US Should Double Down on Tech Controls, Create Outbound Investment Regime, Witnesses Say

Kilcrease said the new regime, which would also allow allies to collaborate on investment screening, could serve as a “successor” to the multilateral Wassenaar Arrangement, which critics say isn’t built to meet modern export control and proliferation challenges (see 2001020029 and 2009290042). The regime also doesn’t have a clear procedure for kicking out members, including Russia, which has become subject to a range of stringent export restrictions by the U.S., the EU and others after its invasion of Ukraine in February.

“That’s clearly unsustainable,” Kilcrease, speaking during an April 14 hearing held by the U.S.-China Economic and Security Review Commission, said of Wassenaar. “Russia should not be in any new regime.”

She said the new regime must “extend beyond the traditional purpose of export controls” to also protect human rights and democratic institutions, and to promote technological leadership among a core group of countries. “The work in the [U.S.-EU Trade and Technology Council] is a strong first step,” Kilcrease said, but added that the U.S. “must push farther” to promote broader cooperation with close allies. The new regime needs to “reflect the reality with Russia and truly rise to the China challenge.”

Although the “core” of the regime should focus on export controls, the U.S. should also use the forum to seek cooperation on a “wider range of tools beyond export controls,” Kilcrease said, including investment reviews. While she said investment coordination on a transaction-by-transaction basis is “likely not practical,” countries could simply benefit from more information sharing.

“We should leverage the identification of technologies of shared strategic interest, so that when national regulators are reviewing transactions involving similar threat actors and similar technologies, we're getting similar outcomes from those processes,” Kilcrease said. “And that's not happening today.”

Kilcrease also said the U.S. needs an outbound investment screening regime, which could serve as a counterpart to the Committee on Foreign Investment in the U.S. The regime should be “targeted” to prevent investments that could lead to the development of technologies "that would normally be controlled if they originated in the U.S.,” Kilcrease said.

“This will be the hardest piece, as it is the newest piece,” said Kilcrease, a former Office of the U.S. Trade Representative staffer who led the office’s work on CFIUS. “But it's also one of the most important to tackle in a multilateral context, given how easily money can move through various jurisdictions.”

Nazak Nikakhtar, former acting undersecretary of the Bureau of Industry and Security, also endorsed the creation of an outbound investment regime, saying it could help close a loophole in U.S. export controls. “Our companies are forming joint ventures in China and developing technologies there, and by virtue of developing technologies there,” she said, “it's outside U.S. export control jurisdiction.”

An outbound investment regime has support from some lawmakers but would likely be met with pushback from industry, which is wary of new red tape that could hurt U.S. competitiveness (see 2202030062 and 2201140038). But Nikakhtar said an outbound investment screening regime will eventually help U.S. companies by encouraging investments in more trustworthy trading partners. “Is it going to hurt companies in the short term? Absolutely,” she said. “But the medium-term impact, the longer-term impacts are going to be so substantial.”

In her written testimony, Kilcrease also recommended that Congress require recently confirmed BIS Undersecretary Alan Estevez to submit a report on the agency’s emerging and foundational technology control efforts. The report should detail whether the agency has enough resources to impose the controls and whether the current legal framework BIS must follow for listing the technologies is “overly restrictive” and hindering its efforts.

Lawmakers and others, including USCESR Commissioner Derek Scissors, have criticized BIS for moving too slowly on the controls and said the authority may need to be moved to a different agency (see 2204050059, 2111170064 and 2110250035). Scissors, an expert with the American Enterprise Institute, said during the hearing that the delay in issuing new controls is “making it easier for China to acquire the technology.”

Although BIS has issued dozens of controls over emerging technologies, a senior agency official said this month BIS is struggling to identify additional specific emerging technologies for potential controls (see 2204080033). The agency hasn’t yet issued a foundational technology restriction since the Export Control Reform Act became law in 2018.

Part of the delay in issuing new controls may be due to BIS’s preference for multilateral controls over unilateral controls, which takes more time to implement but ensures that U.S. companies remain on a level playing field compared with foreign suppliers of the same products. Nikakhtar told the commission that the administration may need to rethink its preference for multilateral restrictions, especially because some allies, such as the EU or Japan, are more economically or geographically “vulnerable” to China than the U.S., which may make them less likely to softly move forward with controls.

“In light of this reality, it makes little sense for the U.S. government to continuously demand multilateral export restrictions and expect allies to consistently act in unison,” Nikakhtar wrote in her testimony. “Where the United States has the will and ability to impose controls in advance of its allies, it should do so and with faith that our allies will likely follow our lead.”