

and with an office in San Fran:isc:o, HAX provides end4o-end teclmical and finouv:ial SllppOn 10 early-s~age 

hardware co~es throoglt iiS "Interactive Mamfacruring Process·, which e.OOies mpid development of 

manofactlll3ble produds. 

Bdutcn 2014 and 2016, Ha~ participated in nearly lnlf of all deals im'OMng Chinese im'CSI0!5 (14 of29 deals). 

HAX companies reeeil'c up to$25.000 10$100,000 caehand access 10 the SOS Ventures Hardware scaling fund. 

"' 

Some e.wnples ofHa.x inl'estments ioclu&: 

• Pttronk$: Petrorics is the creator of "Moosr', a robotic moose that has sensors, actuators. and irteltigenc:e 

that actually SetS a cat and respon:ls 10 its hunting movementS likt a rem animal woold. 

• Disp«clt: Oispa!Ch iscrealing a plalfonn for local delivay powered by a fleet of autommous l'ehicles 

designed for sidewalks and pedestrian spaces. 

• Clean /Wbotics: Clean Rohocics prmides ll3Sb SOiling roboiS for offices. 

HAX is backed by SOS Ve.-ures, a l'entUie finn 11ith headquaners in Shenzeo and an offiCe in San Fmncisc:o. II 

funds a handful of accclerators similar to Ha.x -lndic Bio in the biosynthetic space; Chinacc:elcr.lor for pure 

software; and Food-X for food-related startups. SOS Ve~ provides funding at the seed,-· and growlh 

stage. pi'OI•idi!lg expertise and teclmical 3SSistanc:e to entrepreneurs in areas such as engineering, mass 

manufacturing, product/marker fi~ messaging. and prestlllarion. The company's website claims funding for over 

SOOstanups."' 

111 Jhtric\'C'dii }Ctt.• ~""II,WC!'!!!Kf!1mti\'4'11!Bf!Wrionht.\J@!rn!iv 

Itt JhCJitwdll hl!!!fitl.l'W.Io00'£9! 

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Ull Appendix 4: Chinese Government-Backed Funds in Silicon Valley 

Company 1le to Local Government Total Money Raised Select Investments 

Westlake Owned by Hangzhou $66 million ($16 WI Harper Group, 

Ventures govemrnent million already SVC Angel Fund, 

avaHable and $SO Amino Capital, 

mi16on pending FreeS Fund, Spider 

approval for Capital, Benhamou 

transter out of the Global Ventures 

country) 

ZGCCapital Indirectly owned by 17 $60 million so far, KiloAngel, Danhua 

Corporation state.owned enterprises, plans to raise $500 Capital, Plug & Play 

Including China State million by 2020 (in the process), 

Construction and Beijing Santa Clara office 

Industrial Development building 

Investment Management 

Company. 

HEDA HEDA is a fund set up by $500mi1Non None yet: Focusing 

lnvestinent Hangzhou Economic and on infonnation 

Co.Ud Development, an economic technology and bio 

development zone under tech. 

municipal government of 

Hangzhou 

Shanghai Supervised by the state-owned None yet; plans to A San Francisco 

Ungang Assets Supervision and raise an overseas offiCe building for 

Economic Administration Commission of fund this year $42million. 

Development the State Council (SASAC) of 

Group Shanghai. 

Research Half-owned by the municipal Tens ofmiUions of TEEC (Tsinghua 

Institute of government of Shenzhen, and dollars Entrepreneurs & 

Tsinghua the other half is owned by Executives Club) 

University in Tsinghua University. Angel Fund, 

Shenzhen Early-stage startups 

lrJ Yuru~~7.ha!g. ·OuncscOo\~nm.'lcnfsPath oSdioon\'a~·."'nti~(Janua:y2$.20 7} 

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Appendix 5: China's Economic and Technology Goals 

Miele in Cbiaal025 is a plan aligning Suue aJXI private effons to escablish China as ibe world's pre-eminelt 

manufacturing power by 2049. "liS guidi~ pinciples are to~~~ marufaduri~ be Mwatio~>tn, 

emphasize qualily over quantity, acbim green oovelopmell, optimiz.t ibe strucrure of Chinese indll5Uy aJXI 

llll1tlln: human talent."'" Made in Orino 1025 bigbliglis 10 priori~· sectors emphasizing the criticali~· of 

i~tcgrating information teclloology with indll5Uy. Key sectors prioritized irdude: 

o Advanced infonnalion technoloro• 

o Automated llliiChine tools aJXI robotics 

o Aerospaoc aJXI aeronautical equiplllCOI( 

o Maritime equipment aJXI high tccb shipping 

o Biopbarma aJXI advanced nxxlical prodiiCtS 

o New ent~EY ,·chicles & equip01ent 

11th Fn·e Year Plan of 2011-1015 lists a "new generation information tedulology industry" as one of ibe seven 

str.negic aJXI el!lerging industries to develop. Policies aJXI pmctices were pJt in plaoe to (l) prioritize indigeoous 

innol'lltioo. especiaUy in biglrpenonnance integr.red cimJil produ:ts, (2) promote domesticcbampionsruxl (3) 

encourage technology acquisitions 

• ICf priorities include 

o Mooileool!llllUIIications. 

