The Strategic Competition Act of 2021,1 accredited by the Senate Foreign Relations Committee on April 21, 2021, alerts continued bipartisan consensus to orient U.S. coverage in direction of aggressive motion to counter China. Given the broad bipartisan help in Washington to handle China’s malign actions, the invoice will doubtless cross the Senate and House of Representatives. This invoice is a helpful barometer of congressional sentiment in direction of China and will information the Biden administration’s future China-related actions. The invoice acknowledges that U.S. skill to successfully compete with China requires home help for aggressive industries and engagement with worldwide companions to counter Chinese affect in worldwide establishments and on worldwide requirements. The bipartisan help for the invoice alerts that Congress will proceed a confrontational method to U.S.-China relations.
If enacted, the invoice would direct the Executive department to impose additional sanctions in response to China’s actions in Xinjiang, bolster oversight of overseas items and contracts to U.S. universities and faculties, and assist small- and medium-sized U.S. corporations diversify their provide chains outdoors of China. The invoice additionally consists of broader measures resembling elevated navy spending within the Indo-Pacific, authorizing funds to advertise democracy in Hong Kong, and establishing a program to assist Indo-Pacific nations develop infrastructure to counter China’s Belt and Road Initiative. The invoice needs to be considered in tandem with the Endless Frontier Act,2 which was referred to the Senate Committee on Commerce, Science, and Transportation on April 20, 2021. The Endless Frontier Act would considerably improve federal funding in home science and expertise analysis, provide chain resiliency and diversification, disaster response, and jobs coaching to permit the United States to compete extra successfully with China. The Strategic Competition Act and the Endless Frontier Act are half of a broader U.S. strategic realignment in direction of the Indo-Pacific that goals to leverage worldwide help to discourage Chinese malign actions, whereas additionally making the mandatory home investments in schooling and analysis in order that the U.S. maintains a aggressive edge in crucial sectors of the longer term.
- The Strategic Competition Act consists of the next key parts:
- The invoice would require the Committee on Foreign Investment within the United States (CFIUS) to evaluation the nationwide safety implications of sure overseas items or contracts to federally-funded universities and faculties. CFIUS would be capable of evaluation these items or contracts in two circumstances: (1) people who relate to crucial applied sciences and supply the overseas individual with entry to materials nonpublic technical data possessed by the college or faculty; and (2) people who embody sure circumstances that give the overseas individual management over the establishment. U.S. establishments of larger studying have expressed issues that these provisions would stifle innovation and cut back vital sources of funding.
- The invoice would require the Executive department to impose sanctions towards sure Chinese entities which can be decided to be engaged in compelled labor and different actions in Xinjiang. Specifically, the invoice would require the President to freeze the belongings of individuals which can be engaged in: (1) critical human rights abuses in reference to compelled labor in Xinjiang; and (2) systematic rape, coercive abortion, compelled sterilization, or involuntary contraceptive implantation insurance policies and practices within the area. The invoice displays congressional issues that extra aggressive implementation is required counter China’s malign actions and provides to prior measures to handle compelled labor and human rights points in Xinjiang such because the U.S. Customs and Border Protection’s January 2021 Withhold Release Order3 banning cotton imports produced within the area.
