Background Press Call on U.S. Efforts to Address U.S. Investments in Certain National Security Technologies and Products

Via Teleconference 2:38 P.M. EDT MODERATOR: Good afternoon, everyone. Thanks so much for joining today's call. As a reminder, this call will be on background, attributable to senior administration officials, and it is embargoed until 5:00 p.m. Eastern today. For your awareness, not for your reporting, on the call today we have [senior administration official], [senior administration official], [senior administration official], and [senior administration official]. We'll follow up shortly after the call with embargoed materials as well, but I will turn it over to [senior administration officials] who will have a few words at the top, and then we'll take your questions. Over to you. SENIOR ADMINISTRATION OFFICIAL: Thanks, Eduardo, and thanks to everybody for joining us today. Since the earliest days of the administration, President Biden has said we are at an inflection point with respect to advanced technologies. And as he's often said, we will see more technological change in the next 10 years than we saw in the last 50. And that has motivated historic investments, mobilizing hundreds of billions of dollars in private investment to rebuild American manufacturing and innovation. The flipside of that, of course, of promoting critical technologies is, of course, protecting them. And recognizing how transformative certain technologies can be, the President directed his national security team to ensure that where we have significant advantages, our world-leading technologies and know-how are not used against us to undermine our national security. That's been the guiding principle for the Biden-Harris administration's export control policies, as well as the Outbound Investment Program that we're glad to announce is being finalized today. As many of you know, we've been working on this approach to address certain outbound investments in sensitive technologies and critical sectors that could undermine American national security for some time. And, in particular, we've been focused on the exploitation of certain intangible benefits that often accompany U.S. outbound investments and that help companies succeed through, for example, enhancing their standing and prominence, providing certain types of assistance, introducing investment and talent networks, opening up market access, and enhancing access to additional financing. The People's Republic of China has a stated goal, as you know: to develop key sensitive technologies that will directly support the PRC’s military modernization and related activities, including weapons development, and it has exploited U.S. investments to develop domestic, military, and intelligence capabilities. So, today, the Treasury Department will issue a Final Rule to implement President Biden's Executive Order 14105, from August of 2023, which is entitled “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern.” The Final Rule provides the operative regulations and a detailed, explanatory discussion regarding its intent and application. And as directed in the President's executive order, the Final Rule does prohibit U.S. persons from engaging in certain transactions involving a defined set of technologies and products that pose a particularly acute national security risk to the United States. The Final Rule also requires U.S. persons to notify the Treasury Department of certain other transactions involving a defined set of technologies and products that may contribute to a threat to the national security of the United States. Covered technologies fall into three categories: semiconductors and microelectronics, quantum information technologies, and artificial intelligence. This set of technologies, we believe, is core for the next generation of military, cybersecurity, surveillance, and intelligence applications, providing what we believe are force multiplier capabilities. The United States already prohibits and restricts the export to countries of concern of many of the technologies and products covered by the Final Rule. This program complements the United States’ existing export control and inbound screening tools by preventing U.S. investment from advancing the development of these technologies and products in countries of concern. The Treasury Department, as [senior administration official] will lay out, has used feedback through the notice and comment process to help design a carefully tailored approach. And we also want to commend Senators Casey and Cornyn, Representatives DeLauro, Fitzpatrick, and Pascrell, as well as Representatives Meeks and McCaul in particular, for their leadership on this issue. The overwhelmingly bipartisan vote on Senators Casey and Cornyn’s Outbound Investment Transparency Act as an amendment to the Senate NDAA demonstrates the shared will of Congress and the administration to meaningfully regulate outbound investments. So, with that, I'll turn it over to [senior administration official] to provide more detail on the content of the Final Rule. Over to you. SENIOR ADMINISTRATION OFFICIAL: Thanks very much. As mentioned today, Treasury is issuing, at the direction of the President, a targeted and narrowly scoped regulation that implements a new program to address this threat to U.S. national security. The Final Rule has clear thresholds and definitions to implement the executive order, and provides detailed, explanatory discussion regarding its intent and application to assist investors and other stakeholders to help them navigate this new program. The Final Rule does two things at its core, as previewed: First, it prohibits U.S. persons from engaging in certain transactions involving semiconductors, quantum, and artificial intelligence. And second, it requires U.S. persons to notify Treasury of certain other transactions involving semiconductors and artificial intelligence. The rule explains in detail the scope of the program, definitions, processes, requirements, and penalties for non-compliance, among other things. Importantly, this rule has benefited from the input of a variety of stakeholders, industry experts, and allies and partners. We had two rounds of formal comments on the rulemaking to implement the executive order, first with the August 2023 ANPRM that was issued alongside the ENO and on which we got 60 comments from stakeholders. Those comments were integral in developing the Notice of Proposed Rulemaking that we issued in June of this year and on which we received more than 40 additional comments, which further informed the development of the Final Rule. Over two-plus years, Treasury, along with the Departments