US targets companies with Chinese military ties
The Pentagon is compiling a list of companies with ties to the Chinese military as part of a stepped-up Trump administration effort to stop Beijing from obtaining sensitive technologies and protect US defence supply chains. The US defence department is trying to identity Chinese companies and organisations with direct and indirect relationships with the People’s Liberation Army to help reduce the chances of US weapons supply chains being compromised, according to seven people familiar with the effort, which has strong support from the White House. The Pentagon has become increasingly concerned about supply chains, seeking ways to tackle critical gaps in the US industrial base and prevent infiltration by adversaries. The focus has intensified under the Trump administration, which in 2017 named China a “revisionist” power in its first national security strategy. The review aims to detect supply-chain vulnerabilities to help ensure US companies do not help the Chinese military through sales or procurement. In much the same way the US has clamped down on Huawei, the Chinese telecoms company, the list will help the government to reduce potential threats from China by utilising export-control rules and federal acquisition regulations that can be used to bar government agencies from buying technology from designated companies.
It’s critical that American institutional and retail investors know which companies are involved not only with the Chinese Communist party’s military, but also with its espionage, human rights abuses and ‘Made in China 2025’ industrial policy
“The Pentagon is going whole hog,” said one person familiar with the project. “When it comes to changing trade and supply chain patterns, the federal acquisition regulations are the most powerful weapon in the Pentagon arsenal, even more potent than our nuclear weapons, and are a formidable wedge for forcing decoupling.” General Paul Selva, the recently departed vice-chairman of the joint chiefs, focused the review on semiconductors and integrated circuits since both are critical for weapons, according to the person. The Pentagon declined to comment on any aspect of the supply chain review, saying it was unable to do so “for classification reasons”. The commerce department, which is also involved in the project, also declined to comment.Paul Triolo, head of the geotechnology practice at Eurasia Group, said the Pentagon had become increasingly concerned about critical areas such as semiconductors because of the potential for Beijing to insert sophisticated implants that could be used to compromise weapons during a time of conflict between the US and China. “These types of supply chain operations are extremely difficult to detect, and the Pentagon’s preferred approach seems to be evolving around attempting to identify trusted suppliers, much like in the case of next generation 5G [mobile] systems, and blacklisting those suppliers that are deemed potentially subject to Chinese intelligence services influence,” Mr Triolo said. The effort to secure supply chains for weapons ranging from cruise missiles to fighter jets comes as China pushes ahead with a “military-civilian fusion” programme that experts say further underscores the need for the US government and private sector to be vigilant about companies that may have hard-to-detect connections to the PLA. Christopher Ford, a top state department official, has urged the US to “wake up” to the implications of the programme for areas such as artificial intelligence, cloud computing and semiconductors. “This is not a call for anything like a complete high-technology ‘boycott’ of China, but there is a need for serious risk mitigation,” he said in July.The push to be more vigilant about PLA connections comes 20 years after Congress passed a law requiring the Pentagon to publish a list of Chinese military companies and groups operating in the US. The Clinton administration did not act on the law, which has remained dormant until it was resurrected by the Trump administration. The issue is receiving more attention from Congress as lawmakers become increasingly concerned about China. Tom Cotton, a senior Republican on the Senate armed services committee, told the Financial Times that the Trump administration “should re-examine all the statutory authorities at its disposal to confront the Chinese Communist party, including powers that have lain dormant for years” such as the 1999 requirement. Mr Cotton has joined forces with Chuck Schumer, the top Senate Democrat, and members of the House of Representatives that include Mike Gallagher, a Marine Corps veteran from Wisconsin, to call on the Pentagon to make sure that the US is doing enough to tackle the threat.According to a bipartisan letter that the lawmakers plan to send Mark Esper, defence secretary, they want the Pentagon to consider the issue in the context of the Chinese military-civilian fusion strategy, citing comments by Mr Ford that the programme was the “blueprint for China’s global ‘return’ to military pre-eminence”. “The CCP relies on companies under its influence to steal technology abroad, particularly from the US,” Mr Gallagher told the FT. “Americans deserve to know if PLA-directed companies are operating in the US and threatening our national security.”US security officials are also increasingly concerned about “Made in China 2025”, a Chinese plan to become self-sufficient in critical technological areas such as robotics, 5G, artificial intelligence and quantum computing. Beijing has downplayed the goal following US objections but American officials insist that it remains in place. Marco Rubio, a top Republican on the Senate foreign relations committee, told the FT that the publication of an exhaustive list of PLA-affiliated companies was “long overdue” and would help investors evaluate Chinese businesses. “It’s critical that American institutional and retail investors know which companies are involved not only with the Chinese Communist party’s military, but also with its espionage, human rights abuses and ‘Made in China 2025’ industrial policy,” the US senator from Florida said.
Wednesday, 7 August, 2019
Larry Wortzel, a member of the US-China Economic and Security Review commission, said the list would promote the disclosure of material information about Chinese companies. He said this was critical because Beijing blocks the US Public Company Accountability Oversight Board from inspecting businesses that audit listed Chinese companies. “Chinese companies are making venture capital investments in the US, but it is more difficult to conduct screening of the companies by the US,” he said. “From a security standpoint, this means that the US does not always know about relationships to the Chinese Communist party or the PLA by corporate boards or officers.” Another person familiar with the project said the Pentagon was contacting companies to request details about their supply chains and explaining that the list would help them identify vulnerabilities. He said some US companies were nervous about providing such information because it was unclear if the Pentagon would make clear why they had identified certain Chinese companies as requiring extra vigilance. The outreach is partly necessary because of the complex nature of global production. Mr Triolo said one challenge when it came to semiconductors was their supply chains “touch China” at some point in the production process. “It will be difficult for the Pentagon to alter global value-added supply chains in a way that gives US military planners complete assurance that their equipment is safe from potential Chinese meddling,” he said. “The key will be how far back in the supply chain to exclude some China nexus in the development and testing of complex systems such as semiconductors.” Follow Demetri Sevastopulo on Twitter: @dimi