o Next gener.nion intcmct 

o Internet of things 

o Cloud eo~q~~ni g 

o lntcgr.ned circuits 

o New display technologies 

o High-eoo soflwm & servers 

• Policies and pmctices: 

o Prioritize indigenous innovation, especial~· in higfl.pcrformance integrated circuit products 

o Promote oonJestic clwnpions: pursue M&A, reorgani1.ations aJXI alliances between ups11tarn and 

downsmam C111erprises 

o Encowage tccbnology acquisitions, participation in standards seuing & moving up ibe value c~in 

13th Fire Year Plan of2016-2020 "JJJtcrnd Plus•"' deepens n:fonns and priorities called forinM~ in China 

2025 aoo emphasizes stronger oontrol by ibe govemmelt 01•er nctwort·n:laled issues as China comiooes tooontrol 

the i~temet within China 300 gains access to global nenrruks by oomrolllng key eompo- 300 teleen01ntunieations 

ccbno~gics 

• Plan goal to "Encoor.i8e buOOredsof lhonsaOO! of people's passion for inno>11tio11. building ibe new engine 

foreeonomic devdopnlClll" 

• Levernges large intcmct base of 649 ntillion nsers, 551 01illion of whom aooess the inlcmct with a lllObile 

pho..: 

• Detirer to large cities 100 MBps imernet band11idlh aoo prol'ide broadbaOO access to 98% of the population 

livi~ in incorpomted villages 

• ICf priorities include: 

o E.\]l3nsion of nem~rt eeonontic space 

"' S<di~ "'ii<::J~Mad<;,Cllino2112l."C<fl<rfor~IOd"""""-,._SOoclict; R<IM-.Jil 

p· nwt<JSsttanaluu,rnadN;hmtWS 

,.. l.alutll.olj."CllmaMoosilsU....F\'PCall«<lnl<m<tA""• 

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o New pr.11ioo infonna1ion infrastructu~e, 

o Adl'ancaneNs in Big Dab 

o EnbaR:ed info1Dl3tion sccuri~· and cyberspace ~nemaooe 

o F011ering of domestic cap;bilities in: 

• Allif"lcial illlelligeo:e 

• Sm.'llt haldware 

• New displays and inlelligelll mobile tenninals. 

• 5th geocrntion Jrobile oollllllllllications 

• Advanced seosocs and 11-ea!OOie del'ices 

Medium u d long-Ttn~~ Ptu for Sdt~~cc & Technology Del'clopmeot is tbc IOOSl far- n:aching of go~-emmem 

plans to "siJill China's cutreot growth model to a more sustaillilble one, to male ioooYIIlion tbc dri'~rof foture 

economic gro11tb and empb:lsize tbc building of an indigenous iMO\'lllion cap;biliay. "

101 Th:re are 3 !tr.ltcgic 

objectives: 

• Building iruxwatiol>based COOI'IOIII)' tluougb indigeoous inlxn'lllion 

• FOil Clingan ente!plise<tlllered techrology system and enhal¥:ing Chinese finns' innol'ation 

• Achieving major breakthroughs in lalgeted strategic areas of development and basic researdl and boOIIing 

domestically owned intellcctnal propel1)' 

Project 863: Chi a a's National Higll Technology Program is designed to Ol'crcome tbc shonoomings in 

national securiry tluough lb: nseofscieoce & technology 

• Enoompasses de\-elopmelll of dual·use technology (civilian and milital)' applications) 

• t.oys a foondatioo for indigenous iruxmtion 

Chin~'s Mega Project Priorities are 16 ManhanaJHtyle projcas'" to bring togetlilrthc focus onspeeifJC 

innovatioos and lb: resollltCS to ensun: pm8)1'SS. These are outlined in Appendix 6. 

Appendix 6: Chinese National Science and Technology Major Special Projects 

Mega-Projects 

October 2016 

Original Aonounct<l National Scic.ncc and Technology Agcndc$ in Charge 

Major ~tt al Projects Contained in the '2(1()6.2020 

Medium and long-Term S&T OC\·elopmenl Plan' 

Core Electronics, hig)~ pml chips. basic sofh,~rt MiniSU) oflndus ~ and Information Technology (Mill) 

Ulll<l lrugt scale integration ln.1llllfacruring technolog) Beijing, Shang)l.1i go~ ermnclt(S 

Hi~nd computer numerical controlled tmchire tools and National Oe\'elopment and Refomt Conmtissioo. MilT 

basic manufacturing teehnologj 

Water pollution oo11rol and ucaunc.nt MiniSIIJ' of Em imrunemal Protection 

Large~a e od and gas ~elds and coal-bed metbare China Pctrolewtt China Uruted Coal-bed Methare Co. 