of State and Commerce, have led extensive engagements with stakeholders across the globe. These engagements and our deliberate decision to offer two rounds of public comment have helped us receive insightful feedback that has helped inform the Final Rule to ensure to choose our national security objectives while taking into account the need to be focused, targeted, and clear. Now, I'll briefly discuss a few key aspects of the rule. First, as [senior administration official] suggested, the rule imposes requirements on U.S. persons. This includes prohibiting U.S. persons from engaging in certain transactions with what the rule identifies as covered foreign persons, and requires the U.S. persons to notify the Treasury Department about other transactions that involve covered foreign persons. Second, the Final Rule focuses on specific categories of investment transactions where the target of the investment has a nexus to the PRC and activities involving sensitive technologies and products. In terms of what transactions are covered, the Final Rule applies to, among other things, a U.S. person's acquisition of an equity interest or contingent equity interest, certain debt financing, certain greenfield investments, or investments that could result in corporate expansion and joint ventures. This would include, for example, a U.S. investment firm taking an equity stake in an advanced semiconductor manufacturer in the PRC. It would also cover a U.S. company's purchase of land in the PRC to develop a quantum computing research facility. There are exceptions for certain types of transactions that are less likely to contribute to the national security threat we're worried about. For example, the Final Rule excepts or carves out certain investments by a U.S. person to publicly trade securities and certain investments made by a limited partner in a pooled investment fund, among others. In light of our ongoing conversations with allies and partners on the importance of multilateral efforts in this area, the Final Rule also includes an exception for certain transactions involving a person of a country or territory outside the United States where the Secretary of the Treasury has determined that the country or territory is addressing national security concerns posed by outbound investment. And third, in terms of the technologies and products in scope for the program, the Final Rule provides technical details on the subsets of semiconductors, quantum, and artificial intelligence that are relevant to the program. For example, a U.S. person is prohibited from acquiring equity in a PRC entity that manufactures advanced semiconductors or that is developing an AI system designed exclusively or intended for a military end use. A U.S. person would be required to notify Treasury if they are acquiring equity in a PRC company that manufactures legacy semiconductors. Other examples include direct equity investments by a company or private equity fund into any PRC company that is repurposing an AI model for penetration testing or automated vulnerability detection and exploitation, which would be covered under the rule as either notifiable or prohibited, depending on the design end use and computing power used to train an AI system. In addition to direct investments, indirect investments through a parent of a PRC company that is using AI models to improve targeting, intelligence, reconnaissance, and surveillance, or autonomous weapons systems for military use would be prohibited, as would such indirect investments in a PRC company developing or scaling quantum computers or networks to undermine encryption systems. These technologies can be used for advanced code breaking, the development of next-generation military applications, or offensive cyber operations. Additionally, in general, the rule is based on a U.S. person's knowledge of the relevant facts, rendering a transaction to be covered under the rule. Enforcement and penalties are consistent with the International Emergency Economic Powers Act, or IEEPA, the authority by which the President issued the executive order. The Final Rule takes effect on January 2nd, giving stakeholders time to organize internal infrastructure and processes to ensure compliance with the rule. The lengthy preamble to the rule summarizes the response to the comments received, as well as provides an explanation of the changes since the proposed rule issued over the summer. And let me make two additional and final points before concluding. First, this program is calibrated to help ensure our actions can be supported multilaterally, which is a critical component to maximize its effectiveness and reduce backfill from other investors. The administration has been engaged in extensive conversations with allies and partners on the issue, and we are encouraged to see some allies and partners, including the European Commission and the United Kingdom, exploring the issue of outbound investment security in their own jurisdictions. Second, cross-border investment flows have long contributed to U.S. economic vitality. This targeted action is focused on national security and scope to address specific risks posed by certain U.S. outbound investment, and it maintains our longstanding commitment to open investment. Thanks. And back to you, Eduardo, for questions. MODERATOR: Thank you. We now have time for a few questions. If you'd like to ask a question, please use the “Raise Your Hand” feature on Zoom, and we'll come to you. First up, we'll go to Michael Martina. Q Hi there. Appreciate you doing this. So, what you described sounds quite similar to the notice for proposed rulemaking earlier in the year. I'm wondering if you can detail any specific or key changes that you made to the original notice you said it was used to inform this Final Rule. So, are any changes from earlier? And just an effort at clarification. You know, given the exemptions for publicly traded securities, is it the White House's contention that China has not significantly exploited publicly traded security purchases by U.S. investors to enhance their military or intelligence capabilities? My understanding is that this is perfectly fine - you could trade public securities for Chinese defense companies under this; that’s totally within the rules. Is that correct? Thanks. SENIOR ADMINISTRATION OFFICIAL: So, maybe I'll take the first question, Eduardo. And then, [senior administration official], if you want to chime in on the second from a White House perspective. So, I think while largely consistent with the NPRM in scope and structure, the Final Rule does contain some changes, including with respect to clarity of the rule and thinking forward