Report: U.S. Government Must Do More to Protect Technology from China

A Cellebrite engineer explains the technology used to unlock smartphones and pull data
AFP/Jack Guez

Politico published the results of a six-month investigation on Tuesday that concluded the U.S. Committee on Foreign Investment in the United States (CFIUS) is not doing enough to protect American technology from foreign governments, especially China.

More specifically, the report asserts that CFIUS is not powerful enough to manage global trade to the degree necessary for protecting U.S. technology from China’s relentless appropriation efforts, which employ all manner of weapons – from swooping into bankruptcy courts to buy ailing companies with crucial products to venture capital investments that give Beijing a direct pipeline to Silicon Valley. Even companies whose products have important national security ramifications can be scooped up by China without much intervention by CFIUS.

Although President Donald Trump’s 2017 National Security Strategy mentioned protecting American tech and strengthening CFIUS as priorities, Politico’s report contends that the focus on defending technology was lost in the fireworks over the Trump administration’s “trade war” with China but then adds the White House has begun “exploring what more it could do on its own” by asking the Treasury Department to provide a list of possible Chinese investment restrictions. This would seem to undermine the point that the Trump administration dropped the ball on tech by obsessing over how many soybeans and pigs China is buying from America.

Politico is a bit late to the party, but it is good to see more attention being paid to the problem of technology transfer. Media coverage has previously been muted, hostile to the allegedly paranoid or isolationist tendencies of those who voiced serious concerns or oversimplified to the point that the public thinks this is all about Chinese hackers stealing blueprints from corporate computers.

Last week, Reuters reported on the explosion of Chinese “accelerators” in Silicon Valley – in essence, a program to identify and finance promising American tech startups and bring them to China.

“The accelerators work with companies in fields including artificial intelligence, autonomous driving technology, big data and health sciences,” the report explained. “They often help U.S. companies set up joint ventures or licensing agreements to enter China – the type of deals some U.S. policy hawks have criticized as conduits for transferring intellectual property.”

“Our intellectual property is the future of our economy and our security. China’s government has clearly prioritized acquiring as much of that intellectual property as possible. Their ongoing efforts, legal or illegal, pose a risk that we have to look at very seriously,” Sen. Mark Warner (D-VA), the Senate Intelligence Committee vice chairman, told Reuters.

Big Tech is not entirely on board with the call for strengthening CFIUS. In March, tech firms successfully lobbied Congress to relax elements of the legislation to make CFIUS more powerful, arguing that the enhanced agency could gum up the works of international trade by reviewing too many deals unnecessarily and that other agencies already conduct some of the oversight that Congress wanted CFIUS to perform.

Critics of the bill have also argued that strengthening CFIUS might interfere with the competitiveness of American companies at the very moment Beijing is spending billions to capitalize Chinese tech companies. The trick is to protect America’s tech inventory without hampering international competition, just as a store might be protected so thoroughly from shoplifters that legitimate customers find shopping there inconvenient and take their business elsewhere.

The Wall Street Journal summarized the current state of the legislation last Thursday:

The bill—which has prompted debate among lawmakers and U.S. businesses active in China—would affect both foreign firms seeking deals in the U.S. and American companies doing business abroad by tightening the processes for vetting inbound and outbound investment.

The congressional effort to strengthen U.S. defenses would expand both the remit and resources of the Committee on Foreign Investment in the U.S. CFIUS is an interagency committee that reviews proposed foreign takeovers of U.S. businesses. It can advise the president to block them on national-security grounds.

The proposed legislation spells out CFIUS’s authority to vet the purchase or lease of real estate near sensitive U.S. facilities, and its right to review any deal structured to evade its jurisdiction, such as transactions that use shell companies to obfuscate the would-be buyer’s ownership, for example.

The latest version of the bill seeks to settle the question of how Washington would monitor the overseas transactions of U.S. companies, a significant source of contention from the business community. In a compromise, the revised bill, according to drafts circulated as recently as Wednesday night and reviewed by The Wall Street Journal, would have the government vet domestic and overseas transactions through separate processes.

The alternative procedure for approving joint ventures with China would involve the Commerce, Defense, Energy, and State Departments as well as the intelligence community, and would ostensibly be more transparent than the secretive proceedings of CFIUS.

Supporters of this approach claim the interagency process will actually provide better protection than any version of CFIUS could, by bringing more resources and more varied expertise to bear. Critics worry that tech companies eager for Chinese money squeezed too many concessions from legislators, while the Trump administration has come to view tech protection as one issue among many to be negotiated with Beijing, rather than an absolute imperative.

“With Chinese foreign investment, the strategy is largely technology and knowledge extraction. They buy up the company and suck out the technology,” Robert Atkinson of the Information Technology and Innovation Foundation warned the Financial Times on Monday. Any legislation or body of regulations that fail to interfere with that process will prove insufficient.

.