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Tuesday, February 27, 2024
Feb. 27, 2024

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Congress tightens screws on Chinese tech purchases, collaboration

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WASHINGTON — Lawmakers added new restrictions and limitations late last year on Chinese entities trying to buy U.S. high-tech companies as well as a ban on collaboration between American and Chinese government agencies in several technology sectors.

The provisions included in the fiscal 2023 spending legislation enacted at the end of December are the latest move by Congress to deny Beijing access to U.S. technologies and research and thwart China’s stated goal of overtaking the U.S. as the global technology leader.

Under the new law, U.S. companies being acquired by or merging with foreign entities must notify the Federal Trade Commission of any subsidies the foreign company may have received from governments, including China’s, that pose a strategic and economic threat to the U.S.

The FTC, after consulting with the Justice and Commerce departments, the Office of the U.S. Trade Representative and the Committee on Foreign Investment in the United States, would then have the authority to stop transactions considered to violate U.S. antitrust laws.

The law also prohibits visits by Chinese officials to NASA facilities and Pentagon funding for EcoHealth Alliance, a U.S. nonprofit group that has worked with Chinese labs to counter biological weapons of mass destruction. The statute would rein in those activities, but it leaves room for waivers. It also blocks licenses to export satellites and components to China.

Lawmakers specifically cited a 2020 report from the United States-China Economic and Security Review Commission that warned of threats posed by China, which was subsidizing its state-owned companies to help them expand their reach into the U.S. and other countries.

Left unaddressed, Chinese companies’ acquisitions of U.S. firms “risks setting back U.S. economic and technological progress for decades,” the commission warned.

Chinese subsidies to aid its enterprises in buying U.S. companies have raised concerns for a decade, said Michael Wessel, a member of the U.S.-China Economic and Security Review Commission. He cited the 2013 purchase of Smithfield Foods — a pork producer based in Smithfield, Virginia — by China’s Shuanghui International Holdings in a deal valued at $4.7 billion. China’s state-owned bank supported the Smithfield acquisition, he said.

The December law is a reflection of China’s increasing interest in buying U.S. tech companies, Wessel said, saying he was speaking for himself and not for the commission, a bipartisan panel established by Congress in 2000.

Noting “Chinese patterns of acquisition” and state subsidies, Wessel said the legislation addresses issues long seen as U.S. national and economic security risks. The legislation requires that information about state subsidies be provided before mergers, he said.

“You know, we have not seen that provided in many areas in the past,” he said.

Knowing that a potential buyer of a U.S. company is operating with the help of foreign subsidies could help U.S. agencies assess whether a transaction violates antitrust laws, lawmakers have said.

The provisions in the new law originated in a bill in May 2022 from Sens. Tom Cotton, R-Ark., and Bill Hagerty, R-Tenn., to require companies to disclose financial support from adversarial foreign governments in pre-merger notifications to U.S. agencies.

“The Chinese Communist Party is attempting to gain power by manipulating the market and undercutting American businesses,” Cotton said at the time. “Our bill will promote transparency in antitrust filings and allow regulators to examine whether a company may act anticompetitively because it has the backing of foreign subsidies.”

Chinese President Xi Jinping has said he wants his country to become the “world’s main center of science and the high ground of innovation,” according to a translation of a 2018 speech by researchers at Stanford University’s DigiChina Project.

Xi said China should lead in areas including artificial intelligence, quantum computing, telecommunications, the Internet of Things, blockchain, synthetic biology, gene editing, brain science, regenerative medicine, integrated robotics, development of new materials, high-efficiency sustainable technologies, and space and maritime technologies.

The U.S.-China Economic and Security Review Commission warned in its 2020 report that China seeks to “surpass and displace the United States altogether” in those critical technology areas identified by Xi.

The commission has examined cases of China helping companies with subsidies, below-market-rate loans and — in some cases — espionage to lower the market value of targets in order to acquire foreign companies, Wessel said, adding that one key area in which China is using acquisitions to access U.S. technology advances is biotech.

Advances in biotech — including synthetic biology, or gene editing, sequencing and synthesis — are seen by the Chinese Communist Party as key to addressing a variety of economic and livelihood issues faced by the country, the commission said in another report, in 2021.

“The CCP believes synthetic biology can help address many of China’s most pressing issues, from healthcare needs of an aging population to food supply challenges created by climate change,” the commission said.

Reining in agency cooperation

It also recommended that U.S. agencies screen U.S. investments in China’s tech sector to understand if such capital flows could help China achieve its goals.

But the new law doesn’t address U.S. outbound investment in sensitive areas of interest to Beijing and other countries. The Biden administration is working on an executive order that would address the gap.

In 2021, Sens. Bob Casey, D-Pa., and John Cornyn, R-Texas, proposed an amendment to a semiconductor funding bill that would create an interagency committee to review U.S. outbound investments. But the proposal didn’t make it into the science and technology law, enacted in July 2022.

White House national security adviser Jake Sullivan said in September that the Biden administration was “formulating an approach to address outbound investments in sensitive technologies, particularly investments that would not be captured by export controls and could enhance the technological capabilities of our competitors in the most sensitive areas.”

The administration has already issued executive orders and taken steps to severely restrict China’s access to high-tech semiconductor chips and components from U.S. companies.

In addition to placing constraints on Chinese companies acquiring key U.S. tech companies, the fiscal 2023 spending bill also put restrictions on collaboration between U.S. and Chinese researchers, government agencies and companies.

NASA, the White House Office of Science and Technology Policy and the National Space Council are prohibited from spending money to “develop, design, plan, promulgate, implement, or execute a bilateral policy, program, order, or contract of any kind to participate, collaborate, or coordinate bilaterally in any way with China or any Chinese-owned company.”

The law also bans NASA from hosting any Chinese officials at any of its facilities. The restrictions apply unless the FBI certifies that such exchanges and visits would not result in the loss of any key technologies or classified information relating to technologies.

The law prohibits the Pentagon from funding work by EcoHealth Alliance, a U.S.-based nonprofit group that has worked with Chinese labs, unless the Defense secretary grants a waiver. The Pentagon has funded EcoHealth on programs to counter weapons of mass destruction relating to biological weapons.

EcoHealth also is reported to have used federal grant money from the National Institutes of Health to work with China’s Wuhan Institute of Virology on bat coronavirus research before the COVID-19 pandemic. The pandemic first emerged in Wuhan.

The law prohibits the State Department from using its funds to process license applications for the export of satellites and satellite components to China.

Separately, the law says cybersecurity funds can be used to counter insecure communications networks and services, including 5G, that are promoted by China and other state-backed enterprises under the control of their home countries.

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