Regulation of U.S. Outbound Investment to China

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Updated December 10, 2024

Regulation of U.S. Outbound Investment to China

Introduction

The U.S. government has generally Regulation of U.S. Outbound Investment to China

Introduction

The U.S. government generally has supported an open investment environment at home and abroad to promote U.S. economic growth, sustain the U.S. position as a premier destination for foreign direct investment, and ensure U.S. competitiveness. The U.S. government’'s interagency Committee on Foreign Investment in the United States (CFIUS) reviews a small subset of foreign inbound investments, primarily mergers and acquisitions, that could result in foreign control of a U.S. business and raise potential national security concerns. Since 2016, some Members of Congress have focused onand legislative proposals have sought to address the potential U.S. economic and national security effects of certain U.S. outbound investments to the People’'s Republic of China (PRC or China) and other countries of concern, including the transfer of U.S. technology and know-how in sensitive or strategic sectors.

In response, the 118^th Congress is considering legislation to strengthen foreign investment review authorities and restrict some U.S. investment in the PRC and other “countries of concern” that involves dual-use and critical technology. In response to congressional activity, in August 2023, President Biden issued Executive Order (E.O.) 14105 to establish a targeted outbound investment program. While the E.O.’s scope of covered activity is limited, new rules are considered a departure from traditional U.S. economic policy. Opponents argue that existing tools like sanctions and export controls can address risks. Proponents argue that new measures are needed to preserve a market-based climate and counter PRC policies that incentivize and require the transfer of U.S. technology and capabilities to PRC competitors to benefit the PRC government.

Background and Policy Debate

In December 2025, Congress enacted the Comprehensive Outbound Investment National Security Act of 2025 ("the act"), as part of the National Defense Authorization Act for Fiscal Year 2026 (Title LXXXV of P.L. 119-60). The act codifies certain aspects of the Department of the Treasury's Outbound Investment Security (OIS) Program—in effect since January 2025 pursuant to Executive Order (E.O.) 14105 of August 9, 2023—while establishing some new, distinct requirements and authorities. The act is the first to set up a specific program that regulates and restricts certain outbound investments, though it remains narrowly targeted on a few specific sectors, activities, and countries. The Trump Administration indicated in 2025 that it was reviewing E.O. 14105 and the OIS Program to "examine whether it includes sufficient controls to address national security threats," and is considering potential modifications following the enactment of P.L. 119-60. The act's provisions are to be in effect for seven years (§8505).

Background and Policy Debate

Since 2016, Congress has led efforts to strengthen U.S. foreign investment review and has considered regulating some outbound investment. Enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA, Title XVII, Sub. A, P.L. 115-232) ) in 2018 enhanced CFIUS authorities to review, mitigate, or restrict inbound foreign investments in U.S. firms involved in critical technologies, critical infrastructure, or sensitive personal data, and certain real estate transactions. Other proposed provisions—e.g., on U.S. outbound investment—were diluted or eliminated during congressional and executive branch deliberations over FIRRMA, following business pressure and other policy considerations. Instead, Members reformed U.S. export controls to regulate some critical and emerging dual- use technologies and technology transfer abroad. Since then, Congress has returned to these investment issues, in part in response to high-profile PRC greenfield investments in the United States and U.S. investments investment in China in strategic sectors (e.g., semiconductors and biotechnology). U.S. investments in China includehave included the creation of research and development centers, production facilities, and joint

ventures (JVs) with the PRC government and PRC firms. Some Members say U.S. portfolio investments also support PRC firms in strategic sectors and also should be regulated.

U.S. firms have benefitted from the ability to invest and sell in China as a top global market since the 1990s. Despite the commitments it made to join the World Trade Organization in 2001, however, the PRC maintains policies and practices that require foreign firms to localize production in China and transfer technology to PRC firms in order to sell or operate in the market. Since 2014, the PRC government has issuedadopted additional industrial policies and economic security measures. The U.S. Chamber of Commerce, among other Some U.S. business groups, has expressed support for the Biden Administration’s efforts “to develop a thoughtful regime that safeguards American national security and economic leadership without unnecessarily restricting beneficial U.S. business activity.” At the same time, the Chamber advocates for an approach that is “narrowly tailored to target specific national security concerns in a transparent, efficient, and predictable manner,” follows “clear, workable rules,” and avoids creating a chilling effect on firm activity. The Semiconductor Industry Association warns have expressed support for the OIS Program's tailored approach, while raising concerns that foreign firms could fill any loss of U.S. market share in countries of concernChina that might result from anythe new restrictions.

Executive Branch Action

E.O. 14105, issued by President Biden in August 2023, directs the Treasury Department to create a new outbound investment program. The E.O. reiterates an "open investment" posture that promotes cross-border investment, where "not inconsistent" with the protection of national security interests. It asserts that " new restrictions.

Congressional Activities

Congress has sought to address what some Members see as statutory, regulatory, and implementation gaps with regard to CFIUS and export controls (see text box).

