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“Bureau of Industry and Security FY26 Budget: Export Controls and the AI Arms Race”

House Committee on Foreign Affairs, Subcommittee on South and Central Asia”

June 12, 2025 (recording linked here)

HEARING INFORMATION

Witnesses and Written Testimony (Linked):

• The Honorable Jeffrey Kessler: Under Secretary of Commerce for Industry and Security, U.S. Department of Commerce

HEARING HIGHLIGHTS

IN THEIR WORDS

SUMMARY OF OPENING STATEMENTS FROM THE SUBCOMMITTEE

• Chair Huizenga opened the hearing by emphasizing the urgency of the AI arms race between the United States and the Chinese Communist Party (CCP), stating that technologies like AI, quantum computing, and biotechnology are both economic drivers and military tools. He argued that China is aggressively pursuing dominance in these technologies through state subsidies, espionage, and exploitation of U.S. innovations. Huizenga highlighted the Bureau of Industry and Security (BIS)’s role in safeguarding critical technology supply chains and enforcing export controls to prevent U.S. technology from empowering China’s military and surveillance state. He endorsed the FY2026 BIS budget request, which includes a 133% increase in enforcement funding, as essential to maintaining U.S. technological leadership.

• Ranking Member Kamlager-Dove thanked Under Secretary Kessler for appearing and criticized the Trump administration’s broader approach to AI policy. While she supported increased funding for BIS, she warned that export controls alone are insufficient without sustained federal investment in R&D, which the President’s budget cuts significantly. She noted that California plays a critical role in the semiconductor sector and expressed concern about budget cuts to key agencies like NSF, NIST, and the DOE, as well as anti-immigration measures that threaten the semiconductor workforce. Kamlager-Dove stressed that the U.S. must not only restrict China's access to advanced chips but also accelerate its own AI and semiconductor innovation.

SUMMARY OF WITNESS STATEMENT

• Under Secretary Kessler stated that BIS plays a vital role in protecting national security by enforcing export controls and investigating threats from foreign adversary technologies. He highlighted the proposed $303 million budget request—the largest in BIS history—which would allow for significant expansion of enforcement staff and overseas officers. Kessler emphasized that BIS’s enforcement actions not only protect national security but can also generate penalty revenues, effectively funding themselves. He concluded by urging Congress to provide the necessary resources to ensure BIS can meet its growing responsibilities and support the President’s America First trade agenda.

SUMMARY OF KEY Q&A

• Chair Huizenga began by asking whether BIS had seen significant diversions of U.S. AI chips and if location tracking could help prevent them; he also questioned the impact of the newly announced rare earths deal with China and probed the accuracy of reports about China’s AI chip production capacity. Under Secretary Kessler confirmed frequent diversion attempts, supported increased enforcement funding, declined to comment on the still-evolving rare earths deal, and affirmed that China’s chip production was expected to reach 200,000 units, primarily for domestic use, while cautioning against underestimating China’s progress.

• Ranking Member Kamlager-Dove asked whether BIS had added any entities to the Entity List related to Russia’s war on Ukraine under the new administration and whether U.S. export controls on AI chips to the Gulf included binding security guarantees to prevent diversion to China. Under Secretary Kessler responded that enforcement continued against Russian targets but clarified that new Entity List additions depended on intelligence and interagency review, and he confirmed that security requirements were part of discussions with Gulf states before any exports.

• Rep. Kean questioned how BIS evaluates exports of advanced AI chips to China and how Congress could support stronger enforcement, also raising concerns about undersea cable tech security and lack of allied harmonization with U.S. controls. Under Secretary Kessler explained BIS’s robust and evolving control framework, urged full funding of the President’s budget request, expressed willingness to collaborate on cable-related export risks, and affirmed ongoing diplomatic efforts to align allies like Japan and the Netherlands.

• Rep. Bera asked how China was closing the AI chip gap with the U.S. and how BIS could help maintain America’s lead, especially in light of Gulf technology deals and the need to protect exported chips. Under SecretaryKessler stated that China had global ambitions and stressed that strategic deals and strict export controls were both vital to maintaining U.S. dominance, agreeing on the importance of security safeguards. Rep. Bera then raised concerns about BIS’s staffing losses and capacity to meet its mission. Under Secretary Kessler acknowledged workforce reductions but maintained that BIS could fulfill its current responsibilities and emphasized that additional resources would significantly expand its enforcement reach.

