Sherrod Brown Leads Senate Banking Committee Hearing On Advancing National Security

3 months ago

On Thursday, the Senate Banking Committee held a hearing entitled, “Advancing National Security through Export Controls, Investment Security, and the Defense Production Act.”

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Transcript

00:00:00The Senate Committee on Banking, Housing, and Foreign Affairs will come to order.

00:00:03Welcome to our witnesses. We face an uncertain world with many geopolitical

00:00:09challenges, from Russia's continued brutal invasion of Ukraine, to ongoing

00:00:16conflicts in the Middle East, to an increasingly aggressive and capable

00:00:19Chinese military. We know that China's built that military capability with the

00:00:25help of some of America's biggest corporations and even American tax

00:00:29dollars. For too long our government was willfully blind to the threat China

00:00:34posed. Multinational corporations, eager to move jobs wherever they could pay

00:00:39ever lower wages, lobbied this body and presidents of both parties failed us for

00:00:46permanent normal trade relations with China. When corporations move products

00:00:50overseas they outsource the technology and the trade secrets along with it. We

00:00:55did nothing to stop it and now we're paying the price. We can't make the kinds

00:00:59of mistakes we have in the past. We have to be proactive about these threats and

00:01:02take action now to protect our national and economic security. We need to be

00:01:06clear those two issues are intimately connected. You can't separate the economy

00:01:11and our national security. Today hostile governments work together more and more

00:01:17to challenge the interests and the securities and the values of the United

00:01:19States, our allies and partners around the world. Increasingly hostile

00:01:24governments use our own technology to fuel their destructive efforts. We must

00:01:29lead efforts to stop it. It's the US government's job to police the flow of

00:01:33sensitive and so-called dual-use technologies. Technologies can be used

00:01:37for both military and civil and civilian purposes and Departments of Commerce and

00:01:42Treasury along with DOD, state and other agencies try to restrict the flow of

00:01:46sensitive technologies to our adversaries. We can't allow US innovation

00:01:51investments to be used against us. Against that backdrop NATO met earlier

00:01:55this month. They issued a statement addressing these threats. Specifically

00:01:59NATO leaders called on China to quote cease all material and political support

00:02:04to Russia's war effort including quote the transfer of dual-use tech you dual

00:02:09use materials such as weapons components equipment and raw materials that serve

00:02:14as inputs for Russia's defense sector. That was the NATO statement. That followed

00:02:19last month's G7 summit in Italy where the United States and our allies

00:02:23reaffirmed our shared efforts to implement export controls to address

00:02:27risk to international security and quote to ensure the effectiveness of our

00:02:31respective foreign investment screening. The G7 leaders also noted that measures

00:02:36designed to address risks from outbound investments could be important to

00:02:40complement existing tools of targeted controls on exports and outbound

00:02:44investments. A core element of this committee's work has been to establish

00:02:48and conduct oversight over our export controls investment securities and

00:02:53Defense Production Act authorities. Treasury and Commerce have had active

00:02:57and growing caseloads since our hearing last year. They've expanded controls on

00:03:02semiconductors equipment and services that could support China's

00:03:05semiconductor ecosystem. They've taken steps to establish an outbound

00:03:10investment program that would enable us to better understand and to stop US

00:03:15investments that build up China's military. They recently issued a

00:03:19proposed rule that would significantly expand the committee on foreign

00:03:22investment in the US's ability to review foreign real estate investments near

00:03:27military bases like Wright-Patterson Air Force Base and Yars in Ohio. It's kind of

00:03:33action I and many from both parties have been pressing for here from farmers in

00:03:36Ohio near our military installations who are very concerned about this. As we use

00:03:42our export control and investment security policies to restrict China's

00:03:46ability to use US technology and investments to advance their military

00:03:51capabilities and human rights abuses we must also bolster our own domestic

00:03:55capabilities. To that end I was pleased to see Dr. Taylor Kale and her colleagues

00:04:00thank you released the Defense Department's first-ever national defense

00:04:05industrial strategy earlier this year. As a critical economic security tool this

00:04:09committee has jurisdiction over the Defense Production Act which must play

00:04:13a vital role in advancing that strategy. In Ohio we know the potential here to

00:04:18harness the talents and patriotism of America's workers to protect our country.

00:04:23For decades the Air Force Research Lab at Wright-Patterson Air Force Base near

00:04:28Dayton has been the home of the DPA Title III program. Aside from the good

00:04:32work being done at AFRL the Defense Production Act gives the administration

00:04:37the authority to allocate and prioritize critical materials and to

00:04:41increase domestic productive capacity to address industrial shortfalls. In other

00:04:47words DPA allows the Defense Department and other agent students to invest in

00:04:51American manufacturing that can support US national security as well as making

00:04:55us more prepared for emergencies. This work couldn't be more urgent for decades

00:05:00corporate offshoring and consolidation and restructuring essentially just

00:05:05another elite business school term for finding new ways to screw workers to

00:05:09increase profits all weakened our domestic manufacturing sector. Let me say

00:05:13that again for decades corporate offshoring consolidation and

00:05:17restructuring all with the aid and assistance of too many members of this

00:05:21body all weakened our domestic manufacturing sector. Ohioans know well

00:05:26what it's done to cities like where I grew up Mansfield our families our

00:05:31economy increasingly people in this town finally are waking up to how it's

00:05:35weakened our national security. We know when companies outsource jobs they

00:05:39outsource technological capabilities with them. There's not been enough

00:05:44appreciation for how much innovation happens on the production floor by

00:05:48workers. Over the past few years we finally taken steps to reverse that

00:05:53course passing Chips and Science Act passing the bipartisan infrastructure

00:05:57law we've increased funding for strategic investments using the Defense

00:06:01Production Act. We can do more as Congress as Congress prepares to

00:06:05reauthorize the Defense Production Act we need to look at new ways that DPA can

00:06:09support American industrial capabilities and help us revitalize our domestic

00:06:14industrial base to meet current and future challenges. Today we'll discuss

00:06:18how we're working with our partners to coordinate our expert controls and

00:06:22investment security policies and what steps Congress can take to strengthen

00:06:26these authorities. We look forward to testimony from this panel who can update

00:06:31the committee in their important work. Senator Scott. Thank you Mr. Chairman. I

00:06:35would like to start by reminding this room and our witnesses of the important

00:06:39role they play in safeguarding our nation's economic and national security

00:06:43priorities. President Reagan once rightly noted that we are in a different world

00:06:48and our defenses must be based on recognition and awareness to combat our

00:06:52enemies of the modern day. While he was talking about the Soviets unfortunately

00:06:57many of our adversaries remain the same. Russia, China, Iran, and North Korea. But

00:07:04thankfully what also remains the same is the American spirit to innovate and to

00:07:09create the world's leading technologies. My home state of South Carolina is an

00:07:13excellent example. From F-16s to the world's best luxury airliners to leading

00:07:19automotive manufacturing to creating next-generation technologies I'd say

00:07:24South Carolina is simply our future. But to safeguard that future we must ensure

00:07:30that policies created here in Washington don't cut off growth and stifle future

00:07:35innovation. We must have a global economy where America is the leader. After more

00:07:44than three years of President Biden's policies we have seen soaring inflation

00:07:49that is crushing everyday Americans. Wars across our globe and our enemies

00:07:57challenging us and our allies at every single turn. We can and we must frankly do

00:08:05better. So today as we discuss and evaluate some of our economic national

00:08:10security tools, our export controls, investment security, and the Defense

00:08:15Production Act we must keep these principles in mind. At times we must be

00:08:21willing to reassess our policies and retool our positions and frankly let's

00:08:27consider our allies. One thing we certainly learned through COVID was

00:08:32depending on China is a really bad strategy. To be effective in countering

00:08:38China we must work with our allies so that China cannot easily find work

00:08:43arounds to our U.S. export controls by simply buying these same technologies

00:08:48and equipment from our friends. A failure to look holistically at our economic

00:08:54strategy can and will damage American security, competitiveness, and unfairly

00:08:59leave U.S.-led industry behind. In fact a recent study by the New York Federal

00:09:05Reserve found that the Biden administration's export control policies

00:09:09on the semiconductor industry have led to decreased profitability, job losses,

00:09:16and a hundred and thirty billion dollars in financial loss across the industry.