to compliance. So, for example, we've selected clear technical thresholds for notifiable and prohibited transactions involving AI systems based on the amount of compute power to train an AI system that is open in the NPRM; refine how the rule applies to U.S. persons with investment banking authority and non-U.S. entity, such that it clearly applies only to those who actually exercise authority, for example; and clarifying with respect to compliance and enforcement with the rule. And so, there are a number of areas where we have honed and focused and sharpened the rule since then, and those are some examples. SENIOR ADMINISTRATION OFFICIAL: Thanks for the question, Michael. So, I will say we do have existing authorities to address the threat you were discussing. So, for example, Treasury has authorities - the Chinese military industrial complex sanctions regulations that are intended to address U.S. persons from purchasing or selling publicly traded securities and companies that are involved in this sector, and there are others as well. MODERATOR: Next up, we'll go to the line of Anita Powell. Q Thank you so much. As you guys are surely aware, Elon Musk is developing a data center in China to train the algorithm to work on self-driving cars. That's a lot simpler than I think it really is. But anyway, is this the type of investment that might be restricted under this new rule? Can you just kind of flesh that out for us? SENIOR ADMINISTRATION OFFICIAL: Sure. Happy to start. Look, I don't think we're going to get into hypothetical scenarios, but just reiterate some of the points that I've said. What the rule is really targeted on is capital and the intangibles that can flow from such American capital to go into the development of PRC-based - not just based, but PRC-based entities that are developing these advanced technologies. And so, that's sort of the scope of the rule. And one thing I will mention is that Treasury will provide some guidance and other documents during this interim period before the rule goes online. That’s certainly our intent to help flesh this out. But I think going back to the core tenets of the rule is the best way to answer that. MODERATOR: Next up, we'll go to the line of (inaudible). Q Yeah, hi. Thanks for doing this and for taking my question. Could you talk a little bit more about the engagement with allies and partners in the process of finalizing this rule, specifically which allies specifically you engaged with and whether there are any allies who are going to create similar rules of their own? Thank you. SENIOR ADMINISTRATION OFFICIAL: [Senior administration official], maybe you could start with engagements with allies that you've had, but then maybe, [senior administration official], if we could go to you, you could talk a little bit about the G7 as well. That might be helpful. SENIOR ADMINISTRATION OFFICIAL: Yeah, sure. Thanks. So, in terms of - just to sort of put a topper before going to [senior administration official], we've had a number of engagements with partners and allies, which have resulted in not only sort of technical exchanges about what we are doing and why we're doing it, but also various statements. And [senior administration official] will allude to one of them with regard to the G7, but obviously the European Commission and the United Kingdom have made statements in support of these goals. And so, it's an ongoing process and one that will continue. SENIOR ADMINISTRATION OFFICIAL: Yeah, and just to add on to what [senior administration official] said, this is something that, you know, even from the White House level we engage with our closest allies and partners on. And [senior administration official] referenced, you know, a line in the G7 leaders’ statement from Apulia early this year that refers to, you know, recognizing that appropriate measures designed to address risk from outbound investments are important to complement our existing toolkit. So, it's a conversation that we're frequently having with our key partners and allies. MODERATOR: And we have time for one more. We'll go to the line of Patrick Tucker. Q Hey. Thanks. Patrick Tucker from Defense One. So, when you say the rule prohibits people from acquiring equity in a PRC entity that manufactures semiconductors that might be used in autonomous weapons systems or that might be repurposed for AI penetration testing, is that based on an observation that there are U.S. firms that currently have investments in those areas of autonomous weaponry and penetration testing for China? Or are you making the rule now in anticipation that firms might begin to invest in that sort of thing? I'm trying to get a sense of the degree to which U.S. firms have exposure and have willingly made investments in these areas of the Chinese military. SENIOR ADMINISTRATION OFFICIAL: So let me start, [senior administration official], and then perhaps, [senior administration official], pass it to you. I think what we are worried about, which I would focus on, is the kinds of scenarios that we have outlined, which is supported by data. And one statistic that comes to mind - and I won't get it exactly right, so I’d refer you to the Georgetown Center for - I think it's Technology - that had a statistic that said something to the effect of: For a five-year period, I think between 2016 and 2020 or 2021, 17 percent of investment in Chinese artificial intelligence companies included U.S. participation, and of that, 91 percent was at the venture capital stage. I think if you think about those sets of facts and scenarios, that's the kind of situation that when it comes to certain artificial intelligence capable of impacting our national security, from military intelligence, cyber, other related perspectives, that's what we're concerned about. SENIOR ADMINISTRATION OFFICIAL: Yeah, I would just add to that that part of the motivation, as we were looking at some case studies to inform the development of this executive order and the regulation, actually was focused on cybersecurity, where we had a number - we saw a number of VC investments directly into firms working on cybersecurity that ended up on the entity list for working with Chinese military or intelligence services. MODERATOR: Thanks, everyone, for joining. That's all the time we have for today. As a reminder, this call was on background, attributable to senior administration officials, and the contents of the call are embargoed until 5:00 p.m. Eastern. We'll follow up shortly with embargoed materials as well. but do reach out to us, to the NSC or Treasury, with any questions in the meantime. Thanks so much. 3:00 P.M. 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