Biden’s order proposes new restrictions on technology investment in China

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President Biden signed an executive order on Wednesday aimed at restricting the flow of US investment and management expertise into a limited range of Chinese companies that the administration fears could fuel Beijing’s military ambitions.

The order is a narrow, initial step that will not take effect until next year, but it is a signal to the Chinese leadership that Washington – despite a recent warming in diplomatic relations – intends to continue sending restrict Beijing’s access to critical technology.

Chinese officials reacted strongly to news of the impending executive order. “Usually the US politicizes technology and trade issues and uses them as a tool and weapon in the name of national security,” Chinese Embassy spokesman Liu Pengyu said in a statement to the Washington Post. “We will closely follow the developments and defend our rights and interests firmly.”

At the same time, China hawks in Congress say that the proposal – which excludes sectors such as biotechnology and energy – does not go far enough.

“The administration’s rollback — at a time when aggressive action is needed more than ever — continues the trend of relaxing business at the expense of national security, ” said Rep. Michael McCaul (R-Texas), chairman of the House Foreign Affairs Committee. .

“We must stop the flow of American dollars and knowledge to support the [Chinese Communist Party’s] military and surveillance technology rather than following only half measures that take too long to develop and implement,” he said

The White House’s order comes amid a sharp deterioration in a relationship marked by on-again, off-again contact, which was tempered by the appearance of a Chinese surveillance balloon over the continental United States. earlier this year. Commerce Secretary Gina Raimondo is expected to travel to Beijing this month, following recent visits by Secretary of State Antony Blinken and Treasury Secretary Janet L. Yellen.

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The order, the result of a debate within two years, gives authority to Yellen management of US investment in three sectors of Chinese companies: quantum computing, artificial intelligence related to military use, and advanced semiconductors.

The Treasury Department released the proposed rule on Wednesday, starting a process to seek comments that is expected to take several months and could expand the scope of the ban.

“Rapid advances in semiconductors and microelectronics, quantum information technologies, and artificial intelligence capabilities … are greatly enhancing their ability to perform actions that threaten the national security of the United States,” the order states. saying.

It also proposes a requirement that US venture capitalists and other investors notify the Treasury Department of prospective investments in companies developing technologies in these sectors.

The White House order comes as China seeks to develop a world-class fighting force by 2049, even as it faces a sluggish economy.

The investment restrictions target a handful of critical technologies related to upgrading China’s military and internal surveillance capabilities, administration officials said.

The long delay in issuing the order – last year the White House was expected to move faster – highlights the complexity of determining where to draw lines around it. dual-use technologies such as artificial intelligence. The administration has also faced pressure from US business interests that do not want to be cut off from potentially lucrative investments in China.

For months, there has been intense internal debate over the scope of China’s restrictions, with the Treasury Department consistently advocating for a narrow approach and the Pentagon pushing for a broader mandate. By the end of last year, the debate was resolved for a more limited area, except, for example, electric vehicles and biotechnology.

“This is hard to get right,” said Mike Pyle, deputy national security adviser, in a recent appearance at the Carnegie Endowment for International Peace. “These are very technical questions.”

During her visit to Beijing last month, Yellen sought to reassure her Chinese counterparts that the investment curves would be narrowly designed to address specific national security concerns and not targeted has slowed China’s economic progress.

Chinese officials are openly skeptical of the administration’s plan to achieve what Yellen describes as a “de-risking” of the US relationship with China, with Beijing serving as a diplomatic euphemism for a broader economic disconnect. ​​​​​​Beijing’s fear would lead to their economic impotence.

Restrictions on US investment in Chinese technology are not unique. At the end of his administration, President Donald Trump issued an order banning US investment in a few dozen Chinese companies with alleged links to the People’s Liberation Army. In 2021, the Biden administration expanded the order, prohibiting US funding to additional companies, especially those that sell surveillance technology.

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Analysts note that, at least for now, such a ban is likely to have little effect on China as US investment has fallen, in part due to the impact continued pandemic lockdowns, and partly due to increased scrutiny of Western companies, which have fallen. spurious business.

According to the Rhodium Group, US venture capital in China last year reached a 10-year low of $1.3 billion, down from a peak of $14.4 billion in 2018.

Nevertheless, China is not hurting for capital. He still has plenty of catching up to do, analysts say.

“While Western funds may be upset about lost opportunities in advanced technology investments in China, there are so many domestic funds chasing these deals that China will not be hurt,” said Andrew Collier, managing director Orient Capital Research in Hong Kong and author of “China’s Technology War.”

“At the end of the day China needs technology,” Collier said, “not venture capital money.”

Biden’s order also aims to gain a deeper understanding of investment flows into emerging technologies in China. It is intended to fill gaps left by export controls, which prevent the export of sensitive technologies but not investment in companies that use these technologies.

The Post reported in late 2021 that Goldman Sachs had invested in a fast-rising Chinese artificial intelligence company, 4Paradigm, which had won an undisclosed contract with the Chinese military. In March, the Commerce Department placed 4Paradigm on its blacklist, barring the company from exporting US technology. But US investors are still allowed to make deals with the company. That’s one of the areas the “outbound screening” program plans to address, officials say.

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Another key goal is to prevent the transfer of management advice to Chinese startups, officials say.

“There is a mountain of evidence that China is working through joint ventures to access technology and know-how – not just the hard technology, but the soft skills needed” to build successful enterprises, said Liza Tobin, an expert economic at the non-profit Special Competitive Studies Project. “China has its own currency. One thing the US offers is unique knowledge from Silicon Valley and Wall Street. “

In recent months US officials have gone out to friendly capitals, trying to build support for implementing similar measures. Germany and the United Kingdom are considering their own external investment regimes. In June, European Commission President Ursula von der Leyen said that the EC will develop new investment rules by the end of the year. “We have to make sure that the capital of European companies, their expertise, their knowledge, their research is not misused by countries concerned about the use of weapons,” she said.

For critics and advocates of China’s investment screening program, the real question is where the policy will go next. Biden administration officials like to use the analogy of the “small garden, tall fence,” to describe an approach that imposes strong controls on a narrow range of companies or technologies.

But if the policy is not carefully considered, said Reva Goujon, US-China policy expert at Rhodium Group, “your garden turns into a fence very quickly. “

Some national security experts argued that the proposal, though watered down, is a welcome first step and they hope it will be strengthened by lawmakers.

“Congress should mandate broader transparency requirements to prevent risky transactions and for the US government to better understand the relevant capital markets,” said Ivan Kanapathy, former deputy director for Asia in the Trump administration. and Biden.

A measure passed by the Senate would notify the Treasury Department of a wider range of planned investments than those put forward by the administration.

A bill sponsored by Senators Bob Casey (D-Penn.) and John Cornyn (R-Texas), passed in the Senate version of the National Defense Authorization Act, would also require notification for transactions related to other advanced technologies including hypersonics and fixed satellite communications. The House must agree to that before it becomes law.

Joseph Menn contributed to this report.

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