Biden Admin Grappling With Challenges of Potential Outbound Investment Restrictions

The Commerce Department is trying to find a way to screen outbound investments in a way that protects domestic commercial interests but limits collateral damage to businesses with interests outside the U.S., said Marisa Lago, the agency’s undersecretary for international trade. Lago’s comments came one day after Samm Sacks, an expert on U.S.-China technology policy issues, said the Biden administration hasn’t yet released an executive order to create an outbound investment screening regime because of discussions surrounding implementation challenges.

Lago, speaking at the Washington International Trade Association conference Feb. 14, said Commerce is "helping implement a stronger inbound investment review regime” and “simultaneously, we're identifying the best approaches to prevent outbound U.S. investment flows from supporting foreign interests that would undermine our security.” Commerce Secretary Gina Raimondo has talked about the department's intentions to start an outbound investment review before, including in December (see 2211300043).

“Investment review is particularly salient in strategic technology industries,” Lago said, “where we're working diligently to protect our unmatched innovation ecosystem, harnessing strong relationships with industry and other stakeholders to pursue effective action that minimizes unintended consequences.”

Speaking during the same conference earlier this week, Sacks said her "understanding is there has been tremendous debate” that has “prevented the release of this outbound investment” screening mechanism. Policymakers are grappling with a range of questions that need to be addressed before new reporting requirements are created, said Sacks, a senior fellow at Yale Law School’s Paul Tsai China Center, such as how should the U.S. define outbound investment. “How do you actually define, in scope, what a U.S. investor is?” she said.

The administration is reportedly considering narrowing its upcoming EO to focus on quantum computing, artificial intelligence and semiconductors as opposed to a broader range of critical and emerging technologies (see 2301120035). But even if the new mechanism focuses only on specific sectors, each will need definitions, Sacks said. “What is artificial intelligence" and "how do you prevent code from crossing borders?” she said. “Even things like biotech can be quite fraught with debate.”

Former U.S. national security officials have made similar points, saying they expect implementation to be challenging, particularly as the government tries to define specific technologies that outbound reviews should capture (see 2301190024). Other former officials have urged the administration against issuing a unilateral EO, saying it should work with Congress to make sure any new regime is narrowly targeted to review only a small number of U.S. investments in China (see 2302070052).

“I think we ought to be super careful,” said Scott Kennedy, a senior adviser and trustee chair in Chinese business and economics at the Center for Strategic and International Studies. He said the U.S. needs to first determine “what is occurring in that realm of transfer of knowledge and technologies that isn't captured by export controls.”

Kennedy, speaking during the conference, said he can envision an outbound investment screening regime targeting a scenario in which a U.S. private equity firm, which has no IP itself, gives money to a Chinese startup developing a technology that eventually could damage U.S. national security. “That is probably what one might envision as currently falling through the cracks,” Kennedy said.

In those cases, the U.S. should study “what might be the best way to fill in some of those cracks" that doesn’t "totally upset things,” he said. “Because if we simply create a whole new bureaucracy, we have a lot of reporting requirements, it will dampen investment in a lot of areas that we want.”

An outbound investment review regime risks “rebound[ing] backwards,” he said, and could affect “people's willingness to invest in the United States, including American companies bringing their profits back home. So I think we ought to really be careful and tippy-toe into this, because we may end up in a situation where our national security is less protected than more protected.”

Kennedy also briefly touched on the new U.S. export controls on semiconductor-related items destined to China, saying Chinese politicians and corporate executives are less concerned about the export controls, while researchers view the controls as more dire.

“The further I went up the political hierarchy, the further I went up the corporate hierarchy, the more optimistic they were that these restrictions would be significant blows, but they would get around them,” said Kennedy, who was in China when the new controls were published in October (see 2302020034 and 2302080048). He said many higher-ups in China said: ‘Bring it on, we can handle this.”

But the “further you go down in the political hierarchy, further down in the firms towards researchers and people that make technical decisions, the more worried that they were that these restrictions were going to bite,” Kennedy said, “both on the types of chips that they need for the various applications that they're working on as well as the kinds of equipment and tools that they're going to increasingly be denied, which will allow them to innovate in new spaces.”

He also said the restrictions also will hurt the U.S., which benefits from collaboration with China. “I think it's a question of: which line is going to move further down?” he said. “Is it China's innovation line and trajectory, or is it ours that's going to take a significant hit by this approach?”