- The invoice additionally locations a highlight on abuses dedicated by Chinese corporations which can be energetic in U.S. inventory exchanges. The invoice would require the Executive department to arrange an annual report that publicly identifies Chinese corporations listed or traded on U.S. inventory exchanges which have contributed to actions that undermine U.S. nationwide safety, critical abuses of internationally acknowledged human rights, or considerably elevated monetary danger publicity for U.S.-based buyers. The laws features a non-exhaustive checklist of components for identification, notably, whether or not the corporate has didn’t comply absolutely with Federal securities legal guidelines, together with audits by the Public Company Accounting Oversight Board (PCAOB). The invoice could also be a precursor for added congressional motion however doesn’t impose particular sanctions or countermeasures for listed corporations. The invoice would construct on the Holding Foreign Companies Accountable Act, enacted in 2020, which bans state-owned corporations from U.S. inventory exchanges if the PCAOB is unable to audit the issuer’s public accounting agency for 3 consecutive years, and the buying and selling bans imposed by the Trump administration beneath Executive Order 13959.4 The U.S. Department of the Treasury’s Office of Foreign Assets Control has delayed the implementation of the buying and selling ban till May 27, 2021, whereas the Biden Administration undertakes a evaluation of the Trump Administration’s China-related insurance policies.5
- The invoice additionally consists of measures to assist U.S. corporations diversify their provide chains outdoors of China. The invoice would authorize the Secretary of State to determine a program for U.S. embassies to contract with consultants to assist micro-, small-, and medium-sized U.S. corporations with provide chain administration points associated to China. The consultants could assist U.S. corporations exit the Chinese market, relocate manufacturing services outdoors of China, diversify enter sources to areas outdoors of China, and establish various markets for manufacturing or sourcing outdoors of China.
- This invoice will be considered as a counterpart to the Endless Frontier Act, a proposed invoice that might considerably improve federal funding in science and expertise analysis, provide chains, and coaching to higher compete with China. Among different issues, the Endless Frontier Act would supply the National Science Foundation with $100 billion over 5 years and would prioritize analysis and funding in ten key areas, together with synthetic intelligence, excessive efficiency computing and semiconductors, quantum computing, robotics and automation, biotechnology, cybersecurity, and superior supplies. The Endless Frontier Act would additionally present the Department of Commerce with $10 billion over 5 years to designate at the very least ten regional expertise hubs in addition to set up a Supply Chain Resiliency and Crisis Response Program to observe provide chain vulnerabilities and supply investments to diversify provide chains in crucial merchandise.
Proposed Expansion of CFIUS Jurisdiction
The Strategic Competition Act makes use of the CFIUS course of to handle two nationwide safety issues: (1) issues associated to entry by overseas individuals to crucial applied sciences at U.S. universities and faculties and (2) issues associated to overseas affect in academia. U.S. policymakers proceed to be involved6 with China’s exploitation7 of the open analysis and improvement environments of U.S. larger schooling establishments. This comes on the heels of an October 2020 U.S. Department of Education report8 that discovered that U.S. universities and faculties routinely didn’t adjust to a longstanding authorized requirement9 to report items or contracts from overseas individuals at or above $250,000 in worth.
- The invoice would require “institutions of higher education”10 to submit necessary declarations for sure overseas items or contracts that relate to crucial applied sciences. Covered transactions would come with contracts or items11 that: (1) are equal to or higher than $1 million in worth within the mixture over a two-year interval and (2) relate to analysis, improvement, or manufacturing of crucial applied sciences12 and supply the overseas individual with potential entry to any materials nonpublic technical data within the possession of the establishment. In addition, the invoice would broaden the membership of CFIUS to incorporate the Secretary of Education within the case of lined transactions involving an establishment of larger schooling. To implement these proposed modifications, the invoice would direct CFIUS to conduct a pilot program to evaluate strategies for implementing the evaluation of these transactions, which might account for any burdens on establishments of larger schooling. This pilot program is anticipated to be revealed within the Federal Register as much as 270 days following the date of the invoice’s enactment.
- It would additionally broaden the flexibility of CFIUS to evaluation controlling items to or contracts by overseas individuals to U.S. universities and faculties. Covered transactions would even be outlined to incorporate a “restricted or conditional gift or contract,” as outlined within the Higher Education Act of 1965, that establishes management over the establishment of larger schooling. Colleges and universities would want to evaluate whether or not to submit a joint voluntary discover and contemplate dangers associated to CFIUS actions to mitigate or prohibit the contract or present.