00:09:23With new reports that these types of policies have directly led to thousands

00:09:28of layoffs in states ranging from Ohio to New York, we must scrutinize the

00:09:35actions leading to these results. But it doesn't stop there. In my home state of

00:09:40South Carolina, recent actions by the Commerce Department to revoke thousands

00:09:44of export license for gun manufacturers have resulted in millions of dollars in

00:09:50losses. I've sent three letters to the Commerce Department on this issue

00:09:55and now reports suggest that we will see over five hundred million dollars in

00:10:00annual losses across U.S. firearm manufacturers. Mr. Chairman, I have a

00:10:07letter here that I would like to submit for the record. Objection, sir. Thank you,

00:10:12Mr. Chairman. In my home state of South Carolina, a small minority-owned firearms

00:10:17business had more than 71 million dollars worth of export licenses revoked

00:10:22by the Biden Commerce Department. Unfortunately, this meant that the firm

00:10:27defaulted on multiple international contracts and now those same contracts

00:10:33are being backfilled by China and others. And it is my understanding that these

00:10:39licenses were revoked for foreign policy reasons such as furtherance of world

00:10:46peace. So instead of supporting American companies, we just handed over the

00:10:51marketplace to China. Export controls, investment security, and an important

00:10:57tools like the Defense Production Act should be used in a

00:11:02responsible manner that it maximizes growth here at home and economic pain

00:11:05for our adversaries. I strongly believe that when we have a better domestic

00:11:10environment, a better ability to innovate and manufacture, that means that America

00:11:16is winning. Thank you. I look forward to discussing these important issues with

00:11:20our witnesses. Thank you, Senator Scott. Witnesses today, two of them have been in

00:11:28front of our committee before, two new witnesses. Thank you for joining us.

00:11:31Taya Kendler is Assistant Secretary for Export Administration at the Commerce

00:11:35Department. Paul Rosen is Assistant Secretary for Investment Security at the

00:11:39Department of the Treasury. Grant Harris, Assistant Secretary for Industry Analysis

00:11:43at the Department of Commerce. Dr. Laura Taylor-Callay is the Assistant

00:11:48Secretary for Industrial-Based Policy at the Department of Defense. Thank you, all

00:11:52four of you, for your public service and welcome and you're recognized. Ms. Kendler.

00:11:58Thank you, Chairman Brown, Ranking Member Scott, distinguished members of this

00:12:03committee. Thank you for inviting me to testify about the Biden-Harris

00:12:07administration's ongoing efforts to administer export controls and protection

00:12:11of U.S. national security interests. I appreciate the opportunity to work

00:12:16together with you to ensure we're effectively countering China's military

00:12:20modernization and human rights abuses, degrading Russia's ability to wage war

00:12:25on Ukraine, identifying and controlling technologies that are critical to our

00:12:30national security, and collaborating with our allies and partners in these efforts.

00:12:35BIS does not take on these tasks alone. License applications and licensing

00:12:42policy are adjudicated and set together with the Departments of Commerce, Defense,

00:12:46Energy, and State. Our greatest priority is to effectively apply

00:12:53export controls to thwart China's military modernization efforts. We know

00:12:58that China is going to great lengths to obtain key U.S. advanced technologies

00:13:03with military potential and we're responding accordingly, as demonstrated

00:13:08by our October 2022 and 2023 advanced computing controls. These restrictions

00:13:14aim to impede China's ability to develop artificial intelligence systems used for

00:13:20the development of advanced weapons systems, malicious cyber activity, and

00:13:24other military and intelligence applications. With our interagency

00:13:29partners, we closely scrutinize license applications to the PRC, focusing on end

00:13:34users and end uses, as well as risk of diversion to unauthorized activities.

00:13:39We're not afraid to take the time we need to carefully analyze applications

00:13:44involving PRC parties to assess any and all risks to U.S. national security and

00:13:49foreign policy. Just this morning, we released new proposals to expand

00:13:55restrictions on exports and the provision of support to military,

00:13:59intelligence, and foreign security end users and end uses, consistent with the

00:14:04FY23 NDAA. This includes controls on U.S. person support to such activities in

00:14:10China. And last week, we took action to ensure strong U.S. leadership in the

00:14:16development of standards for critical and emerging technologies. Through an

00:14:19export controls rulemaking, we enabled increased U.S. private sector

00:14:24participation in standard-setting organizations. This undercuts any

00:14:29advantage China could establish in the absence of U.S. industry participation.

00:14:34At the same time, our commitment to working with allies and partners on

00:14:39export controls has never been stronger. Export controls are more effective when

00:14:45used in concert with our partners and allies. We're in the process of

00:14:50finalizing controls now on new critical and emerging technologies, including

00:14:54quantum, and some of our allies and partners have already taken parallel

00:14:58action. We continue to surge forward in common controls against Russia with our

00:15:0438 Global Export Control Coalition partners. Earlier this month, I was in

00:15:09Brussels meeting with counterparts from the European Commission, Japan, and the

00:15:13United Kingdom to discuss combined efforts to enhance the controls we

00:15:17imposed on Russia in response to its attacks on Ukraine. We've also

00:15:22coordinated outreach to third countries outside of our coalition to more

00:15:26forcefully combat illegal diversion. Alongside our tireless commitment to

00:15:32control the export of U.S. technologies, BIS is deeply dedicated to ensuring the

00:15:37health of our defense industrial base. Through the critical tools provided by

00:15:41the Defense Production Act, we work alongside interagency partners to ensure

00:15:46that critical Department of Defense and emergency procurement needs are met.

00:15:50Our DPA authorities also enable us to issue highly confidential and bespoke

00:15:55surveys to industry participants, informing our use of export controls and

00:16:01interagency approaches to national security issues. Reauthorization of the

00:16:05DPA is critical for BIS's support to our defense industrial base. Dual-use export

00:16:12controls have never been more necessary to our national security. We in Export

00:16:17Administration at the Commerce Department are focused on aggressively

00:16:20contending with the national security threats facing our country and using all

00:16:24the tools at our disposal to ensure we maintain U.S. technological leadership in

00:16:29furtherance of national security. Finally, while I recognize that this is not an

00:16:34Appropriations Committee, I urge you to support additional funding for BIS. We're

00:16:40facing more sophisticated threats from China, Russia, Iran, rapid advances in

00:16:45technology, increasing complexity of export license applications, and more and

00:16:50more critical and emerging technologies subject to our controls. To outpace these

00:16:55threats, we need to resource our mission appropriately. Thank you. I welcome your

00:17:00questions. Thank you, Secretary Thea. Thank you, Secretary Rosen. Chairman Brown,

00:17:06good morning. Ranking Member Scott, good morning. And members of the committee,

00:17:09thank you for the opportunity to provide an update on the work of the Department

00:17:14of the Treasury's Office of Investment Security and the Committee on Foreign

00:17:18Investment in the United States, or CFIUS. I also want to thank Congress for the

00:17:23authorities and resources you have provided since the passage of the

00:17:27Foreign Investment Risk Review Modernization Act of 2018, or FIRMA,

00:17:32as well as the constructive and bipartisan support you have provided to

00:17:38our national security mission, which has helped make possible many of the

00:17:42enhancements I will discuss here today. Last year, I spoke to this committee

00:17:46about our work and the progress we've made to safeguard national security. And

00:17:51today, I'd like to update you on these efforts, which have been extensive and

00:17:55ongoing. Over the past 18 months, we have strengthened our analytical and

00:18:00operational capabilities by building and implementing sophisticated tools,

00:18:04platforms, and methodologies for assessing and addressing national

00:18:08security risks, employing cutting-edge information technology platforms to

00:18:13securely manage and facilitate novel aspects of CFIUS's work, and expanding

00:18:19and deepening our human capital to build a team with diverse backgrounds. These

00:18:23improvements have enabled us to be more efficient and effective, even as we

00:18:27contend with two core challenges. Transactions are becoming more complex

00:18:33and sophisticated in their structures, and CFIUS is identifying and addressing

00:18:38more national security risks than in years past. We have paid particular

00:18:42attention to the role of limited partners in investment funds, as their

00:18:46access to, influence, and control over sensitive businesses can vary

00:18:51considerably. All while tackling these challenges, Treasury has successfully

00:18:56improved the efficiency of CFIUS's operations. As noted in the latest annual

00:19:01report, in 2023, CFIUS cleared 66% of file declarations or notices within the

00:19:09first 30 or 45 days, respectively, compared to 58% in 2022. The rate at

00:19:16which parties withdrew and refiled their notices also declined from 23% to 18%,

00:19:22the first such decrease in five years. These changes are not incidental, but

00:19:28reflect improved efficiencies, which is a cornerstone of our focus. Treasury has

00:19:33also transformed the way the committee approaches compliance with mitigation

00:19:37agreements and enforcement thereof. We've expanded and devoted significant

00:19:42resources to the monitoring enforcement mission, including by nearly doubling the

00:19:46size of Treasury's team over the last several years. We have also continued to

00:19:51enforce violations of mitigation agreements where appropriate. In fact, in

00:19:552023, CFIUS imposed four civil monetary penalties for violations of material

00:20:01provisions of mitigation agreements, which was double the number of civil

00:20:05monetary penalties that CFIUS had previously imposed in nearly its 50-year

00:20:09history. CFIUS has also, for the first time, issued subpoenas pursuant to its

00:20:15authority to execute its national security mission. We have expanded our

00:20:19efforts to identify transactions that were not notified to the committee

00:20:23voluntarily and that may pose a risk to national security. The committee leverages

00:20:28multiple tools to identify and analyze such non-notified transactions, and

00:20:33Treasury's non-notified team screens thousands of potential covered

00:20:37transactions, ultimately putting forth to the committee for consideration to

00:20:42request to file those transactions that may pose a national security risk or

00:20:46issues. The Mine 1 transaction that President Biden blocked earlier this

00:20:51year came to the committee through the non-notified process in the form of a

00:20:56public tip. Treasury has also led a number of regulatory enhancements to

00:21:02CFIUS authorities over these years. Working with our partners of the

00:21:06Department of Defense, Treasury issued a proposed rule this month to

00:21:10significantly bolster CFIUS's jurisdiction over real estate

00:21:14transactions. We're also working to finalize the proposed rule to sharpen

00:21:18our investigation and enforcement tools. In many instances, our tools work best

00:21:24when we collaborate and act with our allies and partners. In 2023 and

00:21:282024, CFIUS had more than 300 engagements with allies and partners,

00:21:33and since 2019, approximately 30 countries have proposed, enacted, or

00:21:38significantly expanded their foreign investment review regimes with our

00:21:43support. And lastly, let me update you briefly on Treasury's efforts to

00:21:48implement President Biden's outbound investment security program. Treasury

00:21:52issued a proposed rule last month for this program, and my office is working

00:21:56closely with the interagency to review comments and prepare a final report.

