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Sector-Based Outbound Investment Bans Preferable to Individual Sanctions, Experts Say

Policy experts and former government officials speaking on a panel this week mostly agreed that the U.S. should impose sectoral-based outbound investment restrictions on China rather than individual investment sanctions on specific entities, saying a sector approach would be much simpler and more effective. And although some companies say it will be too challenging to comply with a broad investment ban on sensitive Chinese technology sectors, one expert said it will be easier than the financial industry is letting on.

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Derek Scissors, a senior fellow with the American Enterprise Institute, said the U.S. should pinpoint certain Chinese sectors “that we think are critical” and ban investments in them. Unlike a sanctions-based approach, “that doesn't require a lot of bureaucracy,” Scissors said during a Feb. 13 event hosted by AEI. “It's incredibly simple,” as long as Treasury adequately defines the sectors it bans.

But he also stressed that the U.S. doesn’t yet have enough information to assess which Chinese sectors would be most impacted by U.S. investment restrictions, even as the Treasury Department crafts regulations to potentially ban or require notifications for investments in China’s artificial intelligence, semiconductor and quantum sectors (see 2311140013).

“I would like to know the amount of U.S. investment in Chinese quantum computing in 2020 and 2023. That's not an analytical model, that’s two data points,” Scissors said, calling the issue “so basic.” If “there's one silver lining, I guess, even a small step forward would really help us a lot, because we know so little,” he said.

Bryan Burack, a senior policy adviser at the Heritage Foundation and a former staff member on the House Foreign Affairs Committee, said he believes the Biden administration and Congress are eventually headed toward a sector-based approach, even though some Republicans are still pushing for a sanctions approach. Rep. Patrick McHenry of North Carolina, the top Republican on the House Financial Services Committee, has said existing sanctions and export control measures are sufficient to target Chinese military and technology companies (see 2311300023), and the issue has also been debated among other lawmakers (see 2401180067).

Burack called a sanctions-based approach “inherently backwards looking.” The U.S. should be trying to stop “potentially problematic” Chinese military companies “from developing technology to begin with,” he said, “not to punish them after they've done so.”

Others noted that a sanctions-based approach, as opposed to a blanket investment ban, would require Treasury to constantly search for Chinese entities with ties to the country’s military and make decisions on whether to penalize them. Ivan Kanapathy, a senior nonresident associate with the Center for Strategic and International Studies and a former National Security Council official, said Treasury already has proven that its decision-making process is too slow for an entity-specific approach.

He pointed to Treasury's Non-Specially Designated Nationals Chinese Military Industrial Complex List, which includes a list of entities subject to certain limited investment restrictions. “We're stuck with this list that Treasury hasn't updated since 2021,” Kanapathy said. “And frankly, they tend to not want to [update it]. It’s not in their interest based on their constituency, which is a lot of Wall Street folks.”

In public comments to Treasury, some companies said it may be too challenging to determine whether a company in China would be subject to a sector-specific investment ban (see 2310050035). U.S. businesses have made similar points for years, saying opaque ownership structures and a lack of public information sometimes makes it difficult to find detailed information about a Chinese customer.

“I don't really believe that,” Scissors said, adding that the financial industry works “very hard on knowing who [they’re] dealing with, and that's why these companies don't want any oversight, because it's going to expose that they know exactly who they were giving money to -- not every time, but most of the time.”

He also noted that companies sometimes make honest mistakes, or are tricked by a Chinese firm intentionally trying to evade U.S. restrictions. He said those companies shouldn’t face criminal penalties.

“We should absolutely not be criminalizing corporate mistakes,” Scissors said. “When somebody says, ‘I thought this is who I was dealing with and it wasn't,’ you don't criminalize that, you don't punish the company for it.”

“Now, if they do it four times in a row,” he added, “then you start getting the idea that they're doing this on purpose.”