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[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]

                       EXAMINING THE FLOW OF U.S. MONEY INTO 
                              CHINA'S MILITARY MIGHT

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 17, 2024

                               __________

                           Serial No. 118-76

                               __________

        Printed for the use of the Committee on Foreign Affairs
        
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

       Available:  http://www.foreignaffairs.house.gov/, http://
                            docs.house.gov, 
                       or http://www.govinfo.gov
                       
                               __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
55-922PDF                  WASHINGTON : 2024                    
          
-----------------------------------------------------------------------------------                        

                      COMMITTEE ON FOREIGN AFFAIRS

                   MICHAEL T. McCAUL, Texas, Chairman

CHRISTOPHER H. SMITH, New Jersey     GREGORY MEEKS, New York, Ranking 
JOE WILSON, South Carolina               Member
SCOTT PERRY, Pennsylvania	     BRAD SHERMAN, California	
DARRELL ISSA, California	     GERALD E. CONNOLLY, Virginia
ANN WAGNER, Missouri		     WILLIAM KEATING, Massachusetts
BRIAN MAST, Florida		     AMI BERA, California
KEN BUCK, Colorado		     JOAQUIN CASTRO, Texas
TIM BURCHETT, Tennessee		     DINA TITUS, Nevada
MARK E. GREEN, Tennessee	     TED LIEU, California
ANDY BARR, Kentucky		     SUSAN WILD, Pennsylvania
RONNY JACKSON, Texas		     DEAN PHILLIPS, Minnesota
YOUNG KIM, California		     COLIN ALLRED, Texas
MARIA ELVIRA SALAZAR, Florida	     ANDY KIM, New Jersey
BILL HUIZENGA, Michigan		     SARA JACOBS, California
AUMUA AMATA COLEMAN RADEWAGEN, 	     KATHY MANNING, North Carolina
    American Samoa		     SHEILA CHERFILUS-McCORMICK, 
FRENCH HILL, Arkansas		          Florida	
WARREN DAVIDSON, Ohio		     GREG STANTON, Arizona
JIM BAIRD, Indiana		     MADELEINE DEAN, Pennsylvania
MICHAEL WALTZ, Florida	             JARED MOSKOWITZ, Florida
THOMAS KEAN, JR., New Jersey         JONATHAN JACKSON, Illinois
MICHAEL LAWLER, New York	     SYDNEY KAMLAGER-DOVE, California
CORY MILLS, Florida		     JIM COSTA, California
RICH McCORMICK, Georgia              JASON CROW, Colorado
NATHANIEL MORAN, Texas		     BRAD SCHNEIDER, Illinois
JOHN JAMES, Michigan		     GABRIEL AMO, Rhode Island
KEITH SELF, Texas			
                                

                    Brendan Shields, Staff Director
                    Sophia Lafargue, Staff Director

                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

Pottinger, Hon. Matthew, Chairman of FDD China Program, 
  Foundation for Defense of Democracies..........................     6
Harrell, Honorable Peter, Nonresident Fellow, Carnegie Endowment 
  for International Peace........................................    15

                                APPENDIX

Hearing Notice...................................................    56
Hearing Minutes..................................................    58
Hearing Attendance...............................................    59

    STATEMENT SUBMITTED FOR THE RECORD FROM REPRESENTATIVE CONNOLLY

Statement submitted for the record from Representative Connolly..    60

       WITNESS TESTIMONY SUBMITED FOR THE RECORD FROM MR. MATHENY

Witness testimony submitted for the record from Mr. Matheny......    62

            RESPONSES TO QUESTIONS SUBMITTED FOR THE RECORD

Responses to questions submitted for the record..................    67

 
      EXAMINING THE FLOW OF U.S. MONEY INTO CHINA'S MILITARY MIGHT

                      Wednesday, January 17, 2024

                          House of Representatives,
                      Committee on Foreign Affairs,
                                                    Washington, DC.

    The committee met, pursuant to notice, at 10:15 a.m., in 
room 210, House Visitor Center, Hon. Michael McCaul (chairman 
of the committee) presiding.
    Chairman McCaul. The Committee on Foreign Affairs will come 
to order. The purpose of this hearing is to examine the flow of 
U.S. capital into China's military and technological 
development.
    I now recognize myself for an opening statement. I want to 
thank the witnesses for being here as well. Unfortunately, one 
of our top-tier witnesses who was going to testify, Mr. 
Matheny, came down with COVID this morning, so I hope he gets 
better. But we are delighted to have the two of you.
    The Chinese Communist Party's goals and actions are a clear 
and present danger to the security interests of the United 
States and our allies. We are in a generational competition 
with a determined adversary set on upending the global balance 
of power. Technology is at the center of this competition, and 
the CCP is using it as a weapon for its military and 
surveillance state. These technologies can be used to advocate 
and safeguard democracy, or they can be used for subversion and 
oppression.
    We must understand that whoever controls the best 
technology will likely prevail in this great power competition. 
And while we can restrict China's access to U.S. critical 
technology through export controls, we cannot stop big 
investors from using their money, know-how, and network to help 
build highly advanced technology companies in China.
    Regrettably, U.S. money is fueling the CCP war machine and 
surveillance state. Look no further than the CCP's dystopian 
oppression of the Uyghurs and the successful hypersonic missile 
test which circled the globe and landed with precision. This 
was built on the backbone of U.S. technology.
    The ranking member and I were disturbed that we have no 
effective tools to stop these key investments. They harm U.S. 
national security and endanger our partners and allies like 
Taiwan. And we also want to congratulate Taiwan on their recent 
elections and to the DPP.
    So, the ranking member and I acted. In November, this 
committee, on a unanimous bipartisan basis, passed the 
Preventing Adversaries from Developing Critical Capabilities 
Act. This bill has been one of the most important steps this 
committee has taken to protect U.S. national security and 
counter the CCP. This bill may also be one of the most 
bipartisan efforts that we have worked on.
    This effort spans the past two Administrations. It was 
then-Secretary Mike Pompeo who urged in 2020 to stop the flow 
of U.S. money into national security sectors in China. The 
Trump national security team supports this legislation, but so 
too does the Biden Administration. More recently, the Biden 
Administration took the idea and developed an executive order 
targeting outbound rule.
    While Ranking Member Meeks and I and a growing number of 
members, as well as outside groups like Heritage, Hudson, and 
American Compass, plan to get this bill signed into law. We 
thought we had it done in the National Defense Authorization. 
It got pulled. We need to get this new version that was 
introduced by the ranking member and myself signed into law. We 
cannot wait.
    This hearing today plays an important role in that process. 
The witnesses today were selected by both of us. This hearing 
should help clear up a lot of misconceptions about the threat, 
current situation, and examine tangible solutions.
    It should come as no surprise that China's military and 
surveillance state are exploiting loopholes in U.S. policy to 
access billions of U.S. investment dollars and expertise. We 
know that U.S. investment has not democratized China, and 
companies which are controlled by the CCP have no power over 
the applications of their technology. The CCP can direct it to 
be used for military or surveillance purposes. And we know 
China's military-civil fusion strategy undermines an entity-by-
entity sanctions approach and instead requires country-wide 
prohibitions for key technologies.
    Ranking Member Meeks and I requested that the Treasury 
Department decide whether to sanction Hikvision, a CCP 
surveillance company contributing to the Uyghur genocide, but 
Treasury decided not to sanction the company. The weakness of 
the sanction model, is that Treasury Department will not 
sanction.
    Our witnesses today can provide further evidence on these 
points and articulate why an outbound, forward-looking, sector-
based regime is necessary. And we'll see, whether Republican or 
Democrat, those that examine China objectively, analytically, 
and realistically have reached the same conclusion. And while 
existing tools, such as sanctions, have an important role, they 
simply cannot be a substitute for an outbound investment regime 
that is authorized by Congress.
    And that is our goal: restricting key outbound investments. 
And a whole-of-government approach ensures America's national 
security comes first.
    And with that, the chair now recognizes the ranking member.
    Mr. Meeks. Thank you. Thank you, Chairman McCaul, for 
organizing this important and timely hearing. I also want to 
thank our distinguished witnesses for appearing before the 
committee.
    Our discussion today is critical for America's national 
security and our strategic competition with China. But let me 
also just say to the Chairman: I want to thank you for 
working--we have worked very closely together to get this bill 
passed in a bipartisan way. And I also want to thank our staffs 
who worked very closely to jointly organize this hearing, which 
we worked on collectively and together, which I hope advances 
the joint work that we have done together to pass our 
bipartisan bill, H.R. 6349, the Preventing Adversaries from 
Developing Critical Capabilities Act, out of committee.
    Today, what we are doing, we are demonstrating to the 
United States, to the country, that when it comes to issues of 
critical importance to American interests, Republicans and 
Democrats can come together to solve big problems.
    We know that Beijing is developing advanced technologies, 
critical for military, intelligence, surveillance, and cyber-
enabled capabilities, with dangerous implications for our 
security. We also know that Beijing is busy synergizing its 
civilian and commercial sectors with its military and defense 
industrial sectors. And we also know that Beijing is intent on 
exploiting, stealing, and diverting the world's cutting-edge 
technologies to fuel its military buildup. So, we should not be 
making Beijing's job easier by having Americans fund the very 
PRC companies that are developing these technologies.
    Despite a bipartisan, bicameral desire to address this 
significant national security challenge, for several years now, 
Congress has not coalesced around a solution. But we are doing 
so now. And that is why I want to give credit, in a bipartisan 
way, to Mr. McCaul in what we are doing collectively together. 
And that is why I want to give credit to the Biden 
Administration for tackling this challenge.
    On August 9th of 2023, President Biden issued a game-
changing executive order on outbound investment that calls for 
prohibitions and notification requirements on specific types of 
American investments in China, or in certain Chinese companies 
that develop or produce semiconductors, quantum computers, and 
artificial intelligence applications. As we speak, the Biden 
Administration is busy establishing a process and crafting 
regulations to implement the executive order.
    But that does not mean that we, in the U.S. Congress, that 
we are off the hook. We need to create a statutory framework 
for the executive order, provide the Administration with the 
resources and tools that are necessary to effectively implement 
an outbound screening program, and provide certainty to our 
allies in the private sector that Congress stands firmly behind 
these carefully tailored restrictions. That is our 
responsibility. We should not shrink from that.
    An outbound regime that combines transparency with 
prohibitions on investments in the most sensitive technology 
sectors is the very best way to safeguard the United States' 
national security while also maintaining open global capital 
flows and the United States' preeminent position in global 
financial markets. The only legislation that balances these 
equities, the only one that I think has that true balance, is 
H.R. 6349. It is the most effective and robust legislative 
solution.
    So, I look forward to the discussion today and hearing from 
our witnesses about how best to address this challenge. Thanks 
again for working so closely, Chairman McCaul, and our staffs. 
And I yield back.
    Chairman McCaul. I thank the ranking member. I always think 
we're stronger as a nation and a Congress when we are united on 
these issues and speak with one voice to our adversaries, like 
communist China.
    So, we have a distinguished panel here today. First, Mr. 
Honorable Matt Pottinger is Chairman of the China Program at 
the Foundation for Defense of Democracies and a distinguished 
visiting fellow at the Hoover Institution. From 2019 to 2021, 
he served as the U.S. Deputy National Security Advisor. Thank 
you, sir, for being here today.
    Mr. Peter Harrell is a nonresident fellow of the Carnegie 
Endowment for International Peace. From January 2021 through 
2022, he served at the White House as Senior Director for 
International Economics. We are grateful for you being here 
today.
    The Chair now recognizes Mr. Pottinger for his opening 
statement.

  STATEMENT OF HON. MATTHEW POTTINGER, CHAIRMAN OF FDD CHINA 
         PROGRAM, FOUNDATION FOR DEFENSE OF DEMOCRACIES

    Mr. Pottinger. Chairman McCaul, Ranking Member Meeks, and 
distinguished members of the committee, I am grateful for the 
opportunity to speak to you today.
    We're at a juncture now where the scales of global power 
are beginning to tip toward America's adversaries, in part 
because of the leverage that we are providing them. American 
know-how and capital are seeds and fertilizer that have helped 
foster the growth of China's military might. U.S. companies and 
investment funds have, sometimes inadvertently, sometimes 
carelessly, helped to underwrite and expedite the modernization 
of the People's Liberation Army and China's high-tech 
surveillance and intelligence apparatus.
    Americans do not typically invest with the intention of 
harming U.S. national security, but that is often the result 
when they put their capital into Chinese companies that are 
working with dual-use technologies, those technologies that 
have the potential for military as well as commercial 
applications.
    It is hard and increasingly meaningless to try to 
distinguish between a Chinese enterprise with commercial aims 
and one with military objectives, and it is hard because 
Beijing actually designed it that way. Corporate independence 
in today's China is an illusion. The truth is that the single-
party dictatorship that rules China has powerful authorities 
and influence over all entities, whether private-or state-
owned, civilian or military, domestic or even foreign. Beijing 
has built a business and regulatory ecosystem to facilitate and 
mandate the transfer for dual-use technologies to military and 
intelligence programs.
    China's military-civil fusion strategy, for example, exists 
for that very purpose. So does China's National Intelligence 
Law of 2017, which compels ``all`` organizations and citizens 
to secretly support, assist, and cooperate with China's 
espionage activities. Chinese Communist Party organizational 
cells, rather than entrepreneurial founders, call the shots now 
from inside many of China's most famous technology companies.
    Some American investors try to conduct due diligence to 
reassure themselves about where their money and technology are 
ultimately ending up inside China, but that, too, is an 
increasingly fraught exercise. Beijing is running a 
``rectification campaign'' to shut down or assert heavy 
influence over research, consulting, and due diligence firms 
operating in China. So no wonder that U.S. investors who are 
seeking a return on their capital are often blind to the 
strategic costs that they are incurring for America's national 
security and prosperity. I have listed some concrete examples 
of how that plays out in my written testimony, which I have 
submitted for the record.
    Allow me to close with just a handful of recommendations. 
Congress has an opportunity to build on the initial steps taken 
by the Trump and Biden Administrations to prevent U.S. capital 
from fueling China's military and intelligence capabilities.
    First, Washington should take a sectoral approach, rather 
than merely an entity-based approach. The Treasury Department 
has demonstrated since at least 2021 that it is disinterested 
in using even its existing narrow authorities to limit 
investment in Chinese military-linked companies.
    And in fairness to the Treasury Department, tackling the 
problem on a company-by-company basis would be a resource-
intensive and gargantuan task. Chinese firms commonly dodge 
U.S. controls with shell companies and complex subsidiary 
arrays, and it would be better, simpler, and less resource 
intensive to apply new rules to entire sectors.
    Second, the rules should cover all strategic and military 
technologies. The Biden Administration's draft rules are a good 
start. They are designed to impact semiconductors, artificial 
intelligence, and quantum computing. Proposed bipartisan 
legislation also seeks to strengthen outbound investment 
screening in the field of hypersonics. Congress and the 
Administration should consider adding other technologies listed 
as ``critical and emerging technologies,'' as the White House 
puts it, and as outlined by the National Science and Technology 
Council. These include biotech, directed energy, space 
technologies, advanced manufacturing, autonomous systems and 
robotics, and even some green energy technologies.
    Third, apply rules to all kinds of investments. The Biden 
Administration rules, as currently written, would impact 
venture capital, private equity, greenfield, joint ventures, 
and certain debt financing transactions. And this is very 
welcome. Congress should also seek to cover investments in 
publicly listed companies.
    Fourth, include existing transactions, not just future 
ones, within the scope of legislation. And, finally, seek to 
block investments and not merely review them. Mandating 
transparency for U.S. investments in to China is a welcome step 
to better understand the scope of the problem, but Congress 
should also consider broadening transparency to full 
prohibitions on investments in targeted sectors.
    Thanks very much for inviting me to deliver this testimony.
    [The statement of Mr. Pottinger follows:]

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman McCaul. Thank you, Mr. Pottinger. The chair now 
recognizes Mr. Harrell for his opening statement.