• Rep. Self asked whether closing the subsidiary ownership loophole was critical to preventing PRC circumvention of export controls, whether reinforcing the foreign direct product rule would help, and whether a 50% ownership threshold was appropriate. Under Secretary Kessler agreed there was a legitimate concern about subsidiaries evading restrictions and said he was open to working together on the issue. Rep. Self then asked if BIS planned to issue guidance for other Chinese firms beyond Huawei. Under Secretary Kessler replied that there were no current plans but he was open to considering it. Rep. Self followed up with concerns about U.S. companies slightly lowering chip specs to avoid controls. Under Secretary Kessler stated that BIS must define technical thresholds precisely and acknowledged companies will follow lawful guidelines, so BIS must ensure those do not unintentionally undermine national security.

• Chair Huizenga asked for clarification on whether any export controls had been suspended as part of recent Middle East agreements. Under Secretary Kessler confirmed that no export controls had been suspended and emphasized that all exports still required BIS authorization.

• Ranking Member Meeks questioned why the committee had not received the Commerce Department’s budget justification and asked about the rationale for recent licensing and regulatory decisions, including the rescinding of the AI diffusion rule. Under Secretary Kessler replied that his understanding was the documents had been provided but would follow up, and he explained that the diffusion rule was rescinded because it was overly burdensome and diplomatically problematic. Ranking Member Meeks then asked whether the recent license suspensions had gone through the proper interagency and White House processes. Under Secretary Kessler affirmed that BIS followed all interagency protocols established by executive order when required. Ranking Member Meeks closed by asking whether additional semiconductor actions targeting China were planned. Under Secretary Kessler responded that BIS remained vigilant but had no immediate new actions planned.

• Rep. Shreve raised concerns about BIS’s limited overseas enforcement capacity and the need to attract technical talent, previewing legislation that would allow BIS to hire technologists for one-year terms at competitive pay. Under Secretary Kessler said the proposal sounded helpful and emphasized the value of industry-experienced technical experts in crafting effective policy.

• Rep. Johnson (TX) questioned the justification for BIS’s requested funding increase and asked what metrics BIS would use to demonstrate effectiveness. Under Secretary Kessler responded that the increase was needed to expand BIS’s small enforcement staff, which currently handles an overwhelming number of license applications and international responsibilities.

• Ranking Member Meeks, who expressed concern about reports that export controls were being used as leverage in trade talks and asked which controls were on or off the table in U.S.–China negotiations. Under Secretary Kessler declined to comment on specific diplomatic discussions but emphasized that BIS export controls remained strong and grounded in national security justifications. Ranking Member Meeks confirmed that Kessler had attended the London negotiations and pressed him to clarify whether any controls were implemented to aid trade leverage. Under Secretary Kessler reiterated that BIS controls are based solely on national security and foreign policy interests, not trade negotiations.

• Rep. Moylan emphasized the need for multinational export control enforcement and asked which areas required stronger cooperation, including whether BIS would use the foreign direct product rule to prevent backfilling. Under Secretary Kessler highlighted semiconductors, related manufacturing equipment, and AI technologies as key focus areas and said the foreign direct product rule was a viable tool, though ally alignment was preferable. Rep. Moylan then asked what additional authorities or funding BIS needed to be more effective. Under Secretary Kessler pointed to the requested funding increase as essential for boosting enforcement personnel and resources, stating that the current staff level was inadequate for the scale of the challenge.

• Rep. Johnson (TX) returned to ask how BIS would use the proposed $120 million increase beyond personnel and raised concerns about international coordination. Under Secretary Kessler said most of the funds would go to hiring and supporting enforcement staff but agreed that international alignment on export controls was essential. Rep. Johnson then raised the issue of America’s stagnant engineering graduate pipeline and the national security risks of brain drain and talent loss to China. Under Secretary Kessler responded that while BIS’s core mission is technology protection, the broader administration was working to strengthen the U.S. talent pipeline across educational and technical training levels. Rep. Johnson criticized the administration’s higher education cuts and anti-immigration measures, arguing they undermined U.S. competitiveness and national security. Under Secretary Kessler said he did not see other administration efforts as counterproductive to BIS’s work. Rep. Johnson strongly disagreed and warned that talent loss would render export controls ineffective without a domestic workforce to support innovation.