00:22:02This important program success ultimately will depend on the resources

00:22:06we receive. And to that end, I'd ask Congress to fully support Treasury's

00:22:10request in the President's 25 budget for this program at 16.7 million. Thank

00:22:16you, and I look forward to your questions. Thank you, Senator. Thank

00:22:19you, Secretary Rose. Secretary Harris, welcome. Chairman Brown, Ranking

00:22:23Member Scott, distinguished members of the committee, thank you for inviting

00:22:26me to testify today. As Assistant Secretary of Commerce for Industry and

00:22:30Analysis, I lead a team of over 265 industry experts and economists. Our

00:22:36mission is to support the global competitiveness of U.S. industry. This

00:22:40unit, which sits in the International Trade Administration, is the analytical

00:22:45engine of U.S. competitiveness policy because it is the broadest industry

00:22:50expertise available in any one place in the U.S. government. We cover

00:22:54approximately 90% of the U.S. economy and work on everything from raw

00:22:59materials like critical minerals to vital components like semiconductors to

00:23:03finished goods like autos and airplanes. The unit's singular industry

00:23:07expertise, our unique commercial perspective and our advanced analytics

00:23:12capabilities are critical to advancing U.S. government work on outbound

00:23:16investments, CFIUS and supply chain resilience. With respect to outbound,

00:23:20commerce plays a special role in supporting the program. Commerce is key

00:23:25to identifying and understanding the relevant technologies to be covered and

00:23:28how the requirements should be scoped. We have the technical fluency and industry

00:23:33relationships to help anticipate the national security risks that may be

00:23:38associated with cutting-edge technologies. In addition, my team has spearheaded

00:23:42extensive industry engagement, consulting over 450 stakeholders, working

00:23:47with Treasury as the development of the program has progressed. This is important

00:23:52as we seek to craft an effective program while reducing the risks of

00:23:56unintended market effects. Commerce will also be key to successful implementation.

00:24:01Our sector-specific experts will be indispensable to interpreting and

00:24:06recommending action based on analysis of the data received through the program.

00:24:10Turning to CFIUS, the industry and analysis unit leads commerce's

00:24:14participation in the committee and analyzes issues related to the U.S.

00:24:18business and the market in which it operates, market trends and the business

00:24:23rationales for transactions, among other issues. My team works closely with

00:24:28colleagues across the department, especially in BIS. In 2022, President

00:24:33Biden directed CFIUS to consider supply chain resiliency in its national

00:24:38security reviews. Commerce analyzes issues such as the scale and types of

00:24:43supply relationships pertaining to a given U.S. company and the potential for

00:24:47supply chain disruptions or undue foreign influence over specific supply

00:24:52chains. More broadly on supply chains, the industry and analysis unit has long

00:24:57been central to U.S. supply chain work. We've had a supply chain services focused

00:25:03office for over a decade and for years before that, a dedicated team. We focus

00:25:09on applied analysis and action. For instance, the industry and analysis unit

00:25:14was the first team in the U.S. government to sound the alarm on competitiveness in

00:25:19the semiconductor supply chain and spring into action. The team mapped out

00:25:23choke points, created an early warning system and connected industry leaders

00:25:28with suppliers to encourage solutions. The team also set to work supporting

00:25:33investments to strengthen the supply chain and was recognized for securing

00:25:37investments into the United States, totaling $34 billion and supporting over

00:25:4320,000 U.S. jobs. Last year, we established what the White House called a

00:25:48first of its kind supply chain center. We're pioneering new data driven tools

00:25:54and creating playbooks to assess supply chain vulnerabilities and specific

00:25:58sectors, including for emerging technologies. Our supply chain exposure

00:26:03tool provides a common operating picture that that enables evidence based

00:26:07actions with international partners. We're also building a diagnostic tool

00:26:13to assess supply chain risk across the U.S. economy with an emphasis on risks

00:26:18to national security and economic security most relevant to the U.S.

00:26:23government. In conclusion, the industry and analysis units industry expertise is

00:26:28vital to investment security, U.S. technological leadership, supporting

00:26:33domestic manufacturing and job growth and addressing unfair trade practices by

00:26:38the People's Republic of China. The president's FY 25 budget request for the

00:26:43International Trade Administration includes $5 million in new funding to

00:26:47support the outbound investment security program and $12 million to support our

00:26:52supply chain work. In finalizing the FY 25 appropriation bills, we ask that you

00:26:58please consider how important it is for U.S. national security to support and

00:27:02fund these functions. Thank you and I look forward to answering your questions.

00:27:08Thank you, Secretary. Secretary Taylor-Culley, welcome. Thank you. Good

00:27:13morning, Chairman Brown, Ranking Member Scott and distinguished members of the

00:27:17committee. I am grateful for this opportunity to represent the Department

00:27:21of Defense today. As the first Senate-confirmed Assistant Secretary of

00:27:28Defense for industrial-based policy, issues of national security and issues

00:27:33of economic security interlink for us in the Department of Defense. Generally, I

00:27:40interact with the Armed Services Committee. However, this committee has

00:27:43oversight over key areas of economic security that are of critical importance

00:27:48to DoD. CFIUS, antitrust reviews, and the Defense Production Act in particular.

00:27:54Through DoD's role on CFIUS, we see how adversarial capital investments in the

00:28:00U.S. technological base attempt to weaken the United States by robbing us of our

00:28:04technological know-how. Our role in Hart-Scott-Rodino antitrust reviews

00:28:09allows the DoD to remain vigilant to adversaries using unfair trade and

00:28:14predatory acquisition and investment strategies to weaken the U.S. defense

00:28:19industrial base. All of these remain very important priorities for the Department

00:28:25of Defense, as underscored in the National Defense Industrial Strategy, in

00:28:31support of economic deterrence and our warfighters. And while I welcome

00:28:36questions on any of these topics, today I will focus most of my comments on the

00:28:40Defense Production Act. The Defense Production Act expires in September

00:28:462025, and the Department of Defense strongly supports a five-year

00:28:50reauthorization of DPA, and believes that the reauthorization needs to happen this

00:28:56year in the NDAA or another means, rather than risk a lapse of authorities by

00:29:01waiting until 2025. Why is that? Because in addition to timely, consistent

00:29:07appropriations and multi-year procurement authority, supporting the

00:29:12Defense Production Act may be one of the most important actions that Congress can

00:29:16take to ensure that the U.S. industrial base is ready to preserve our military

00:29:21advantage and support the warfighter. I'd also like to take this opportunity to

00:29:26thank Congress for expanding the definition of domestic source in the

00:29:31Defense Production Act to include Australia and the United Kingdom. This

00:29:36allows us to, in addition to working with Canada, to support and work with our

00:29:40allies and partners to strengthen our own industrial base as well.