 STATEMENT OF HON. PETER HARRELL, NONRESIDENT FELLOW, CARNEGIE 
               ENDOWMENT FOR INTERNATIONAL PEACE

    Mr. Harrell. Chairman McCaul, Ranking Member Meeks, 
honorable members of the Committee, it is an honor for me to 
testify in front of the Committee today on one of the most 
important aspects of America's strategic competition with 
Beijing: managing the flow of American capital to China. I have 
submitted a statement for the record and will confine my in-
person testimony to just several points.
    In August of last year, with President Biden's issuance of 
Executive Order 14105, the Administration took an important 
step toward regulating U.S. investment in China's AI, 
semiconductors, and quantum computing sectors. EO 14105 is 
intended to begin addressing the risk that certain U.S. 
investments can help China develop an edge over the U.S. and 
our partners in key technologies.
    Over the last decade, for example, we saw comparatively 
early stage U.S. investment in a number of Chinese technology 
firms that later engaged in problematic activities. An example 
of this is Chinese surveillance technology firm SenseTime, 
which attracted U.S. investment as early as 2017, but only in 
2019 did the U.S. Government understand that SenseTime was 
engaging in China's surveillance in Xinjiang, triggering export 
controls on the company.
    Unlike an outbound investment regime that focuses on 
sanctions against specific Chinese companies--which would 
require the U.S. Government to know up-front every Chinese firm 
that is problematic, a virtually impossible task given the 
scale of China's economy and the civil-military fusion doctrine 
in China--a sectoral outbound investment regulation can limit 
risky investment in early stage Chinese companies, as well as 
direct U.S. investments in those sectors that pose long-term 
risk to U.S. national security.
    While Executive Order 14105 is an important authority to 
address the risks posed by U.S. investments in strategic 
technologies in China, it is still vital for Congress to act. 
Legislation along the lines of H.R. 6349, the Preventing 
Foreign Adversaries from Developing Critical Capabilities Act, 
which Chairman McCaul, Ranking Member Meeks, you and other 
Members of Congress have introduced and have pushed through 
this committee, would put U.S. investment restrictions on a 
permanent statutory foundation, signal Congress's agreement 
that the U.S. needs a targeted regime to regulate U.S. 
investment in a handful of high-tech sectors, and strengthen 
and expand on the Administration's initial action.
    As Congress acts, I urge you to do so in a way that 
reinforces rather than undermines the regulatory processes that 
are already underway, as H.R. 6349 would do, reinforcing and 
expanding on already-existing regulatory processes.
    While I understand the legitimate desire by some members of 
this committee and many Members of Congress for a more 
expansive approach than is in H.R. 6349, I am also cognizant 
that regulating U.S. investment in specific Chinese sectors is 
a new endeavor, and it is appropriate for the focus today to be 
on the most important and most critical technology sectors. 
There is going to be a learning curve, a need for agencies and 
companies to build expertise, and a risk of unintended 
consequences.
    Legislation had a very different set of goals. For example, 
it would cover a hugely different number of sectors, would risk 
actually undermining progress by forcing a restart of 
rulemaking, overtaxing agencies, and creating confusion for the 
corporate sector and American allies. Congress should start 
with a tailored and scoped approach, focused on appropriate 
sectors where we know there are problems. And, of course, 
Congress can later add to the program if circumstances dictate.
    The final point I want to make is in response to arguments 
that restricting U.S. investment in China somehow undermines 
our own free market principles and will weaken U.S. influence 
over China's corporate sector. The U.S. tried, going back to 
the 1990's, to use economic engagement with China to make China 
more like the U.S. and to pool Chinese companies and Chinese 
society toward our direction.
    What we have found is that, under President Xi Jinping, 
that strategy simply does not work. The Chinese State, not 
American investors, ultimately tells Chinese companies in 
strategic sectors what to do. With respect to China, a 
geopolitical and economic competitor, we need to accept that we 
will have to more actively manage the economic relationship to 
make sure that it serves American national security interests 
and not simply the economic interests of American companies.
    That does not mean cutting off all, or even most economic 
ties, but it does mean that, where we see a pattern and 
practice of U.S. investment helping China grow critical 
technologies, the U.S. Government has a legitimate regulatory 
interest.
    Thank you, members of the Committee, for your focus on this 
issue, and I look forward to your questions.
    [The statement of Mr. Harrell follows:]