• Chair Huizenga asked whether BIS would commit to thoroughly investigating SMIC’s compliance with U.S. export controls using its increased enforcement budget. Under Secretary Kessler responded that BIS would investigate any credible violations, including those involving SMIC, and welcomed referrals from Congress or others. Chair Huizenga then asked how BIS was working to meet the 30-day license processing timeline required under the Export Control Reform Act. Under Secretary Kessler explained that BIS has a dedicated team within Export Administration focused on timely license processing. Chair Huizenga followed up by asking how BIS leverages global demand for U.S. technology to secure international cooperation on enforcement. Under Secretary Kessler answered that BIS encourages the global use of U.S. technology under secure terms, ensuring it benefits allies and not adversaries.

• Rep. Self returned to ask whether current export controls are effectively limiting China's access to military-use semiconductors. Under Secretary Kessler affirmed they were and cited public acknowledgments by PRC company officials of the impact. Rep. Self asked how aggressively BIS could apply the foreign direct product rule (FDPR) to foreign labs using U.S. technology. Under Secretary Kessler said BIS had strong authority under FDPR for semiconductor-related technologies and could act aggressively in that area. Rep. Self then asked what legislative authority would help BIS further. Under Secretary Kessler suggested having a separate discussion on ways Congress could strengthen BIS’s powers. Rep. Self asked for an assessment of multilateral export controls and the extent to which allies’ gaps undermine U.S. efforts. Under Secretary Kessler acknowledged that alignment was incomplete and that those gaps allowed adversaries to exploit workarounds, requiring more action and attention. Rep. Self emphasized that advances in AI and quantum computing posed serious national security risks and warned that quantum breakthroughs could compromise encryption. Under Secretary Kessler agreed and underscored the critical nature of BIS’s work in that context.

• Rep. Moylan criticized BIS’s past record of approving licenses for Chinese companies like Huawei and SMIC, and asked how BIS would ensure new funding does not repeat “rubber stamp” policies. Under Secretary Kessler stated unequivocally that such approvals had ended and would not resume.
  Rep. Moylan then asked for Kessler’s assessment of China’s recent tech advances, including DeepSeek’s progress and Huawei’s OS development. Under Secretary Kessler responded that these developments showed the need for stronger hardware and software controls and emphasized the importance of ongong vigilance to prevent U.S. technology from aiding adversaries.

• Chair Huizenga asked how AI should be categorized for export control purposes—whether as a general-purpose technology or closer to a military asset—and how that framing should shape BIS policy. Under Secretary Kessler responded that AI is best compared to civil nuclear technology: powerful, beneficial, but dangerous if misused—requiring secure, but not overly burdensome, regulation. Chair Huizenga then asked what concerns Kessler had with the rescinded AI diffusion rule. Under Secretary Kessler explained that the rule was overly complex, imposed arbitrary computing caps by country, and was detached from commercial and technical realities. Chair Huizenga pressed Kessler on whether BIS would end its delay in identifying emerging and foundational technologies until international consensus is reached. Under Secretary Kessler said he would not honor any such unofficial policy and affirmed that BIS has no obligation to wait on multilateral coordination under statute. Chair Huizenga next asked whether the House-passed “One Big, Beautiful Bill” provides sufficient funds to modernize BIS’s outdated IT system. Under Secretary Kessler confirmed the funds were sufficient and said he would prioritize cybersecurity upgrades, as the agency still runs on 20-year-old systems.

• Rep. Self asked whether Kessler would be willing to recommend using non-export control tools like sanctions or tariffs if U.S. allies continue providing chips to China. Under Secretary Kessler agreed that national security concerns may require tools beyond export controls and said all options should be considered.

• Ranking Member Kamlager-Dove returned to the issue of Gulf AI chip exports and asked whether Kessler would commit to requiring binding security agreements with UAE or Saudi Arabia before approving exports. Under Secretary Kessler committed to enforcing rigorous security requirements for all licensed AI chip exports. Ranking Member Kamlager-Dove asked what such security requirements entailed. Under Secretary Kessler explained that BIS would require trusted data center operators, physical and personnel safeguards, and “know your customer” diligence to prevent illicit diversion. Ranking Member Kamlager-Dove raised concerns about smuggling and asked whether Kessler had ordered a pause or slowdown in license approvals. Under Secretary Kessler said he had not ordered a formal pause but had launched a careful review of the process due to prior rubber-stamping of problematic applications. Ranking Member Kamlager-Dove asked whether average review times had increased. Under Secretary Kessler admitted they likely had, due to his decision to more rigorously scrutinize applications.

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