Select Legislation in the 118^th Congress

• National Critical Capabilities Defense Act of 2023 (H.R. 3136) would create a committee to review and regulate or prohibit certain U.S. investments involving “national critical capabilities” in “countries of concern.”

• Outbound Investment Transparency Act of 2023 (S. 2678) proposed notification of certain outbound investments in certain sectors. It was part of a Senate- version of the National Defense Authorization Act for FY2024 (S. 2226) and excluded from the enacted NDAA.

• Preventing Adversaries from Developing Critical Capabilities Act (H.R. 6349) would prohibit or require notification for certain activities of U.S. persons involving covered sectors in countries of concern. It would codify aspects of E.O. 14105. A modified version was included in the broader bill H.R. 7476, introduced in Feb 2024.

Some legislation broadly aims to sustain and rebuild U.S. production, technology, and innovation capabilities and counter PRC trade and investment policies of concern. Proposals include notification requirements, prohibitions in key sectors, and a case-by-case review process broadly similar to CFIUS that some call a “reverse CFIUS.” Some Members advocate for an entity-based sanctions approach

Regulation of U.S. Outbound Investment to China

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to restricting investments (e.g., H.R. 760), rather than a sectoral approach. In early 2024, committees held hearings to debate H.R. 6349 and H.R. 760. Some experts say that sanctions could augment a sectoral approach by including portfolio investments and banning investment in PRC firms already subject to other U.S. restrictions.

Executive Branch Action

E.O. 14105 directs the Treasury Department to create a new outbound investment program. The E.O. reiterates an “open investment” posture that promotes cross-border investment, where “not inconsistent with the protection of United States national security interests.” It asserts that “advancement by countries of concern in sensitive technologies and products critical for the... military, intelligence, surveillance, or cyber- enabled capabilities”" constitutes an “"unusual and extraordinary threat”" to U.S. national security. It says thatasserts such countries can exploit U.S. investment and related intangible benefits such as “enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing.” Features of the authorized program include • . Features includeA two-tiered system that (1) prohibits certain outbound investments in “involving "countries of concern” involving" and sensitive technologies and products that pose an acute national security risk, and (2) requires notification for investments in technologies with a lower risk profile.

• “ "Covered national security technologies and products,”" broadly identified as those in the (1) semiconductors and microelectronics, (2) quantum information technologies, and (3) artificial intelligence (AI) sectors.

• Unlike CFIUS, no case-by-case review of transactions.

• Coverage of investments in “"countries of concern” now," currently defined as the PRC (including Hong Kong and Macau).

In October 2024, Treasury issued its final rule to establish the new Outbound Investment Security Program, which is to go into Treasury's final rule to establish the OIS Program took effect on January 2, 2025. Treasury said thatstated its approach seeks to focus on U.S.focuses on investments that “"present a likelihood of conveying both capital and intangible benefits.” The rule describes the new regime as targeted and," and is narrowly scoped “"to avoid unintended impacts in broader sectors of the U.S. or global economies.”

"

Covered transactions include acquisitionsacquisition of equity interests in a covered foreign person; certain debt financing; the acquisition, leasing, or development of operations, land, property, or assets in a country of concern (i.e., greenfield investments); JVs; and limited partner (LP) investments in a non-U.S. pooled investment fund that the U.S. person knows “"likely will invest in a person of a country of concern.”" The final rule elaborates on a “"knowledge standard,”" i.e., knowledge a U.S. person must have about the facts and circumstances of each type ofa transaction to trigger the obligations under the rule. It defines U.S. persons as any U.S. citizen, lawful permanent resident, entity organized under U.S. laws or within U.S. jurisdiction (e.g., foreign branch), or any person in the United States.

Excepted transactions include investments in publicly- traded securities; certain LP investments in venture capital, private equity or other funds that are $2 million or less, or made with certain contractual assurances; certain intra- company transactions between U.S. parent firms and

controlled foreign entities; equity-based employment compensation; and some transactions in third countries, among others. The Treasury Secretary, in consultation with others, may grant exemptions on national interest grounds.

The program also targets potential loopholes. For example, it prohibits a U.S. personU.S. person from “"knowingly directing”" a transaction by a non-U.S. entity (e.g., foreign fund) that the U.S. person knows at the time would be prohibited if undertaken by a U.S. person. . The Treasury Secretary may take actions authorized under the International Emergency Economic Powers Act (IEEPA, 50 U.S.C. 1701 et seq.) to nullify, void, or require divestment of any prohibited transaction.

Multilateral Cooperation

Some bills (e.g., H.R. 6349) would direct the executive branch to coordinate with allies and partners to develop comparable regimes. Some governments (e.g., the PRC, South Korea, Taiwan) have outbound investment rules. A May 2023 G7 joint statement recognized the role of outbound investment authorities to address risks, complement existing authorities, and “protect our sensitive technologies from being used in ways that threaten international peace and security.” An April 2024 U.S.-EU Trade and Technology Council (TTC) statement reiterated a common interest in addressing potential risks from certain outbound investments in a narrow set of critical technologies. The European Commission is considering new outbound measures in its economic security strategy.