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman McCaul. Thank you, Mr. Harrell. Let me just say 
first, you know, I have been studying this issue for quite some 
time.
    Mr. Pottinger, you were the architect of the Trump 
Administration's China policy. I was in full agreement. In 
fact, your team was the one that came to me, and Secretary 
Pompeo, and National Security Advisor O'Brien regarding the 
CHIPS Act that we were able to pass to get off the supply chain 
that threatens our national security issue. But when I looked 
at the way Treasury works with sanctions on the entity 
approach, as you mentioned, versus the sector-based approach, 
it seemed to make more and more sense to me.
    I had a discussion with Undersecretary Estevez of the 
Bureau of Industry and Security. And he said instead of just 
providing a sanction on a company, and then China will turn 
around and call it something else the next day or take it off 
the books, the sanction has no effect. And they are very smart 
about this.
    So we started talking about this sector-based approach, and 
the key sectors are the semiconductors, AI, quantum, 
hypersonics, high-performance computing. And to your point, Mr. 
Harrell, we know these are the sectors that go right into the 
PLA's military war machine or civil-military fusion. So if we 
have a prohibition based on the sector, to me, that seems to be 
more effective than this entity-based approach that can change 
overnight.
    I want to get your thoughts on that.
    Mr. Pottinger. Mr. Chairman, I agree with Peter's opening 
remark on that very point. I think your point was that it is 
much simpler. It is less confusing for American businesses. It 
is less resource intensive.
    That is not to say that I do not think that the Treasury 
Department should have authorities to target specific entities, 
but a sector-by-sector approach is just much more clear-cut. It 
allows for the compliance teams at various American financial 
institutions and investment funds to simply adjust and not to 
get caught in this very complex web of subsidiaries and shell 
companies.
    The Treasury Department has had the authority to target 
Chinese military-affiliated companies going all the way back to 
late 2020. President Trump signed a couple of executive orders 
that gave them that authority. President Biden reaffirmed with 
some changes, his own executive order to that effect.
    But since then, I think only 68 companies have been added 
to the list of prohibited Chinese firms for American 
investment, and I can tell you that the galaxy of Chinese 
entities that are involved in China's military modernization is 
many, many orders of magnitude greater than the number 68.
    Chairman McCaul. That is very good. So when you look at 
export controls, this committee has jurisdiction over that as 
well, but it seems to me that alone is not going to solve this 
problem, and that is dual-use technologies.
    I remember prosecuting the Johnny Chung case of the money 
that was coming from China, military intelligence, China air 
space, funneled through his Hong Kong bank accounts to 
influence the Presidential election. Why? Because they wanted 
the satellite technology, aerospace. They also wanted to become 
part of the WTO, and guess what? They got all of it. And that 
was 1997. Where are they today?
    So, I think using both the export control laws that we have 
that Mr. Meeks and I worked on, but also the sector-based 
approach on capital flows going into China, that combination 
seems to be a powerful one, in my opinion.
    Mr. Pottinger. I agree. And I commend the bipartisan spirit 
reflected today in Congressman Meeks' remarks, as well.
    Chairman McCaul. I do not know if you have noticed, it is a 
little rare these days. Mr. Harrell, just one thing, you know, 
defining technologies, like advanced semiconductors, AI, or 
quantum, we did this with AI. In terms of the business 
community understanding what we are talking about when we talk 
about a sector, can you elaborate on that?
    Mr. Harrell. Absolutely, Mr. Chairman. Obviously, in 
implementing legislation like this or the Biden 
Administration's executive order, you are going to need a 
rulemaking process that is going to lay out in some detail 
exactly what parts of the semiconductor ecosystem we are 
talking about here, the most advanced, and what parts of the AI 
ecosystem we are talking about here, not just kind of customer 
service chatbots but the high-end models that we are actually 
concerned about. But the thing is that we have that experience 
in export controls where we have had to define a lot of 
different kinds of semiconductor technology. The business 
community understands that regime, and they will understand 
that regime when, with appropriate tailoring, you move it over 
to an investment, a complementary investment restriction 
regime.
    Chairman McCaul. Thank you. The chair recognizes Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman. I thank both of you for 
your statements. I think that they were excellent and show the 
bipartisan nature of both Administrations on this particular 
issue, which I think is extremely important.
    You know, in recent years, consecutive Administrations and 
congresses have strengthened the United States' foreign 
investment review and export control authorities to bolster 
national security protection. But, Mr. Pottinger, I will start 
with you, you know, because I hear some things come back and 
forth to me about our existing CFIUS process, sanctions and 
export controls. Can you tell us what are some of the critical 
problems that an outbound regime should tackle that cannot be 
addressed through CFIUS sanctions or export control regimes?
    Mr. Pottinger. Thank you, Congressman. You know, it is 
interesting that the money that is represented by, you know, 
big name private equity and venture capital firms in the United 
States represents more than just the dollar signs. It 
represents know-how. It represents networks to talent and board 
members and technologies that reside in the portfolios of these 
venture capital firms that then work at the service of other 
companies in their investment portfolios, including companies 
in China.
    So if we look at something like export controls are kind of 
a lagging indicator. It takes a long time for us to even 
recognize new technologies that are being developed in China, 
for example, using U.S. capital and some U.S. know-how. By the 
time those technologies mature and are ready to be harvested by 
smart people scouting technology for the Chinese intelligence 
agencies or for the Chinese military, the cat is already out of 
the bag, the horse is out of the barn, whatever farm animal, 
you know, analogy you like; it is too late.
    And so I think the reason that we were focused, 
particularly in 2020 during the Trump Administration and Peter 
and colleagues who are currently and recently in the Biden 
Administration have been focused on trying to close that 
loophole to actually capture technologies before those seeds 
are planted and before they can sprout into something that is 
going to be weaponized against us.
    Mr. Meeks. So let me just followup that up with Mr. 
Harrell. So those gaps, can you tell us specifically how the 
Biden Administration's outbound executive order addresses them?
    Mr. Harrell. Absolutely, Congressman. And thank you for the 
question. Let me give a hypothetical example that I think will 
help illustrate the gap here that we are all trying to close.
    So since October 2022, the Biden Administration, with 
strong support from Congress, has imposed pretty tough export 
controls on China in semiconductors where U.S. companies cannot 
send tools and designs for high-end semiconductors to China. 
How is China responding to this? Well, they are trying to build 
an indigenous capability for those same tools and designs.
    Export controls alone do not provide a tool to prevent an 
American venture capitalist from saying, you know what, that is 
an interesting opportunity. I might not be able to ship a tool 
over to China, but I could invest $20 million in this upstart 
Chinese firm that is trying to build that same tool or that 
same design here in China. And then, as Matt says, helping that 
Chinese firm recruit talent, helping that Chinese firm build 
contacts in the industry to help them grow, because none of 
that expertise is technology. The export control just focuses 
on the technology, and what we are worried about is that the 
capital can still go over there to help them innovate around 
our export controls, which is why I think an approach like that 
in your bill, sir, would be helpful in closing that gap.
    Mr. Meeks. Thank you. And I will try to get this in real 
quick because the Biden executive order identifies three 
sectors that are critical for the military, intelligence, and 
surveillance or cyber-enabled capabilities of the PRC that 
could cause or pose a national security threat to the United 
States: semiconductors, microelectronics, and quantum 
information.
    So either Mr. Pottinger or Mr. Harrell, in the short time 
that I have or do not have, what are the benefits of utilizing 
a sector-based approach for countries of concern instead of 
having a case-by-case review or a company-by-company based 
approach to address outbound investment?
    Mr. Harrell. Just very briefly, Congressman. I actually 
think there is a helpful lesson again from export controls. So 
when Matt was in the White House, the Trump Administration took 
very important actions against a couple of Chinese technology 
firms, like Huawei Technologies, limiting exports from Huawei. 
What we have seen since is that China, of course, sets up lots 
of front companies and other companies to get that technology 
that Huawei then couldn't get, which is why in October 2022, 
with its export controls, the Biden Administration expanded 
beyond this company-by-company approach to go after 
semiconductors going to China as a whole, and I think that 
lesson in how China evaded the export controls shows why, in 
the investment regime, as well, we should have a sectoral and 
not just a company-by-company approach.
    Chairman McCaul. The gentleman yields. The chair recognizes 
Mr. Smith.
    Mr. Smith. Thank you very much, Mr. Chairman. Thank you for 
your bill, 6349, you and Ranking Member Meeks, an excellent 
piece of legislation, and I do hope it becomes law sooner 
rather than later and then is faithfully implemented. So often 
we get great bills passed, and I do not care who is in the 
White House, implementation falls far short.
    But let me just say, you know, often we quote the fact 
that, you know, there was a famous quote that came out of the 
Soviet Union: we'll hang the West and they'll sell us the rope. 
That has never applied to the Soviet Union. It applies to 
China, especially under Xi Jinping. I was one of those who led 
the effort against MFN delinking of human rights. I believe 
when Clinton delinked MFN from human rights on May 26, 1994, 
that was a catastrophic game-changer for the dictatorship, and 
ever since they have believed, and maybe rightfully, with some 
exceptions, that they can do whatever they want and no 
sanctions will be forthcoming that are meaningful.
    I held hearings on not allowing China in the WTO, believing 
that they would change the WTO and not the other way around. 
And it is my sense that that has been somewhat vindicated, that 
view. And we have had hearings over the years, many of them. I 
have chaired 97 hearings on human rights abuse in China; we 
just counted them up. I am shocked that we still have not 
learned, and that is why this bill is so important, we still 
have not learned that they will do everything they can to take 
anything we sell, particularly in the area of electronics and 
really high tech, and use it dual use, use it for the military. 
They have been doing that for decades. We do not learn. We 
think somehow, if you trade more, they will matriculate from 
dictatorship to a democracy. Not going to happen under Xi 
Jinping and the CCP.
    Outbound investment is a very, very good concept that needs 
to be further backed up through law, and I would also add 
outbound enabling. You know, I got a bill passed almost a year 
ago, and it was totally bipartisan, two votes against it on the 
floor of the House, to try to end, certainly expose and end the 
egregious practice of forced organ harvesting. Tens of 
thousands of young people, average age 28, are killed to get 
two or three of their organs each and every year. The problem 
is not only a gross human rights abuse, but it is absolutely 
being enabled by the PLA. And there is even a hospital, a 301 
military hospital in Beijing where, you know, if Xi Jinping 
wants a new liver, he will probably get it from a Falun Gong 
practitioner who is 28 years old. I mean, how perverse is that?
    So I would like, you know, from our panel, and I thank you 
both for your expertise, are you aware of the PLA's role in 
this terrible practice? And, again, what are they doing is, 
they do it with all kinds of pharmaceuticals, they try to get a 
monopoly on just about everything. But in this case, it is a 
huge moneymaker for the PLA. It is also a way of regenerative 
medicine for their elite and for their military. Your thoughts.
    Mr. Pottinger. Congressman, thanks for your leadership over 
the years on China human rights. I wish we had all listened 
when you had the foresight 30 years ago on most favored nation 
status. That really was, you know, the snowball that led to an 
avalanche.
    China's human rights abuses are so grotesque and the scope 
is so big now with what is happening in the northwest of the 
country, in Xinjiang, whole ethnic groups which are being--
well, in the words of both then Secretary of State Pompeo and 
current Secretary of State Tony Blinken, it is a genocide. I 
have heard over the years about and partly thanks to what you 
have uncovered with witnesses that you have spoken to over the 
years, the forced organ transplant business, I would not be 
shocked to learn the full scale of that industry, but I do not 
have particular insight right now into the scale of it.
    Mr. Harrell. Yes, I just want to echo Matt in thanking you, 
Congressman, for your leadership on the human rights issue over 
many, many years, a really important set of issues with respect 
to China. Unfortunately, like Matt, I do not have specific 
insight into what the PLA is doing on organ harvesting.
    Mr. Smith. I appreciate that. Well, our bill, it has been 
languishing in the Senate for months, would, in addition to 
sanctioning those who are, with knowledge, procuring these 
organs, it would do a serious work within the U.S. Department 
of State to investigate and to expose. That is the beginning of 
trying to bring an end to this horrible abuse. But, again, the 
PLA is benefiting usually from it. I yield back.
    Chairman McCaul. The gentleman yields. The chair recognizes 
Mr. Sherman.
    Mr. Sherman. Mr. Chairman, thank you for holding these 
hearings. I would like to put in the record a list of nine 
hearings of the Financial Services Committee that are relevant 
to this hearing.
    Chairman McCaul. Without objection, so ordered.
    Mr. Sherman. And, in particular, we have dealt in the 
Financial Services Committee on making sure that American 
investors do not get phony financial statements and that 
Chinese companies are not able to raise money from American 
investors with phony financial statements, and Senator Kennedy 
and I have passed the Holding Foreign Companies Accountable Act 
and the Accelerating Holding Foreign Companies Accountable Act 
to at least deal with that issue. We also had a hearing earlier 
last year on combating the economic threat from China.
    There are two aspects to this. There is the macroeconomics: 
does China have enough capital to build its economy; and the 
micro: can a particular company get its hands on an idea, a 
technology, an introduction? What is not polite to mention is 
the enormous trade deficit. We are running a trade deficit of a 
third of a trillion dollars with China, so every 10 years they 
have $3 trillion of capital decade after decade that they can 
deploy where pretty much wherever they want. Why this trade 
deficit? Well, both our countries are mercantilist to some 
degree. We want to export more, import less, we want more 
investment in the United States, less investment elsewhere. But 
China has two ways to achieve this. First, they could have 
tariffs. Second, they can orally tell their companies just do 
not buy the American stuff. I cannot imagine a Member of 
Congress calling a company in our district and telling them do 
not buy the Chinese stuff, do not buy the German cars.
    But China has higher tariffs on our goods than we have on 
theirs. So we have only one device and, even as to that device, 
they are using it better. We, therefore, have a situation where 
China has $1.2 trillion of our bonds. We need that capital 
because we have to finance our trade deficit. Now that as to 
debt equity. As to stocks and other equity investments, the 
flows are roughly equal.
    Now, one of our witnesses mentioned that venture capital 
situation. A company needs $20 million. I do not think we are 
going to be able to stop that because, if it is a good 
investment, the Chinese have $20 million. They have, as I say, 
a third of a trillion every year just from their trade surplus.
    But we can deal with the technology. We saw an example a 
decade and a half ago where American satellites were being put 
into space on Chinese rockets. What happened? Our satellite 
companies and their insurers found it in their interests to 
make sure the rockets did not blow up. So they provided good 
technical advice to China, and now China has better rockets.
    When we have a situation where Americans have it in their 
interest to transfer technology to China, it will be 
transferred. And it may not be a patent; we can outlaw that. 
But unless we outlaw the kind of investment where you have a 
controlling interest, when you are a consulting company, when 
you are a venture capitalist, and prevent the flow of 
technology there, we will continue to provide advice and 
contacts and know-how to Chinese companies.
    I commend the chairman and the ranking member for their 
bill. There is more to be done. I am working on legislation to 
make sure that we do not see--that every American company 
disclose to its shareholders its China risk and what it is 
doing to prevent its China risk for two reasons. First, so that 
the investors will know. Second, so the company will start 
working, as they have not sufficiently, on derisking themselves 
from China. Second, we have got to prevent index funds from 
investing in China because this is not paint by the numbers. It 
is too complex to figure out how and which companies in China 
to invest in. Third, on the human rights side, we have to 
prohibit American investment in sanctioned companies, 
