MCCAUL DISHES ON OUTBOUND EO DISCUSSIONS: The Biden administration’s push to regulate American investments in China could be broader than many expect — according to one key lawmaker. House Foreign Affairs Chair Michael McCaul (R-Texas) last week revealed that the administration is considering a full U.S. investment blockade on entire sectors of the Chinese tech economy — a more aggressive approach than we previously thought was on the table. The Biden administration “is talking about a theory where they would stop capital flows into sectors of the economy like AI, quantum, cyber, 5G, and, of course, advanced semiconductors — all those things,” McCaul told your host last week, recalling recent meetings with the Commerce Department’s Bureau of Industry and Security. “They actually want to say, right, you can’t invest in any [Chinese] company that does AI. You can’t invest in any company does cyber” or other similar sectors. Tailored to what? Sector-wide investment rules or prohibitions would appear to contradict the Biden administration’s promises that its eventual outbound investment order will be “carefully tailored” to hit only high-end technologies related to national security, while exempting more commonplace commerce. But an NSC spokesperson stressed that the administration still sees a “tailored” action as its North Star, and debate over scope continues in the administration. “I won’t get into specific sectors,” the spokesperson said. “But we know the importance of precisely defining which investments would be covered under an outbound investment regime and which would not be, particularly given the dual-use nature of the technologies that would be under consideration for any regime.” How to read it: McCaul’s comments don’t necessarily contradict the administration’s stated approach. It just may be that, in the eyes of White House China hawks, a carefully tailored approach could mean blocking investments in entire high-tech Chinese sectors. Elsewhere in his interview, the Texas lawmaker said it’s tough to draw the line between benign investments in China and those that could end up benefiting the CCP or People's Liberation Army. That’s hard enough when considering the export of technologies like semiconductors, and even more difficult when it’s just American capital flowing into Chinese firms. “Now, [managing] capital flows [into the Chinese economy] is actually more difficult than exporting technologies, because you can argue that capital flows are fungible,” he said. “And then with a civil-military fusion governance they have, that you can make an argument that anything could go to the military or the government right.” Debate continues: Where the administration — and Congress — will decide to draw the line is still an open question. In recent weeks, the Treasury Department has reportedly tried to narrow the outbound investment order, pushing in the opposite direction from the hawkish approach outlined by McCaul. Taken alongside the hawkish stance of sector-wide investment rules, the reports indicate that policy debate between agencies, ongoing since the Trump era, continues in this administration. Dutch deal reached: In one sector, the administration’s push for strategic decoupling is gaining steam, with the Dutch government ready to sign on to American rules against exporting microchip making machines to China. Their cooperation, along with the Japanese, is seen as essential to make the American rules workable. TIKTOK BILL UNVEILED: Elsewhere in his extended interview, McCaul revealed that he will hold a markup for a new bill that would give the president authority to ban TikTok — something the Biden administration is already considering through a long-running national security review. Berman amendment targeted: The bill would provide a waiver from the Berman amendments, which date back to the end of the Cold War and prevent the president from unilaterally banning information and communication materials from foreign adversaries. The idea was to promote a free exchange of ideas in the hopes of liberalizing those regimes, but McCaul says they’ve got to be overruled in the face of the threat from the Chinese Communist Party. “So what my bill does is essentially waive that amendment, so that we give the president the authority not to ban social media, but [to ban] PRC-controlled or Chinese state-controlled social media, like TikTok, just like a lot of universities have,” McCaul said. A markup of that bill is expected Feb. 28 in McCaul’s committee. And he said he remains skeptical of efforts from the Chinese-owned video-sharing app to reach a national security compromise with the Biden administration that would see it set up an independent U.S. subsidiary, but still be owned by its parent company ByteDance. “Now, you know, trust but verify. Maybe it's possible,” he said. “But I'd be very skeptical that a firewall can be put up between the PRC and a social media platform in the United States.” CHINA’S CHARM OFFENSIVE REACHES HFAC: If the Texas lawmaker is skeptical of TikTok’s “full offensive” in Washington, he’s