Hidden behind the January 6 proceedings, something else extraordinary is happening on Capitol Hill. And many American businesses seem unaware of its implications. Congress is batting around legislation that would formalize an outbound foreign investment review process with sweeping implications for US competitiveness.
The National Critical Capabilities Defense Act will require US firms to notify officials if they intend to invest abroad. The basic idea is to prevent US companies from handing over advanced technology to China. However, policymakers have watered down the language so severely that it could apply under changing circumstances to just about any geography or industry. That reach and scope is where the problem lies. The legislation can easily escalate over time into a de facto industrial planning framework, with lots of bureaucratic stupidity thrown into the mix.
The US Chamber of Commerce understands the problem. In mid-June, it sent a letter to Congress opposing the latest draft of the legislation. The organization, representing a cross-sector of American industry, writes: “US national security objectives are best served when policies supporting them are clear, targeted, and predictable.” The proposed act is none of that.
The Chamber continues: “Nearly every sector of the US manufacturing and agricultural economy—and the services sectors that critically enable them—appears to be covered… [The legislation] would also complicate efforts to collaborate with our allies on matters related to emerging and critical technologies and disproportionately burden US small and medium-sized companies, chilling their ability to innovate, scale up, and access global markets.”
The National Critical Capabilities Defense Act is a Trojan Horse. The legislation, in one form or another, has been lingering in the trenches for years; it was once considered a fringe effort. The China-focused, but not China-exclusive, effort is positioned as a corrective step to a gap in federal policy under the premise that it merely calls for 45-day notification of foreign activity. For context, the US now has an official mechanism for reviewing inbound, but not outbound, investment.
The notification period is just one of many problems. For companies, foreign commitments unfold over time; they may take years to come to fruition. Why should a US company invest millions in its business strategy, only to discover at the last minute that its hard-won efforts face some prevailing, previously-unknown political headwind?
Senator Patrick Toomey (Pennsylvania) validates our point: “I have yet to be convinced that existing export-control laws are falling short. Moreover, I’m concerned that what may begin as ‘notification’ will soon evolve into a new federal agency with sweeping authorities to dramatically disrupt and halt the free flow of trade and investment, risking slower economic growth and higher prices for consumers.”
Consider how absurd an outbound foreign review process could become, depending on shifting political sentiment. A US company looks to expand a textile facility in Indonesia with advanced looming robotics. Could that investment be construed as counter to American interests? What about a new automobile production facility in Mexico using AI-based manufacturing techniques? We argue in the extreme to make our point.
In a different era, such legislation would have corralled little support. Concerted focus by both major political parties on China’s ascent to a global superpower, however, now makes the passage of such legislation inevitable. What congressman is willing to be tarred-and-feathered in the court of public opinion for appearing to pander to Chinese interests? Rudimentary economics and sound diplomacy be damned.
We of course believe that United States has a right and obligation to protect its competitive edge in advanced technologies. The issue here is that the National Critical Capabilities Defense Act is poorly formed in reach and scope. Existing laws, such as the US Export Control Act, can be highly effective, if modelled properly. Granted, the original Cold War legislation dates to 1949, but it seems far more sensible to upgrade, if not re-codify, some aspects of this longstanding statute. ■
Our Vantage Point: The National Critical Capabilities Defense Act aligns with growing protectionist sentiment in the face of an economic downturn. It also harkens to the fractionalization of the global economy in tandem with the war in Ukraine.
Learn more at The National Law Review
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