US Needs ‘Precision’ Controls, Not ‘Meat Cleaver’ Entity List Approach, Former Official Says
A former senior export control official with the Commerce Department told the House Select Committee on China that he thinks the Entity List is ineffective against China, because countries can change their names, establish partnerships, change locations, and because the Entity List is a "meat cleaver" approach, given that listed parties are subject to very strict licensing requirements.
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"I would argue putting companies on the Entity List gives the impression of doing something," Christopher Padilla, Commerce's former assistant secretary for export administration, said during a debate on the best economic policies to respond to Chinese abuses held on Capitol Hill July 19.
Padilla, who served during the George W. Bush administration and now manages IBM's global lobbying operation, was on the more moderate side of the debate. Although he said countrywide export controls are necessary for China, he also said they should be "precision controls," what's often called "higher walls around smaller gardens."
He praised the October action on semiconductor manufacturing equipment (see 2210070049), where the U.S. went first, but Japan (see 2303310031) and the Netherlands (see 2306300028) followed with their own set of restrictions. He said a similar approach is necessary for advanced robotics and for artificial intelligence software, but that coordination would be more difficult, because more countries produce those goods.
"Restrictive and unilateral controls ... erode economic competitiveness," he argued.
Wiley Rein's Nazak Nikakhtar, a former acting undersecretary at the Bureau of Industry and Security during the Trump administration, argued the U.S. "should not be exporting any sensitive technologies at all" to China, and complained that BIS approves 93% of export licenses to China. She said the stipulations BIS places are toothless, as there are no effective end-user checks in China, and military-civilian fusion is pervasive.
Padilla agreed that because of military-civilian fusion, end-user restrictions are no longer appropriate.
Nikakhtar cited an Australian assessment that China is ahead of all competitors in 37 of 44 emerging technologies (see 2306070070), and said that the high fence-small yard approach is too nuanced in the face of this threat. "I'm a realist when I look at the Chinese economy," she said. "You cannot trust the transfer of anything sensitive."
Rep. Rob Wittman, R-Va., echoed her point as he asked Padilla why the U.S. should narrowly restrict technology when China is ahead in 37 of 44 domains. Padilla said chips evolve rapidly, and that while it's justified to restrict the last three or four generations, it makes no sense to refuse to sell semiconductor chips that were designed more than five years ago. Those are now commodity chips, he said, and other countries will happily sell them to China.
Rep. Ritchie Torres, D-N.Y., told Nikakhtar: "You've made a compelling argument that precision export controls are not effective." He asked her if the October semiconductor export controls had been effective. She replied it was a "great first step," but that Chinese companies can incorporate outside of China, so the U.S. needs to keep doing more. She also complained that BIS has given companies export exceptions that last too long.
Padilla then said the administration is apparently about to make the October action "more stringent." BIS is considering tightening restrictions on a broader set of artificial intelligence-related semiconductors as it prepares to finalize its October controls (see 2306290048 and 2307060037).
Padilla and Nikakhtar also argued over the appropriate way to restrict outbound investment in technologies the U.S. wants to lead in -- or at least, stay ahead of China. Nikakhtar said a notifications-only approach -- as suggested by some technology policy experts (see 2305040068, 2304210034 and 2304130034) -- for private equity and venture capital is not enough.
Padilla said that's not what he advocates -- he does think private equity and venture capital investments should not be allowed if they are accompanied by management expertise. But, in terms of broader restrictions on capital flows, he questioned both their effectiveness and whether they are consistent with our free market economy. "Tread very carefully," he warned.
He said controlling technologies is easier than controlling capital, since money is fungible. If there is less U.S. money for AI firms in China, but there is U.S. money invested in furniture factories, computer manufacturers or automobile companies, the Chinese money that would have needed to support expansions in those sectors could flow to the prohibited sectors.
In a brief interview after the debate, Committee Chair Mike Gallagher, R-Wis., said that was an interesting point. "Let's say you have a sector-specific approach, which I favor, how then do you guard against money in adjacent sectors going to the sector or the thing or the company that your'e worried about? I think that's a valid point. And that challenged my thinking a little bit, and so I'm going to have to go and figure out how to mitigate that unintended consequence."
Padilla also argued that the private sector is already turning away from China -- he said foreign direct investment declined 76% in 2022 -- and that with $3 trillion in foreign reserves, China isn't exactly starving for cash.
Rep. Andy Barr, R-Ky., told Padilla during the debate that he liked his argument that money is fungible, and that the U.S. does not stop capital outflows; China does.
He asked Padilla if the U.S. does decide to start restricting capital, should they take an approach more like a reverse CFIUS (Committee on Foreign Investment in the United States) or more like the Office of Foreign Assets Control's Specially Designated Nationals List?
Padilla said regulators prefer something like CFIUS, which he described as: "Bring it all in for review, we'll let you know." But Padilla said it's a better idea to be prescriptive at the start, which could include telling companies: "This is what you're not allowed to do, this is who you're not allowed to invest in."
Nikakhtar, in the closing argument on outbound investment, said U.S. investors are accelerating the demise of capitalism. "This is a zero-sum game," she said. "Every dollar invested in [the Chinese Communist Party] is a dollar away from America and our allies. We are at an inflection point in this country. We either choose America, or we choose the adversary. We cannot do both."