CFIUS reform will assist in countering the long-term national security threat that China poses

For the sake of our future, we must recognize that China – not Russian, not Islamic radicalism or Iran – is the greatest long-term threat to our national security. It will take a generational change in our thinking on security, intelligence, defense, and economic policies to do this, but we must reorder our priorities before it’s too late.

And while I don’t think China has the ability to destroy us on their own, they may if we help them and right now we are.

{mosads}Most Americans are accustomed to the phrase “Made in China.” For a generation, we associated this phrase with cheap and disposable items; generally safe so long as you don’t eat it or feed it to your dog. And many of us remember our parents looking at various Chinese products and musing, “You know, we used to make these things here.”

Perhaps this perception is why most Americans don’t associate Made in China 2025 with anything more than a shrug or a bit of resentment — the next corporate rebrand of a product that once declared “Made in America.”

But Made in China 2025 isn’t about teddy bears and TVs. It’s not about moving China up the manufacturing food chain in gas station trinkets. It’s about something much more important. And we ignore it at our peril.

Made in China 2025, and more strategically One Belt One Road, is China’s ambitious and specific goal toward become the world’s greatest power. It’s a strategic plan designed to acquire advanced research and technologies that will allow China not just to challenge the U.S. but to supplant the United States as the single dominant world power. It’s about intellectual theft, deceitful trade practices, military intimidation, economic espionage, military power, predatory pricing, currency manipulation, Confucian Centers serving as higher education centers of IP theft and financial surveillance.

And we haven’t shown any seriousness in challenging them in these efforts. In fact, we are helping them. Which is why the recent National Defense Authorization Act and its reforms in foreign investment is so important.

China’s success in Made in China 2025, particularly their use of venture capital to jumpstart their own research and technology, is striking.  Let me give a brief example. In early 2017 a revolutionary California startup was forced into bankruptcy. Although ATopTech’s products were solving difficult technological barriers in traditional chip manufacturing, they were unable to survive a protracted legal battle. The bankruptcy sale attracted a variety of offers from direct competitors and venture capitalists. But the highest bid, quadrupling the others, came from a Chinese linked software firm. This proposal was noticed by government analysts in Washington, D.C. who recognized ATopTech’s product as potentially “critical to defense systems and U.S. military strength.” And yet, despite the government’s concerns with letting this technology get into the hands of an adversary, the transfer happened.

This is just one example where we are selling the “crown jewels of U.S. innovation.”

One of the reasons these transactions are receiving insufficient scrutiny is because the Committee on Foreign Investment in the United States (CFIUS), the organization responsible for reviewing such investments, has neither the resources nor the mandate to step in. The fact that CFIUS relies on outsiders and various government agencies, some with conflicting priorities, is also part of the problem.

The obviousness of technologies which have national security implications has eroded over the last 40 years. Blockbuster deals, such as Broadcom’s blocked bid for Qualcomm and Dubai Ports World’s attempt to acquire management leases to six U.S. ports, attract significant attention. Today however, lines of code, data and new techniques in manufacturing make up some of the most critical national security interests. Recognizing the value of these technologies, China has attempted to over-run CFIUS through sheer volume. According to the Government Accountability Office, the number of Chinese transactions reviewed by CFIUS has grown by almost 700 percent from 2011 to 2016. As the following chart illustrates, Chinese venture capital investment in the U.S. is on a similar rise.

FIRRMA will expand CFIUS jurisdiction to certain non-FDI equity investments. Our latest analysis shows why that is timely: Chinese venture capital investments in the US will reach new record levels in 2018 due to a big jump in biotech deals and shift to later-stage funding rounds pic.twitter.com/VskzkkxC9B

— Thilo Hanemann (@ThiloHanemann) July 23, 2018

Recognizing the increasing risk, Congress included in this years National Defense Authorization Act the Foreign Investment Risk Review Modernization Act (FIRRMA).

This legislation gives CFIUS new resources and enhanced authorities to establish stricter scrutiny of foreign investments while still maintaining the incentive for the private sector to push the envelope in research and development. It also allows an expedited process to consider transactions that don’t need a full-blown review while allowing the Intelligence Community additional time to complete the analysis of transactions that may pose a threat.

I wish I could say that CFIUS reform will entirely solve the threat of China’s global ambitions. The truth is, it won’t. But it’s clear that Congress took seriously its obligation to balance national security needs against our culture of free and open investment. And at least we can say that we tried to hinder China’s ability to use us as a resource in our own demise.

Stewart is chairman of the Department of Defense Intelligence and Overhead Architecture Subcommittee.