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The China Select Committee proposes comprehensive 2024 U.S. economic strategy for countering PRC | Hogan Lovells

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Introduction

On December 12, the Select Committee on the Chinese Communist Party of the U.S. House of Representatives (the “China Select Committee”) issued a report containing a wide range of over 160 trade, investment, and economic policy recommendations intended to “fundamentally reset the United States’ economic and technological competition with the People’s Republic of China.” Chairman Mike Gallagher (R-WI) and Ranking Member Raja Krishnamoorthi (D-IL) say that their proposal would “reset the terms of our relationship with China, prevent the flow of American capital and technology from supporting its military advances and human rights abuses, and build collective economic resilience in concert with our allies and partners while ensuring American leadership for decades to come.”

The China Select Committee asserts that PRC has been engaged for the past two decades in strategically decoupling from the United States, “reducing its own dependence on the world while increasing America’s dependence on the PRC.” Beijing, they say, has “waged a concerted campaign of economic aggression, violating basic standards of trade, property protection, and human rights.” The United States “now has a choice: accept Beijing’s vision of America as its economic vassal or stand up for our security, values, and prosperity.” By legislating these policy recommendations, Congress would “reset the terms of the U.S.-PRC economic relationship, counter the PRC’s economic aggression, and promote long-term prosperity and resilience.”

Given that the China Select Committee does not have the authority to legislate, however, the China Select Committee will now have to persuade committees of jurisdiction to move legislation implementing these policy recommendations, some of which are privately expressing skepticism about its recommendations. The Committee’s recommendation to impose higher tariffs on China under a new Column 3, which replaced its earlier recommendation to revoke permanent normal trade relations (“PNTR”), is already facing a backlash from leading farm groups. A letter opposing the Committee’s original PNTR recommendation, was signed by 14 farm groups, including the American Soybean Association, Iowa Soybeans Association, Meat Institute, National Corn Growers Association, National Milk Producers Federation, and National Sorghum Producers Federation. Given its heavy reliance on exports and political influence, U.S. agriculture is a perennial target for foreign retaliation in trade disputes. The Committee’s recommendation to impose higher tariffs on U.S. agriculture’s biggest export market is likely to prove especially problematic for Republicans from farm states or districts. The U.S. business community has been muted so far but is less than enthusiastic on many of the Committee’s recommendations, as many U.S. companies have important markets in China or are still heavily dependent on Chinese supply chains. Finally, while the Biden Administration has been conspicuously silent, some of the Committee’s recommendations are likely to heighten bilateral tensions, provoke Chinese retaliation, and end the President’s hopes of stabilizing U.S.-China relations.

Summary

The China Select Committee was established in the 118th Congress and has largely operated on a bipartisan basis, reflecting the consensus on Capitol Hill that the PRC poses a full-spectrum geopolitical threat to the United States. The China Select Committee focuses on diagnosing the economic and security competition between the United States and the PRC.

On 12 December, 2023, the China Select Committee issued a report containing over 160 policy recommendations intended to reset the United States’ economic and technological competition with China, through comprehensive changes to a wide range of U.S. trade, investment and other economic policies. Several recommendations are broad, and in some instances, they might be excessively expansive in addressing the identified concerns, like suggesting the use of sanctions designations. The report lacks justifications for why a specific measure would be effective or tailored to address the concern. Therefore, companies are advised to map and assess how these recommendations could potentially impact their business.

As a body, the China Select Committee does not have legislative authority, meaning that other congressional committees will need to act on the recommendations contained in the report for any of them to become law. As set forth below, it is unlikely that Congress will act on any of the policy recommendations before the Presidential elections in November 2024. That being said, the Biden Administration could implement certain of the policy recommendations through executive action, and we expect a number of these policy proposals to be discussed on the campaign trail.

