US ‘may exacerbate national security risks’ with unclear China tech restrictions, new congessional report says

·3-min read

The US government has failed to provide clarity on what critical technologies American businesses should be restricted in selling to China to protect US national security, a congressional report said on Tuesday.

In the report published by the US-China Economic and Security Review Commission (USCC), the advisory board said the Commerce Department had been very slow to come up with a list of “emerging and foundational” technologies that should be examined before exporting to China.

The lack of clarity on what types of technologies should be put under scrutiny, required by law passed in 2018, “impedes the ability” by various government agencies to review relevant transactions and “may exacerbate national security risks”, said Emma Rafaelof, the author of the report.

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Contrary to the most effective export controls that target a narrow list of products with robust protection, an approach known as “small yard, high fence”, US agencies now lack the guidance on how to determine the boundary of its yard, according to the report.

Employees make semiconductor chips in a factory in China. Photo: STR via AFP
Employees make semiconductor chips in a factory in China. Photo: STR via AFP

The USCC, which was created two decades ago to advise lawmakers on the national security implications of trade with China, asked Congress to look into reasons for the multi-year delays and look for ways to speed up the guideline making going forward, including whether a different agency should be handed the authority to come up with the list, and how to coordinate efforts among agencies to tap the expertise needed for this task.

The Commerce Department did not immediately respond to an emailed request seeking comment for the story.

US lawmakers passed the Export Control Reform Act of 2018 to limit mergers and acquisitions that would lead to key technologies in the hand of China. Biotechnology, artificial intelligence, semiconductor, quantum technology were among the initial 14 broad categories that would require screenings before a transaction takes place.

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The Commerce Department was directed to identify specific emerging technologies and foundational technologies since then.

The department has since made some progress, proposing to regulate software for gene editing used in biological weapons, releasing an interim rule on geospatial imagery involving AI neural networks, as well as regulating advanced surveillance technology used in Xinjiang.

But over the years, the agency, after seeking public and industry feedback in multiple rounds, has been struggling to finalise the list of technologies that will be covered under the law.

Part of the reason for the delays, many have said, is because it is difficult to capture the emerging technologies as the space evolves very quickly.

In August, the department asked for further industry comment on how to define the category of foundational technologies.

That has left a separate inter-agency body – the Committee of Foreign Investments in the US (CFIUS) – in limbo with regard to which transactions need to be reviewed.

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“With the list of emerging and foundational technologies still under development, CFIUS may be unable to fully implement some of the new authorities and processes intended to scrutinise or prevent certain transactions,” the authors wrote in the report.

“Foreign investors are increasingly wary of putting money in a venture that may face additional restrictions if it eventually falls under an emerging or foundational technology category in the final rule,” said the author of the report said.

Foreign direct investment into the United States fell 37.7 per cent in 2019 from the year earlier, according to the report, and the uncertainty was “one of many components of the policy environment during that period” that have attributed to the drop.

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