particularly those sanctioned for the activities that Chris 
Smith recounted for us. It may not deprive those companies of 
capital, but it will at least prevent us from being involved. 
And fourth and most importantly, we need to prevent a capital 
gains allowance for investing in Chinese companies. This costs 
our Treasury many tens of billions of dollars. And I will ask 
our witnesses: does it make any sense for us to be providing an 
investor with a low tax rate on profits they make by investing 
in Chinese companies? Do either of you think that is a good 
idea?
    Mr. Pottinger. I do not like that idea. That is to say that 
we are giving tax incentives to invest in our chief adversary.
    Mr. Sherman. And I will point out China has incentives for 
investment that are only applied to investing in China. So it 
is both unfair and stupid for us to be providing a capital 
gains allowance, and I look forward to working with members on 
this committee to make sure that the capital gains allowance, 
which is designed to get people to invest in building an 
economy, is not an incentive to build a Chinese economy. And I 
yield back.
    Chairman McCaul. Excellent point. The chair recognizes Mr. 
Wilson.
    Mr. Wilson. Thank you, Chairman Mike McCaul, and I also 
want to thank Ranking Member Greg Meeks for the bipartisan 
dedication to exposing the single-party dictatorship of the 
Chinese Communist Party. And it is also very revealing that, 
amazingly enough, I agree with everything that Congressman Brad 
Sherman just said. And I do not want to ruin his reputation 
back home, but, hey, I even agreed frequently with Kathy 
Manning, too. So I am going to, I will brand several of you. 
Hey, we are working together in a bipartisan manner on this.
    It is sad to me that the people of China are impressed by 
the Chinese Communist Party. I appreciate firsthand the people 
of China. My father, First Lieutenant Hugh Wilson, served in 
the Flying Tigers, the 14th Air Force, in Kunming, Shantou, and 
Xinjiang. Our family has great affection for the people of 
China. We are inspired by the people of Taiwan in this week's 
elections. Courageously, the Taiwanese have voted for democracy 
and freedom. Taiwan is a beacon of success for a free market 
democracy.
    With that in mind, Mr. Pottinger, since the murderous 
October 7th terrorist attacks by Iran puppets of Hamas into 
Israel, the Chinese Communist Party has stepped up their 
outreach to the gulf allies of America and partners, hoping to 
capitalize on destabilization caused by the Iranian regime's 
terrorist networks and is working together with war criminal 
Putin to gain a foothold in the region. There is a significant 
increase in media by the Chinese Communist Party and by war 
criminal Putin across the region in Arabic.
    The question: how do you see the CCP working to increase 
its influence interview he Middle East and what can be done to 
counter the increased role in the region and how is the threat 
to U.S. interests, as we, sadly, are in a conflict we did not 
choose, of dictators with rule of gun invading democracies with 
rule of law?
    Mr. Pottinger. Congressman, thank you for those comments. 
And I would love to see photos of your father in Kunming with 
the P-40 Flying Tiger. Fantastic legacy. Brilliant.
    Look, I think you are exactly right that these conflicts 
that are beginning to spread us thin are, in fact, related. I 
believe the incoming Chinese foreign minister was here recently 
and made a remark to a U.S. audience when he was in the U.S. 
specifically that they are not related. Of course he would say 
that. They are very much related. China is the number-one 
backer economically for Russia, certainly diplomatically for 
Russia. According to a State Department report that came out 
last year from the Global Engagement Center, China is spending 
more money on pro-Russian propaganda worldwide than Russia is 
spending on pro-Russian propaganda worldwide.
    China is a key backer for Iran. It is no coincidence, I 
liked the way that you put it, that they are trying to 
capitalize on this situation. I have noticed that Chinese 
shipping is not affected in the Red Sea the same way that 
everyone else's shipping is. That is not by accident. That is 
being engineered by virtue of the fact that China is one of the 
main buyers of Iranian oil. These things are related.
    And I will paraphrase Xi Jinping, who has said something 
frequently, going back at least to 2021. He has given internal 
speeches where he has said the lead word to describe the global 
situation today is chaos. Chaos. And he has gone on in those 
speeches to make clear that he views that as a favorable 
condition for China achieving its ambitions worldwide.
    So here we are. Chaos is something that is part of the 
design of China's global ambitions and of its foreign policy, 
and we, at our peril, fail to connect those dots. Those dots 
are very much connected, sir.
    Mr. Wilson. Indeed they are. And I really appreciate, one 
of the great achievements of President Donald Trump were the 
Abraham Accords to provide stability and success for our Middle 
Eastern allies. And then, sadly, I really believe one of the 
reasons that Iran, through their puppets of Hamas, attacked 
murderously and conducted the mass murder in Israel was to 
disrupt the ability of Saudi Arabia to join in, which would 
have been so beneficial to Saudi Arabia and to the Middle East 
region.
    And so with that, I thank both of you for being here, but I 
really want to thank again the chairman and ranking member. All 
of this needs to be exposed. I yield back.
    Chairman McCaul. The gentleman yields, and I appreciate 
the, you know, you mention Abraham Accords. The security 
agreement with the Saudis, it is going to be so important 
between Israel and the United States and Saudi Arabia. It could 
truly bring peace to that region. So thanks for bringing that 
up.
    The chair recognizes Mr. Bera.
    Mr. Bera. Thank you, Mr. Chairman. And for the millions of 
viewers on C-SPAN that are watching this, the media does not 
cover the bipartisan nature of how Democrats and Republicans 
work on policy. I commend the chairman and the ranking member 
and the members of this committee to work on a challenge that 
addresses our vulnerabilities as a nation but also strengthens 
America's security.
    If we were to go back a decade, two decades, three decades 
ago, you know, there was a hope that, you know, as China built 
a middle class, an entrepreneurial class, that they would 
become responsible partners in a global economy. Obviously, 
that isn't where we are today. We clearly understand what Xi 
Jinping's policy objectives are, what Beijing's policy 
objectives are, and we have to address the reality that we face 
today.
    I think, Mr. Pottinger, I would use the term the panda has 
left the zoo. The panda has left the zoo, so I think we have 
got to address that.
    Mr. Harrell, you used a statement, I think, is important 
for us to understand. I think the term you used was a civil-
military fusion doctrine. And if you could just take a minute 
to expand on that doctrine.
    Mr. Harrell. Absolutely. So this has been one of the 
defining societal doctrines in China, particularly under Xi 
Jinping, where, under Xi Jinping thought, if you will, and, 
certainly, he calls it Xi Jinping thought, there is an idea of 
mobilizing all of China's society behind China's ultimately 
military aims. And so what we have seen over the last, well, 
going back many years but particularly over the last decade is 
increased efforts, not only through sort of official spending 
and subsidies but through a variety of regulatory mechanisms, 
as well as informal mechanisms, to galvanize China's technology 
sector, universities, major SOEs behind building China's 
military might, such that, sort of to come back to today's 
hearing, I think really only a sectoral approach that says we 
are going to limit investment in these key sectors is going to 
work to prevent Americans from supporting the development of 
those key technologies in China because, if you just go after 
one or two firms, China's response is we're just galvanizing 
all the other firms in this sector to do what that firm can no 
longer do.
    Mr. Bera. So super important for American and Western 
industry and investors to really understand the root of that 
doctrine and the foundation. These may be patriotic companies 
that are profit-driven, that are just looking for good 
investment opportunities; but if they do not truly have an 
understanding of how those investments potentially could be 
used to undermine our own national security.
    Mr. Pottinger, let me ask you a question that touches on 
that. International coalitions are going to be important. And, 
again, I commend the chairman for his work on the CHIPS Act, an 
incredibly important piece of legislation. You know, Micron has 
a presence in my community, and we saw some economic 
retaliation from China on Micron. I do think we were successful 
in keeping, you know, international companies from seeing a 
market opportunity and saying, OK, well, we will go and 
undermine that. But I think it will be really important for us 
to have these international Western coalitions of like-valued 
countries that understand this. It won't be easy, but I think 
it is important.
    Mr. Pottinger. Congressman, I agree with you. And I found 
that, over the years, when the U.S. leads, our allies tend to 
eventually follow, sometimes very quickly. In the case of 
sanctions on Russia, I mean, it would have been even better if 
we had credibly threatened them in advance of an invasion by 
Putin, war criminal Putin, as Congressman Wilson, put it, which 
is a great title for Vladimir Putin. It would have been better 
to have had that advance, but, once that invasion began, the G7 
and other allies began to coalesce very quickly. So I think it 
is incumbent upon the United States to lead and others will 
follow.
    You made a comment a moment ago just about how private 
equity firms and others, you know, often need to be told or, 
actually, in some cases, want to be given those guardrails. I 
have had conversations with investment funds that have said, 
look, we have a compliance shop. If Congress will tell us where 
those guardrails are, we will abide. And in some cases, they 
want those guardrails to come in more tightly because that 
means that they are not missing out on opportunities that, you 
know, less scrupulous competitors could take advantage of. And 
then, over time, it is not just American competitors but others 
in Europe and Japan and elsewhere that will follow with similar 
types of rules and regulations.
    Mr. Bera. Great. Again, I commend the chairman and the 
ranking member for their work and leadership on this topic.
    Chairman McCaul. Thank you, Mr. Bera. The chair recognizes 
Mr. Mast.
    Mr. Mast. Thank you, Mr. Chairman. I appreciate the 
expertise you both bring today, the work that you all have 
done. I am over here, Mr. Pottinger. I know you were looking 
for where we are at. I have read work from both of you over the 
years. I want to start with you, Mr. Pottinger. How many times 
can you recall in speeches Xi Jinping talking about preparing 
for war?
    Mr. Pottinger. Well, Congressman, last March, so less than 
a year ago, China held its annual two meetings, what they call 
the lianghui, two meetings. It means the National People's 
Congress and another gathering called the Chinese People's 
Political Consultative Conference.
    Mr. Mast. Simultaneously.
    Mr. Pottinger. Simultaneously. Xi Jinping gave four 
addresses to delegates to those two meetings. All four of them 
had the common theme of the need for China to prepare for war. 
And in the lead-up, there were changes that were being made to 
laws, for example, on making it easier to put the military in 
charge of Chinese society in the event of war; new rules to 
retain reserve military personnel for longer periods of time, 
particularly if they have key skills; new mobilization, 
military mobilization offices that have popped up in most of 
the provinces around China; building air raid shelters right 
across from Taiwan, as well as starting to create authorities 
for building military hospitals that can do combat care. I do 
not take comfort in any of those signals, any one of them, much 
less the constellation that is painted by all of them combined.
    So I think that war is on Xi Jinping's mind. He has told us 
as much.
    Mr. Mast. Anybody preparing for war, obviously they are 
looking at a number of different facets of where they could 
weaken their enemy. And whether that is through their military 
might, whether that is economically, whether that is in any 
place domestically, there could be a host of places that they 
try. What worries you most out of any of those areas that you 
see them working to weaken the United States of America as they 
prepare for war?
    Mr. Pottinger. Well, I think that all of the things that 
add up to deterrence are built on one factor in particular, and 
that is hard military might, the credible availability of 
decisive military force. I worry that if we do not keep pace 
with the crises that Beijing, in some cases, is adding fuel to, 
we will not have sufficient capacity, munitions, whether it is 
torpedoes or anti-ship missiles or the ability to build more of 
those things relatively quickly. It is not like the days of 
World War II with Rosie the Riveter where you can build bombs 
on what the day before was an auto factory quickly. These are 
very sophisticated munitions that take sometimes years for 
those supply chains to add up.
    So my biggest concern is we do not meet this moment that Xi 
Jinping is talking about as a moment where he can take 
advantage of what he calls an opportunity of a hundred years.
    Mr. Mast. We quite often in this body talk about the Belt 
and Road Initiative and largely focus on these developing 
countries where they can put a road in, extract something that 
they need for their supply chain. To that effect, I do not 
think we look enough internally about where does the U.S. 
investor, the U.S. investment into China, how is that making us 
subservient to that Belt and Road Initiative as Americans and 
where does that advance their preparation or where could it 
pull their preparation back were that U.S. investment to 
decrease?
    Mr. Pottinger. Well, the Belt and Road Initiative is really 
a vehicle for corruption. It is a means to expand China's 
influence around the world through co-opting elites and 
governing elites in foreign countries. There is a reason why 
most of the Belt and Road agreements that China signs with 
foreign governments are not available to the light of day. They 
are secret. Some of them have been leaked over the years, and 
they have these common patterns to them. They involve countries 
pledging sovereign assets, I mean, things that belong to the 
people of those countries, whether it is a port or it is 
telecommunications and rail infrastructure. And so China is 
weakening the ability really of those countries' people to 
maintain something like a democratic--in some cases they are 
democracies and that democracy is at risk or they aspire to be 
democracies and are undermined by the enormous debt and 
corruption that these agreements saddle on them. So that hurts 
our interests. When corruption and co-optation of elites is the 
mode for advancing power in the world, that is terrible for our 
values and our influence.
    Mr. Mast. Thank you, Mr. Chairman.
    Chairman McCaul. The chair recognizes Ms. Manning.
    Ms. Manning. Thank you, Chairman McCaul and Ranking Member 
Meeks, for holding this hearing. And I do appreciate the 
bipartisan nature of the hearing on this critically important 
issue. And thank you to our witnesses for being here today.
    I want to get into some of the details that are involved in 
this issue. So, Mr. Harrell, in your view, which Chinese State 
activities or industrial policies, including the forced or 
coerced transfer of technology, IP theft, data localization, or 
others, which pose the greatest risks to our national security 
and how can greater scrutiny of our outbound investments help 
combat these practices?
    Mr. Harrell. I think there are many things, obviously, the 
Chinese do that pose a threat to U.S. national security, but I 
want to focus on two in response to your question. I think, 
fundamentally, we need to keep an edge in a number of critical 
high-technology areas that are going to be hugely important to 
both military and economic and societal goals over the next 
decade. And here I am thinking semiconductors, AI, quantum, 
certain parts of the green technology revolution, that are 
coming where we need to both be innovating more here at home 
and then we need to make sure that our technology and our 
expertise is not helping them catch up and indeed overcome. And 
that is why I really think that on those kind of key 
technologies, making sure we have both an export control regime 
so we do not give those technologies, semiconductors, green 
technologies, AI, a couple of other sort of high-end military 
dual-use technologies, both we are not giving them the 
technologies and also our capital and kind of business know-how 
expertises and helping them catch up and ultimately overcoming 
us.
    Separately a little bit from the focus of today's hearing 
but I do think is important is making sure we are not dependent 
on China for key supply chain inputs, things like critical 
minerals, things where, if we got to that situation where there 
is a conflict, they would have leverage over us. A little 
separate from today's hearing, but I know the committee has 
done important work on those supply chain vulnerabilities and 
would urge the committee to continue that work, as well as the 
focus on technology and investment we are talking about today.
    Ms. Manning. Great. Thank you. And I want to focus in a 
little bit on the AI issue. While the Biden executive order on 
outbound investment pertains to AI, not all applications and 
investments in AI technology are equally risky to our national 
security. You mentioned in your testimony the need for greater 
scrutiny into high-level AI research lab owned and run by a 
U.S. company in China. How should our outbound investment 
regime treat different types of research or applications within 
a sector like AI?
    Mr. Harrell. So when I was in the Administration working on 
the Biden Administration's executive order, which came out 
after I left, this definitional issue was one of the most 
complicated ones because the goal, at least from the 
Administration's perspective, is not to sort of prevent a 
Chinese hotel from having a chatbot, you know, for basic 
customer service. I think what we have seen is a need to focus 
on a couple of different types of AI. One is obvious, which is 
specific applications of AI that have clear military or other 
harmful impacts, like facial recognition and other kinds of AI-