,., """"'c~-~"'*'"""~Clwplal 1

* Micbd bb. '"Scitcni.fi"' 111.1),)\-.ioft md ct.ana·s Milibt) Modi'mil.llico~. TlttDrpbtla(Stoplmbtr.). 2013}. Rdfit,«<. h!tm' \\-.w !Mfittm!t.wm 

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development 

Nc'1 gcllCI3tion broodoond wireless mobile communicaions Minisuy of Scieoce & Tecboology (MOST). National 

Ene!K)' ~reau. Tsinglll3 Unirc~it) 

Genetic transfonootion and breeding of~.- plarus MllT, Da~ang Eltttronics, CAS. Shanghai lnstuutc of 

MicroS) stems, Cbim Putian 

Majornen dJ118derclopll\ent MiniSIQ' of Agricullure 

Higl~rcsolution Eanh obscMuion system MOST, Minisuy of Health. People's Liberation Am~· (PLA) 

Gcrc!lll Logistics Department 

Prerention ard eoi'(!OI of major infoctious diStaSCS State Adrninisamtion for Scieoce. Technology ard lndustQ' 

for National Defense (SAS11ND). Cbim Natioml Space 

Administration 

Large passenger ailtraft MOST. Minisllj of Health. PLA Gerc1111 Logistics 

Dcpanmc111 

Mann:d spaccOigil and lunar C.\'Jllomtion project MllT, Commercial Aireran Cotp. of China 

3 Unidentified Classified Defense-Related Mega-Projeas 

(candidates include Bcidou Satellite Nm1gation Sl stem ard 

lrcnial Confineroeru fusion) 

Nen Additional National Science and Teehnolog,v Major 

Special Projects Contained in the 'Science, Technology 

and Innovation 21)30 Plan' 

Aero-eogioo; and gas tutbines SASTIND. Chioo Aimaft Engirc Cotp. 

Qua111um eoimnunications 

lnfonn.ttion ~h•olks and C) bersccuril) 

Sman marufacturingard robotics 

Deep-space and deep-sea exploration 

Key materials 

Neuroscience 

Health care 

Source. Tai Ming Cheung, Associate Professor and DiJeCtoroftbe IIISiitute on Global Conflict and Cooperation (UGC) ill the 

Uni\'eJSity of CaUfomia, San Diego 

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Appendix 7: McKinsey Study on Industries Where China Leads in Innovation 

To assess 111: compamtive inro>llion capabitily bel~-een. China and the U.S., McKinsey recently am~ zed in what 

iOOns!ries Cltim was derdopingan iMOvalioo lead and in wbal industries Chim is lagging.101 

In llllditiooal manufacluring-based indllllries where low COliS pro1idc a competitive 00\•amage, il is 1101 

surprising lbal China is leading Lbe wodd. These indUllries would inelude elcclronics, solar panels and 

constllJCiion cquipmem wh:rea corrllimtion of a large and concenu:llcd supply base. agile manufacturing. 

modular desi&n and fle.'ible automation all proride bm1fiiS. 

In iiS consumer ma!kets (which arc customer·focused), China has a oa1Ul31 adl~nlage given Lbe sheer size 

oflhe markel of 1.3 billion people (4x llw oflbe U.S.) and lhisOOI·aoUige is CO!npoundcd when l!llrkets 

are proLCCied. Industries wb:re China apin leads lhe wodd would include hooschold applialres, 

smartpllones (fon:tiomlity delhtrcd allow 0011) and imemel software COJnpanics (Aiibaba, Baidu and 

Tencell). 

In engineering-based induslries, Lbe resuliS arc ml'Ccd, Tb: beS1 example is high-speed rail wb:re 

llllOI~tion has b:en malch:d wilh local demand and goremmem sponso~hip. China actounts for 86% of 

lhe global growlh io railroads since 2008. Olher examples would be wind power and lelecommunicalions 

equipment (Huawci and ZTE). Cltim is not yet leading in 31l10mobile engines. 3Cill$)XlCC, ru:Jear power or 

medical equipme11. 

In scieo:e-based indllllries, sucb as branded ~cals, the resuiiS arc poor. Here, th: massi\t 

growlh and national focus on R&D sperding bare 001 yet paid dhicl::nds. These inve!lmeoiS naturally lake 

a long time 10 pay off and Ill: Chinese govemmem is actively 11od<ing 10 remove obstacles to enable 

Chinese rums 10 lead. This is an area "-rete focus on oarioml mep projCCis can be fruitful since !hey 

concemr.ne go1't11l11l1:1l1 sponso~p wilh focused resources and local dcmaJX1. For example, China is 

13pidly improring its drug discol'eiJ' and medical trials process 10 f3\'0r i1S domestic co~ Gene 

editing is a technology where lhe go•'Cmtneri sees tremendous prootise and is active~· suppotting. 

Tb: follo~>ing chan summarizes Ibis indlllll)'•grouping analysis: 

Chinese companies In industries that rely on efficiency-driven 

innovation perform well, science-based companies less so. 

ChlMM indu•trlee: •ctual ve x~.S ~rf0f"fn8nc•1n innov.tion (besed on Chin•'s ahafe of gk;lbeJ GOP'). number of indus.tries: • 31 

Effiotency drlven Customer focused Engulee(lng baaed 

l Four lnnovatJon archetypes 

'Chine·s $1'tare v.fla 12% in 2013. 