00:29:45DOD's primary aim in the use of the Defense Production Act is to increase

00:29:49the readiness and resilience of the defense industrial base in support of

00:29:54defense critical needs and the warfighter. Since Congress enacted the

00:29:58DPA in 1950, the Executive Branch has invoked DPA authorities to manage the

00:30:04nation's defense-related production capacity, our critical supply chains, and

00:30:09to protect and strengthen the U.S. industrial base in times of war, peace,

00:30:13and national emergencies. And today it remains an essential national defense

00:30:19tool. Make no mistake, our adversaries attempt to use supply chain

00:30:24vulnerabilities to weaken the U.S. economy and our military, and the DPA remains one

00:30:31of the most effective tools to bolster our domestic industrial production. We

00:30:37use the DPA Title I to prioritize components for defense systems and

00:30:42ensure availability of components does not preclude industry from delivering

00:30:47the warfighter needs in a timely and cost-effective manner. We use

00:30:52Title III to alleviate pain points in supply chains and expand domestic

00:30:56manufacturing of critical technologies and processing and production of

00:31:01critical minerals and strategic materials. Since the last reauthorization

00:31:07in 2018, DoD appropriations for DPA Title III have increased dramatically

00:31:13from an average of $70 million a year to about $750 million a year. Last fiscal

00:31:20year, we executed over $733 million of DPA Title III awards in microelectronics,

00:31:28strategic and critical minerals, kinetic capabilities, energy storage, and

00:31:32batteries. Going forward, we need to do more, and yes, Senator Scott, we also need

00:31:40to do so responsibly. We recently announced a defense industrial base

00:31:45other transaction authorities, a consortium that will allow DoD to

00:31:50expand execution of DPA awards more timely and offer more small

00:31:56businesses and companies that are not traditionally part of the defense

00:31:59industrial base to compete for awards. We continue to want to work with allies

00:32:05and partners through security of supply arrangements, and of course, now that we

00:32:10can work with Australian and UK companies as well in

00:32:15support of AUKUS in order to secure defense critical supply

00:32:20chains. As Congress considers reauthorization, we recommend a few

00:32:27changes to the DPA law, including raising the DPA fund balance to allow that

00:32:32annual fund balance to increase so that appropriations won't be penalized, and we

00:32:37like to create more executive offices in addition to our great partnership with

00:32:42the good people of Ohio who work for AFRL. We also support increasing the

00:32:48period of availability of funds, which will allow the department to support

00:32:51advanced procurement of material for defense critical components. Again, I'm

00:32:56absolutely honored to be here today representing the Department of Defense,

00:32:59and ultimately, I hope that our joint efforts will continue to ensure the

00:33:04necessary resources for our warfighters and secure our nation's economic future.

00:33:09Thank you again. Thank you, Secretary Taylor-Clay. I'll begin the questioning

00:33:13with Senator Cortez Masto of Nevada. Thank you, Mr. Chairman. Thank you to the

00:33:18Ranking Member for the hearing today. Assistant Secretary Taylor-Clay, let me

00:33:21start with you, and thank you very much for your comments. I want to commend you

00:33:25for the work you've been doing to develop our national defense industrial

00:33:29strategy. It's been a really a whole-of-government effort, and I thank

00:33:33you for that. One question I have, though, is what that concerns me, and I'm seeing

00:33:38it across the board, is the decline of the defense workforce. There were

00:33:44three million people working in U.S. defense industries in 1985. Today, it's

00:33:48only about 1.1 million. As we look to strengthen the defense in the

00:33:53industrial base, that includes the workforce. Can you talk a little bit

00:33:57about what we should be considering, what DOD is doing, what are we looking

00:34:03at, and what tools and resources are we utilizing to collaborate with federal

00:34:09agencies, with the private sector, in strengthening that workforce?

00:34:13Thank you, ma'am. I'm glad you asked that question. Indeed, the decline of the

00:34:19defense workforce is a key area of risk. It is a risk for production in general,

00:34:27certainly for production in defense-critical supply chains. As part of

00:34:32the National Defense Industrial Strategy, we made workforce readiness one

00:34:36of the four strategic priorities for that very reason. The Department of

00:34:41Defense is in implementing the strategy and developing the implementation plan.

00:34:45Workforce will remain a very important issue, and I'd also like to note it's not

00:34:49just the defense industrial-based workforce, but it's also the organic

00:34:54industrial-based workforce, as well as our acquisitions workforce. We need all

00:34:59of them to be able to work in concert to be able to, again, bring the

00:35:03capabilities that our warfighters need at speed and at scale. We have a number

00:35:08of programs that we're developing. We've been focused on the submarine

00:35:11industrial-based workforce. I was just in Michigan on Monday with Secretary of the

00:35:18Navy Del Toro, so we were unveiling a new initiative in Michigan to help reskill

00:35:25and upskill workforce there, particularly automotive workers who may

00:35:30want to work in the submarine industrial-based workforce, so creating

00:35:33an additional workforce in Michigan. We continue to promote manufacturing and

00:35:40advanced trade skills as well. Again, workforce remains of a priority and will

00:35:46continue to be a priority for us as we continue to want to build out the

00:35:51resiliency of the industrial base. I appreciate that. Thank you. Let me jump

00:35:56to Assistant Secretary Rosen. I want to talk a little bit about CFIUS. I

00:36:01welcome your proposed rulemaking, which adds the Hawthorne Army Depot in

00:36:06Nevada to CFIUS. A couple questions. I guess I know you're adding 50

00:36:13additional facilities as well. What factors contributed specifically to

00:36:18adding, if you can tell me, adding the Hawthorne Army Depot to the list?

00:36:23Senator, thank you for the question and for your leadership on these issues. Of

00:36:28course, you mentioned Hawthorne, but there's a host of other facilities in

00:36:31your state that are on the list, importantly so Nellis and others.

00:36:36When Congress enacted FIRMA, it gave us this new real estate

00:36:42jurisdiction. At the time, we worked closely with our colleagues at the

00:36:46Department of Defense to develop the initial list. When we came in, when I

00:36:52came in a couple years ago, we looked at cases and we decided, working closely

00:36:57with our colleagues at DOD, to take another look. In 2023, we added eight

00:37:02additional bases. As you point out, we're in the process of adding 59 more bases.

00:37:08I would defer to my colleague, Dr. Taylor Colley, for some details on this.

00:37:15As a general matter, what we look to is the sophistication of what's going on at

00:37:19these facilities, the possibility for potential espionage, how much of it is

00:37:25core national security, how much of it is training. That goes into whether

00:37:30something should be on a list and what the range should be. I should

00:37:34note that this update is the result of a broad strategic review led by my

00:37:41colleagues at the Department of Defense, to really take a holistic view, to make

00:37:45sure we're not leaving anything on the table in terms of plugging gaps, to make

00:37:50sure the list is full and complete.

00:37:52No, I appreciate that. You mentioned FIRMA 2018 and I

00:37:55supported it and obviously was looking at that. Is it the security of our

00:38:00installations that you just mentioned in Nevada and throughout Nevada? The

00:38:04collaboration is key and it's nice to see that happening. I thank you very

00:38:08much. I only have so much time left. One final thing I just want to touch on

00:38:12and it's Assistant Secretary Kendler, you mentioned this, is more funds, more funds

00:38:18for the department. My understanding is you haven't received funding and

00:38:22increase since 2010. Based on that, I would imagine it is challenging now

00:38:31because of the increased capacity of your jurisdiction and oversight to cover

00:38:35some of the coverage that you need with less resources. Is that one of the

00:38:42reasons why you're seeking an increase? I guess talk a little bit about that if

00:38:46you would. Senator, thank you very much for the question. That's right, taking

00:38:51inflation into account, our budget has essentially been flat for quite some

00:38:57time. Basically the last decade it's barely kept up with inflation. We do

00:39:01support the president's budget for fiscal year 25, which is a down

00:39:05payment on what we need in the Bureau of Industry and Security. If I had one ask,

00:39:10it would be for funds for IT modernization. We need roughly a hundred

00:39:15million dollars to take antiquated systems and turn them into useful

00:39:20productive data and analytic support. We've had issues in providing answers to

00:39:29the Hill in a timely way because we don't have an updated modernization

00:39:33system and we're not taking advantage of the data capabilities we have to the

00:39:37best of our ability. With more funds we would we would enhance our technical

00:39:44expertise, we would work on data and analytic capabilities and certainly our

00:39:50enforcement capacity as well. Thank you. Thank you, Mr. Chairman. Thank you, Senator

00:39:55Scott, the ranking member from South Carolina. Thank you, Mr. Chairman.

00:39:58Ms. Kindler, I'm glad you're here. My colleagues and I have written several

00:40:02letters calling for your testimony and on Commerce Department's firearm export

00:40:07licensing policies and regulations because unfortunately your policies

00:40:11appear to have all the signs of political targeting, costing the industry

00:40:15an estimated five hundred million dollars per year and generating no

00:40:20national security benefits. Case in point is the company I mentioned during my

00:40:24opening testimony, MG Super and Associates. I'm looking at some of the

00:40:29the denials on these licenses and the reason, fascinating, foreign policy

00:40:38pursuant to 22 CFR 120.18 A1 and 2 of the ITAR, the Department of State

00:40:46may deny a license or other approval when the department deems such action to

00:40:51be in furtherance of world peace, denying a company the opportunity to

00:40:59sell firearms to the Ecuadorian police. Next one, same verbiage to deems it such

00:41:08action necessary to further world peace, denying again another license to sell to

00:41:18the Ecuadorian military. This minority business owner is Ecuadorian, cares a lot

00:41:26about safety in a country where his mother born and raised. Another one,

00:41:35furtherance of world peace. It is not only frustrating and exacerbating but

00:41:43challenging to see this over and over and over and over again. Your firearm

00:41:50policy has resulted in over 71 million dollars in licenses

00:41:55canceled for this company, meaning they've lost their contracts and they've

00:42:00lost the ability to support the police and the military across the Western

00:42:04Hemisphere. That does not mean that the Ecuadorian police did not find another

00:42:07channel. Of course they went to Brazil, Czech Republic and China to get these

00:42:13orders backfilled. You haven't prevented the sale of firearms, you've merely used

00:42:20a political tactic to harm an American business. What's even worse is that it to

00:42:28me appears to be political targeting. The International Trade Association under

00:42:34your leadership has stopped this company but allowed competitors in some

00:42:42of our nation's poorest areas to not be able to effectively create jobs, not be

00:42:58able to effectively produce a world-class competitive product and

00:43:05have a market to sell it to because you're trying to further world peace.