enabled surveillance technologies. We clearly need to focus on 
that.
    I also think we need to focus on the underlying development 
of advanced high-end models like we have seen here in the U.S. 
with ChatGPT-3, ChatGPT-4, because the reality is, if China 
develops those models, they can then develop the applications 
of them. So I focus on both a set of applications and then also 
higher-end large-language models and other large-application 
models generally.
    Ms. Manning. So one of the areas that I focus on where I 
think we continue to miss the boat in this country is the need 
to reform and update our immigration laws. They have not kept 
up with the economic needs of our country. So I think, in your 
testimony, you welcome State Department and DHS efforts to 
expand visas for top AI and other technical scientists and 
researchers to come to the U.S. to help us innovate here. Can 
you talk about how we can leverage visa and immigration 
policies in ways that best serve our interests?
    Mr. Harrell. I very much appreciate that question and your 
focus and leadership on this issue. As part of the Biden 
Administration's AI executive order a couple of months ago, a 
little-noticed provision in there directed the State 
Department, DHS, to set up a program to speed visas for top AI 
researchers, including in China, so that we can actually get 
them to come here and innovate and help do research here. Now, 
of course, there are security risks. You need to think through, 
you know, the vetting process. But, ultimately, I think we want 
to have a country where we continue to bring the best AI talent 
from around the world and have them come here and develop those 
innovations here. The Administration is doing what it can under 
existing authorities, but, obviously, immigration requires 
statutory change, including in this area. And so I do urge the 
committee to look at that important issue.
    Ms. Manning. Amen I meant to say. My time is expired. Mr. 
Pottinger, I have some questions for you that I will submit in 
writing, but thank you and I yield back.
    Chairman McCaul. The gentlelady yields. The chair 
recognizes Mr. Barr.
    Mr. Barr. Well, let me first thank and commend Chairman 
McCaul and Ranking Member Meeks for their work and certainly 
very well intended to protect our national security by 
restricting U.S. investors for unwittingly financing certain 
sectors in China that threaten our national security, and I 
share their goal. But I do want to unpack this discussion about 
an entity-based approach versus a sector-based approach, and, 
first of all, the chairman and I have had many discussions on 
this in working through this with other colleagues on both this 
committee and the Financial Services Committee. I do not think 
the two are necessarily incompatible, and we are working on 
potentially marrying both approaches. But I also would disagree 
with the suggestion, respectfully, that a sector-based approach 
is, quote, stronger than an entity-based sanctions approach 
when, in some cases, in some cases, the exact opposite is true.
    So let's unpack that for a minute here, Mr. Pottinger. Does 
a sector-based outbound investment restriction block Beijing-
directed subsidies at a state-owned enterprise?
    Mr. Pottinger. Not necessarily. Right? If these are 
Chinese-invested companies----
    Mr. Barr. Right. So if we are restricting Americans from 
investing in a Chinese military company but it is subsidized by 
Beijing, that regime does not affect the funding of that 
entity.
    Mr. Pottinger. Right.
    Mr. Barr. And then revenue generated by the sales of goods 
and services, if the Chinese military or surveillance or 
technology company is selling goods and services globally, 
restricting U.S. investment does not impact that, correct?
    Mr. Pottinger. That is true.
    Mr. Barr. Also, investment from non-U.S. investors, does a 
restriction on U.S. investment, outbound investment, does that 
impede investment from non-U.S. investors into that Chinese 
entity?
    Mr. Pottinger. No, not unless we build a coalition to 
support that goal.
    Mr. Barr. And, Mr. Harrell, would the Biden executive 
order, does that, in any way, that is the CMIC companies, the 
Chinese military industrial complex companies, are investors in 
other countries in any way affected by that executive order?
    Mr. Harrell. They are not directly affected by it, though 
they cannot use a U.S. bank to facilitate that investment. So 
it probably makes it a little harder for----
    Mr. Barr. So here is the point I am trying to make: would 
full-blocking SDN sanctions, if Treasury actually did it, would 
full-blocking SDN sanctions have a multilateral 
extraterritorial effect that these restrictions that only apply 
to U.S. investors have? Would a full-blocking SDN sanction have 
a multilateral extrajurisdictional effect?
    Mr. Pottinger. Yes.
    Mr. Barr. So this is why I think we ought to not just 
dismiss this entity-based approach. And, certainly, the 
chairman is right and you all are right that China changes 
names and whatnot, but OFAC is particularly equipped in 
conjunction with the intelligence community to continue to 
adjust those sanctions.
    I want to also mention the fact that the Financial Services 
Committee bill that we have marked up, the Chinese Military 
Surveillance Companies Sanctions Act, would require Treasury. 
And I think this letter that Treasury sent back to the chairman 
and ranking member on Hikvision is troubling, but that is 
exactly why the Financial Services Committee bill would require 
Treasury to not just send a perfunctory letter back to the 
chairman but require Treasury to do much more than that and 
inform the chairman of this committee, the Financial Services 
Committee, the Senate counterparts, on an annual basis why the 
Treasury Department is not imposing full-blocking sanctions on 
Hikvision and continually update the sanctions list, the Entity 
List at Commerce, the CMIC list, the DoD military list on an 
annual basis to keep up with the changes with China.
    Last point and it is a question about the bill before us 
today. What I am worried about, and it is a good bill, but on 
page 20 and 21, it specifically talks about exceptions, covered 
activity. Covered activity does not include an investment in 
publicly traded security or an index fund or a mutual fund or a 
venture capital fund. In other words, we might be restricting 
the funding, U.S. funding, but Americans, under this bill, 
because there is not full SDN-blocking sanctions, would still 
be able to trade in those securities, whereas if we sanctioned, 
full-blocking sanctions, on these entities, there could be no 
trading of these securities at all. There could be no 
contracts, and it would not just apply to U.S. but also non-
U.S. citizens.
    My time is expired, but if you could comment on the 
strength of sanctions versus a non-sanctions approach.
    Mr. Pottinger. Congressman, I agree that sanctions, when 
applied, really come at a company from more angles than just an 
export control or even just an investment restriction for sure. 
I think the challenge are ones that we have talked about, 
simply how do you incentivize the Department of Treasury to 
really apply those? You mentioned just a moment ago, I think, 
the idea of an annual requirement and so forth. I mean, I think 
that would be welcome.
    Mr. Barr. Thank you. I yield.
    Chairman McCaul. The gentleman yields, and we will have 
further discussion. I know we are meeting with the majority 
leader. It seems to me you could take the provisions of this 
bill--I am not opposed to sanctions. It is just that we have to 
have a compromise, and I think that is the bottom line.
    So the chair now recognizes Ms. Dean.
    Ms. Dean. Thank you, Mr. Chairman. I thank you and Ranking 
Member Meeks for this legislation, for working together so well 
and guiding this committee in a bipartisan way. I want to go 
back to something that Mr. Bera was talking about, and I wanted 
to ask you, Mr. Pottinger, you, too, spoke of and wrote in your 
testimony about the military-civil fusion. For those who are in 
far into that, you know, in a democratic society we do not 
fully appreciate that strategy, the depth and breadth of it, 
would you want to add anything to what Mr. Harrell spoke of 
also?
    Mr. Pottinger. Congresswoman, thank you. I think that, 
under Xi Jinping in particular, he has really reoriented the 
State around his personal goals, which have now become the 
goals of ruling party that he leads. And those tools are 
sometimes laid out explicitly, for example in things like this 
military-civil fusion strategy and some of the laws. One that I 
mentioned was this national intelligence law that mandates that 
anybody must serve the Chinese intelligence apparatus and do so 
in secret when asked.
    There are also a lot of intangible ways that the party 
forces business, irrespective of whether it is nominally 
private or State owned, to align itself with the interests of 
the party. And one of the ways that Xi Jinping has done that 
has been to establish committees, Communist Party committees 
and cells at multiple levels within existing companies. So a 
very good example would be if you look at something like 
Alibaba where Jack Ma, who, by the way, is a party member 
according to Chinese public accounts, but was really an 
entrepreneur at heart who founded this incredible company, and 
it was an incredible success within China and beyond. He was 
eased out of, you know, away from the steering wheel of that 
company shortly after he made remarks criticizing China's 
regulatory environment under Xi Jinping. That was back in 2020.
    And so there is a Communist Party secretary of ByteDance, 
which is the controlling shareholder of TikTok. He also, the 
Communist Party secretary of ByteDance is also the editor-in-
chief of all the applications under ByteDance, presumably 
including TikTok. So those are a couple of examples of things 
that are hard to see but are going on.
    Ms. Dean. Thank you for those explanations. Mr. Harrell, I 
was thinking you are both coming from such important background 
in two Administrations on this issue. Can you speak to this 
bill and in what important ways does H.R. 6349 go farther than 
the executive order issued by the president in August either by 
sector or by investor?
    Mr. Harrell. Thank you very much for the question, 
Congresswoman. And as I said in my opening remarks, I do think 
it is very important for Congress to act here. I think what the 
Administration has done, while an important start, is not 
sufficient to meet the challenge.
    And I think the bill does a couple of important things. 
First, it does expand the technology, the covered technology 
sectors to focus on some high-performance hypersonics in a 
couple of areas that are important to China's defense 
industrial base that I think are valuable additions. It also 
adds a permanent statutory footing to the Biden Administration 
approach, which I think is important both for signaling 
purposes, that there is bipartisan support on this issue. We, 
as a country, are united on this. I also just think, over time, 
you know, Administrations come and go. And I think having a 
permanent feature in American law, just as we do under CFIUS, 
which also got started in the 1980's by executive branch action 
but which Congress later came in and codified and expanded on, 
really important to have that statutory basis here.
    Ms. Dean. And we, as Members of Congress, agree with you on 
that. It is better to have a statutory basis in something that 
is quite clear. Mr. Harrell, do we have any calculation, does 
anybody have any calculation of outbound investments that have 
really ultimately done harm either to our national security or 
global security?
    Mr. Harrell. So I am not aware of public sort of top-line 
figures of here are the investments that have caused national 
security harm. When I was in the Administration and, obviously, 
I am still under confidentiality provisions, the Administration 
did do a very lengthy detailed analysis cataloging many 
different investments that we determined the Administration did 
think later caused harm, one of which I talked about in my 
opening statement on SenseTime. That is one that is now public 
and sort of easy to talk about. But I think what we have seen 
is a wide range of investments over many years have later 
caused harm, but I am not aware of any public kind of top-line 
number of the dollar value of those.
    Ms. Dean. Again, I thank you both, and I thank the 
chairman. I yield back.
    Chairman McCaul. The gentlelady yields. The chair 
recognizes Ms. Kim.
    Mrs. Kim of California. Thank you, Chairman McCaul and 
Ranking Member Meeks for holding today's hearing on outbound 
investment regulations. So I am hearing that there are 
generally two approaches to addressing outbound investment 
concerns. One is, you know, the broad investment restriction in 
technology sectors where there are national security concerns; 
and the second one is the Entity List-based sanctions approach 
focused on specific foreign companies that are linked to CCP 
military or intelligence agencies. As you know, this is a 
debate we are having right now and trying to decide which of 
these approaches is best.
    So in your view, is there a way to reconcile these two 
different policy approaches; and, if so, can you describe how 
Congress can go about doing that?
    Mr. Harrell. Maybe if I could just offer a minute of 
remarks and then see if Matt has anything to add. I do think a 
sanctions approach with respect to China has value.
    Clearly where there are Chinese companies that are engaged 
in human rights abuses, in truly nefarious kinds of activities, 
we should sanction them. I also think the Biden Administration 
should be more aggressive, as Matt said in his opening remarks, 
on using the existing executive order first signed under 
President Trump that limits U.S. investment in the publicly 
traded securities of big Chinese companies that are linked to 
the Chinese military. I think the Administration should be more 
aggressive in prohibiting American investment in these publicly 
traded securities.
    I think there are a couple of notes of caution on SDN 
sanctions though when it comes to big Chinese companies.
    And, again, I think there are times when it is appropriate.
    But if I look at, for example, the Defense Department list 
of Chinese companies linked to the Chinese military, all of 
China's major mobile telecommunications providers are on that 
list, understandably. They are all, I am sure, providing 
telecommunications to the Chinese military.
    On the other hand if we sanctioned all of China's mobile 
telecommunications providers, you would effectively prohibit 
all American companies from doing business in China because 
none of their employees in China could use the telephone.
    So I do think there is a place for SDN sanctions, but I 
think we also have to be careful in our application to not, you 
know, kind of inadvertently do something like preventing 
American companies in China from using the telephone.
    Mrs. Kim of California. Sure. Mr. Pottinger, do you want to 
add to that and hopefully quickly?
    Mr. Pottinger. Sure, Congresswoman. I agree with what Peter 
just laid out. SDN, to Congressman Barr's point, is a more 
powerful tool. But sometimes it can be overkill or 
inappropriate if it is applied in ways that the example that 
Peter just laid out sort of illustrated.
    This sector approach, I think the importance of that is the 
simplicity. It is less resource intensive for the Treasury 
Department. It is easier for companies to understand what is 
off limits and not to cross those barriers.
    So I wouldn't know how to describe the way to meld those 
together. But it would have to have enough flexibility built in 
so that it did not mandate, for example, that you would have to 
use both simultaneously necessarily.
    Mrs. Kim of California. I appreciate both of your 
perspectives on that. Hopefully, we can come together and 
hopefully reconcile but find a way that we can really make this 
work because both options do present its pros and some concerns 
as well.
    But resourcing will be important as Congress moves to 
establish an outbound investment regime. But I am interested in 
hearing from you about where these new resources would be best 
suited. Yes.
    Mr. Harrell. I do think to manage effectively an outbound 
investment regime, it is important for the executive branch to 
have adequate resourcing. These are complicated issues.
    I think fundamentally probably in three places you need 
resources. One is at the Treasury Department, just it manages 
investment. It needs some resources.
    One is probably in the Commerce Department where they need 
some additional technical expertise, which they are already 
staffing up because of export controls, but they need that 
there.
    The third, of course, is in the intelligence community to 
kind of better understand what's going on within China and the 
dynamics there.
    Mrs. Kim of California. Do you think that establishing an 
outbound investment regime requires the creation of a new 
office, or agency for that matter?
    Mr. Pottinger. I think that--I have asked myself that at 
times when I was in office and thought it might be easier if it 
was put into some other entity. But I think it really 
ultimately boils down to leadership, that Congress has the 
ability to hold accountable leaders of the departments and 
agencies that currently have those authorities.
    I think that is the fastest way to exert the authorities 
and intention that you were legislating.
    Mrs. Kim of California. OK. I think my time is up. Thank 
you. I yield back.
    Chairman McCaul. The gentlelady yields. I just want to make 
a point that the two witnesses have made. You know, the 
executive order just applies to China. This bill, it's not only 
China, but it's Iran, Russia, and North Korea as well as China.
    As we see the current unholy alliance forming between these 
four countries against the West, the United States, our 
interest, and our NATO allies, I think that's a very important 
point.
    The Chair recognizes Mr. Schneider.
    Mr. Schneider. Thank you, Mr. Chairman. And I want to 
associate myself with your remarks. As you said, it is more 
than just China. And it is immediate, mid-term and long-term. 
And that is one of the things I want to touch on.
    I also would like to associate myself with the comments 
earlier of my colleague, Mrs. Manning, on immigration. But in 
particular, as everyone has said, thank the witnesses here 
today but also the chair and the ranking member for bringing 
this legislation forward.
    I join with colleagues on both sides in commending the 
Biden Administration executive order on outbound investment, 
and I want to thank the committee for having this hearing today 
on this legislation. I am proud to join in co-sponsoring it.
