Introduction
As the first session of the 118th Congress comes to a close, Congress unveiled a vast array of policy recommendations and legislation furthering their focus on U.S.-China strategic competition. Throughout the year, China hawks worked to include their provisions on how the defense community can further respond to Chinese aggression and unfair economic practices by crafting provisions included in the National Defense Authorization Act (NDAA). The China Select Committee (CSC) spent the 2023 legislative calendar focused on highlighting to the public their concerns about the national and economic security threats the Chinese Communist Party (CCP) poses to its people internally as well as the international liberal world order. The CSC culminated its year of oversight by recently releasing a report detailing over 150 policy recommendations for how to best respond to the threats posed by the CCP. Also of import was the House Foreign Affairs Committee Chair Michael McCaul (R-TX)’s release of the 90-Day Review Report of how the Department of Commerce’s Bureau of Industry and Security protected American intellectual property and technology from CCP-controlled companies.
Many of these legislative moves from Congress not only come at a time when strategic competition with China is becoming more mainstream, but also in the lead up to the 2024 presidential election cycle. In such an important election cycle, we expect Congress to try and put its stamp on U.S.-China policy to garner more support from their constituents and the broader American public. With the series of policy recommendations and passed legislation aimed at giving the United States more of a competitive edge against unfair Chinese economic practices and aggression on top of the coming election year, it is difficult to discern the final outcome of the congressional actions. Below you will find a more detailed summary of recent moves from congressional China hawks and what this will mean for the next legislative calendar of the 118th Congress.
Select China Committee Report
On Dec. 12, the CSC released a bipartisan report on U.S.-China economic competition. The report includes nearly 150 policy recommendations, of which a majority are supported by bipartisan members of the CSC, geared toward strengthening U.S. economic competitiveness vis-à-vis China. The CSC recommends a variety of legislative and regulatory actions be taken to bolster the United States’ economic posture, including: requiring the Department of the Treasury to report on U.S. portfolio holdings of foreign securities; directing the Biden administration to impose duties on products originating from China that are deemed critical, such as semiconductors; and directing the Biden administration to take specific actions against Huawei, ZTE and other telecom vendors complicit in installing unsecure telecommunications infrastructure in the United States and other countries. It also includes recommendations to expand the U.S. export control and outbound investment regimes, such as by requiring the Department of Commerce to adopt a countrywide system for export controls concerning China and restricting outbound investment in Chinese companies on U.S. sanctions and red-flag lists, as well as their subsidiaries. The report includes recommendations geared toward promoting U.S. technological competitiveness, including by enacting legislation that provides additional funding for agencies with jurisdiction over artificial intelligence regulation and forming a tax incentive to encourage private investment in critical technologies, such as through a targeted capital gains tax exemption for companies in key technology sectors.
BIS Report
On Dec. 7, Rep. Michael McCaul (R-TX) released a 90-day Review Report on the Department of Commerce Bureau of Industry and Security (BIS), the regulatory entity responsible for implementing dual-use export controls. The report notes that due to China’s immense industrial subsidies and large-scale IP theft, a “run faster only” approach—where the United States relies on the pace of its technological innovation without restricting technology exports to outcompete China economically—will “fail on its own.” The report states that export controls are a “vital tool” that should be used to limit advancements in China’s semiconductor sector, among other areas, noting that “up and down the supply and value chain, China cannot independently produce advanced semiconductors without the talent, know-how, and technology of a small group of democratic countries.”
The report states that growth in China’s semiconductor industry and ability to produce advanced chips may be significantly slowed if “the United States and a handful of U.S. treaty allies”—ostensibly referring to Japan, the Netherlands and South Korea, among other countries holding mutual defense treaties, strong economic ties with the United States and large semiconductor industries—“fully restrict China’s access to semiconductor architecture, electronic design automation software, machine tools, and fabrication facilities.”
To that end, the report says that BIS should focus a greater amount of attention on restricting technologies that are not currently posing national security threats but may do so in the future. The report contains recommendations that would reform BIS’ internal structure and licensing policies to ensure that different federal agencies play a larger role in BIS licensing decisions. It also directs Congress and the Biden administration to bolster the U.S. export control regime to capture a greater amount of sensitive U.S. technologies that currently flow to Chinese entities either under a license or free of regulation, including by implementing a countrywide system of export controls for goods exported to China and other countries of concern.