Among the key policy recommendations in the report are the following:

  1. Revisit China’s PNTR status by moving imports from the PRC to a new tariff column, i.e., a different, higher set of tariffs than U.S. HTS column 1, which “should be phased in over a relatively short period of time to give our economy the time necessary to adjust without avoidable disruptions.”

  2. Consider options for defending U.S. economic interests in response to tariff retaliation, including reallocating tariff revenue to assist U.S. farmers.

  3. Give the Committee on Foreign Investment in the United States (“CFIUS”) the legal authorities, mandates, resources, and focus necessary to address the alleged PRC threat to U.S. technology.

  4. Negotiate, on a bilateral basis, new high-standard comprehensive trade agreements on a bilateral basis, especially with Taiwan, Japan, and Britain (but not plurilateral agreements).

  5. Direct the Department of Commerce to impose import duties on foundational (i.e., legacy) semiconductors from the PRC.

  6. Strengthen safeguards against products made with forced labor in the PRC entering the United States and higher scrutiny around companies linked to the forced labor and currently placed on the Uyghur Forced Labor Prevention Act (“ULFPA”) Entity List.

  7. Strengthen export controls to restrict the flow of critical and emerging technologies to any entity in the PRC and stopping currently uncontrolled dual-use commercial technology from going to the PRC.

  8. Require large U.S. public companies to disclose key risks related to the PRC and the expected effects of a sudden change in market access.

  9. Promote research and development in critical and emerging technologies and strengthening the defense industrial base.

  10. Codify restrictions on U.S. investment in areas related to the PRC’s critical and emerging technologies, military capabilities, and human rights practices on a sectoral basis.

  11. Force divestment of or ban foreign adversary-controlled social media platforms like TikTok.

The China Select Committee report contains three primary pillars. The first pillar, called “Resetting the Economic Terms of U.S.-China Relations,” aims to redefine the terms of the United States’ commercial relationship with China. The second pillar, called “Stem the Flow of U.S. Capital and Technology Fueling the PRC’s Military Modernization and Human Rights Abuses,” focuses on policies to curtail the transfer of capital and technologies that could contribute to China’s military advancement and enable human rights violations. The third pillar, called “Invest in Technological Leadership and Build Collective Economic Resilience in Concert with Allies,” advocates for the policies to reinvest in U.S. technological leadership, emphasizing initiatives for supply chain security and immigration reform; this pillar also emphasizes the importance of developing economic resilience in collaboration with allied nations. While most of the policy recommendations identified in the report would fall under the category of “defensive” trade and economic measures (i.e., polities to “protect” the U.S. domestic market and national security interests), the third pillar features a number of policies with an “offensive” goal of expanding U.S. trade, economic and national security interests abroad.

Pillar one: Resetting the economic terms of U.S.-China relations

The most headline-grabbing recommendation in the report is the first one, which calls for moving imports from China into a new HTS tariff column phased in over a brief period of time. While the report does not reference PNTR, the original draft of this proposal did explicitly call for the China’ PNTR revocation. China was originally granted PNTR status by Congress upon its accession to the WTO in 2000, giving China access on a permanent basis to lower column 1 most favored nation (“MFN”) tariff rates. Since 2018, a substantial percentage of Chinese imports have been subject to higher (non-MNF) tariff rates because of President Trump’s Section 301 tariffs. In the past year, there have been increasing calls from a handful of members and Presidential candidates to consider revoking China’s PNTR status, further increasing tariffs on Chinese imports across the board. Repealing China’s PNTR status, however, would be a dramatic step for nearly all sectors of the U.S. economy. The Committee’s compromise language no longer recommends PNTR revocation but, rather, suggests that Congress should establish new tariff rates, specific to China (i.e., so-called “column 3”). The report does not say what those new tariff rates should be.