00:43:17Thoughts? Senator, I really appreciate you bringing up this topic and I'm not sure

00:43:25you do but I think this is an important topic that reinforces this

00:43:30administration's philosophical approach to trying to shut down or cut off gun

00:43:37manufacturing in our own country. I do appreciate you bringing it up because I

00:43:43think there's a lot of misunderstanding about what we're trying to accomplish

00:43:46and and what our rules have actually done. Our focus is on protecting national

00:43:52security. Full stop. We tailored the rule. Our presumption of denial in this rule

00:43:59is tailored to ensure that US lawfully exported firearms don't end up in the

00:44:03hands of criminals, gangs, cartels, terrorists. Let me ask you a question there. Is there

00:44:12evidence that his company's firearms sold to the military and to the police

00:44:18have not been received by the military or police? Is there something

00:44:24specific about this transaction or the other three that were denied? Senator, I'm

00:44:29not in a position to speak to a specific company's situation but I certainly feel

00:44:34sorry for your constituent and I'd like to follow up with you in an environment

00:44:38where we can talk about a specific company. But let me be clear. Our

00:44:41presumption of denial, it only applies to non-government entities in the 36

00:44:48countries designated by state as high-risk. So if these transactions are

00:44:52with government entities, that is not the subject of our presumption of denial.

00:44:57Thank you. Let me just say, I think words mean things.

00:45:03Ecuadorian police. Ecuadorian police. Ecuadorian military. Colombian military.

00:45:22Thank you, Senator Scott. Secretary Taylor Calais, the current DPA

00:45:30reauthorization expires next year, as you know. Senator Scranton, Member Scott

00:45:34and I filed an NDA amendment that would extend the DPA. Describe, if you would, why

00:45:39it's a critical tool that needs to be reauthorized and how DOD uses its

00:45:44authorities. Thank you, sir. Again, as you noted, DPA reauthorization is a

00:45:55priority for the Department of Defense. We use the DPA all three titles daily.

00:46:02A lapse would ultimately impact our warfighter needs and the ability of our,

00:46:08particularly our industrial base, to address some of the long lead items,

00:46:14long lead times for critical defense components and would ultimately, again,

00:46:22impact our warfighter. Annually, we use Title I over 300,000 times to

00:46:31prioritize and allocate some of these urgent defense critical components and

00:46:36resolve supply chain issues. Without reauthorization by next year, we wouldn't

00:46:41be able to do that. We also use Title I really at no cost to the taxpayer.

00:46:50A lapse would impact our prioritizations, not just for us, but also with our

00:46:55allies and partners. We have over 20 security of supply arrangements with key

00:47:01partners and allies across the globe. Those security of supply arrangements

00:47:06have been used with Israel. They've been used for Ukraine. With Title III, it would

00:47:12also impact industry. It will impact small businesses. Forty percent of our

00:47:16Title III DPA awards go to small businesses and nontraditional defense

00:47:21suppliers. We're using the Defense Production Act Title III to expand and

00:47:26bring more nontraditional companies into the defense ecosystem. Without Title III

00:47:32awards and the reauthorization of DPA title in general, we wouldn't be able to

00:47:38do that very important work. Thank you. Secretary Rosen, 2018 Congress

00:47:46gave CFIUS the authority to require mandatory filings of foreign investments

00:47:50in critical technologies, as you know. Since then, we've seen increasing

00:47:54attempts by malign actors to target U.S. critical infrastructure. It's why I'm

00:47:58pushing to give CFIUS the ability to require mandatory filings. We need to

00:48:02know about these investments. It should not be optional. We filed an amendment to

00:48:07NDAA to do this. Would CFIUS talk through whether CFIUS would be able to

00:48:11better protect the U.S. from dangerous foreign investment if it had the ability

00:48:15to require these mandatory filings for transactions related to infrastructure?

00:48:21Senator, Chairman, thank you for that question and for your leadership on

00:48:24these issues throughout. You bring up critical infrastructure. It's a core

00:48:29component of what FIRRMA was all about. It's also a core component of what

00:48:33CFIUS reviews and looks at on a regular basis. It is true that certain filings of

00:48:39critical infrastructure investments are mandatory. I think the more, as a

00:48:45general matter, we want to make sure that we are seeing investments into places

00:48:49like critical infrastructure that raise national security risk. I think the

00:48:54challenge is figuring out how do you do that in a way that mandatorily

00:48:59requires what we need to see, what we want to see, but sort of weeds out some

00:49:04of the broader noise. I think there's ways that we can do that through

00:49:07regulations and otherwise. We're committed to working with you on that

00:49:11effort and we appreciate you spearheading that. Thank you. Secretary

00:49:16Harris, the administration's taken steps to establish a targeted program to

00:49:21ensure outbound U.S. investment doesn't strengthen China's ability to develop

00:49:26certain critical technologies described. As you know, Senator Casey and Cornyn

00:49:31have led a bipartisan effort to codify an outbound investment program.

00:49:36Talk to us if you'd describe why the administration has

00:49:41taken a sector-based approach in its outbound investment program. Thank you,

00:49:46Chairman, for that question. We're trying to take a very deliberate and narrow and

00:49:51tailored approach to address a national security risk, and that is certain

00:49:56outbound investments supporting the development of certain sensitive

00:50:00technologies in a country of concern. That is U.S. venture capital or private

00:50:05equity supporting the development of, say, sensitive semiconductor technology or AI

00:50:10related applications in a Chinese startup. We've been consulting very

00:50:15broadly with hundreds of stakeholders throughout the development of this

00:50:19program, and our belief is that with this sectoral approach as we define it, it can

00:50:24be most administrable and most impactful, but also most narrow. Our goal here is to

00:50:30address that tailored threat while minimizing broader unintended impacts.

00:50:36Thank you. Senator Van Hollen is recognized from Maryland. Are you ready?

00:50:44Thank you, Mr. Chairman. I appreciate it. We have a

00:50:47appropriations subcommittee hearing markup going on. Thank all of you for

00:50:52what you're doing, both to strengthen our economy but also protect our national

00:50:58security at the same time. And I do want to just pick up on a couple of the

00:51:03questions that the chairman asked, first with regard to the outbound investment

00:51:09screening. And I applaud the administration's leadership on this

00:51:13issue, working with our G7 partners and trying to design this in a way that you

00:51:20just said, Mr. Harris, was well tailored. I returned from a trip last week to a

00:51:28number of countries, including Saudi Arabia and the UAE. There's a voracious

00:51:32appetite for U.S. technology, especially in AI, but also other sectors. But if

00:51:38we're going to be successful in terms of targeted outbound investment screenings,

00:51:43starting with the notification provisions, we obviously need our allies

00:51:48who are also in strong positions to, you know, provide investment technology to

00:51:54cooperate fully, right? Otherwise we can shut the front door of the barn but

00:51:59leave the back one open. Can you talk about the progress we're making, getting

00:52:03some of our partners, whether it's the EU or others in East Asia, Japan,

00:52:08South Korea, to adopt similar measures with respect to outbound investment?

00:52:15Thank you for that question, Senator. And I'll quickly pull in Assistant Secretary

00:52:19Rosen as well, with Treasury's role in leading the program. I would say from a

00:52:23commerce perspective, though, we've been, with Treasury and the State Department,

00:52:27very focused on working with allies and partners. We're in a situation where

00:52:31we've identified a threat and we need to take action, and we're doing so. But we

00:52:36want this to be as inclusive and as broad as possible, and have as many

00:52:41partners and allies share our perspective and take their own actions.

00:52:44I appreciate that. No, I was going to ask you, Mr. Rosen, as well. I know this is

00:52:48your portfolio at Treasury. If you could just speak specifically, not to

00:52:54the goals of enlisting support from our allies, but whether we're making

00:52:57substantial progress on that front and what more needs to be done.