downright dubious of the Chinese embassy’s new push to improve economic relations with China. Officials from the Chinese embassy have been briefing media and policymakers in recent weeks, saying they want to avoid a further deterioration in commercial relations that has seen some Chinese firms (perhaps fearing TikTok’s fate) hesitate to invest in the U.S. That campaign has gone far enough to reach even committed China hawks like McCaul, who said he recently found himself face-to-face with an unexpectedly friendly Chinese ambassador at a social function. “We were at the international club and our Israeli ambassador said let me introduce you to the ambassador from China,” McCaul recounted. “I said I’m not sure he likes me a whole lot.” But much to McCaul’s surprise, then-ambassador Qin Gang was all smiles. “The Chinese ambassador said, I’d love to talk to you anytime, please come through,” McCaul said, “and then the next week he became the Foreign Minister of China, and they want us to go visit China.” The HFAC chair won’t be going to mainland China anytime soon, his staff confirmed. But the encounter reveals how extensive the new pressure campaign from the Chinese in Washington has become. “It was cold, like a Cold War mentality [before],” McCaul said. “What I’m seeing now is a charm offensive.” NO END IN SIGHT FOR CHINA, RUSSIA EXPORT CONTROLS: That was the message Thea Rozman Kendler delivered Friday in a virtual speech at the Massachusetts Export Center’s annual export expo. She’s the assistant secretary of Commerce for export administration in the Bureau of Industry and Security. “Russia and China will continue to be at the forefront of BIS policy actions, frankly for years to come. You can also expect that we will continue to keenly focus on strengthening our relationships with partners and allies,” she told the group. Global exports of semiconductors to Russia have dropped by nearly 70 percent following the export controls imposed by the United States and 37 other countries last year, degrading Russia’s military capabilities and domestic manufacturing operations, Kendler said. Russian hypersonic ballistic missile production “has nearly ceased” and the country’s commercial car production has fallen 75 percent compared to last year, suggesting that critical advanced microchips used in cars have been redirected for military use, she said. “In a measure that really … shocks me, Russia is buying artillery shells and rockets from North Korea, and drones and drone parts from Iran. These are not the partners of choice for a modern military, I would imagine. And that certainly shows sanctions and export controls are impacting Russia's ability to supply its military,” she said. Comments due Tuesday: Turning to China, Kendler rejected any suggestion that tough new export controls on advanced computer and semiconductor-making equipment were imposed mainly to give the United States an economic advantage. “I couldn't disagree more. We imposed this rule, building on our ongoing work out of BIS for years, to restrict access to advanced dual use items and technologies of most significant national security concern to China,” Kendler said. She also reminded the audience that comments on the proposed rule were due Tuesday and said BIS wants to know about “the ramifications of this rule on your business, on your relationships, your foreign relationships — the good, the bad, the ugly — all of it.” Since you asked: The global tech trade association ITI filed comments warning that a unilateral approach to the export controls would weaken U.S. competitiveness without achieving the Biden administration’s national security objectives. WTO DISPUTES BACK WITH A BANG: Washington, China and Brussels clashed over totemic disputes at the World Trade Organization on Friday. U.S. appeals national security rulings: The Biden administration on Friday challenged the World Trade Organization’s ruling against Washington’s steel and aluminum tariffs. Who’s the boss now? The U.S. is standing up for former President Donald Trump’s decision to impose tariffs on steel and aluminum imports for national security reasons. That’s despite the world trade body’s arbiters and a range of countries seeing the tariffs as thinly-disguised protectionism. “The WTO has no authority to second-guess the ability of a WTO member to respond to a wide range of threats to its security,” U.S. Ambassador María Pagán said at the dispute settlement body meeting. OK, but… Brussels begged to differ on this one. “The EU fully recognizes the special nature of security interests covered by the security exceptions, and the need for a margin of discretion,” EU Ambassador to the WTO João Aguiar Machado said. “However, such discretion cannot be unfettered, since that could give rise to abuse.” How convenient: Washington’s appeal effectively prevents the WTO decision from ever becoming final. That’s because the U.S. effectively killed the WTO’s Appellate Body by blocking the appointment of new judges during the Trump era. Full story here.
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