- The invoice would promote transparency with respect to overseas involvement within the U.S. tutorial analysis group. The invoice would require CFIUS to report on “whether there are foreign malign influence or espionage activities directed or directly assisted by foreign governments against institutions of higher education aimed at obtaining research and development methods or secrets related to critical technologies.” It would additionally make specific the flexibility of CFIUS to contemplate the ways in which a overseas individual’s contracts with and items to U.S. universities or faculties could restrict tutorial freedom within the United States and this consideration is more likely to be an added focus of companies. This would seem to handle longstanding issues13 associated to the Chinese authorities’s Confucius Institute Program. In reality, the FBI has highlighted that overseas adversaries could use funding and donations to universities to “place stipulations on how the [academic] programs or centers function or install its own recruits in positions with little or no university oversight.”14
- Universities and faculties can anticipate that CFIUS may impose circumstances on delicate grants and contracts to mitigate perceived nationwide safety dangers or require cancellation of a grant or contract. While it’s presently unclear how CFIUS will impose mitigation on grants and contracts, universities and corporations ought to look to present CFIUS mitigation for potential steering on what mitigation could seem like within the context of contracts and items. This implies that CFIUS mitigation will doubtless embody entry restrictions on delicate expertise or data and even the outright prohibition of such items or contracts in the event that they pose a excessive danger to nationwide safety.
- There are issues, nevertheless, about destructive penalties of the extra CFIUS mandate and implications for college analysis and innovation. On April 20, 2021, representatives from the U.S. larger schooling group wrote a letter to the Chairman and Ranking Member of the Senate Foreign Relations Committee strongly opposing the proposed growth of CFIUS’ jurisdiction.15 Among different issues, the letter states that the growth of CFIUS jurisdiction would disincentivize philanthropic giving, injury U.S. analysis and financial competitiveness, and burden CFIUS with a excessive quantity of anticipated necessary filings. The letter additionally casts doubt on the technical experience of the Department of Education to evaluate dangers associated to crucial applied sciences.
Implications for Private Sector
- Legislative developments for the invoice will present a helpful barometer of congressional sentiment in direction of China and information in direction of attainable future China-related actions. The Senate Foreign Relations Committee accredited the invoice by 21-1 on April 21, and the invoice will doubtless be despatched to the complete Senate for consideration within the coming weeks as half of a push on China-related laws by Senate Majority Leader Schumer of New York.16 Although the expanded CFIUS jurisdiction is unlikely to influence overseas buyers, the invoice needs to be considered within the broader context of the U.S.-China relationship and the potential for reciprocal actions by China. It may sign future actions by the Biden administration to each counter China’s affect and to remain forward of congressional developments.
- If enacted, CFIUS selections, to the extent made public, may also assist inform corporations of explicit CFIUS focus areas or delicate analysis and improvement. University and faculties could have much less incentive to take care of confidentiality round CFIUS selections involving potential overseas funding than corporations present process the CFIUS course of. If universities and faculties present higher transparency round CFIUS selections, it could present helpful indications of CFIUS priorities with respect to primary analysis and significant applied sciences.
- The invoice additionally locations a highlight on abuses dedicated by Chinese corporations which can be energetic in U.S. inventory exchanges. Some Chinese corporations listed on U.S. inventory exchanges have beforehand engaged in fraudulent actions in addition to actions opposite to U.S. nationwide pursuits, resembling Luckin Coffee, which in 2019 fabricated its gross sales figures by about $310 million,17 or Weibo Corporation, which works beneath Chinese authorities course to censor posts on its running a blog platform.18 Congress has continued to ship sturdy alerts that it’s conscious of and actively scrutinizing the monetary and nationwide security-related dangers posed by U.S.-listed Chinese corporations. As a outcome of this elevated congressional scrutiny, U.S. buyers could want to assess their danger urge for food with regard to proudly owning shares of Chinese corporations listed within the United States.