00:53:01Senator, you hit the nail on the head in terms of the sort of the backfill thing

00:53:05that we're focused on. I would say we're making progress, we're engaged, and we're

00:53:09committed to continuing that engagement. I do think that a number of allies and

00:53:16partners are studying the issue to assess whether within their own

00:53:21economies, they are similarly worried about the export of their dollars, of

00:53:27their and their know-how, in the same way we are. So I think we're getting

00:53:32different responses as a result, but I'm encouraged by some of the statements

00:53:36that you alluded to, and it's an effort we're not going to give up on. I

00:53:39appreciate it. I just think we need to really, really push here. Otherwise, we'll be,

00:53:45in some ways, putting restrictions, handcuffs on our own company's

00:53:49investment when others are free to do so. Under the jurisdiction of the

00:53:56Department of Commerce, Mr. Kendler, and specifically related to some of the

00:54:01machines that are used to manufacture very high-end chips for semiconductors,

00:54:08the United States has been very clear that we want to protect what we

00:54:15call the small garden, our crown jewels, but high walls. This also requires our

00:54:21partners' engagement. So, for example, when it comes to some of the machines to help

00:54:25manufacture high-end semiconductors, we've worked with ASML and Tokyo

00:54:30Electron, but, you know, my understanding is that there may not be the progress

00:54:35that we'd anticipated earlier. So my question to you is, when and if would

00:54:42the United States want to apply the foreign direct product rule in order to

00:54:47ensure compliance with our goals? I don't know which of the two. Okay. I'll take

00:54:54that, Senator. Thank you. Thank you. From the view of Industry and Security at

00:54:58the Commerce Department, multilateral coordination is crucial to export

00:55:02controls, full stop. We, and we're constantly building export control

00:55:09coalitions around the world on different critical and emerging technologies, like

00:55:12semiconductors. The Dutch and the Japanese, as you alluded to, they impose

00:55:17their independent controls on semiconductor manufacturing tools.

00:55:21They're comparable to ours, that what we picked up last October in our amended

00:55:27controls, and that's a critical part of our work, ensuring that our allies and

00:55:33partners writ large understand the threat, that they understand what it

00:55:37means if we don't have controls in place. That's a fundamental of the

00:55:42coalition we built to respond to Russia's invasion of Ukraine. It's a

00:55:45fundamental of how we're approaching quantum and other issues, as I alluded

00:55:51to in my opening statement. It's critical to us to keep that going. If you

00:55:56could, I asked specifically when and if we would apply the foreign direct

00:56:01product rule, which is obviously an escalatory measure, but one that may help

00:56:08get people's attention to secure their cooperation. Can you speak to that? We

00:56:13have increasingly applied the foreign direct product rule, which captures

00:56:18certain foreign produced equipment under our regulations. We have

00:56:23increasingly used that as a tool. It is a heavy measure. Happy to talk to you

00:56:30about when and what circumstances might be appropriate. I would appreciate

00:56:34following up on that. Thank you, Mr. Chairman. Senator Kennedy of Louisiana is

00:56:38recognized. Thank you, Mr Chairman, Mr Rosen and thanks to all of you for

00:56:42being here. Mr Rosen, NVIDIA makes probably the most advanced artificial

00:56:49intelligence chips, does it not?

00:56:53NVIDIA does produce advanced chips. Yes, Senator. And those chips are highly

00:56:59coveted because they can perform the massive computations needed to train AI

00:57:07systems, don't they? I believe so, yes, Senator. And we have export controls on

00:57:14those chips, do we not? We do, and that's a process led by my colleague, Ms

00:57:18Kendler. And we prohibit those chips from being sold to China, is that

00:57:24correct? I don't know exactly what chips are prohibited. I would defer to Ms

00:57:28Kendler, but I know there are controls on the export. You don't know whether

00:57:31the advanced NVIDIA artificial intelligence chips are prohibited from

00:57:36being sold to China? So, Senator, my understanding is that they are, but that

00:57:40is export controls. It lies with my colleague at the Department of Commerce.

00:57:45Um, so how come we're selling? We're allowing them to be sold to China.

00:57:51Senator, I would respectfully defer. I don't I don't oversee export controls.

00:57:55I oversee inbound investment into the United States. Um, you, you, you, uh, you

00:58:00control investment security, don't you? I do. And and as all right, let me ask

00:58:05Miss Kendler, how come? How come we're we're allowing them to be sold to

00:58:09China? Senator, our advanced computing controls from last October in the

00:58:14October before, uh, they're absolutely targeted at the most advanced chips. As

00:58:19you noted, we are controlling them for export to China. And we look together

00:58:24with Department of Defense, Energy and State at where they're going. Yes, ma'am.

00:58:29But if you go on the Internet, you'll find 70 distributors, not 7 70

00:58:37distributors

00:58:39which will sell NVIDIA's supposedly restricted chips to China.

00:58:47And in fact, some of them will sell to China the entire servers. It cost about

00:58:56300,000 apiece. They've got eight chips in. Isn't that a fact? Senator, I'm not

00:59:02familiar with with the website that you're referring to. But what I can tell

00:59:06you, I'm referring to 70. Do you read the Wall Street Journal?

00:59:10On occasion? Yes, you should read this article. They've identified at least 70

00:59:15distributors, and they have confirmed that these chips are being sold to

00:59:19China.

00:59:22Senator. And, uh, I mean, this is very disturbing. Um,

00:59:30what one estimate not according to the Center for a New American Security.

00:59:37It estimates that the median number of a one ships chips being sold sold

00:59:43already to China 12,500. Isn't that correct?

00:59:49Senator. Any diversion of our controls would be a matter for export

00:59:53enforcement, and we're tracking that very closely. But you're not aware that

00:59:5712,500 have been sold.

01:00:00Senator, we track all sorts of data through our analytic capabilities to

01:00:04understand illicit procurement networks. That's very important to our work, but

01:00:09it's something we're cracking down on 500. I can't speak to the specific

01:00:14report that you're referring to, sir. Well, you need to read the paper.

01:00:18No disrespect. These chips have been sold, and it's been confirmed to China's

01:00:24most elite universities.

01:00:27They've been sold to the state Research Powerhouse Chinese Academy of Science,

01:00:32haven't they? You don't know. Do you know anything about that?

01:00:36Senator, we look at license applications and determine whether

01:00:40they're consistent with national security. If it's not consistent with

01:00:44national security, we do not approve. All you gotta do is go on, get your

01:00:49computer out and go on Google and search, and you'll find 70 distributors

01:00:57that are selling these restricted chips that you're not shutting down.

01:01:02And the Wall Street Journal has confirmed all of this.

01:01:07Sir, we would add entities like that to our entity list as a regulatory action.

01:01:12We would also haven't done it yet. We would also have our enforcement

01:01:17colleagues investigate. Were you aware of this before? I raised it today.

01:01:21Senator, I certainly am aware that when our laws are effective, illicit

01:01:26procurement networks stand up to violent distributors and the thousands

01:01:31and thousands that have been sold right there on the Internet in front of

01:01:36God and country bigger than Dallas. Was your agency in charge of enforcing

01:01:42this aware of that?

01:01:44Senator, I'd be happy to connect you with our enforcement team to talk

01:01:48about this in more detail. Yes, sir. I mean, who's on first? What's on second?

01:01:53We've got export controls here,

01:01:56and all you got to do is go on the Internet and China buys them.

01:02:05The expound. Are you aware? Were you aware of this before? I raised it

01:02:11today. Senator Kennedy, you've made your point clear. I share your concerns.

01:02:16I think this is one reason why B. I. B. I. S. Needs more funds. Senator Smith

01:02:21from Minnesota is recognized. Well, can I just say one more point? Certainly

01:02:26may. I don't think they need more money. I think they need people that talk to

01:02:31each other and know how to use an Internet and know how to read articles

01:02:35in The Wall Street Journal. This is not. You don't have to be an astrophysicist

01:02:40here.

01:02:44Senator Smith. Thank you, Chair Brown. Thanks to all of you for being here. I

01:02:49really appreciate it. I'd like to direct my first question to Assistant

01:02:53Secretary Taylor Colley, if I may. The recent disastrous crowd strike

01:03:00incident, I think, exposed the alarming vulnerabilities that can result when too

01:03:04many critical systems and capabilities air dependent on a single source

01:03:08component and that faulty software update crashed. It apparently crashed

01:03:14over eight million windows devices. I mean, airlines were crippled banking

01:03:18systems, hospitals. It was a mess. A lot of people paid the price for that. My

01:03:22question is, um, the D. O. D.'s industrial based strategy includes

01:03:28efforts to reduce the risks associated with over dependence on a single or

01:03:33potentially adversarial adversarial source for national critical

01:03:37capabilities. I'm wondering how is the D. O. D. Thinking about the national

01:03:41security risks that can stem from instances like the crowd source outage

01:03:45where there's vulnerability from a single sourced product that can crash

01:03:49critical systems?

01:03:51Ma'am, thank you for that question. Um, single sources of, um, in our supply

01:03:58chains and our particular defense critical supply chains, um, remains a

01:04:05huge, incredible, um, uh, risk for our industrial base and for the Department

01:04:12of Defense. Um, in general, for us being able to provide our warfighters

01:04:17with the, um, capabilities that they need at speed and at scale. Um, an

01:04:22issue like the one that you raised with CrowdStrike is one that, um,

01:04:26obviously we we all experience. I experienced it myself personally on

01:04:30Monday trying to leave Michigan. Um, but, um, in general, we address sort

01:04:36of our supply chain issues. Um, you know, looking at broadly looking across

01:04:41the board. We also through our, uh, our chief information officer look at

01:04:48cyber threats in particular, and I want to emphasize the importance of cyber

01:04:54as part of the, um, sources of risk to our industrial base, particularly to

01:05:00manufacturers as well. Um, as part of the umbrella of the National Defense

01:05:06Industrial Strategy, uh, C. I. O. Also issued the cyber of the D. O. D.