Sov~: IH$ Globa! lne.lght; lntomaUorlol Ooto CorporotiOn; 8MUDI ropott•; McKintey GIObtl 

tnstiMe analys~s 

38 
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Appendix 8: Largest Chinese Cyber Attacks 

• Bmch of110relhln lli'Odouomojor,...ponssylltm d,.iplsin FdJNaiy,l0121iomlllemililayiiXI 

dd'enseC<lllln!ct<XSinciOOingbforlllelld~P11riotlllismleS)'$1<1D(PAC-3~811Aml)'S) S1emforsbootillg 

do•n bellistic missiles(l'aminallfogb AkilucleAtea M.-, lliAAD)IIXIllle lla,r'sAtgls belli~ls!ile 

dd'Cil!<S)'SIIm, 1lle F-35 Joint Slril<c F~t<r llle FIA-18 f.glucr jd.llle V-22 Osp<ey, ibe Black lla•t belicopt<r 

11¥1 ibe Navy's oew Uttoral C001bol Ship"' 

• ' 11111 Roio' a o:ries or ooanlillalcd llllael:s forllllllliple ycm since II kali200J ll1li<b comprom~llwndt\lds 

of go,·emmesll CCI!Ipo1m5t<alillg SCDliti\~ infonnalion • " ln2004, 811 anal) '!I namodSba\\nCspenttr Ill Sandia 

N&1iooal Labonllorics lnl<cd 1lle origins of a....,;,~ cybes apionage ring bo:k loolallll of go\'lmll<lll 

~~in Quang~ Proviacein Cllim. Thehacl;ess.oode""".ol bj' 1lle Flll"rllan Rsin." ~ole 

massire amoonts or inC0111131ioo liom mitiiJII)•labs, NASA, 1lle Wcrld Bank, 8lld olh<rt. "

1

• 

• PLA Unit 61398(• cybctfOtte within tbcCIIin<s:mililal)')•hichJl'lldr.llol tbcDOiwclksoC>I41 bill< dip 

C<llllponiesacross2011llll<gically ~ il>du>aiesideotiflcd in China's 12111 Fh~ Year Plan for2011-201S""h 

1$aerospoo:t,!aldliiei!XIItlooomll!unica1ioosi!XIIT. ~otbcrareasoftbcft,WtccodewasSIOieoliom 

SCIIIC of tbc mOlt pominelt U.S.Io:lmology OOill]lOilics so:b as Googlc. Adob: 8lld dhcn; Oooglc 8!IOOCllCCd 

lbi$ in Iamay, 2010. 11iSI<$UIIcd in tbc US. indictmenl ofl memilcn oflhisocgilllizatioa. AOO>Iding 1o 

~faDcianl, PLA Unit 61398 is jlllt oneofmon:llmn lOcyh::r IIIIOCk gro<¥ •ithin China."' 

• ' Hlddto L)lll" •flicb ~ 10 SylllOII"' basaloog hislco)' ofallaeting thedd'""" industrial ~rof 

Wes~an counlries •ilb some oftbc moot sopbisticalolledmi<]ues bas SIXCISS(ully IIIIOCkcd the 1<1eh st>:l«, 

fi-iol..mce.,def...,C<llllmdcrs811dgovl!llllll!lllll&'l"iessincelll..st2009"' 

• "'OlS sayslbat b<l\\-.a~ o.:..mbes201111Xl lone 2012, c)'bes criminals~ llga> piptlioe <®~panl<s .,S 

510le infoonalioo ihat could be used"' abo~e porposes. Forensic dati Sllgg<SIS 1lle ]l!OOes originolol in 

ChiDa."'ll) 

• "Caoadian.-rdmsay in Malvh, 210:5 ihat Cllin<s: hactut$UO:tcd U.S.~ silc GkRub. GiiHubsaid 

the attack involved "a •iclecomhinalioo of attack ''"'lol$" 8lld used newl<duliqoesiO inrolrciiiiSillJl'IC(i •d> 

ustrs in 1lle l1ood ofllltT'JC 10 1lle siiC. At:OO!di" lo tbc r=bcrs, tbc llltotk ~ poges fOJ lWo Gilllub 

uscrs-Gn:al Fire 8lld the A'tw Yorl< l'MwJ' Cllin<s: minor silo>-00111 of •flicb mwno·em China's r ... .u ... " • '1llt Comm<m Dtpa111Dtot's Bomuoi1Dd11111)' ••d S«uri~ bod10 lll'ow'"'Y allofiU"""JlUJ<U$in 

<kloba 2001, pnl~ ille bm:au for more limn a momb clll< to lalgelod IIIIOCksorig~ from Cllim. BIS is 

•bese"'l'<lff I...,., for tfclulology il<msto cowtries liteCbina.,.. issued. ,ou 

• Bntt~ of lilt U.S. Ofllorofl'trsoond a~~~&tiiMI (OPM) in 2014 •bese thepcnoooel file< of 42 million 

formerond""""'go<cmnenlcmpk>j""as".Uastbcse<nrilycl"""""~infonnatioofor21.S 

million indh·icluals was SIOlen. Fonner NSA Direcooc Mi:hacl K.aydoo said dlallbi$ •.Wd ~ .... 

nllliooal socwi~· for111cnlire g<llellliort'" 

"' f.liMNoblhiono. "Coof ..... iaiRq>ootU..U.S. W-S)-D<s;p~i>)'CI1irlcs<CybmpCs",W""'-Poor(M•y27 201l~ 

Rdria"C'datf:nr· ..... .wwr'n!!fooi"S$ oom Ut N•lhl.o 1llombtqlt. "'IMide tk OIDtw flad: Attll.i; .. , TiMt(A.upa2S,lOOS) Rttrie\'ft!a l!!!n ~ Y."\\o'W soo!M.IImto."CCI 