    A thoughtful outbound investment regime is necessary to 
building on the work of CFIUS and making sure that U.S. 
investment is used to uplift communities around the world 
rather than strengthening our strategic adversaries and 
empowering totalitarians.
    We have already had an impressive conversation about the 
technical aspects of this legislation and specific concerns 
regarding the People's Republic of China semiconductors, 
microelectronics, quantum information technologies, artificial 
intelligence, and other technologies of the future. And it is 
our job here in Congress to make sure that we keep the United 
States, U.S. interests, U.S. population, U.S. citizens safe and 
prosperous.
    I want to start, and I will go back to something we were 
talking about earlier with Mr. Barr, the idea of sector versus 
company specific.
    The sanctions approach led by Treasury, Mr. Pottinger, I 
will ask you, would it catch a startup, for example, AI 
company, that is in its earlier stages just beginning to 
develop its technology may not even be on the radar other than 
with venture capital, would it catch and prevent them from 
developing civilian military technology?
    Mr. Pottinger. Congressman, it could easily miss that. It 
is very difficult to map China's AI ecosystem. Oftentimes, it 
takes sometimes years before the importance of a particular 
entity really makes itself apparent.
    Mr. Schneider. Mr. Harrell?
    Mr. Harrell. I completely agree with what Matt said. Now it 
very likely would not capture that simply because Treasury does 
not know all of the millions of companies in China that are out 
there.
    Mr. Schneider. Conversely would the sectoral approach 
likely catch such a startup?
    Mr. Harrell. Not only would it likely catch such a startup, 
but it might actually require the investor, if the investment 
wasn't prohibited, if it was sort of outside of prohibited, to 
come in and tell the U.S. Government about that that startup so 
the U.S. Government could begin better understanding it.
    Mr. Schneider. Mr. Pottinger, do you agree?
    Mr. Pottinger. I agree with Peter's remark.
    Mr. Schneider. Thank you. Let me shift gears. H.R. 6349 
adds hypersonic technology to the list of covered technologies. 
We have seen hypersonic missiles as a priority for Tehran, 
Moscow, Pyongyang. In fact in the Ukraine War, in Putin's War 
against Ukraine, we have seen for the first time the Kh-47M2 
Kinzhal or Dagger in action.
    My question for whichever one of you wants to answer this, 
now looking at the immediate term where they are currently 
being used but long-term threat to the United States, how will 
this prospective outbound investment regime affect the short-
term application of hypersonic technology like what Russia is 
using against Ukraine, Iran, or North Korea and what do you 
think the long-term impact would be?
    Mr. Pottinger. Hypersonics is one of those that I think the 
United States was hemorrhaging our technology early on before 
there was a consensus like what we've heard in this room today 
about the nature of the threat that China poses to our 
interests.
    And I know stories of conferences that China held where 
American scientists showed up to talk about their latest 
findings with respect to hypersonics. And in some cases, China 
ended up putting that theory to practice before the United 
States did.
    If we had had outbound export controls earlier on that, 
that would have helped. Outbound investment restrictions might 
have helped with that as well.
    Mr. Schneider. Thank you. And just to wrap up, with my 
colleague, Mr. Wilson, he and I have been pushing to curb the 
export of high end machine tools, especially CNC machines, to 
Russia.
    Treasury did sanction 130 entities related to this effort, 
and we are grateful to see that. But with respect to China and 
this policy, can you talk about how it might affect machine 
tools, if at all? Either one?
    Mr. Pottinger. I do not have a specific answer on that, but 
I will say I recently met someone after I had given a talk out 
in Arizona who told me about how much damage our transfer of 
our machine tooling capabilities, particularly to China, have 
been to some of the problems that we're trying to solve for 
now, for example building up our own defensive capabilities, 
munitions, things that are wholly civilian, commercial 
capabilities as well. Machine tooling was really one of the 
things that allowed us to win World War II.
    Mr. Schneider. Thank you. And it is critically important 
today. And I know we will continue to focus on that in this 
committee. But again, I thank the chair and the ranking member 
for this legislation, and I yield back.
    Mr. Schneider. The gentleman yields. The chairman 
recognizes Mr. Davidson.
    Mr. Davidson. I thank the chairman for holding this 
hearing, and I thank the body for paying attention to an 
important issue.
    Back in 2018, we passed the bill called the Foreign 
Investment Risk Reduction Modernization Act. Part of the reason 
we are here today is presumably that bill is not adequately. 
Why not?
    Mr. Harrell. Thank you very much, Congressman, for that 
question. I think that the steps that Congress took back in 
2018 with FIRRMA were really important in expanding the limits 
on Chinese investment in the U.S. There was a pattern that we 
were seeing at the time, Congress certainly saw at the time, 
where Chinese companies were investing in a whole range of 
technology----
    Mr. Davidson. Specific to outbound investment. I mean, we, 
of course, dealt with Chinese investment in CFIUS. But there is 
still the export control portion.
    And frankly, we had lots of companies that were concerned 
even as we had done the research and development tax credit. We 
have done things to incentivize investing and doing your 
research and development in America. But they were concerned 
that if I am going to do research and development in America, 
do I own the intellectual property or does America own it?
    And if at the end of the day, they cannot export the 
technology, they just simply invest elsewhere. So is that a 
flawed approach or is there some other thing that we are 
looking to capture here that isn't captured by FIRRMA?
    Mr. Harrell. Well, Congressman, I would just say that 
because FIRRMA to my knowledge is only for inbound investment 
into the United States, that this in some ways is almost a 
mirror image of FIRRMA. So it is trying to achieve some of the 
things that FIRRMA was trying to solve for but whereas FIRRMA 
is trying to prevent----
    Mr. Davidson. But we stopped too short on FIRRMA. We did 
not get an adequate way to address the outbound controls. 
Obviously, Mr. Barr and Mr. McCaul have different approaches.
    I will tell you as a private sector business guy, I go back 
to the days of conflict minerals. You know, so there was this 
idea, you know, that certain minerals in countries, primarily 
in Africa, that are involved in conflicts, we do not want those 
things to show up in American products. And so the solution was 
that you have every company that uses metal report on it.
    I had at the time a small business in Western Ohio, and I 
am signing off on a statement that the metal I am using 
contains no conflict minerals. Now that is essentially Mr. 
McCaul's approach. You go all the way down to the small 
business level, and you hold every business in America 
accountable for something.
    Frankly they are, like, why am I signing this? I have no 
idea. I certainly do not have a way to trace all the origin of 
the tin that is in the steel here to where in Africa the tin 
was cut. Why do not you ask U.S. Steel on that?
    And frankly that is Mr. Barr's approach. Mr. Barr's 
approach says, let's use OFAC. And, you know, we use OFAC just 
short of conflict, right? We go with a sanctions regime as a 
tool short of going to war. Is that a more serious toolkit than 
just regular laws that apply to small businesses?
    Mr. Harrell. Sir, I very much understand and sympathize 
with the challenges of supply chain sourcing that your business 
faced in Ohio.
    I guess I see things a little differently where you have an 
American company, whether it is a big company or whether it is 
a small company investing in China. Presumably that company 
knows that it is investing in China and is making a decision to 
invest and knows what sector in China it is investing in.
    So I think that if you are a company that wants to make a--
an American who wants to make an investment in AI sector in 
China, you probably do know what you are doing and could make a 
decision on the sector about whether or not to invest there.
    Mr. Davidson. I guess speaking of conflicts, maybe we could 
just go, like, who else do you guys represent? Do you represent 
big tech? You know, because it seems to me as a small business 
guy, just like we did this business, you know, beneficial 
ownership disclosure.
    Originally, every business in America was going to have to 
report all of this and essentially negotiated it down to where 
the smallest of the small businesses, businesses under 20, now 
have some reporting requirement because apparently that is how 
all the bad stuff happens, not the big companies. It couldn't 
be those guys.
    So all the lobbying stopped because the small companies do 
not have enough lobbying power to do it. So either of you guys 
represent big tech companies?
    Mr. Pottinger. I am a small business owner. I am not 
representing any company's interest here today. I have no 
financial interest in the outcome of any of the bills that you 
are talking about. I am representing myself. I am representing 
the think tank that I work for as well, Foundation for Defense 
of Democracies, sir.
    Mr. Davidson. All right.
    Mr. Harrell. I just want to say the same. I am here 
representing myself. I have no financial interest in the 
outcome of this or in the sanctions approach.
    Mr. Davidson. This is the challenge. The biggest of the big 
companies get lobbied and represented. And you pass this off, 
and Congress will hold up the shiny object and say we did 
something. It does not solve the problem.
    The sanctions regime works pretty well. I am highly biased. 
And frankly it is the committee of jurisdiction. I am on both. 
I think that's the right way to solve the problem. And I yield 
back.
    Chairman McCaul. The gentleman yields. I just want to say 
first that the witnesses filled out a truth in testimony form 
regarding any motivation to impugn your character before this 
committee is not well served in my judgment. Perhaps for Mr. 
Davison, since he missed your testimony, Mr. Pottinger, why do 
not you describe the difference between a sector-based approach 
and an entity-based approach.
    Mr. Pottinger. Congressman, if you are looking at an 
entity-based approach, that requires the U.S. Government, 
probably the Department of Treasury, to look at each specific 
company that it wants to prohibit Americans from investing in.
    So they actually have that authority from the executive 
orders that emerged from the late Trump Administration and the 
early Biden Administration, but only 68 companies to my 
knowledge were ever actually designated for prohibition on U.S. 
investment into Chinese military-affiliated companies.
    So a sector approach, the idea is that you do not have a 
barn full of analysts, God bless them, over at Treasury. They 
are often having to divide different problem sets as well.
    I mean, I have been over there when I was in office. You 
know, if North Korea is testing a nuke or a missile, that team 
has to really shift to start targeting North Korean entities. 
And by the way, you know, Iran is creating problems. Russia has 
now launched the biggest war in Europe since World War II. That 
Treasury team is getting spread very, very thin. I know how 
hard they work.
    If you have a sectoral approach that just says, look, 
Americans, U.S. persons, are not allowed to invest in these 
particular sectors that are relevant to China's military and 
surveillance state as well as Russia's, North Korea's, and 
Iran's, it makes it simpler, and it is less resource intensive 
for the U.S. Government.
    Chairman McCaul. So it in fact provides more clarity to the 
private sector and businesses, correct?
    Mr. Pottinger. I would argue it provides more clarity, yes.
    Chairman McCaul. And an entity can be changed overnight in 
China, correct?
    Mr. Pottinger. Sure.
    Chairman McCaul. And so a sector-based approach would get 
around that?
    Mr. Pottinger. One of the things I mentioned earlier is 
that China has systematically shut down the research enterprise 
in China so that it is harder for foreign companies to acquire 
real-time information about ownership structures, supply chain 
flows, and the like. Those companies are being systematically 
rolled up and dismantled or co-opted to serve and align 
themselves with the Chinese Communist parties.
    Mr. Davidson. Will the gentleman yield for a question?
    Chairman McCaul. I am not finished yet. We attempted to 
sanction under Treasury, Hikvision, which is a State 
surveillance company on the Uyghur Muslims, and guess what the 
Treasury Department said? In a letter to me and the ranking 
member, it cannot be done.
    So I guess it depends on who is at the Treasury Department. 
But, yes, I will yield.
    Mr. Davidson. Is it the gentleman's contention then that 
OFAC and the current sanctions regime is inadequate to the task 
of preventing sanctions of Asia?
    Chairman McCaul. I think the question is what is most 
effective? And I think the sector-based approach is going to be 
a more effective way to capture capital flow and investment 
into these five sectors that we know are responsible for the 
buildup of the PLA and their war machine.
    An entity-based approach can be manipulated by the CCP as 
the former deputy national security advisor to President Trump 
has just told this committee and testified to.
    I am not saying that sanctions aren't an effective tool. In 
fact, Mr. Barr and I have had many discussions trying to come 
to some sort of rational, you know, conclusion of this, but it 
has to be in good faith.
    And I think you can take the best of both perhaps and 
that's precisely what we are working on.
    Mr. Davidson. Hopefully, we will wind up with good 
amendments. I yield back.
    Chairman McCaul. All I really care about, sir, is we have 
got to stop selling China the technology. We have got to stop 
investing in their war machine, particularly at this dangerous 
time that we find ourselves in as we look at Taiwan and the 
Taiwan Straits. And you look at TSMC and semiconductors and the 
whole thing. So I appreciate your spirited debate. The chair 
now recognizes Mr. Mills.
    Mr. Mills. Thank you, Mr. Chairman. I think we can all 
realize the significant importance of strengthening not only 
our supply chain and industrial capabilities but also limiting 
our adversarial reliance upon China.
    You know, for far too long we have listened to many people 
on the other side of the aisle talk about the competition with 
China as opposed to what they really are is an adversarial 
nation.
    We have seen where China continues with their Belt and Road 
initiatives that has expanded out their Eurasian borders, 
attempted to take Africa, Oceania, in an effort to essentially 
cutoff Western Hemisphere supply chain and further impact 
America economically while simultaneously utilizing propaganda 
and misinformation warfare campaigns in developing nations to 
try and create doubt in American currency value to try and 
prevent that from being utilized as the U.S. global currency.
    Now this is all in an effort, as we know, and the chairman 
had pointed out with the Russia, China, Iran, and North Korea 
geopolitical alignment, this is an effort to try and attack the 
West in many different facets. But we have to understand that 
we cannot help to continue to propagate that for them.
    I think that's where I actually agree that the outbound 
investment into China and critical sectors actually does 
provide our competition and our adversaries with the invaluable 
information, skills, and innovation that poses potential harm 
to America's national security interests.
    Dating back to the 1990's and potentially even earlier, 
there are obvious instances in which U.S. investments on the 
ground floor of Chinese tech startups have been instrumental in 
developing China's current surveillance, defense, and other 
technological capabilities that threaten the U.S. interests at 
home and around the world and also advancing their alliances.
    So my question is if a U.S. investor supports the 
development or acquisition of a critical technology by a 
Chinese company, can intellectual property protections or U.S. 
export controls effectively stop that Chinese company from 
transferring it to China's military surveillance state?
    Mr. Pottinger. So the question, could we know in advance if 
we are investing in a Chinese company whether we could prohibit 
it from transferring its----
    Mr. Mills. I know you said right now almost every company 
is State controlled. And I do acknowledge that Chairman Xi's 
role in The CCP is to take over everything. But I am just 
curious, what would be an effective tool that we could utilize 
that would help to prevent this and kind of get a bit of a 
heads up on it?
    Mr. Pottinger. Yes, you know, China uses these what they 
call force technology transfer. In other words, it is sort of 
the price of admission for a lot of companies to have access to 
the Chinese market.
    I think, I mean, on the top of my head you could require 
that they would have to report to their shareholders, which I 
think would be good practice anyway if they were planning on 
transferring, you know, hard won, hard researched, and 
developed technologies as a price of admission for getting into 
that market. But it is----
    Mr. Mills. And, Mr. Harrell, some argue that China has 
sufficient resources, domestically and abroad, to invest in the 
high tech companies. In addition to money, what value do U.S. 
investors bring supporting China technologies and ambitions?
    Mr. Harrell. I think that is a great question, Congressman. 
Because when a U.S. venture capital company, whether it is like 
a VC company or whether it is a venture arm of a big AI or 
semiconductor company goes into China, it is not just putting 
that cash in that Chinese company. It is providing expertise to 
that Chinese company on how to go to market. It is probably 
doing some door opening and introductions to potential 
customers. It is providing expertise on how to run that company 
effectively. There is really a lot that goes alongside that 
investment that is value in addition to the cold hard cash 
itself.
    Mr. Mills. I think we can all agree that one of the things 
that America needs to do is invest in building up our 
industrial base, ensuring that we have more capacity here at 