Considerations for Congress

Congressional approaches to a U.S. outbound investment regime differ with regard to relevant countries, sectors, and activity to be covered. Most legislation targets China; some include Iran, North Korea, and Russia. Some bills would codify aspects of the Biden Administration’s approach, while others would also expand the covered technologies and countries. Some Members favor the legislative process to set “statutory boundaries” on new rules. Some Members support more restrictions than the E.O., while others have raised concerns about the scope of new rules and whether they could discourage investment in the U.S. market or erode U.S. competitiveness. Members debated potential inclusion of outbound investment restrictions as part of an NDAA for FY2025 (H.R. 5009). As Congress considers whether and how to regulate outbound investment and over- see E.O. 14105 implementation, some questions include • How could the U.S. government best organize a new investment regime, designate roles of national security and economic agencies, and address any potential overlap with inbound investment review authorities?

• What visibility does the U.S. government have into U.S. investment activity in China without a notification or review process? What current authorities does it have to review, mitigate, and restrict these activities?

• What is the best approach for determining which sectors or activities are subject to regulation?

• How would proposals affect U.S. competitiveness as a destination for investment, particularly compared to major economies that lack such regimes?

Cathleen D. Cimino-Isaacs, Specialist in International Trade and Finance

Regulation of U.S. Outbound Investment to China

https://crsreports.congress.gov | IF12629 · VERSION 6 · UPDATED

Karen M. Sutter, Specialist in Asian Trade and Finance

IF12629

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Congressional Action

Congress has sought to address what some Members see as statutory, regulatory, and implementation gaps with regard to CFIUS and export controls. Legislative proposals to restrict certain U.S. investments abroad have included notification requirements (S. 2678); prohibitions in key sectors (H.R. 6349); a case-by-case review process broadly similar to CFIUS that some called a "reverse CFIUS" (H.R. 3136); and an entity-based sanctions approach (H.R. 760).

Subtitle C, Title LXXXV of P.L. 119-60 codifies aspects of the OIS Program's two-tiered system of prohibition and notification requirements by amending the Defense Production Act of 1950 (50 U.S.C. 4501 et seq.) (§8521). The sense of Congress calls on the President to exercise authorities in the act to restrict certain U.S. outbound investments in technologies, in the PRC and other countries of concern, that "benefit a foreign adversary's military modernization efforts, surveillance states, and human rights abuses" in order to prevent harm to U.S. national security and foreign policy interests (§8504). Key aspects include

Expands sectors and countries subject to requirements, but leaves specifics to be determined by regulations. The act expands the countries covered by the OIS Program from China to also include Cuba, Iran, North Korea, Russia, and Venezuela. It expands covered sectors to include high-performance computing, supercomputing, and hypersonic systems. Treasury has rulemaking authority to define the technical parameters of prohibited and notifiable technologies and the specific technologies to be covered.

Defines covered transactions and key terms. The types of transactions covered largely mirror the OIS Program. The act expands a covered transaction to include U.S. persons "knowingly directing" a notifiable transaction by a foreign person. Treasury is granted authority to cover any other transaction (subject to congressional and public consultation requirements) "that is contributing to the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern." The act may broaden the scope of a covered foreign person subject to Section 8521 by including entities that are "subject to direction or control" of certain entities (such as PRC firms or members of the Communist Party of China) of a country of concern, and not just those that are owned in the aggregate 50% or more. The act authorizes but does not require the Secretary of the Treasury to establish a publicly accessible database that identifies covered foreign persons engaged in a prohibited or notifiable technology.

Exempts additional types of investment activity. Similar to the OIS Program, the act excepts a range of U.S. financial investments, such as stock market listings and certain venture capital and private equity investments. It adds new exemptions, such as de minimis investments based on a threshold to be established by Treasury.

Supplements prohibition and notification scheme with sanctions authorities. Subtitle B, Section 8511 of the act authorizes the use of sanctions under IEEPA on certain covered foreign persons with PRC ties (as separately defined in §8512), and requires an annual assessment and report to Congress regarding PRC firms listed on other federal agencies' lists under other authorities (§8531).

Requires multilateral engagement. The act directs the executive branch to engage multilaterally and coordinate with other countries to effectively implement the provisions and encourage the development of similar mechanisms.

Considerations for Congress

With the enactment of Title LXXXV of P.L. 119-60. Congress has directed Treasury to implement a modified prohibition and notification process for certain outbound investments to countries of concern. The act requires a report to Congress on enforcement actions taken and other aspects by June 2027 and annually thereafter. In conducting oversight, Congress may consider issues such as

• How does Treasury plan to implement the act? Are there plans for revising and issuing new rules?
• Will Treasury establish a process and criteria to add new sectors or activities to the Program? Should Congress expand the scope of the sectors and types of investments covered?
• Some exemptions to the restrictions limit coverage of passive U.S. financial investments involving PRC firms and sectors. Might such exceptions enable U.S. contributions to the development of PRC dual-use (civilian and military) technological capabilities?
• To what extent might the new requirements affect U.S. competitiveness as a destination for investment compared to major economies that lack such regimes?