1

" losbROjjo. 1b<Topi0Qina<C)ilcrillo<b(lhaWt"-oi):F"""8J!Pilllcy(Jnory2UliO) Rtl!itw<l• 

l!t!p· '""'bl!p: r~nmM~l'(J(It'2010 ll211'te-tortJ~..aNt41d~lbJI Wt.-lno.w4' 

"' •AI'TI: ElQ)OO .. Qlto!Cioino'oC)i>cr!;,piooo&<l!llios".ll....,.~lOil 

ou iidoloiL)11JC·i'lo-lbcl;mf«Hirt",S)>oooof«OJ/i<lol81"f (Scplanb<rl7,20 1l~ Rdrito«!Oib!!J!! .. wnm!!!«\1)!!\ 

IU Rob<IIK..t., •r;,.a,;..,.C)i>crAllacblh1tllipolle£,.,.W.,.rbanlbtOP\IIIb<~"!HfoocO.. ( .... IS 201~ Rtori"<dll 

n · \li,li'W.&rm:aw.A"!!. 

'" Knok.. 1i"' on""' C)1><r Allad.l""' M".;rt & e.· .. w .... """"" oor n..:t" 

II! Rop..1b<TopiOC!rina<C)i>crAIIJ<ts(tbiiW<KMwo0 

"' .,. OI'M llmdl: 11ow,.. Oo>""""" Jooprilcd.,. N.oionat Scari)' ror w ... ,..., G<ntnl.., ·c-on O.'<!Sijlll tOo>·'""""" 

Rtlorm,U.S. llouseolltqw<>m""'"' 1141b C..I""(Sqocmbcr7, 2016). 

39 
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Appendix 9: U.S. Events with Chinese Sponsorship 

I. Siliron Valley lnno>·ation and Entrtprtntursbip FoRJm (SVIEII). aoc:oldi~ to its wd)sile "is an 

illcma1iooal confe.rence designed to foster illllO\~tion and promole busi.- partnerships connecting U.S. 

and Asia-Pacifoc region. • SVJEF has expanded to hold two confereoo:s per year. lhe maiJl conferenct. 

beld io lhe fall of2016 and Silicoo VaDey Small Future Summit held in winler and focused on 

iltcltQoncctod deliccs. Both Cltnls are beld at !he Sa.-a Clara Colll'ention Center in Silicon Valley. A 

U.S. Congresswoman Qudy Chu) is !he honor.uy Chailwoman ofSVJEF and a keynote speaker at tte 

priocipal fall conference was form:r U.S. Secrewy ofEne'K\' Ste\'en Cbu. This g.11heri~ of Slallup 

CEOs, \'cnture capitalisU, Chinese companies and Chinese ltlaure capitalists makes this an ideal 

location to collect infonnation on lhe Slate of U.S. techrology. Chinese officials attend who are assigned 

to collect iorcUlgeoce. 

2. DEMO China, an annual t\'enl held in Sa.-a Clara. California (lhe bean of Silicon Valley) sbontasing 

promising S!anups to Chinese im-csto~ Th: eveJt includes a keynote by lhe Chinese Consulate 

Genera[ and has panels tbroughoot lhe day CO\'ering topics such as 113\'if!lling obstacles to im'CSIIIlent in 

the U.S. and China; tips on how to el'aluate stanups: adl·aruages of technology acx:elel:lor~: and 

clil-alssion of olher iRI'eSIJnelll ueod~ 

3. Silicon Valley-Chin Foturt FoRJ.m (August, 20 16) to tink Silicon Valley with Chinese capital 

specifically in the f~elds of aug®ntod reality, virtu.'ll reality and anifoeial ioteltigtnce. 

4. Cbina Silicon Valley is working with Silicon Valley ci~· gol'emmellts to drive increased ill\'estment and 

joo gronth by facilitatiog talent, techrology and busi.-exc~ and in\'estmem benYeen cities and 

b~ in China and !heir Silicon Valle)' coonterpans. The illelll is to help prol'ide a one-stop scrviee 

for go.·emment relations, legal, tax, consulting. networking and talent acquisition to f<dita!e Chinese 

go1·emment, businesses and individoals to im·est, CS!ablish a facto!)', R&D center or olher business 

actil'ities in Silioon Valley. Cbill3 Silicon Valley Ills An eslensil'e netnoll< of business partners from 

dil'ersified industries in Silicon Valley to eany out lhese actil i1i~ 

5. 1'IK Global Cbam.btr Saa Francl!«< (GCSF) hosts a seminar for entrepreneurs, illl'estors ruxl serl'ice 

providels with an ilteresl in U.S.-Olina markets on strategies and best practices to ~er and capitalize 

on business opportunities in U.S. & Cbina. 

6. O.S.-Chiaa VC Summit & Stanup Expo (OciOber. 2()16) hosts a conference in Boston foriRI'estOIS 

and entreprenetJJS who want to eollahorateonoppollllllities between lhe U.S. and China. 