NDAA Provisions
The National Defense Authorization Act (NDAA) (H.R.2670/S.2226) is an annual piece of legislation that includes a variety of “must-pass” provisions related to the Department of Defense (DOD) and many sections also include language that impacts aspects of the U.S. economy and international security. On Dec. 14, the House voted 310-118 to agree to the final conference report of the NDAA and present the bill to the president for signature. The House vote followed the Senate’s, which was approved by an 87-13 vote on Dec. 13. The approved legislation would authorize $841.1 billion in total defense discretionary spending for fiscal year 2024 (FY24) for the Department of Defense, Department of Energy (DOE), the National Nuclear Security Administration (NNSA) and other agencies.
This year’s approved version includes over 20 provisions aimed at preventing DOD cooperation with CCP-owned entities and increasing U.S. capabilities during the era of strategic competition. Some provisions of note include Sec. 5413, which would end China’s developing nation status by removing certain tax benefits and economic support measures provided to countries listed as such. There are also various provisions preventing various DOD offices and bureaus from cooperating with, purchasing from or investing in entities associated with the CCP. Some are aimed at decreasing U.S. reliance on as well as connection to China’s involvement in the critical minerals and renewable energy supply chain. Others seek to establish strategies, notification systems or offices to conduct oversight of engagement with CCP-related entities or investments. There were also provisions designed to increase support for entities located in Taiwan as well as U.S. allies and partners across the Indo-Pacific to counter Chinese aggression in the region.
To read more on this year’s NDAA process and the range of issues included prior to the conference and the final passage of the bill, click this link.
What to Expect
All of the above China-related actions convey a continued bipartisan focus on U.S.-China policy that is likely to intensify in the coming year. The focus on China will also grow as the 2024 U.S. presidential elections draw greater scrutiny to the Biden administration’s approach to China, with lawmakers in both major political parties likely to express support for tougher policies on China as a result.
The CSC’s Economic Security report contains numerus provisions that may be introduced as standalone bills or as amendments included in the FY25 NDAA or other year-end legislative packages in 2024. While the report’s recommendations are not yet legislation, CSC Ranking Member Raja Krishnamoorthi (D-IL) noted that the report provides a blueprint of expectations for the coming year. To that end, multiple lawmakers have already introduced legislation in line with the report’s recommendations. On Dec. 13, Sen. Marco Rubio (R-FL) and Rep. Elise Stefanik (R-NY) introduced bills in the House and Senate that would require Chinese companies listed on U.S. stock exchanges to use independent auditors not controlled by the Chinese Communist Party (CCP). The report also referenced other pieces of legislation they would like to see passed in the coming year to continue their “tough on China” agenda during the era of strategic competition.
One issue of particular import is the outcome of the debate over the official language regarding outbound investment, particularly the provision sponsored by Sens. John Cornyn (R-TX) and Bob Casey (D-PA) in the Senate-passed FY24 NDAA. However, after lengthy discussions with NDAA conferees, particularly House Financial Services Committee Chair Patrick McHenry (R-NC), the provision was removed. There are now a variety of legislative proposals to consider, such as the Chinese Military and Surveillance Company Sanctions Act of 2023 (H.R.760) offered by Rep. Andy Barr (R-KY), the Preventing Adversaries from Developing Critical Capabilities Act (H.R.6349) offered by House Foreign Affairs Chair Michael McCaul (R-TX), and the American Investment Accountability Act (H.R.6733) offered by Rep. Stefanik in the House and Sens. Rubio and Rick Scott (R-FL) in the Senate. Rep. Barr’s proposed legislation, which is supported by the House Financial Services Committee, would require the president to impose property-blocking sanctions on companies involved with China’s defense or surveillance technology sectors to address those threats. China hawks such as Reps. Mike Gallagher (R-WI) and Krishnamoorthi as well as Sens. John Cornyn (R-TX) and Bob Casey (D-PA) support Rep. McCaul’s legislation to prohibit U.S. persons from engaging in transactions involving technologies and products, particularly those that would pose a threat to U.S. national security. Lastly, Rep. Stefanik’s bill aims to require the departments of Commerce and the Treasury to regularly report to Congress on U.S. outbound investment to China and other foreign countries of concern. We expect that Speaker Mike Johnson will want a resolution of this issue in the first or second quarter of 2024.
We believe that some form of broad, bipartisan China “Omnibus” legislation may be the way the House in particular, and potentially the Senate tackle the many pressing concerns congressional lawmakers have with China. However, 2024 will be a challenging year to pass legislation, so these lawmakers may have to settle for a more piecemeal approach, such as amendments to the NDAA.