home, stopping our reliance upon China, looking at things like 
eliminating the double taxation of Taiwan, which will allow the 
nearly 92 percent of global semiconductor manufacturing to 
actually be brought to the United States and other areas. But 
critical sectors of technology, research and innovations 
represent the next generation of information. And I think that 
opens up Pandora's Box as we continue to support that.
    I am not trying to be hyperbolic, but the potential 
applications of AI, machine learning, quantum mechanics, 
hypersonics, and others are difficult to underState.
    The U.S. should absolutely seek to mitigate the threats 
from our adversaries who are actively seeking to beat the U.S. 
in these research races. And I think that is why it is so 
critical for us to start focusing in on the quantum data 
computing as well as for the quantum entanglement capabilities 
for AI autonomous drone sets.
    So for that, I yield back. Thank you so much.
    Chairman McCaul. The gentleman yields. The chair recognizes 
Mr. Self.
    Mr. Self. Thank you, Mr. Chairman, and thank you for--I 
think our ground has been well plowed so I want to go a little 
bit further afield.
    First of all, I appreciated Mr. Barr's comments about the 
total integration of the Chinese private sector in military. 
Money is fungible. I think we need to expand our view here. 
Dual use capability in precursor chemicals, the supply chain 
rare earths, I have not heard the rare earth minerals mentioned 
here at all. And we could go on.
    So this is not just technology. And I think we ought to 
move beyond technology. I realize we may be addressing 
technology here. But the broader picture to me is well beyond 
technology.
    So I want to go to the WTO and the PNTR. The WTO, the first 
question for you gentlemen, is are they still meeting the 
policies that China had to agree to in order to get most 
favored nation? That's one question.
    And then when we go to the U.S. PNTR, I understand the 
concern with repealing that. The tariffs would be larger. But I 
would like for you to comment on is this the standard CVO 
static scoring, if you will, as opposed to the dynamic scoring 
because U.S. manufacturing would pick up the slack?
    So I would like for you to address both the WTO, are they 
still meeting it and is there anything we can do about it if 
they are not meeting those policies?
    And second when we talk about our PNTR, would you address 
my question on static versus dynamic scoring? Thank you.
    Mr. Pottinger. Congressman, thanks for those remarks and 
questions. With the WTO, I mean, I'm not a trade expert, but I 
remember because I had been working as a journalist at the time 
in China writing for the Wall Street Journal when China came 
into the WTO.
    China made all sorts of promises about market access and 
the like in exchange for us bringing them into the WTO and 
giving them market access. I am confident that if you were to 
ask folks over at the U.S. Trade rep's office, they would tick 
off a long list of promises that were not kept by Beijing. And 
it is very hard to enforce because in cases that we brought in 
the WTO Beijing has been able to run out the clock and sort of 
game the system in those ways.
    The WTO has worked, I think, a lot better for trade between 
countries that enjoy the rule of law.
    Mr. Self. Of course.
    Mr. Pottinger. So it is not to knock what we created with 
that system, but by bringing in a single party dictatorship 
that was intent on not holding and keeping up its obligations.
    When I was working at the White House, I kept a list that 
my staff compiled for me of all of the agreements China had 
signed with the United States that they had abrogated. It was a 
long list. It was several pages. And trade was only the 
beginning of it.
    Mr. Harrell. OK. Let me just associate myself with Matt's 
remarks on whether China has lived up to its WTO obligations, 
sir. Of course not. I mean, it has been very, very clear for 
many years now that they have not lived up to their obligations 
under the WTO. As Matt says, that is only one of many sort of 
agreements they have made that they have not lived up to.
    On your question about tariffs, I do think tariffs can be a 
valuable tool to help reduce our dependencies on China. As you 
note, we are dependent on China for certain things like 
critical minerals that are not sort of high technology kind of 
things but instead go into lots of products, including high 
technology products.
    And I do think it would be valuable for the Administration 
to really take a hard look at the important tariffs that the 
previous Administration started, but to look at kind of what 
isn't working and where are we still dependent, and maybe 
critical minerals is a good example. We actually do not tariff 
our imports of critical minerals from China.
    And I understand why we do not want to hike prices on 
critical minerals. On the other hand, if we are letting them 
come in tariff free, it is really hard to build a vibrant U.S. 
ecosystem for critical minerals. So I think we do need to look 
at tariffs through that supply chain lens on how can we wean 
ourselves off of Chinese supply chains.
    Mr. Self. Well, rare earths, critical minerals, as you call 
them, we do not mine because of our own environmental laws, not 
because of tariffs on China. With that, I yield back. Thank 
you.
    Chairman McCaul. The gentleman yields. The chair recognizes 
Mr. Stanton.
    Mr. Stanton. Thank you very much, Mr. Chairman. I want to 
thank you and Ranking Member Meeks for holding this important 
hearing today and for your leadership on H.R. 6349. It is much 
appreciated and much needed.
    The United States and U.S. companies are strong in large 
part because of our commitment to open capital markets, and a 
belief that free flowing capital and knowledge will lead to 
innovation. But spending that capital on critical technology 
innovation in China can lead to serious problems, specifically 
as it relates to national security.
    For example, prior to President Biden's August 9 executive 
order, U.S. entities were able to invest in China's 
Semiconductor Manufacturing International Corporation, also 
known as SMIC.
    The first question is for Mr. Harrell. Could you tell us 
why SMIC's technology might worry the United States of America?
    Mr. Harrell. So SMIC is one of China's major semiconductor 
development firms. And one thing we have seen over the last 
year and a half, particularly as the U.S. has put pressure on 
China to deny them access to tooling, is we have seen SMIC and 
other Chinese companies double down on trying to develop things 
indigenously in China to overcome the restrictions we have put 
on their semiconductor sector.
    And I think the fact we are seeing China double down makes 
it all the more important to make sure the wall that we have in 
those key high end semiconductors is even higher, which is why 
I think it's so important to focus on investment in that sector 
as well as export controls.
    Mr. Stanton. The same question--or another question for 
you, Mr. Harrell. When American companies or venture capital 
firms invest in a business, including in China, they also 
provide know-how, technical transfers, and legitimacy to those 
businesses. Can you tell me why sharing this with China's 
critical technology sector will hurt U.S. interests?
    Mr. Harrell. We clearly want to keep our edge here in the 
U.S. in these critical technologies, AI, semiconductors, 
quantum, things like that.
    And as you say, Congressman when an American venture 
capitalist goes over to China to invest over there, it's not 
just the money that he or she takes with them. It is opening 
doors to customers. It is putting board members who help manage 
the company on the board. It is providing them kind of 
expertise on how to grow and how to expand.
    And those are all really important aspects to that company 
and whether that company is going to be able to actually 
succeed in developing that technology over in China, which we 
do not want them to do.
    Mr. Stanton. This is a question for both Mr. Pottinger and 
Mr. Harrell. What if we do not do it? What are the 
ramifications of not using an outbound investment regime to 
address concerns about the PRC's critical technology sector? 
Please touch upon both human rights concerns and the impact on 
U.S. global leadership.
    Mr. Pottinger. Peter mentioned earlier the example of Sense 
Time, which had come on my radar when I was in office. On the 
human rights front, these are cutting edge technologies that 
are applied specifically for the purpose of monitoring the 
thoughts, the actions, the communications.
    I mean, this is George Orwell's thought police in action, 
building systems for identifying people based on their ethnic 
or racial background from a distance so that they can then be 
put under surveillance or segregated or even sent to a re-
education camp.
    So on the military side we're seeing--you know, you take a 
company like DJI, for example, right? This is the Chinese heavy 
weight drone manufacturer that has got something like 70 
percent of the consumer drone market. Well, they are supplying 
drones that are being used for military use on both sides of 
the conflict in Europe. And that was a company that was--it got 
its lead early investment from Americans.
    Mr. Stanton. That is great. Mr. Harrell, anything to add to 
that?
    Mr. Harrell. No, I think Matt put it very well.
    Mr. Stanton. I will be very brief. My last question, we are 
investing historic amounts in U.S. critical technology through 
the CHIPS and Science Act. It is so important for the United 
States to be a leader in a semiconductor production and not to 
undercut our investment by also giving a leg up to China in 
this crucial sector.
    The U.S. Chamber of Commerce supports the Biden 
Administration's efforts to develop a thoughtful regime that 
safeguards American national security and economic leadership 
without unnecessarily restricting beneficial U.S. business 
activity.
    Mr. Harrell, can you describe how the Biden 
Administration's tiered approach in the August 9 executive 
order tries to balance national security and be beneficial to 
business activity?
    Mr. Harrell. I think the Biden Administration, and I think 
legislation this committee is looking at, really provides an 
important highly tailored approach, right? We are not talking 
about all sectors. We are not talking about all or even most 
investment. We are talking about a set of investment in sectors 
that we know are critical to our technological and national 
security edge.
    The Biden Administration, I think the legislation would 
accomplish the same goal, also plans to provide clear guidance 
on what are the investments that are prohibited to make it 
reasonably straightforward for companies to know what they and 
cannot do so they aren't just going to have to hire, you know, 
armies of lawyers to advise them on it.
    So I think we do want, and I think we are expecting, very 
clear guidance on definitions and what kinds of investments are 
off limits
    Mr. Stanton. Thank you so much. I yield back.
    Chairman McCaul. The gentleman yields. The chair recognizes 
Mr. Hill.
    Mr. Hill. I thank the chairman. Thank you, gentlemen, for 
sharing your views with us today. And I think it is important 
to note that all members on both sides of aisle and in all the 
committees and certainly our China task force want to get to 
the sweet spot on this topic for an effective regime that has a 
reasonable cost-benefit metrics in order to screen and block 
where appropriate outbound investments to China. I just think 
that's where we are.
    We are going a bit around and around on how this would sit 
in the menu of what we have today from all the lists that we 
have, export controls, tariffs in some instances. And so I want 
to thank you for trying to add clarity to it.
    Mr. Harrell, you, in your testimony, you praise President 
Biden's investment prohibitions on publicly traded securities 
issued by Chinese military industrial complex companies, the 
CMIC designation. However, since being put on that list, 
Hikvision's revenues are up by 30 percent. SINOCAM's revenues 
are up 60 percent. China Mobile's stock price is up 67 percent, 
Huawei and SMIC went on to develop an advanced 5G chip.
    So that does not seem like this system is working. How do 
you expect, you know, an additional layer on that to be more 
successful?
    Mr. Harrell. So I think--Congressman, thank you for the 
question. I think it is important to think through different 
kinds of goals we have with respect to limiting investment in 
China. So I think the goal of the Biden Administration's 
executive order from last year is really to go after investment 
in these kind of early stage companies that are developing 
technologies.
    I think that the CMIC list, which President Trump stood up 
in late 2020 and which President Biden has continued, is really 
to take an approach of where we know there is a Chinese company 
that is linked to the military, we are going to say Americans 
cannot invest in that.
    Now maybe those companies can raise money domestically or 
that sort of thing, but we think it's important that Americans 
aren't raising money in those big Chinese companies that are 
linked to the military.
    It is not to say that limiting investment is the only tool 
we should take. I think where you have a Chinese company that 
is linked to the military, it is engaged in some activity, like 
SMIC and semiconductors, you also have to have an export 
controls approach, right? Make sure they cannot get the 
capital. They also cannot get the technology.
    And if we find that that isn't working, maybe at that point 
we need to look at additional measures. But I think that the--I 
will leave it at that.
    Mr. Hill. Let me followup on that and say so that is U.S. 
only. But if we want to maximize the impact to remove the 
fungibility aspect of this and everybody trying to make a 
living, wouldn't having whatever decision we take here being 
put on the OFAC list and governed by the Treasury gives us some 
G7 clout on enforcing like a sanctions regime.
    So if you wanted to have maximum pressure campaign here, to 
use a phrase, you might have--they would be on the list. They 
would have export controls over the certain technologies. They 
would have a prohibition on investment, and they would be 
sanctioned so that our G7 colleagues would actually put them on 
the list and not actually go or--pick a country. Wouldn't that 
be the strongest possible menu?
    Mr. Harrell. So I certainly agree we want a multilateral 
approach to investment restriction.
    Mr. Hill. So if we just do something here, do we get a 
multilateral approach?
    Mr. Harrell. I think it is important for America to lead on 
this. And I think having an approach that limits investment and 
then making sure the rest of the G7 comes along, building that 
diplomatic coalition is important.
    Mr. Hill. Thank you. Let me slip in one question for my 
good friend, Mr. Pottinger, and thank you for your fantastic 
work in the National Security Council.
    The sector approach, I got it. I think every bill we are 
talking about has identified the sectors now, but some of them 
having really broad listings. You are proposing, or I heard 
maybe Mr. Harrell say, might leave that to regulatory 
definitions. But AI for example, I cannot think of anything 
more broad. It is integrated in every single thing every single 
person does. Won't that require an army of lawyers to figure 
out? What is your thought there, Matt?
    Mr. Pottinger. Yes. Congressman, it is good to see you. 
Look, no question, I mean, AI is tricky. What Peter was laying 
out earlier was sort of a nexus for looking at where there is a 
reasonable use case for military and intelligence uses, so the 
application on the one hand. And the other is the power of the 
actual model that is making possible all those applications and 
looking at that.
    I think that it is not clear-cut, I would agree. AI, it is 
a big deal. But I would say this though. AI is already being 
weaponized against us----
    Mr. Hill. Oh, yes.
    Mr. Pottinger [continuing]. By a company that Americans 
invested in, ByteDance. It is a TikTok platform.
    Mr. Hill. I will yield back, Mr. Chairman. That is an 
example of where naming that company is better than saying we 
want to cutoff investment to AI. I will yield back to the 
chair.
    Chairman McCaul. Well, I appreciate the gentleman's 
diplomacy. I think there is a sweet spot here as you said. 
Hopefully, we will get some of this resolved tomorrow. The 
chair now recognizes Mr. McCormick.
    Mr. McCormick. Thank you, Mr. Chair. U.S. investors in 58 
investment deals related to China's semiconductor industry over 
the last 3 years represented 17 percent roughly of all 
investments into the Chinese artificial intelligence industry.
    I am a big pre-market guy. And I know we have some bills on 
the table to talk about investing with the conversations going 
on today. But, Mr. Pottinger, specifically, given your 
experience in the Trump Administration, how would you compare 
the Biden Administration versus the Trump Administration's 
limitations and direction as far as what can we do to keep us 
from investing?
    I know we talked about this kind of ad nauseam today. But 
specifically, how would you compare the Administrations and the 
way they are facing down this specific problem? And obviously 
we in Congress have some ability to affect this, and we want 
to. But if you could compare side-by-side the most recent 
Administrations, what is the difference?
    Mr. Pottinger. Yes. I think it might actually be a good 
test case for how you eventually find that sweet spot because 
there were some things that the Biden Administration did that I 
wish that we had done in the Trump Administration. And then 
there were a couple places where the Trump Administration was 
stronger on this specific area.
    For example, when President Trump signed those two 
executive orders prohibiting U.S. investment into Chinese 
companies, he included subsidiaries of those companies. So even 
those there was 40 some odd companies that the Department of 
Defense put on the list, that immediately accordioned out to 
about 1,100 companies.
    The Biden Administration, I was disappointed that they got 
rid of the subsidiary requirement. But on the other hand, they 
expanded the authority to cover not only Chinese military 
affiliated companies, but also Chinese companies that are 
involved in egregious human rights violations, the surveillance 
state stuff that we have been talking about. That was a good 
move.
    So I think if you put these things together, you end up 
with a stronger whole.
    Mr. McCormick. OK. Great. And so that does not necessary 
increase--our proposed bills do not necessarily increase 
executive permission. It is basically an overall blanket to 