- The invoice would additionally embody measures to assist U.S. corporations diversify their provide chains outdoors of China. The COVID-19 pandemic uncovered U.S. reliance on Chinese corporations for crucial pharmaceutical elements and associated medical gear, which in flip spurred a bipartisan effort to evaluation U.S. provide chains with China for vulnerabilities and to extend assets to reshore crucial industries. As demonstrated by the Biden Administration’s current govt order on provide chains, the chief department is presently reviewing provide chains in different sectors which can be deemed essential for nationwide safety, resembling semiconductors, high-capacity batteries, and significant minerals, amongst others.19 This provide chain evaluation is happening alongside U.S. designations of Chinese entities for malign actions together with compelled labor practices, expertise switch, and espionage,20 which creates extra regulatory and reputational dangers for U.S. corporations that preserve provide chains in China. As a outcome of this more and more contentious U.S.-China relationship, corporations which can be concerned within the manufacturing of “critical goods and materials”21 as outlined within the govt order could want to contemplate whether or not Chinese involvement of their provide chain could elevate U.S. nationwide safety or reputational issues, and will wish to contemplate consulting with third-party consultants to conduct applicable due diligence.
- Market members ought to take observe of the dangers arising from a broader decoupling of the U.S. and Chinese economies, which parallels comparable efforts by Australia, Japan, the United Kingdom, and Canada. The invoice’s measures to crack down on delicate expertise transfers to China, its broadened sanctions designation authorities for human rights abuses, its measures aimed toward Chinese corporations listed on U.S. inventory exchanges, and its efforts to diversify U.S. corporations’ provide chains highlights a continued and rising rift between the U.S. and China. U.S. allies such because the United Kingdom22 and Canada23 have equally imposed sanctions on Chinese entities for human rights abuses in Xinjiang, and Australia is reportedly contemplating imposing sanctions24 on Chinese entities for a similar practices. Investors needs to be conscious that these measures could lead to reciprocal actions by China that additional exacerbate U.S.-China relations in addition to relations between China and U.S. allies.
1 U.S. Senate. Committee on Foreign Relations. “Strategic Competition Act of 2021,” (April 15, 2021), obtainable at https://www.congress.gov/117/bills/s1169/BILLS-117s1169is.pdf.
2 U.S. Senate. Committee on Commerce, Science, and Transportation. “Endless Frontier Act,” (April 20, 2021), obtainable at https://www.congress.gov/bill/117th-congress/senate-bill/1260/text.
3 U.S. Customs and Border Protection. “CBP Issues Region-Wide Withhold Release Order on Products Made by Slave Labor in Xinjiang,” (January 13, 2021), obtainable at https://www.cbp.gov/newsroom/national-media-release/cbp-issues-region-wide-withhold-release-order-products-made-slave.
4 The Executive Office of the President. “Executive Order 13959 of November 12, 2020, Addressing the Threat From Securities Investments That Finance Communist Chinese Military Companies,” (November 12, 2020), obtainable at https://www.govinfo.gov/content/pkg/FR-2020-11-17/pdf/2020-25459.pdf.
5 U.S. Department of the Treasury, Office of Foreign Assets Control. “General License No. 1A, Authorizing Transactions Involving Securities of Certain Communist Chinese Military Companies,” (January 26, 2021), obtainable at https://home.treasury.gov/system/files/126/ccmc_gl1a_01272021_1.pdf.
6 U.S. Department of Education. “U.S. Department of Education Launches Investigation into Foreign Gifts Reporting at Ivy League Universities,” (February 12, 2020), Available at https://www.ed.gov/news/press-releases/test-0.
7 U.S. Senate. Permanent Subcommittee on Investigations. “China’s Impact on the U.S. Education System,” (February 22, 2019), obtainable at https://www.hsgac.senate.gov/imo/media/doc/PSI%20Report%20China%27s%20Impact%20on%20the%20US%20Education%20System.pdf.
