Congressional Panel Calls for China Sanctions Planning Committee, More BIS Oversight

The recommendations, outlined by the U.S.-China Economic and Security Review Commission in its annual report released this week, accompanied warnings from the commission that China is closing the technological gap with the U.S., partly due to what it said have been failed U.S. export control efforts. The report was again critical of Commerce, saying its “ongoing failure” to produce an “adequately detailed list” of emerging and foundational technologies “may thus be enabling the development of frontier industries in China that could scale up rapidly and undermine pivotal parts of U.S. supply chains.” The commission last year said the agency had “failed” to carry out its export control responsibilities under the Export Control Reform Act (see 2106020024) and suggested that Congress establish a new group in the White House to speed up the controls.

“Mistakes and oversights in the implementation of U.S. export control policy” could be aiding China’s technological advancement, the commission said in its report to Congress. Commissioner Derek Scissors called Commerce’s new China chip controls announced last month (see 2210070049) “potentially the most important U.S. technological action” against China, but said their effect on trade will take time to evaluate.

“It has not been implemented yet formally. There have been impacts already on American firms in the transition to implementation, but we don't know what the implementation's going to look like,” Scissors, also a senior fellow with the American Enterprise Institute, said during the commissioners' Nov. 15 presentation of the report, which included a question-and-answer session. “So we’re really not in a position to evaluate whether U.S. policy has changed the trajectory of the U.S.-China economic competition.” He said the U.S. may not have a complete picture about whether the new restrictions are working until 2024 or 2025.

To better address China and deter it from taking steps that could threaten national security, the U.S. should create a new interagency committee -- composed of members from the departments of State, Treasury, Commerce, Defense and Homeland Security -- to develop, coordinate and plan potential sanctions against China, the commission said. The committee would create plans for sanctions or “other economic measures” against China in multiple scenarios, including if it attacks, blockades or takes a “hostile action” against Taiwan. The group would “evaluate the potential economic and political consequences of various options, coordinate their implementation, and advise Congress” if it needs to make revisions to any statutory authorities to “enhance their effectiveness.”

Commissioners said the committee should mirror the U.S. response to Russia’s invasion of Ukraine. “The reason that the U.S. and its allies were able to implement sanctions so quickly and so effectively against Russia was that there had been a good deal of advance consideration and advance planning,” said Commissioner Aaron Friedberg, co-director of Princeton's Center for International Security Studies. “We believe that the visible preparation for that kind of action can help to contribute to deterrence.” Friedberg added that the planning of sanctions isn’t “sufficient in and of itself, but Chinese leaders have to be clear in their minds that if they do something like attack Taiwan, they would face enormous economic consequences and action.”

The commission said China views the coordinated response to Russia’s invasion as “an example of what could happen if it intensified aggression against Taiwan.” Although China is “highly susceptible to foreign sanctions,” the report said Beijing has recently “redoubled its ongoing attempts” to reduce its “vulnerability to sanctions and export restrictions.” The commission also noted that coordinated, multilateral trade restrictions “would be far more difficult to achieve on China without significant disruption to many key supply chain networks due to the size and global integration of the Chinese economy.”

In addition to planning more new sanctions, the U.S. needs to better implement the ones it already imposes, the commission said. Along with what it said is a failure to adequately control emerging and foundational technologies, the commission pointed to “lax enforcement” by Commerce of its foreign direct product rules.

Despite the agency expanding the FDP rule in 2020 to increase restrictions on foreign exports to Huawei (see 2008170029 and 2005150058), the agency “has brought limited regulatory actions against companies for violating the expanded” rule, the report said. “This stands in contrast to other export control regulations -- such as those on Iran, which have led to numerous investigations and substantial penalties -- and in spite of evidence suggesting exporters have violated the rule.”

The commission specifically pointed to Seagate Technology, a company that Senate Commerce Committee Republicans last year told the Bureau of Industry and Security was ​​violating export controls against Huawei (see 2110260040). BIS has yet to announce an enforcement action against Seagate, but the company in October said it received a proposed charging letter from BIS (see 2210260022).

“Without more committed U.S. government export control enforcement action, exporters may continue to assess that they face little downside risk from failing to adhere to export restrictions on Chinese firms,” the commission said. A BIS spokesperson declined to comment.

Commissioner Michael Wessel said China “has made major strides” technologically, specifically naming the quantum computing sector. “Congress, the administration, the American people are focused on this,” said Wessel, president of the Wessel Group, a Washington-based consulting firm. “We've made some investments this year, but much more needs to be done.”

Scissors was more critical of the U.S. approach, saying it’s “just starting to respond in a race that China has been running for years.” He said the U.S. needs to better combine domestic investment with trade restrictions to stay ahead.

“If you are running faster and then giving your water to your opponent, it's more likely your opponent is going to run faster than they would otherwise,” Scissors said. “Stop sharing, involuntarily or voluntarily, your technology, and you have a better chance to win the race.”

The commission said Congress should demand more accountability from Commerce. Lawmakers should require the agency to provide semiannual reports on its enforcement of its foreign direct product rules and its approvals of export license applications for entities seeking to export to China items controlled for national security reasons. The report shouldn’t name specific U.S. exporters but should include statistics on the number of licenses Commerce has approved, the number of licenses approved for each destination, the item classifications for each license, the value of the exports and the reason Commerce approved each license.

Another recommendation said Congress should require the Office of the U.S. Trade Representative to create an “updateable” list of Chinese firms operating in critical sectors and “found to have benefited from coercive intellectual property transfer, including theft.” Commerce would deny export licenses to those companies for a “rolling period of five years,” and Treasury would ban investments in those entities, the report said.

The commission last year said the U.S. should screen outbound investments to China to prevent transfers of sensitive technologies, and commissioners this week again stressed that an outbound investment review mechanism is needed. Scissors said the U.S. needs better insight into whether it’s allowing investments that support China’s military, human rights violations or sanctioned entities.

“We have export controls, meaning you're not supposed to send technology to China through exports, but we have no monitoring of U.S. support for Chinese technological development through outbound investment,” Scissors said. “We need to find out where that money is going as best we can.”

Wessel said “capital flows to China across the board are of enormous concern.” The U.S. needs “to get a better handle” on those investments. “There has been some progress,” he said, but “it needs to be much more.”