01:05:11Defense industry cyber strategy as well. So we continue to look very

01:05:16closely at these and look at ways in which they affect particularly the

01:05:20defense industrial base and how we can intervene. Thank you. I, uh, I

01:05:24appreciate your response. I think it was just sort of impossible for most

01:05:27Americans to believe that everything could just be so screwed up because of

01:05:31one software update gone awry. And, um, I think when you think about what

01:05:38that might mean for other, you know, highly, um, important systems that we

01:05:42rely on for so many other things, it's it's really concerning. I want to ask

01:05:48you another question. This one has to do with, um, on drug on shoring. So the

01:05:53FDA tells us that nearly 70% of the ingredients that the ingredients and

01:05:59medications that Americans take are sourced overseas, mostly India and

01:06:04China. And the Finnish drug supply is also heavily reliant on overseas supply

01:06:09chains again, mostly from India and China. So, um, could you talk about

01:06:13what the risks are that are posed by this reliance on foreign manufactured

01:06:17drugs, especially medications like antibiotics? What impact that has on

01:06:22military readiness and civilian health? And what tools does the Department of

01:06:26Defense have to promote domestic manufacturing of these critical medical

01:06:30products? Ma'am, I want to underline the concerns that you raise, um,

01:06:36particularly with pharmaceuticals, um, and the fact that they have in our

01:06:40supply chains and ultimately to, um, our war fighters. I don't, in my purview,

01:06:46handle these issues within the Department of Defense. But I also want to

01:06:50note that Mr Harris also does within the Commerce Department. He may have

01:06:54something. Thank you, Mr Harris. Thank you, Senator. We absolutely share your

01:07:00concern that we need to be focused on where there are dependencies, where

01:07:03there are single sources of supply, and we have an urgent need to be more

01:07:08proactive and strategic in our approach to supply chains. We all collectively

01:07:12learned lessons in the pandemic, but it's not just about where the market

01:07:16might not function or where the supply might be too brittle of a supply chain.

01:07:20There are also national and economic security risks in these supply chains.

01:07:24You noted a perfect example. Americans expect every day that they would have

01:07:29what they need in the medicine cabinet or on the kitchen table, and the supply

01:07:33chains are what gets those products to point on my team in the Commerce

01:07:37Department and in the new supply chain center that we've created. We've been

01:07:41working with the Health and Human Services Agency and others to try to

01:07:44assess the data and identify what is of greatest concern and who do we need to

01:07:49work with to try to improve resiliency in that supply chain. Thank you. Thank

01:07:53you very much, Mr Chair. I just note that I have to, um, bipartisan bills to

01:07:58address this issue, one with Senator Cassidy, which would provide fundings

01:08:01to antibiotics manufacturers to, um, bring those factories back to the

01:08:06United States. And the second with Senator Cotton would provide incentives

01:08:10to drug manufacturers to produced finished drugs here in the United

01:08:14States by providing higher reimbursement for those products. I

01:08:18look forward to working on those proposals with any of my colleagues

01:08:21who are interested. Thanks, Senator Smith. Senator Brett from Alabama is

01:08:24recognized. Thank you, Chairman. Uh, and thank each of you for being here

01:08:28today. We appreciate it. Look, we all know the ever growing threat that is

01:08:33posed by the Chinese Communist Party and whether the C. C. P. Um, no matter

01:08:38what they're doing, undermining the American worker, stealing intellectual

01:08:42property, buying up our farmland. Uh, they have demonstrated a disregard for

01:08:48internet international rules. So when we're looking at that, it seriously

01:08:53doesn't matter if it's trade, if it's intellectual property, anything

01:08:56standing in their way, they're willing to just bulldoze straight through that.

01:09:00And American companies across every single sector of our economy are under

01:09:04pressure as a result. So I'm looking at A. I. Computing, energy, robotics,

01:09:12um, just influence or attempts to influence our institutions. The buying

01:09:16up of farmland, we could go on and on and on. The Chinese Communist Party is

01:09:21going to stop at nothing until they achieve their ultimate goal and the up

01:09:25end international order. So using the tools at our disposal, whether it's

01:09:30export controls, CFIUS or sanctions, we must pursue a strategy that strikes

01:09:36the right balance between protecting U. S. Industry and businesses and hard

01:09:41working Americans from the threats that are imposed by the Chinese Communist

01:09:45Party and other adversaries, while also allowing our economy and capital

01:09:49markets to thrive and to remain dominant. On this, a recent New York

01:09:55Fed report raised questions about the effect of unilateral export control

01:10:00policies. The report highlights the unintended consequences, like lost

01:10:04revenue to U. S. Firms, loss of start market capitalization for U. S. Companies

01:10:10and worse yet, unintentionally propelling Chinese firms to innovate

01:10:14and develop and advance technologies in house. In that end, the American

01:10:20consumer is the one that pays the price, and that is who I am concerned about.

01:10:25Mrs. Kendler, how do you think we strike the balance between cutting off

01:10:31China's access to our critical technologies while also ensuring

01:10:35American consumers don't pay the ultimate price?

01:10:41Thank you, Senator. This is this is a question that we struggle with every

01:10:44day. Our focus is on maintaining national security, that that comes

01:10:49before all good. But part of national security is U. S. Technological

01:10:53leadership. And so I think the first thing I'd point you to is the

01:10:59multilateral approach to export controls and the calibrated approach

01:11:03to export controls. So such is in our semiconductor controls where we've

01:11:07targeted the most advanced chips. We're not trying to unduly interfere with

01:11:12with business that doesn't cause a national security risk. We're trying to

01:11:16target our controls and create them in a way, together with our interagency

01:11:20partners, that attacks the most important need. The the danger of not

01:11:26using multilateral controls is that we may fail where we're damning half the

01:11:32river if it's only the United States imposing controls and not our partners

01:11:36and allies or other supply countries. We're also potentially incentivizing

01:11:42foreign companies to design out U. S. Components as they manufacture goods.

01:11:47So this is something we pay a great deal of attention to as we have. We

01:11:50don't take our eye off the national security ball. Well, and in that vein,

01:11:55unfortunately, since it was reauthorized last in 2018, the Defense

01:11:59Production Act has become increasingly used. You've seen President Biden and

01:12:03Vice President Harris again acting out of the bounds of congressional intent,

01:12:07this time using it to further the Green New Deal agenda and by boasting

01:12:12productions of things like solar panel parts using the Defense Production Act

01:12:16for partisan priorities that have little to do with national security

01:12:20undermines the critical use of that tool and the way that it was intended to

01:12:26essentially give our nation the ability to defend ourselves and our allies. We

01:12:30are considering reauthorization ahead of 2025, and we need to ensure that it's

01:12:35actually being appropriately utilized. And so, Mrs. Taylor Kell, I understand

01:12:41you recently released the first national defense industrial strategy. Can you

01:12:45share with us the status of implementation? And more broadly, what

01:12:50is the state of the industrial base and ensuring that our war fighters are

01:12:55properly equipped?

01:12:58Thank you, ma'am. I want to emphasize again that the Department of Defense

01:13:03strongly supports the reauthorization of the Defense Production Act. The

01:13:07defense, we use the Defense Production Act daily, all three titles to, um, make

01:13:13sure that our supply chains, our defense critical supply chains are

01:13:17secure. Last year, FY 23 alone, we invested $733 million in critical

01:13:25minerals, microelectronics and other areas where there are gaps in our supply

01:13:30chains. We very strongly see the importance of this is with respect to

01:13:36some of the investments that you mentioned. I can again only speak to

01:13:40Department of Defense investments that I oversee, and I refer you to other

01:13:44agencies and particularly, um, Department of Energy or HHS, right? But

01:13:49the warfighter specifically, and that is how we use the Defense Production Act

01:13:54within the Department of Defense again. It's to address long lead times of

01:13:59critical, um, materials of their, for instance, materials that go into rare

01:14:06earth elements, they go into the F-35, for instance. We use the Defense

01:14:12Production Act daily to support the warfighter. Thank you. Senator, Senator

01:14:19Warnock of Georgia is recognized. Thank you so very much, Chair Brown. I don't

01:14:26believe that giant American corporations should get richer by selling their

01:14:31technologies to authoritarian regimes or human rights abusers. And that's why

01:14:38I was glad to see the Biden Harris administration take steps in 2021 to

01:14:44further center human rights in U. S. Foreign policy through the Export

01:14:50Controls and Human Rights Initiative, an effort aimed at curbing the misuse of

01:14:56American technology by repressive governments and regimes whose human

01:15:04rights record we rightly deplore.

01:15:0925 nations have signed on to the initiative's code of conduct, leading to

01:15:14more of our allies considering human rights when reviewing their exports of

01:15:19technologies that can perpetuate human rights abuses. We don't want to make,

01:15:27uh, the trampling of human rights efficient.