8 U.S. Department of Education. “Institutional Compliance with Section 117 of the Higher Education Act of 1965,” (October 2020), obtainable at https://www2.ed.gov/policy/highered/leg/institutional-compliance-section-117.pdf.
9 Section 117 of the Higher Education Act of 1965, 20 U.S. Code § 1011f.
10 i.e., a federally funded faculty or college.
11 The Strategic Competition Act would add definitions of “contracts” and “gifts” to the DPA. “Contract” would imply “any agreement for the acquisition by purchase, lease, or barter of property or services by a foreign person, for the direct benefit or use of either of the parties.” “Gift” would imply “any gift of money or property.”
12 “Critical technologies” is outlined in 31 C.F.R. Part 800.215.
13 U.S. Senate. Permanent Subcommittee on Investigations. “China’s Impact on the U.S. Education System,” (February 22, 2019), obtainable at https://www.hsgac.senate.gov/imo/media/doc/PSI%20Report%20China%27s%20Impact%20on%20the%20US%20Education%20System.pdf.
14 The Federal Bureau of Investigation. “China: The Risk to Academia,” obtainable at https://www.fbi.gov/file-repository/china-risk-to-academia-2019.pdf/view, p. 6.
15 Association of American Universities, Association of Public and Land-grant Universities, American Council on Education, Association of American Medical Colleges. “Letter to Senate Foreign Relations Leaders Opposing Section 138 of the Strategic Competition Act,” (April 20, 2021), obtainable at https://www.acenet.edu/Documents/Letter-Senate-Foreign-Relations-Strategic-Competition-Act-042021.pdf.
16 Steven T. Dennis. “Schumer Set to Move on China Bill with Sprawling Agenda Ahead,” Bloomberg News, (March 25, 2021), obtainable at https://www.bloomberg.com/news/articles/2021-03-25/schumer-set-to-move-on-china-bill-with-sprawling-agenda-ahead?sref=Pw1Mp35R.
17 Weizhen Tan. “Fraud at China’s Luckin is a ‘great morality tale’ for investors, says analyst,” CNBC, (July 6, 2020), obtainable at https://www.cnbc.com/2020/07/06/investing-fraud-at-china-luckin-coffee-fraud-case-warning-for-investors.html.
18 U.S.-China Economic and Security Review Commission. “Chinese Companies Listed on Major U.S. Stock Exchanges,” (October 2, 2020), obtainable at https://www.uscc.gov/sites/default/files/2020-10/Chinese_Companies_on_US_Stock_Exchanges_10-2020.pdf.
19 The Executive Office of the President. “Executive Order 14017 of February 24, 2021, On America’s Supply Chains,” (February 24, 2021), obtainable at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/.
20 Bojan Pancevski. “U.S. Officials Say Huawei Can Covertly Access Telecom Networks,” The Wall Street Journal, (February 12, 2020), obtainable at https://www.wsj.com/articles/u-s-officials-say-huawei-can-covertly-access-telecom-networks-11581452256.
21 “Critical goods and materials” means items and uncooked supplies presently outlined beneath statute or regulation as “critical” supplies, applied sciences, or infrastructure.
22 Government of the United Kingdom. “UK Government announces business measures over Xinjiang human rights abuses,” (January 12, 2021), obtainable at https://www.gov.uk/government/news/uk-government-announces-business-measures-over-xinjiang-human-rights-abuses.
23 Government of Canada. “Canada announces new measures to address human rights abuses in Xinjiang, China,” (January 12, 2021), obtainable at https://www.canada.ca/en/global-affairs/news/2021/01/canada-announces-new-measures-to-address-human-rights-abuses-in-xinjiang-china.html.
24 Natasha Kassam. “Australia is Under Pressure to Implement Magnitsky-Style Laws,” Foreign Policy, (April 2, 2021), obtainable at https://foreignpolicy.com/2021/04/02/australia-china-sanctions-magnitsky-law/.