One reason for today’s inflation is supply chain disruptions caused by Russia’s invasion of Ukraine. A confrontation with China could have far worse effects. Last year Senators Casey (D) and Cornyn (R) introduced legislation to limit further loss of US economic capacity, to the People’s Republic of China (PRC) especially. Recent events show action like this is needed to protect American prosperity.

The legislation aims to defend “national critical
capabilities.” These can appear anywhere in a supply chain, from design to
final manufacture. The idea is to evaluate, mitigate, modify, or prohibit
commercial activities which effectively shift such capabilities to adversary
countries. The primary way American companies have done so is investing in the
PRC.

The original legislation didn’t pass the Senate but is part
of the House version of the omnibus China bill, after being introduced on a bipartisan
basis there too. This week the original version was revised to respond to
criticism from business, particularly regarding scope. The revised version has
also been criticized but, in light of the changes made, some new criticism is
disingenuous.

There are reasonable questions. A committee is designated to
oversee a review process and it’s not obvious who should chair. The Department
of Commerce lost the trust of many in Congress by refusing to implement export control law. With a
narrow view of what’s critical, the defense department may be the best choice,
but it’s not ideal either.

Related, it’s a legitimate topic of debate whether
“critical” is applied too broadly. The revised legislation finds adversary
influence over commercial entities to be risky yet doesn’t define influence,
which can lead to seeing high risk where it doesn’t exist. The new text doesn’t
include a way to decertify capabilities no longer critical, which will be
necessary over time.

But there are potentially serious problems with accommodating other business concerns. The revised legislation exempts “ordinary” transactions. Knowledge transfer in seemingly ordinary transactions can boost capabilities of foreign entities, for instance learning how to produce to specification. China has benefited enormously from this.

A better limit on the scope of review is to start cautiously
in identifying what’s truly critical and amenable to this form of government
action. Within that set of capabilities, all sizable transactions are worth assessing.
But the large majority of transactions involve ordinary capabilities and
should be untouched.

The central issue is enforcement. Two months ago the
Department of the Treasury floated an alternative approach in the form of just gathering information. Until late 2020, Treasury didn’t even publish accurate data for total American
investment in the PRC. It still provides no data by sector, whether critical or
not. Treasury’s record here is poor and its role should be limited.

Other business and political interests seek to replicate the
useless Treasury approach. They are still contesting the parts of the bill that
provide authority for any action at all. This would leave an
information-collection exercise and not much of even that, since there are no
consequences for failing to disclose properly.

The clock is ticking. As part of successful 2016–2018 reform
of the Committee on Foreign Investment in the US, Congress also attempted to
address these issues, falling just short. This extended effort refutes one argument
against the legislation—that it’s brand new and must be extensively vetted.
It’s not new, it’s not unprecedented, and vetting has occurred.

More broadly, opponents have had over a year to propose
alternatives. They haven’t done so because, posturing aside, they favor doing
absolutely nothing.

In a conflict over Taiwan, Americans’ supply of
pharmaceuticals, among other things, would be devastated by loss of both Chinese final products and Chinese key materials
for others’ final products. Do nothing. From the end of 2016
through the end of 2020 (latest available), US investment in PRC bonds and
stocks rose from $368 billion to $1.15 trillion. Do nothing.

China’s military capabilities and aggressiveness have increased, as has repression. Do nothing. But the US should, say parts of the
business community, give billions in taxpayer dollars to semiconductor firms
while those same firms continue to help China advance this critical capability.
For some, profiting from the PRC is more important than the rest of the national
interest combined.

House-Senate conference on the China bill faces multiple
obstacles. If the larger package can’t pass, legislation to address outbound
investment moving supply chains should be considered separately. The US is
walking toward a price and availability shock far worse than what’s happening
now. And we’ve already lost years to empty talk.

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