Biden has at last issued the long-awaited executive order. It bans American investments in certain aspects of Chinese technology. The White House has indicated that it has been more than a year in the making and reflects all sorts of compromises with others in government and in industry. It parallels last year’s order to stop American exports of certain types of technology to China. Washington’s effort will surely slow the pace of China’s technological advance, but it cannot stop it. And since it is the latest in the tit-for-tat exchange between Beijing and Washington, it certainly will evoke retaliation from Beijing.
Congress, it seems, would have preferred something more severe than the White House has issued. Representative Mike Gallagher (R. Wis) and the House committee dedicated to China wanted a much broader range of banned investments. The investment industry understandably, wanted fewer constraints. If the order is too strong for some and too weak for others, it is nonetheless the first time that Washington has sought to impose investment bans on U.S. firms overseas.
Information available at this early date indicates that the order will prohibit investments in Chinese firms engaged in quantum computing and microelectronics, including sensors and networks, as well as advanced semiconductors and artificial intelligence (AI). Its aim is to limit support for China’s military modernization and claims U.S. national security as its justification. The bans will apply only to new investments, not existing deals and will require outbound investors to provide notification to the Treasury Department. The order aims at U.S private equity firms, venture capital operations, and joint ventures in China. Those who violate the order will face fines and be forced to divest themselves of their stake in the forbidden activities.
Washington has insisted that the limitations are narrowly focused. Treasury Secretary Janet Yellen, on her visit to China last month, described the then pending order as “highly targeted.” But as always with such things, the prohibitions will affect more business and investing than a strict reading of the order would seem to suggest. Business is well aware that even the most tightly written law leaves room for interpretation by the authorities, especially when issues of national security are involved. Even those framing the law claim to have had trouble defining what constitutes AI. Investors will as a consequence steer clear of any activity that even comes close to the forbidden list.
Indicative is how already at least one U.S. venture capital firm, Sequoia Capital, has split off its China business. Meanwhile, direct U.S. investment into China fell last year to a 20-year low of $8.2 billion. Venture capital investments fell to a 10-year low of only $1.3 billion. To be sure, American investors are reconsidering China for a number of reasons having little to do with the new White House order. (Regular readers of this column should be familiar with those considerations.) But this presidential action, combined with fears of an expansive interpretation by Washington, will only reinforce these other reasons and accelerate the flight from China.
At least initially the investment prohibitions will go hard on China, which depends to a large extent on the technical knowledge brought by foreign investment flows. The damage will be that much worse if America’s allies in Europe, Japan, and South Korea yield to pressure from Washington and institute similar prohibitions. Japan and Germany have already shown signs of imposing similar rules. Even if other nations fall into line with the United States, however, the most these restrictions can do is slow China’s acquisition of technologies. History shows that efforts to restrict the movements of technologies are invariably short-lived. In the meantime, all – the United States, the nations of Europe, Japan, and South Korea — await Beijing’s inevitable retaliation.
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