help us direct money away from these Chinese----
    Mr. Pottinger. I think one of the things it does, I mean, 
if you have got a law to support, in essence, the Trump and 
Biden executive orders, you give them--you give it much more 
credibility. You give spine to executive branch officials who 
might be afraid that they are going to get sued by the 
companies that end up in the cross hairs.
    But if you have got a law behind that, a court in the 
United States is going to give that a lot more weight than a 
mere pen stroke from a President.
    Mr. McCormick. Excellent. Mr. Matheny, do you believe that 
had the United States banned outbound investments to Chinese 
about 15 years ago or so would have made a different in the 
ultimate outcome of the advancement of AI and other 
technologies that are possibly harmful in the competition and 
strategic outcome with what we have done?
    Mr. Harrell. It is obviously hard to know the 
counterfactual history. But I think there are many cases over 
the last 15 years where we have seen a U.S. investor come in to 
a Chinese high tech company. We talked earlier about Sense 
Time. Matt talked about ByteDance, the owner of TikTok where 
that early U.S. investment was absolutely essential to that 
Chinese company being able to thrive and grow both domestically 
and in China and then ultimately around the world.
    And so I do think just looking at the history of these 
kinds of cases that had we had a tailored investment 
restriction regime 10, 15 years ago, we probably would see a 
less well-developed Chinese high tech industry in some of these 
key technologies. And that would be very much in our interest.
    Mr. McCormick. I think in some ways it is kind of a 
rhetorical question. It takes investment to make R&D, and it 
takes investment to make a company grow. That is exactly what 
happened. We were a big part of that, almost 20 percent.
    Mr. Pottinger, do you think any of our partner nations and 
allies have adopted restrictions to their citizens investing in 
Chinese defense sectors?
    Mr. Pottinger. Not that I am aware of. I think that there 
is sort window guidance in some countries where, you know, we 
have seen investment drop off from Japan, for example, into 
certain Chinese sectors. But, again, I think this is one of 
these areas where we lead and eventually others follow.
    The United States, President Trump was the first official 
anywhere to put human rights sanctions on Chinese officials who 
were involved in the Uyghur genocide. It wasn't Europeans. It 
wasn't anyone anywhere else. But eventually Parliaments in 
Europe began to follow suit. Canada and others followed the 
lead of the United States.
    Mr. McCormick. And I know I am out of time. But just a yes 
or no question. Does the PRC limit their citizens and private 
industry from investing in our industries?
    Mr. Pottinger. They heavily regulate depending on where 
they want to see strategic gains. So there is a constant give 
and take in terms of the instructions that industry receives in 
China for coming into the U.S.
    Mr. McCormick. So with that comment, just that it is an 
unfair system. I yield. Thank you, Mr. Chair.
    Chairman McCaul. That is an excellent point. Thank you for 
bringing that up. The chair now recognizes Mr. Moran.
    Mr. Moran. Thank you, Mr. Chairman, and thank you to the 
witnesses today. A very important topic we are talking about 
today.
    I first want to, though, thank the chair and Representative 
Barr for working to reconcile these two approaches that have 
been talked about so much, the entity-based approach, the 
sector-based approach are really reflected in the different 
bills that are going through this committee and the Financial 
Services Committee.
    I agree with the chairman that there is going to be a way, 
and we must find a way, to reconcile these because both have 
some issues that we need to deal with. Both do not actually get 
us completely to the end that we are all after, and that is 
frankly to quit assisting and helping China build its 
technology to the point where it is harmful to the United 
States national security interest and our economic interest. 
That is certainly not the end that any of us want.
    So I applaud both the chair and Representative Barr for 
their work on this matter. And I just wanted to say I am 
encouraged by the discussion today because it tells me we are 
going to get somewhere eventually.
    Now other countries have developed and implemented formal 
outbound investment restrictions, South Korea, Taiwan, and even 
China themselves have done that. I would like to direct my 
first question to Mr. Harrell.
    What has been the economic outcome for countries like South 
Korea and Taiwan by imposing outbound investment restrictions?
    Mr. Harrell. Thank you very much for the question. I know 
that when the Biden Administration was looking at this issue, 
they looked at both South Korea and Taiwan which have, frankly, 
fairly narrow, but I think nonetheless important, limits on 
semiconductor investment by their companies in China. 
Obviously, both Korea and Taiwan have very advanced 
semiconductor companies. And a number of years ago, those 
countries restricted or imposed a regime to make sure that 
their companies weren't putting the most advanced technologies 
in China.
    Now that was a really pretty narrow only going after really 
the very, very bleeding edge of the technology. I think we need 
something broader than that. What the Biden Administration 
would do is broader than that.
    But the reality, looking at those cases, is the costs were 
quite limited. I mean, South Korea and Taiwan have the world's 
most successful, or are among the world's most successful, 
semiconductor companies. We obviously have some here too.
    And so I think what that experience shows is that you very 
much can impose a tailored and scoped restriction on investment 
in China and have very much a global leading company here at 
home.
    Mr. Moran. Thank you, Mr. Pottinger. Do you have anything 
to add to that?
    Mr. Pottinger. I think that covered it pretty well.
    Mr. Moran. Good. I also want to ask you guys about the fact 
that China openly seems to want to overthrow the U.S. dollar as 
a global currency. They have partnered with countries to create 
BRICS. We have seen the BRICS conference. There is an argument 
that something such as BRICs would offset U.S. financial 
leadership and that a concept like outbound investment will 
expedite that shift.
    On the contrary though, if the U.S. develops an outbound 
regime we would, in my opinion, be able to garner support from 
allies like Japan and the UK to develop their own.
    Mr. Pottinger, I will start with you this time. How 
impactful would that be for the U.S. national security for us 
to do that?
    Mr. Pottinger. Well, I do think that there is an argument 
that can be made. And I have heard it made by Treasury 
officials that if we overuse our SDN sanctions authority, it 
creates an incentive for other governments, particularly 
adversarial governments, to try to find work-arounds to the 
U.S. dollar. So that might be a consideration as well in this 
debate.
    But if I understood correctly, your broader point is what 
is China doing to try to undermine?
    Mr. Moran. That is correct.
    Mr. Pottinger. Yes, they are, on the one hand, asking their 
trade partners increasingly to settle trade in Chinese 
currency. They have launched a Central Bank digital currency, 
which I certainly wouldn't want my savings denominated in 
Chinese digital currency, which could just evaporate from your 
account at any moment. But that is another tool they are using.
    Perhaps the most important one is they are trying to build 
new plumbing for settling transactions worldwide, sort of like 
our Swift banking system. They are trying to come up with 
successor systems to that that bypass U.S. dollar and 
Treasury----
    Mr. Moran. Before my time is up, I want to ask you about 
one more thing that Mr. Barr had mentioned because one of the 
holes that we are trying to fix here is that if we go at this 
alone, we still have the problem that many of our allies around 
the world can still invest in China, and they will not feel 
hardly the impact of what we need them to feel to be able to 
change their behavior.
    So what are we doing to work with other nations to ensure 
that whatever we do here, they are joining us in that effort 
against China?
    Mr. Pottinger. I think in part it is pointing to the 
example of what happened with Ukraine where companies still 
wanted to get in there and open shops or buy oil or what have 
you from Russia. And people convinced themselves that commerce 
would mitigate against something as crazy as invading your 
neighbor and getting hundreds of thousands of people killed. 
But that is exactly what Vladimir Putin did.
    I think it is simply leading our allies to see the long-
term benefits of tackling this problem. I think many of them 
will.
    Mr. Moran. Thank you to both of you guys. Mr. Chairman, I 
yield back.
    Chairman McCaul. The gentleman yields. We have two more 
members if the two witnesses have the time. Mr. Huizenga.
    Mr. Huizenga. Thank you, Mr. Chairman. And let me first 
start by saying I know this is an issue that is near and dear 
to you. It is certainly an issue that is near and dear to me 
and Mr. Barr and others. We have got a number of folks on the 
Foreign Affairs Committee who also serve on the Financial 
Services Committee, which has been sort of the epicenter of a 
lot of the sanctions regimes that have gone on.
    And, you know, my own experience goes back to my third term 
where I was named chair of the Monetary Policy and Trade 
Subcommittee and was brought in for a SCIF review regarding a 
CFIUS review of A123 Battery, a company that was sold to a 
Chinese company. Michigan has been sort of the epicenter of a 
lot of the debate surrounding batteries and Gotion, for 
example. But really a lot of it is centered around automotive.
    And so we have been dealing with this collectively for 
many, many years because this is a real issue. It is a problem. 
And COVID, I think, just underscored this in ways that nobody 
really expected, everything from paper masks to ventilators, 
and, you know, having the Defense Production Act, the DPA being 
invoked to bring about medical equipment, not to mention 
pharmaceuticals, not to mention, you know, the myriad of food 
items and all the things that we have become, in my opinion, 
overly dependent on China.
    So Congress has maybe been collectively maybe--well, maybe 
I will put it this way. Because I think the conversation has 
been happening within Congress, but maybe society as a whole 
has kind of come late to the game a bit with the dangers and 
the overdependence on China.
    And so we have--my whole point in this is we have many 
common goals, which is to limit the economic and military 
influence that China has certainly over the United States and, 
I would argue, in the Indo-Pacific region.
    So what we are having the discussion about is the methods. 
All right? And what I personally am looking for is making sure 
that we have an effective and real way of curbing and bending 
that influence that China has had.
    We have done a lot of work on that with the Financial 
Services Committee over the years, the work that has been here 
on the Foreign Affairs Committee is important, the China Select 
Committee. I have been working with Mr. Barr for a long time on 
these issues. And in my mind, Treasury is still sort of that 
main thrust of where the most effective sanctions can be.
    But as we know with a lot of other things here in 
Washington, DC, whether it is the border, whether--you pick the 
issue, if you are not willing to enforce the rules and the laws 
that are already on the books in the systems that are in place, 
just adding a new system isn't necessarily the solution on 
that. And I just want to be very careful that we are doing 
that.
    So I do have some concerns about the authority being turned 
over to an agency that may not have the experience in that. I 
have little confidence in the Commerce Committee for example 
or, you know, some other committee, State Department, I mean, 
that sort of to me does not make a whole lot of sense. The 
State Department, that is not their bailiwick.
    So I have a quick question for both of you. If you can let 
me know, are you aware of any U.S. companies that have invested 
in Chinese companies that have gone into partnership with the 
PLA? Go ahead.
    Mr. Pottinger. Sure. One that I was looking at as I was 
crafting the testimony was a company called 4Paradigm. 
4Paradigm is, you know, an AI firm in China that has reportedly 
sold software to China's military for what they called, quote, 
battalion command decisionmaking and human machine learning. 
That company was seeded by Goldman Sachs, Sequoia Capital, and 
probably some others as well.
    Another would be Biren Technology, B-I-R-E-N. That is an 
advanced semiconductor designer that wants to compete with 
Nvidia in China. In fact it is already on the Commerce 
Department's entity list for potential ties to, quote, weapons 
of mass destruction, advanced weapon systems, and high tech 
surveillance. And that one was invested by a couple of American 
venture capital firms.
    Mr. Huizenga. OK. I know my time has expired. I do not 
know, Mr. Harrell, if the chairman will indulge. Otherwise, we 
can do this in writing. So I appreciate that. Mr. Chairman, I 
yield back. Thank you.
    Chairman McCaul. Thank you. The Chair now recognizes Mr. 
Lawler.
    Mr. Lawler. Thank you, Mr. Chairman. Last year Chairman 
McCaul and I sent a letter to BIS Secretary Estevez with 
questions about how commerce is implementing U.S. export 
control laws in response to China exporting goods to designated 
State sponsors of terrorism, Cuba, North Korea, Iran, and 
Syria.
    The indirect resourcing of State sponsors of terrorism from 
U.S. entities is a serious concern and should be met with 
strict reform. It took the Biden Administration 6 months to 
respond to our inquiry, and they seemed to share our commitment 
for preventing U.S. tech from being illicitly acquired by our 
adversaries. But actions certainly speak louder than words. So 
we will see what they do on that front.
    Just as concerning though as using U.S. tech for nefarious 
purposes is U.S. investment in nefarious technology. Not only 
should we not be providing resources to terror, but we should 
not be providing their funding. It is past time to establish 
outbound investment restrictions to ensure U.S. dollars are not 
funding the development of tech that will be used counter to 
our national security interests.
    Is it possible to utilize or expand existing export 
controls to restrict U.S. capital investment into China?
    Mr. Harrell. So my understanding, and I know there has been 
a bit of debate on this, but my understanding is that even with 
the important reforms to U.S. export controls that Congress 
enacted in 2018, the Export Control Reform Act, it remains 
really technology focused and is just not well suited through 
ECRA and through the export controls to go after dollars where 
there is not a technology flow alongside that.
    Mr. Lawler. So are you of the mindset that we need to 
develop a different vehicle or regime by which to do this?
    Mr. Harrell. I am. I think it is very important to develop 
what I would view as different but also complementary. I mean, 
it should be done in parallel, a complementary regime to go 
after the dollars so that Congressman, as you say, not only are 
we not giving the Chinese technology, we are not investing in 
their ability to develop the technology.
    Mr. Lawler. Are you aware currently of any instances in 
which U.S. Government tools, such as export controls, were 
unable or insufficient to mitigate the risk presented by U.S. 
investments into China and any specific examples?
    Mr. Pottinger. Well, earlier, Peter was talking about the 
example of Huawei where President Trump took action to prevent 
Huawei from being able to acquire high end semiconductors that 
had been made with American technology.
    That approach bought time. It slowed down Huawei, but 
ultimately they were able to fashion a work-around using new 
companies that they had established, bringing in equipment that 
hadn't really been geared for sale to Huawei but ended up in 
service of Huawei's goals.
    So I think with investment, it is sort of a similar 
principle at work except it is the capital flows as opposed to 
the technology. By limiting the capital flow, you are able to 
go after early stage things that you wouldn't see in time to 
apply necessarily an export control restriction.
    Mr. Lawler. This past May, leaders of the G7 countries 
issued a joint statement recognizing that outbound investment 
could be important in complementing existing export controls 
and inbound investment controls as well.
    When President Biden issued Executive Order 14105, which 
focused on outbound investment in August, to your knowledge did 
he consult further with our G7 partners?
    Mr. Harrell. My understanding is the Administration has 
been in a very active discussion with G7 partners, that 
American diplomacy was instrumental in getting that statement 
that you alluded to in May.
    I think ultimately the way the U.S. is going to get our 
partners to come along is the way we always have, which is a 
combination of us acting and us engaging in diplomacy.
    I think it is going to take the European Union and some of 
these others a bit of time. But I am optimistic that with us 
acting and strong diplomacy by the executive branch, but also 
by Congress, we will pull them along with us.
    Mr. Lawler. Are you aware of any similar executive actions 
being taken by any of our allies and partners?
    Mr. Harrell. So the European Union has begun a regulatory 
process to look at this. Obviously, we are going to have to 
keep up the pressure on them to get it over the finish line, 
but they have begun a regulatory process on this.
    Mr. Lawler. Great. Thank you. I yield back.
    Chairman McCaul. The gentleman yields. I want to thank the 
witnesses for their valuable testimony. Additional questions 
may be submitted by members of the committee that we will ask 
you to respond to in writing.
    Pursuant to committee rules, all members may have 5 days to 
submit statements and questions for the record. Without 
objection, the committee stands adjourned.
    [Whereupon, at 12:42 p.m., the committee was adjourned.]

                                APPENDIX
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         STATEMENT FOR THE RECORD FROM REPRESENTATIVE CONNOLLY
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       WITNESS TESTIMONY SUBMITED FOR THE RECORD FROM MR. MATHENY
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            RESPONSES TO QUESTIONS SUBMITTED FOR THE RECORD
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