01:15:32Miss Kendler, can you highlight some successes from the Export Controls and

01:15:38Human Rights Initiative and how they contribute to efforts to combat

01:15:42authoritarian regimes?

01:15:45Senator, thank you for this question. Human rights is front and center in how

01:15:49we consider export controls. The, uh, ECRI, as we know it, the Export Control

01:15:55and Human Rights Initiative has been very helpful in bringing together

01:15:59countries that that share values even when they don't have export control

01:16:04systems of their own. And it's enabled a dialogue that is desperately needed for

01:16:11our national security and foreign policy. Just today, the Commerce

01:16:15Department released a proposed rule that's connected to ECRI. We're looking

01:16:20at foreign security end users in countries of concern, authoritarian

01:16:26countries, like you note, to ensure that U.S. person activity, U.S. persons are

01:16:30not supporting jail operators, foreign police and that sort of thing. And that

01:16:38is a proposed rule. We're seeking industry comment, but it is connected to

01:16:42ECRI in the sense that it moves our human rights protections forward. We've

01:16:47also been very active at the Commerce Department in adding entities to our

01:16:52entity list, requiring specific licenses for companies and other

01:16:59organizations that may be involved in human rights abuses, contrary to U.S.

01:17:06national security and foreign policy.

01:17:09So it's important in terms of the advancing of our own values and our

01:17:15commitment to human rights, but could you say more about why it's important that

01:17:22the United States of America lead in this space? My sense and core belief is

01:17:29is that there is no replacement for American leadership in the world. It's

01:17:34indispensable. And can you say more about the geopolitical implications of

01:17:40us leading in this space? U.S. technology is the best in the world. We need to take

01:17:49a leadership role to ensure that it's not used in a way that is contrary to

01:17:55our values, and by taking that stance and working with our allies through

01:17:59multilateral regimes, plurilateral regimes, bilateral relationships, we can

01:18:04bring others into that fold. And there are many countries around the world who

01:18:09do share our values and who are looking at things like facial recognition

01:18:12systems and saying that may be appropriate in an, I don't know, an

01:18:16airport context. It is not appropriate when you're surveilling minority

01:18:20populations in Xinjiang or Tibet. So you would say that the United States is

01:18:24uniquely positioned to lead in this space, and would you also say that it has

01:18:28national security implications for us? Yes, Senator, I would. Are additional

01:18:35congressional authorities necessary to expand and improve the efficacy of these

01:18:39initiatives? Senator, there's several ways where we could bring in technical

01:18:44expertise into the Bureau of Industry and Security. One thing that comes to

01:18:48mind is a highly, excuse me, highly qualified experts program that we were,

01:18:53we are seeking authority for. We could bring in experts on a temporary basis

01:18:58into the Bureau of Industry and Security who know these technologies

01:19:01well. That's a, that's an area where, where we'd welcome an opportunity to

01:19:06obtain additional authorization and resources. We'd also look at some

01:19:12provisions in our regulations like remote access and the opportunity to

01:19:17control access to data centers and other high-end advanced technology. That's an

01:19:25area where, where expansion of authorities under ECRA would be helpful.

01:19:28Well, thank you so much. There are more questions that I could ask, but maybe we

01:19:33can follow up later. But I'm grateful that the Biden-Harris administration

01:19:39understands that export controls can be an effective tool to combat authoritarian

01:19:43regimes. This is important in this moment, especially when you look at the

01:19:49geopolitical situation, the, the effort by some to advance the kind of

01:19:54authoritarian approach, both internationally and, and I would say

01:19:59domestically. So thank you for your work. As surveillance technology continues to

01:20:04improve, we must ensure American corporations are not making money from

01:20:08authoritarian regimes and human rights abusers. All of us have a stake in that

01:20:13project. Thank you very much. Senator Warnock, Senator Warren from Massachusetts.

01:20:18Thank you. Thank you, Mr. Chairman. So the Committee on Foreign

01:20:24Investment in the United States, or CFIUS, reviews foreign investments in our

01:20:28country to make sure they don't pose risk to national security. Increasingly,

01:20:33foreign companies are building crypto mining facilities on U.S. soil. These

01:20:40mines are actually warehouses stuffed with computers that process crypto

01:20:47transactions and produce new crypto tokens. They're loud, they're hot, and they

01:20:53suck up a ton of electricity, which can crash the power grid. And that's why many

01:20:59countries have banned crypto mining, leading more foreign companies to set up

01:21:05shop here in the United States. According to a blockchain analytics firm, today

01:21:11one-third of crypto mining facilities in the U.S. are owned by citizens of the

01:21:18People's Republic of China, including people with direct ties to the Chinese

01:21:24government. Crypto mining is a disaster for the environment, and it can pose

01:21:29national security risks as well. In May, at CFIUS's recommendation, President

01:21:37Biden issued an order requiring the Chinese national owners of a crypto

01:21:42mining facility in Wyoming called Mine One to divest their ownership and remove

01:21:50the crypto mining equipment from the premises. Assistant Secretary Rosen,

01:21:55you're the head of CFIUS, so you oversaw the investigation into Mine One and told

01:22:02the president that the divestment was essential. The divestment order cited two

01:22:09primary factors. One, the technology inside Mine One could be used for

01:22:15surveillance, and two, Mine One was located one mile from a strategic

01:22:22missile base housing intercontinental ballistic missiles. So I want to ask you,

01:22:28could the equipment inside that crypto mine have been used to spy on our

01:22:34military operations and our nuclear weapons system? Senator, thank you for the

01:22:40question, and I think pointing out this case in particular. I'm limited in terms

01:22:44of what I can say about this particular transaction, but to answer your question,

01:22:48there is a generalized concern that sophisticated equipment in proximity to

01:22:54sensitive facilities can be used for espionage. Okay, so can be used for

01:22:59espionage. Foreign adversaries are using crypto mines to spy on U.S. military

01:23:06operations. That's an obvious national security risk, but it isn't the only risk.

01:23:12Foreign-owned crypto mines also threaten our energy grid. According to an analysis

01:23:19by the New York Times, Bitcoin mines in the U.S. owned by Chinese nationals use

01:23:26enough energy to power 1.5 million homes. National security experts have

01:23:33warned that foreign-owned crypto mining facilities' connection to our energy grid

01:23:40could leave the U.S. vulnerable to targeted blackouts and cyber attacks.

01:23:46Assistant Secretary Rosen, if China or another foreign country had the power to

01:23:54crash a significant portion of our country's power infrastructure, could

01:24:00that threaten our national security? Senator, of course an impact on our energy

01:24:07sector, our energy resources, our energy supply chain could very much have a

01:24:12national security impact. All right. There is yet another risk as well. Foreign

01:24:19nationals have been able to buy up crypto mines in the United States in

01:24:24secret. How? By paying in crypto. Crypto allows them to bypass our traditional

01:24:32banking system and the anti-money laundering rules that are supposed to

01:24:36prevent any anonymous foreign money from coming into the U.S. In fact, that is

01:24:42exactly how a Chinese investor was able to secretly buy a six million dollar

01:24:48crypto mine in Texas. It is also how U.S.-based crypto mines have been able to

01:24:55secretly send millions of dollars back to China. Assistant Secretary Rosen, do

01:25:03you agree that we need to plug the holes in our anti-money laundering rules that

01:25:09have allowed foreign nationals to secretly buy U.S. crypto mining

01:25:14facilities or make other kinds of investments in the U.S. without our

01:25:19knowing about it? Senator, I certainly share your concern about ultimate

01:25:24beneficial ownership and making sure that we know who is doing the buying. I

01:25:28can speak for the CFIUS context. When we look at a transaction or try to find a

01:25:32transaction, that's a critical component to our diligence. All right. Crypto mines

01:25:38could be used by our adversaries to spy on our military bases or to bring down

01:25:44our power grid or to move money in and out of the country in secret. Last year,

01:25:50the Treasury Department requested additional tools from Congress to

01:25:54prevent China, Iran, Russia, and other foreign countries from using crypto to

01:26:01evade sanctions and launder dirty money. It is time for us to pass the laws that

01:26:07Treasury needs. Thank you, Mr. Chairman. Thank you, Senator Warren. Not unrelated

01:26:11to her comments, yesterday I introduced the CAR Act to be proactive and stay

01:26:16ahead of the threat that Chinese connected vehicles pose to our

01:26:20national security and to Americans' privacy. Another

01:26:24threat that we have the chance to meet now early before there are more

01:26:29Chinese connected vehicles on our streets. Ms. Kendler, I hope you and your

01:26:34colleagues will work with me on that effort. Thank you to the witnesses today.

01:26:38For senators who wish to submit questions, for the record, those questions

01:26:41are due one week from today, Thursday, August 1st. To the witnesses, you have 40

01:26:46days to 45 days to respond to any questions. Thank you again. The committee

01:26:51is adjourned.

Sherrod Brown Leads Senate Banking Committee Hearing On Advancing National Security

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