To this end, the report’s third recommendation is also important in that it recognizes that China is likely to retaliate against U.S. farmers and other groups because of increased tariffs. To this end, the Committee recommends reallocating tariff revenue to assist those hit by Chinese retaliation and to help them find alternative export markets. It further states that “[a] broader strategy must also be developed to support workers to prepare for a period of increased trade tensions and uncertainty.” While the idea behind the fund is to compensate American farmers for the loss of their biggest export market, this would likely lead to the loss of markets in China that have taken decades to build. Replacing lost Chinese export sales poses a challenge due to the saturation of existing potential export markets, which are either already filled or overshadowed by China’s dominance. Furthermore, the Biden Administration’s shift away from pursuing free trade agreements, where American agriculture has historically thrived, further complicates the situation. In addition, at least in the past, American farmers have been less than enthusiastic about replacing export revenues with government hand-outs, the long-term fate of which is at best uncertain given rising budget constraints.

In pillar I, the report makes a number of other recommendations with respect to trade remedy and trade control measures, targeting diverse industries such as manufacturing, telecommunications, quantum computing, biotechnology, and artificial intelligence. For example:

  1. Section 421, 337 and 232 measures: The report calls for renewing the China Safeguard mechanism under Section 421 of the Trade Act of 1974, which expired in 2013; updating Section 337 of the Tariff Act of 1930; and implementing Section 232 of the Trade Expansion Act to impose remedies on products and components from China.

  2. De Minimis threshold: The report calls for lowering the current $800 de minimis threshold for shipments currently entering the United States duty-free—although it does not specify to what amount.

  3. UFLPA: The report calls for increasing investigative capacity and enforcement and recover lost U.S. revenue by appropriating additional funding for trade enforcement capacities, including the Department of Justice’s Trade Fraud Task Force, which investigates PRC transshipment, evasion of tariffs, trade-based money laundering, violations of UFLPA, and other trade-related crimes. It also calls for passage of the Strengthening the Uyghur Forced Labor Prevention Act (H.R. 4567) to strengthen safeguards against products made with forced labor in the PRC entering the United States.

  4. Social Media Platforms: The report calls for legislation that would force divestment of or, if necessary, ban foreign adversary-controlled social media platforms, like TikTok from the United States.

  5. Drones: The report calls for legation to ensure that all Chinese commercial drone companies and subsidiaries that have proven PRC military ties should be on the Entity List maintained by the Department of Commerce, the 1260H List maintained by the Department of Defense, and other relevant government lists.

  6. Telecom vendors: The report calls for placing Huawei and other high-risk foreign adversary-controlled telecom vendors on the Specially Designated Nationals and Blocked Persons List (“SDN” List) and recommends fully funding “rip and replace” programs that would remove Chinese products from U.S. communications networks.

  7. Legacy chips: The report calls for directing the Department of Commerce to levy duties on traditional chips from China due to the China Select Committee’s assessment that these chips will play a significant role in the upcoming phase of technological competition between the U.S. and China.

  8. Public procurement: the report calls for preventing U.S. government funds, including loans or grant funds, from being used to reimburse the use or purchase of biotechnology machines, products, and services from Chinese biotechnology companies and People’s Liberation Army (“PLA”)-affiliated entities.

Pillar two: Curbing capital and technology flows

The second pillar of the report focuses primarily on enhancing both existing investment screening tools and export control restrictions, noting that such measures are inadequate to address the current threats to U.S. national security.

  1. On the outbound investment side, the China Select Committee calls for:

  • The reinforcement of the Biden administration’s executive order on outbound investments on a sectoral basis.

  • Limiting U.S. investments in entities with direct or indirect ties to the PLA, critical technology sectors, or involvement in forced labor and genocide.

  • Enacting legislation to prevent further U.S. capitalization of Chinese companies under U.S. human rights sanctions or implicated in Uyghur forced labor. This may involve mandating the U.S. Securities and Exchange Commission (SEC) to delist any entities on the UFLPA Entity List.