7. Cbi- Ameriran Semiconductor Professional A!SOciatioo (CASPA) bolds many dozens of e~ 

per year in Silicon Valley and China. For2017, lhe pubtisOOd schedule includes 4 conferences, 4 

lr.ldeshows, 4 11o00hops, 3 C21Ctrde\'elop«nelll e>t~ts, 3 international trips to China, hostod delegations 

from Chim and6 menteTs necwoll<inge-tJtS. These a-cots are all gathering Chineseruxl American 

semiconductor talent with the purpose of recruiting American talenL 

40 
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APPENDIX I 0: Private Sector Largdy Unaware of China's Technology Transfer Threat 

Tho l'i'lle so:IOr is lll!leiY lllll>lln: of China· s plans for ccooomic domination (oor ba<e companies !p!lll tim< contonpating 

ill po~mtial COIISeQUCilCCS) and Ulla•>re of llle J<ale of ~tebooJosy lr1lliSfcr 10 Cbim l.l¥lcr1! ny "'<q>e for well·pubOOzed eylx:r 

incidents. This isioJ!dydue 1011ler.ct lhllibe U.S.I!lldeand inv.,.,...,t policiesiO~>rdsChinaare~ ofbiloltnl 

l!llde and ~L Tbe balditsoflow-co~ !ll81!ufac~and llle promise of a~ Cbina marltd lun-e beat widely 

jX1llll04ed-ca13inlyb) theCI!D:t:busiD<SSC<IIUIWIIil)'andgovonmentbut l9>n:infon:edb) CCOilOIIliopo icies~ 

10 fost<r the integrntioo ofllle U.S. and Chinese «<ilOilliesas part of aeol:ular.d goopofiticalemlxac< of China, begm 1Jlder 

~ Nixoo,IIXdcnlled under~ ~andCiimoD,andcooliniiC<J 10 lhisdny. 

IYbile lllo:te ba\'¢ beat Fill efrons 10 •'lllll coqlGilies of iOOusWI espiooogc risl:s. these ~ nwtly the Jeod stories in the 

lllmllivo •itbCbina ..-co though the oumbcrof coo>ictioos ba>< beat~· In eases •ben: the information isclassifr.d, the 

FBI bas greattrdiflkllll)' ~the~ whicl! •\lllld show China 10 be llle perp<lmlor it eases of mad<el manipui3tioo 

COO>binod •ilh induslriaJ C$piooagt and cybcr theft. lnotbcr eases, the U.S. gov;:mmcotbasnot """""'ted allthedoU •ben 

China bas used some of the technology lnl1sfer methods outlined abu>'ll in C10111binati011."' F111bcr, sioc:e C«llllOIlic c:spiooage 

basi!OI beco a piority for the U.S. intd~ogc><ie$,gail>:rin8 and analyzing lhis inttJlitcoct bas oor beco a focus for 

""""""nora planncl, S)'Sii!matic effort. Tho fBI otT~ials •lD spoke •itb llleontboBof dlis n:pMnor.d tl13l the btruw bas 

Y<l)' 611lir.d resoortOSrdati><to llletlvi.'OI. E''CO •bcn:.-,..applicd,themtas~~tofSUC«SS forlaw<llf-is 

proso:lllioos nul"' th3n Jltv<lllin3 the tJ<jl 

We spol:e •idt some Saicut Vall•!)' technology O<Celli\·esand lllOll)' '""""' copi1>6.U in the """"'oftlris •lld: (oli>t is 

available in AJlllCOdi.' m Mo~ "'"' not,. >re of the degree of threat China poses and '""' more focused on lbe market 

~~of sdq 10 ChiDese buliocsses orCOIWD<B tball in iq·l<nn llalds oftecbooJosy uwfcrlball!.-10 erode 

U.S. slobol competitiveness and, along •ilh it, mmlal)' 5UJICIIl3CY. Finns, lil:e Cisco, •llo dim;Oy compete •idt a 

Chirleo>bad;ed gJobol clwnpioo, like Homi, reJI"SS''lllbe "'ception sioc:eCisco ~ •<II 1\\velhat•bcrl Hoawei cornpdes for 

~iniDanaYnl;madlCI,Jik AJOOi,illaltheOJiDesegor<DilllCilljoinsHwwciand~aponfollo faddlional 

offerints to bear oo a <lolL For ....mpl<, the CltiDe$: govemm<llt migbt otTer to buM iofrasauctt~re in .. ~ martel, 

lin3otc dlis •iib low-<ost eopild from !be China Jle\·eloproent llaJt and, in lbe JliOCCSS. JlfO'idejobs in the comm111il)' in 

additioa10 ~ Humi •itb wbsidies for a'tttmdy COOljleliti'" pi<iing on r.Jecomnnllicatioos and -mking gear. 

Cisco Jims dlis is-))' difti:WtiOcompett •ill> and bas 1051 mad:...-sbatt oo a£)ollel bG5is 10 Rua•<i in~ martels. 

B) ~ Huawei's domestic mad<etand boclcing them in lbee<po~~ mad<elosdesaibcd abuve, Chino basa<aled a gloOOI 

cbampion tbol ~today lbe •~rid s ioJ!eslllleeommunicalioo$ ")uipm<oll1UII!Ilfacllln:f. 

