US House Committee Proposes Reset to US - China Economic Relationship

On December 12, 2023, the US House Select Committee on the Chinese Communist Party (CCP) (“Select Committee”) released a report titled “Reset, Prevent, Build: A Strategy to Win America’s Economic Competition with the Chinese Communist Party” (“Report”), which contains nearly 150 policy recommendations as part of a strategy to fundamentally reset the United States' economic and technological competition with the People's Republic of China (PRC). The Report is noteworthy because it was issued on a bipartisan basis by the Select Committee and encapsulates the growing support in Congress across the political spectrum for a stronger US stance against what the committee views as unfair and adversarial Chinese economic competition.

In this Legal Update we summarize the Select Committee’s findings and recommendations.

FINANCIAL REGULATORY POLICY RECOMMENDATIONS

While the Report’s recommendations will be of interest to a wide range of industries, they may be particularly useful to the financial sector, potentially foreshadowing the next phase in the ongoing shift in US financial regulatory policy with respect to the PRC. The Select Committee has been especially focused on stemming US investment in the PRC, which the Report states “creates systemic risks for U.S. financial stability” and “puts U.S. investors and markets at risk.” The Report does not call for a complete ban on outward-bound investment to the PRC but instead recommends a series of more practical and likely more attainable policy changes, including:

• The codification and expansion of the Biden Administration’s Executive Order¹ on outward-bound investment to “restrict investment on a sectoral basis” and cover areas related to emerging technologies, military capabilities, and human rights abuses.
• The adoption of legislation to require large public companies to disclose key risks related to the PRC, including “expected effects of a sudden change in market access”—specifically, “details regarding material ties to the CCP, supply chain, profit from the PRC, and the company’s preparation for and ability to withstand the sudden loss of market access.”
• The adoption of legislation to require private equity firms and ERISA retirement plans to “disclose their continuing investments in companies based in or controlled by foreign adversaries.”
• The adoption of legislation to prevent the federal government’s thrift savings plan from investing in PRC companies that are subject to US human rights action and or prohibited by the Uyghur Forced Labor Prevention Act.
• Stronger enforcement of the Holding Foreign Companies Accountable Act and the adoption of the “Holding Chinese Companies Accountable Act,” which would require the US Public Company Accounting Oversight Board to inspect the audits of Chinese-based companies every year and allow the Securities and Exchange Commission to remove non-compliant companies from US exchanges.
• The adoption of legislation to allow state and local governments to divest their assets from the PRC.
• The adoption of legislation to “tax capital gains and dividends made from investing in the PRC” at ordinary income tax rates.
• The Federal Reserve stress testing US banks for their ability to withstand the sudden loss of market access to the RPC.

OTHER SIGNIFICANT POLICY RECOMMENDATIONS

The Report also seeks to chart a new path for the US-PRC relationship through other significant policy recommendations set out in a three-pillar strategy. We provide below an overview of the Report’s three pillars and the Select Committee’s corresponding key findings and recommendations.

Pillar I: Reset the Terms of the US Economic Relationship with the PRC

The Select Committee found the PRC’s economic system incompatible with the obligations of the World Trade Organization (WTO), noting that the PRC’s accession to the WTO has fundamentally undermined and impaired the benefits that the United States and many other economies expected. The Select Committee also found that US national security and financial risks associated with US investment in PRC companies remain unknown and that the PRC uses an intricate web of industrial policies to increase US dependency on PRC imports.

To remedy these findings, the Select Committee recommends several measures to Congress, including:

• Moving the PRC to a newly created tariff column.
• Renewing the China Safeguard mechanism, under Section 421, which expired in 2013, by amending the Trade Act of 1974.
• Ensuring that the United States’ existing trade agreements with third-party countries, including the US-Mexico-Canada Agreement, have strong rules of origin.
• Directing the US Trade Representative (USTR) to bring a comprehensive WTO dispute against the PRC’s subsidization, support for state-owned enterprises, and non-market economy policies and practices.
• Directing the USTR to publish a full assessment of the PRC’s compliance with the “Phase One” agreement and remedies necessary to address any areas of non-compliance.
• Passing legislation, including amending the Tariff Act of 1930, the COOL Online Act (H.R. 6299), and the Reveal Risky Business in China Act (H.R.4451).
• Directing the Biden Administration to implement Section 232 of the Trade Expansion Act to impose remedies on products or components from a country of concern while limiting applicability to allies and partners.
• Directing the Department of Commerce to impose import duties on foundational (i.e., legacy) semiconductors from the PRC.
• Updating Section 337 of the Tariff Act of 1930 to better address the threat from unfair PRC trade practices.

Pillar II: Stem the Flow of US Capital and Technology Fueling the PRC’s Military Modernization and Human Rights Abuses

The Select Committee found US investors support the PRC’s defense industry, emerging technology companies, and human rights abuses. The Select Committee also found that US export controls have been slow to adapt to rapid changes in technology, that the Committee on Foreign Investment in the United States (CFIUS) needs additional authorities and tools to effectively evaluate inbound investments from the PRC, and that the PRC exploits the openness of US research.

To remedy these findings, the Select Committee recommends several measures to Congress, including:

• Passing legislation to prohibit investment in PRC companies included on key US government sanctions and red-flag lists.
• Requiring the Department of Commerce to adopt “country-wide” controls for specific technologies going to foreign adversaries.
• Expanding the definition of “critical technology” in the Foreign Investment Risk Review Modernization Act (FIRRMA) (P.L 115-232).
• Expanding the list of sensitive sites over which CFIUS has jurisdiction.
• Building on cross-agency disclosure guidance produced under National Security Presidential Memorandum 33 (NSPM-33) by the National Science Foundation (NSF) to mitigate research security risk.

Pillar III: Invest in Technological Leadership and Build Collective Economic Resilience in Concert with Allies

The Select Committee found the United States is falling behind in the “race for leadership in certain critical technologies.” The Select Committee also found that the PRC is gaining on the United States in the race for global talent, that the United States should work with US allies to increase US exports and reduce supply chain reliance on the PRC, and that the United States is too dependent on the PRC for critical mineral imports and pharmaceutical and medical device supply chains.

To remedy these findings, the Select Committee recommends several measures to Congress, including:

• Establishing a mechanism where the Department of Defense, in coordination with the Department of Energy and other relevant agencies, has the resources to fund early-stage, capital-intensive emerging technologies with national security applications.
• Establishing a work authorization program for foreign nationals from partner countries that are part of Five Eyes or the Quad and from select NATO countries and who have a background in critical and emerging technology.
• Enacting legislation setting negotiating priorities and a process for congressional consideration of comprehensive bilateral trade agreements, starting with Taiwan.
• Passing H. Res. 270, which provides that the United States should negotiate strong, inclusive, forward-looking, and enforceable rules on digital trade and the digital economy with allies and partners.
• Authorizing and appropriating a critical mineral Resilient Resource Reserve.
• Requiring the Food and Drug Administration to track the supply chains of key pharmaceutical products.
• Reforming the International Development Finance Corporation.

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The above is only a summary of the Select Committee’s findings and recommendations. Those who may be impacted by the Select Committee’s recommendations should review the full report.

 

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¹ Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern | The White House (See also our Legal Update on the executive order.)