  1. On the inbound investment side, the China Select Committee calls for:

  • Expanding the definition of “critical technology” in the Foreign Investment Risk Review Modernization Act (“FIRRMA”) (P.L 115-232) to include:

    • “Technologies that directly or indirectly enable those technologies listed as a Critical and Emerging Technology by the White House Office of Science and Technology Policy;” and

    • “Any technologies that are deemed ‘critical technologies’ by either a majority of CFIUS member agencies or a single member agency of CFIUS with concurrence by the Chair (the Treasury Department).”

  • Broadening the scope of sensitive sites falling under CFIUS jurisdiction to encompass all military facilities, officially recognized intelligence sites, national laboratories, defense-funded university-affiliated research centers, and critical infrastructure sites.

  • Extending CFIUS jurisdiction to include greenfield investments from entities associated with foreign adversaries, particularly those involving critical technologies, critical infrastructure, or sensitive personal data, as well as mandating mandatory filings for such transactions.

  • Empowering CFIUS to exercise jurisdiction over all joint ventures with foreign adversary entities, including minority stakes, and making mandatory filings a requirement, as well as introducing a presumption of un-resolvability for transactions involving critical technologies; and

  • Addressing mitigation agreements by compelling CFIUS to block any transaction where national security concerns cannot be resolved through a mitigation agreement within three years.

  1. On export controls side, the China Select Committee calls for:

  • Appropriating additional funding for the Bureau of Industry and Security (“BIS”) of the Commerce Department, which administers U.S. export controls.

  • Utilizing the Biden administration’s October 7, 2022, controls on advanced semiconductors as a blueprint, mandating the Department of Commerce to implement “country-wide” controls for specific technologies destined for foreign adversaries, irrespective of end-use or end-user. The report also calls for establishing a “policy of denial” for export licenses for items falling under National Security (“NS”) controls.

  • Directing the Executive Branch to promptly institute comprehensive controls on critical and emerging technologies for foreign adversaries. This includes, but is not limited to, artificial intelligence, quantum technologies, biotechnology, advanced materials, optics and sensing, advanced energy research, and space-based technologies.

  • Instructing BIS to formulate a cloud computing end-use rule to close a loophole permitting foreign militaries to access U.S.-produced advanced semiconductors through cloud service providers.

  • Extending export-license requirements to subsidiaries of foreign adversary entities listed on the Entity List maintained by the BIS to counter the issue of diversion.

  • Mandating the End User Review Committee (“ERC”) to conduct a comprehensive review of all items classified as commercial items (EAR99) to ascertain their eligibility for inclusion in export controls.

  • Enacting a “policy of denial” for all U.S. technology exports to Chinese firms involved in espionage campaigns against the United States.

  • Rejecting all export control licenses for products and technologies related to the development of supercomputing for Chinese entities engaged in the development, design, or operation of supercomputers.

  • Preventing U.S. government funds, including loans or grant funds, from being used to reimburse the use or purchase of biotechnology machines, products, and services from the Chinese biotechnology and PLA-affiliated entity, the BGI Group, and its subsidiaries.

Lastly, the report calls on the Department of State to establish a new multilateral export control regime that would mirror the Coordinating Committee for Multilateral Export Controls (“COCOM”) of the Cold War era.

Pillar three: Investing in technological leadership and building allied economic resilience

Pillar III of the report is dedicated to ensuring that the United States maintains its position as a global leader in innovative research. The China Select Committee recommends that the United States expand training and development programs for the American workforce and attract global talent to enhance the strength of the U.S. national security innovation base. Additionally, the report emphasizes the imperative for the United States to invest in robust supply chains in strategically critical areas. The other aspect of Pillar III is the Committee’s “offensive” trade strategy of negotiating trade and other economic opportunities for the United States in third countries and with allies It notes that “A united, multinational effort to incentivize, invest in, and jointly restore our economic security is overdue.” This section provides six overall recommendations. The six recommendations are: 1) invest in innovation; 2) acquire new talent through targeted immigration changes; 3) develop a positive economic agenda; 4) create transparency regarding U.S. risk exposure to foreign weaponization of critical mineral dependencies; 5) authorize efforts to reduce dependencies on foreign sources of medical supplies and to secure medical supply chains; and 6) expand the U.S. tool kit for countering the Belt and Road Initiative (BRI).