Man)' of the \'elllllreeopilalllls .c spoke•ilh •ere ial!dY Ulla"""'of the partici~on of Chines< capital inearfy·;lag< 

IC<~I:lg) companies. Thisisll>SUI')Xisegi>'COihalCitil>e$:capitai isinoolyaboot IO!Ioofi'CIIturecleals<'~lboligbdlis 

p<!CCO!ag< bas iD:n:ased<hmatieoDy lioma fe.,y<aJSago. Sc:>....O U.S. venrure Jims •bobavedoocdcols •iih ChiDese 

l'<lllore~Clql'<$!0d dtcir fnmtion aboot multiplo I'OOilds of ~"'!!tialiocl oo price and terms !a)~ )OU ll¢l'ern:ally 

kn<\\•ifyou bodcoocblal a <lolL Most .,.. .. ....,tl131theCI!incseinlaneiClO<ll)>1llies(Baidn, TellCCIII,Aliblllo, elc.)•m 

activd)' porticipotillg ill cJeals assuattsic invO!Itlr$. Naunlly. the \'<Ilion: commlllity and technology OO!Dp«llies an: plta!<d 10 

bm the bm:i'd oflhisacl.ii1iooal ca)ital it the market •bcrllbey bm:i'd from ibe bisJ!er \'llloatioos !hat resul~ at least ooe 

l'!llton:capilallst•uco=ncdaboot the8S$!1 pricq dillcrtionlhll-.. •ilb•llolwasseatasa •iDillgnessof tho Chines< 

Ill 0\'CI')lO)' for ISSeiS. Weal9> Jeanr.dtbolCilit<o!eopital is involr<d toa small degree as limited portnenofU.S. V<lll.,. fllll1S. 

Tho fi.uoflimir.d portner> are f")' cloolly goanled 1>11 the renton: capitalists •• 'l'OP, •i1b .......t 11<1hat the Cilit<o! limited 

par11l<fstal:esin tllcir fumsw<~o:•.U under Ill%. 

'" eoc._.,..;,hll<p<l1,_otll<f .... wm ~•li&-"''<llcd1Ml•ill>oolink""""'I'Piiollo-ot-~•·"' .. 

unabk: todolt.eformsicwod:IOt«whcttq~lhtfthls: lod iOillltastrial~llldru:kdllllllipablicn. 

41 
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Appendix 11: Strengths and Weaknesses ofCFJUS Process Today 

~ 

• Anundetstoodprocessdefinedby FINSAstatute(2007) 

• No clear \iew on what constitutes a colllrolling inte~ that uigge~ an assessment by CF!US n1tich allows 

CF!US to reriew more transactions than if a qii3Jllil3live metric were ahvays applied suclt as a Sl% equity 

stake 

• Many problematic pole!lial acquisitions by Chio:se companies have been SlOpped 

~ 

• CF!US reporting is \'OIUlllal)'-tr.lnS3COOnsdo 001 b.n-e to be reported 

• There are many types of techrology transfer not currently covered by CFIUS 

o JoiJt \'Cnlllrenbere the U.S. complll)' contributes IP/techn:llogy rnlh:rtlnn an entire business 

o Techn:llogy licenses 

o Pri'~te ~ transactions that are "below the radar" 

o Mioori~· iDI'estments thai do 001 rise to lh: level of a •controlling irlerest' 

o Re.e~ mergers 

o Greenfield im'esllllents 

o Assets pun;b.-lsed from bankrupt~ 

• There's an inherent bias to de>·dop mitigation agreements' ~ to allow tutnsactions to proceed but mitigation 

a~nts are diffJCUh 10 construCt and enforce. Mitigation agreemenes Joek cornpanies into 

uncompetitive cost struclures; lh:se are too often designed undef time pressure resulting in one-of·a-kird 

~nts or agreements which are far too comprehensivt. There are no goremment n:souroes assigned 

to mooitor lh:se agreements which wldolilledly means lh:y are uneaforoed. The Jil;elibood of a costly 

miligalion ~mem also ltlllltt$1h: itmlil'c for fricOOly foreign com~ to acquitt U.S. ~cs. 

• There is no fonnal risk-scoring (by country ard by sector) 10 cm~te a traosparert, stalable proc;ess to 

manage iaJ!e mmbers of tutnsaclions; expecting consensus among lh: I~ CFIUS agencies is wrealistic 

• Security agencies {DcpalUtlCit of Ddense, Dqlartment of JIJ!jjee, Depanmcrt of Homeland Security) are 

not tasked to coUiilornte in aruculating lh: national securi~· risks of foreign im'CS!m:rt in sensitive 

technology and facilities 

• No comprthensi\e view of lh: technology 13!XIscape exists, ard since CFIUS is only designed to review a 

single deal at a time, there is increased risk of damaging a complete sector critical to national security such 

as is hawening in semioonductO<S119 

• Allied gol'enuncrus' view of threats are not incorpornled 

• Reqll(red certification 10 CoogtcSS of"no unmitigaled security threats" is unrealistic; uith an increasing 

number of complex tutnsactions tbe~e will be unmitigated security tluelis thai e.·olve 

• 90-day timeUnc defined by Sl3lUie does 1101 allow for cleating with 11101t compb uansactions 

• CFIUS transactions aret.lip3Dding to >ISQO·earand there is no dedicated furding by CoogtcSSto suppon 

this effon; resouroes are Slltlched in e.·ery participatinga~ncy 

'" Milipi .. _io<olpcnlt~COIIhllslliayd><llllioool-.iyn.ts ..... J<), __ """"r"''" _ _.,,. 

stnSiti\ eopta~ill!lfromthe~oreMilorint'l'frir~"'*ioniM.~ Fn:m2009-lGII ~ohllcaesm.W'afumlttdiDmi!iplian 

·- ~dooCFMi- ()prizolioofO<Ini<""'icoalbrv-. 