The China Select Committee proposes adopting the following measures related to the automotive and battery industries:

  1. Resource Reserve: The report calls for establishing a resource reserve for critical minerals to protect American producers from price fluctuations.

  2. Domestic Sourcing: The report calls for the domestic sourcing of critical minerals, including establishing sector-specific agreements to ensure a reliable supply chain. The report calls for domestic rare earth magnet production through enacting the following tax incentives:

  • The Rare Earth Magnet Manufacturing Production Tax Credit Act (H.R. 2849), which would establish a $20 per kilogram tax credit for light and heavy rare earth magnets manufactured in the United States and an enhanced $30 per kilogram credit for magnets manufactured in the United States in which 90% of the component materials are produced domestically.

  • 100% tax credits for substitute non-neodymium-iron-boron (non-NdFeB) magnets and upstream rare earth products (including carbonates, oxides, metals, and alloys).

  1. Domestic-Produced Light and Heavy Rare Earth Magnets: The report calls for incentivizing the development of domestically produced light and heavy rare earth magnets and production capacity by establishing monetary prizes for businesses within the permanent magnet supply chain that are the first to market, located on U.S. or North American soil, 75% or more U.S.-owned, and have measurable success indicators.

  2. Trade Remedy Investigation of Imported Permanent Magnets: The report calls for directing the Commerce Department to initiate an investigation on imported permanent magnets and rare earth elements to determine the extent of dumping and other market‑distortive practices.

  3. Updating the General Mining Act of 1872: The report calls for enhancing certainty and stability for the industry while promoting the development of domestic mineral supply chains and streamlining the regulatory process.

  4. Encouraging battery recycling industry as follows:

  • Requiring that any facility that receives Department of Energy or Department of Defense funding for the processing of black mass shall be restricted from exporting any material from the United States.

  • Leveraging the National Defense Stockpile (“NDS”) through the Annual Materials Plan to support national stockpile purchases of downstream products with a defense application derived from critical minerals, including NdFeB magnet blocks.

  • Strengthening existing authorities that compel the NDS to purchase domestically produced critical materials when such materials are available and cost-effective.

  • Increasing recycling programs for qualified end-of-life products owned by the U.S. government.

  1. Rebuilding the Domestic NdFeB Magnet Production Industry: Improving U.S. workforce capabilities through providing more training programs and including mining and related skills in the criteria for a National Interest Waiver for an EB-2 Visa by the United States Citizenship and Immigration Services.

Looking ahead

It is too early to assess the fate of the recommendations, and next year will be a particularly challenging legislative environment, even for an issue that crosses party lines. Congress has the following options to implement some or all of the recommendations: 1) move an omnibus China bill in 2024 containing some or a considerable number of the Select Committee’s policy recommendations, 2) carry certain key policy recommendations from the proposal in must-pass legislation, such as NDAA, and/or 3) move standalone bills with a subset of key policy recommendations from the proposal.

Under present circumstances, it is hard to see comprehensive legislation on anything moving next year, and the inability of Congress to pass meaningful discrete pieces of standalone legislation is an impediment to the third pathway. The most likely way for some of these proposals to be enacted next year is via the NDAA and Appropriations processes, neither of which is likely to be resolved before Americans head to the polls next November. That being said, the Biden Administration could implement certain of the policy recommendations through executive action. For instance, the Commerce Department could decide to issue amendments to the Export Administration Regulations to implement certain of the export control-related proposals without waiting for Congressional action.

Next steps

We would be pleased to assist you in understanding the impact of any of the Select Committee’s recommendations on your business.



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