'""~LontTcnnU.S. I.eadmlnpilS..~ -·acouncilor.w,;.,onsamcoaodT«hDIIIot.J' .I.w!u.y2017 

42 
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Appendix 12: Consultations 

CONSULTATIONS 

INTERVIEWS w/ OFFICIALS FROM POLICY. ACADEMIC AND INVESTMENT ECOSYSTEM 

, .... _ 

r~~......_.,t....,. 

~OIIt.Tr.....ry 

· -clc-<. 

• USTl .,....,_c_. 

~·(l"fity 

-----

_, 

~·~us .... .__DAIPIOI 

·-·- . _ .. _. .. ~-~Secw!CV 

.• -..-- Cooo!oomc..< .. 

• Oit«OI .. -d.._ 

. 

-

t-.oN~StarC\'CNd 

OI'JIC.4olso.nctw~~ 

---- .,_ 

~,~f,._.,loM 

U.S.·C'IIN(t;...c.ft~ -(-

,_ .......... _(_ f:oc~a~ 

~~ 

~~'" ... $o.lattHII~ 

. ~ .... ;(_ 

. s.-v_..,.,. ~"' 

.·

• 

--

NltWVtcflC:.U~ _ .... 

'"""""""" toewu•Gio.~t 

• WHMIC.... 

• ~~'w • .- .C-.,.~ _ ... _ -o---. 

. · -'"' '« ...... 

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,.._ ... _ .. __ .-. ............ • (ow __ ,., 

. ..,...,w _ _., C..bkrM:~rp:...,~~ 

.

-,__... ....... .., ~.0~ 

........ ,..,..,.,_ Cfftt«ttrNtw~~ty 

·

• 

_

--........ 

_ ~SdJolf .. c-s. ... 

• ~OM.I( ... Inllul:r'YAw\ • W.O...O.<Ic-. 

• ww.-forawSC...tiW. 

• 'W' ...... 

·--

43 
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91417054.eps

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About the Authors 

Michael Brown is a WhiteHouse Presidential Innovation Fellow 

working with D!Ux. 

11lrough August of20 16. Michael 1115 the CEO of Symantec Corporation. the 

global leader incybetsecurily. During his tenure as CEO (2014-16). he led a 

torroiOillld as the compall)' de\'eloped a new str.Jtegy focused on its securi~· 

business, sold its Veritas business. hired a rew execlllh~ team, fonred bmincss 

units, improved opctati~ ltlllgins alii articulaled a new culture fostering inno\'ation. Michael scr\'ed on the 

Symantec Board from 200) until2016. 

MIChael is the former Chainnan alii CEO of Quantum Corporation ( 1995-2003), a leader in the computer storage 

indU!Uy specializing in baciup alii artbhing producls. As CEO of Quartum, the COmpall)' achie~·ed !!COrd 

re\'enues as the world's leader in disk dri1es for PCs alii the world's largest tape drive business. Michael joiocd 

Quartum in 1984 alii scn·ed in 1~rioos management roles before being named as CEO in 1995. Michael sen~ on 

the Quan!lllll Board from 1995 until2014. 

Michael has also sen·ed as the Chlinnan of Equallogic and Line 6 and has sen·ed on the ptlblic boards ofNddJir 

Therapeutics, Ma.<tor Corporation, and Digilallmpact He serves on the Board ofTrusteesofthe Berldee College 

of Music in Boston. He has a BA degroe inoeonomics fromH.'Il\•ardandanMBA from Stanford Uni\'erlity. 

Pavneet Singh has served in several roles on the National Security 

Council and National Economic Council at the White House and is a 

consultant with D!Ux. 

Most recently, he sen~ as diredorofiriem:nional affairs and managed the U.S. -Olina 

and U.S.·India oeonomic rela!ionships ii!Ciuding scning as the NSC's lead director for 

the Asia Pacific Economic Cooperation (APEC) Lead · Summit in Beijing and dCI~Ioping the Presidert's 

oeonomicdeli\'erables for the bilaiCral summit with Chinese President Xi liopiJ18. 

From 2011to 2013. l'll\'1l£Cl was the scnioradlisorto the Deputy Na!ional Securi~· Advisor Mike Froman and 

p101ided str.Jtegic a.nd policy~ across a ponfolio 1bal iooluded tr.lde, ereiX)', climate, espons and 

~ng the U.S. oeonomic relalionshlps with emerging oeonornies. Priorto the Wllite House.l'al'ncei worud as 

an analyst at the World Bank and~ the Brooldngs Institute. l':wncet earned his masler's 11ilh distinction in 

irterrotional relations ~ Georgetown Umtrlity and his undergraduale degtees in business administr.Jtion and 

political oeooomy from UC-Berkeley. 

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