Washington — The Biden administration will try to slow Beijing’s development of next-generation technologies that could have military and intelligence applications — like advanced semiconductors, artificial intelligence and quantum computing — by limiting some American investment in those sectors in China.
An executive order issued by President Biden on Wednesday outlines new regulations that will subject investments by American firms to unprecedented new federal oversight by the Treasury Department. The aim is to ensure that U.S. cash does not support China’s military modernization and potentially threaten the United States.
The rules will not take effect for at least a year, and there will be a public comment period so businesses and other groups can weigh in before they are finalized.
“It’s important to recognize this is a national security action, not an economic one,” said a senior administration official, who spoke on condition of anonymity to discuss the order. “We recognize the cross border investment flows have long contributed to U.S. economic vitality. This executive order protects our national security interests in a narrowly targeted manner, while maintaining our long standing commitment to open investment.”
Under the order, Americans will be barred from making investments in China’s advanced chip sector. Investments in less-advanced chips and artificial intelligence will be permitted, but will require U.S. government notification. Investment in quantum computing – specifically the development of computers, sensors and networks – will be prohibited.
The rules only apply to new investments, not existing deals. Transactions by private equity and venture capital firms in particular will be scrutinized.
The executive order came together after months of engagement with the private sector. Some American executives had expressed concern that clamping down on the flow of U.S. capital to China could hurt U.S. businesses and have a negative impact on the domestic economy. China has the world’s second-largest economy with more than 1 billion consumers, making it a vital market for many American companies.
The U.S.-China Business Council said it would be closely watching how the Biden administration defines “covered national security technologies and products,” given that the U.S. “benefits from the vast amount of U.S. commerce in China that does not implicate national security.”
“We hope that the administration will make more progress with U.S. allies and partners to advance common interests and prevent an otherwise unilateral US policy from disadvantaging American companies vis-à-vis foreign competitors,” it said.
The Semiconductor Industry Association said it hopes the final rules allow U.S. companies “to compete on a level-playing field and access key global markets, including China, to promote the long-term strength of the U.S. semiconductor industry and our ability to out-innovate global competitors.”
Senior administration officials repeatedly emphasized in a briefing Wednesday that the U.S. remains committed to capital investment between the world’s two largest economies. Indeed, officials said they were trying to limit the transfer of so-called “intangible” benefits — namely American expertise — that could accelerate the development of Chinese technology. Private equity and venture capital groups often connect companies in their investment portfolios with experts to help them grow.
The move comes ahead of an expected trip later this month by Commerce Secretary Gina Raimondo to Beijing, as well as an expected visit to the U.S. by Chinese Foreign Minister Wang Yi.
Earlier this summer, Secretary of State Antony Blinken and Treasury Secretary Janet Yellen took separate trips to Beijing to help ease tensions between the two countries. In Yellen’s meetings with her Chinese counterparts, she tried to reassure them that the executive order would be “highly targeted.”
“I want to allay their fears that we would do something that would have broad-based impacts on the Chinese economy,” Yellen said at a July press conference in Beijing. “That’s not the case. That’s not the intention.”
Liu Pengyu, a spokesman for the Chinese Embassy in Washington, said China was “very disappointed” by the move and said it advances the decoupling of the two economies.
“The latest investment restrictions will seriously undermine the interests of Chinese and American companies and investors, hinder the normal business cooperation between the two countries and lower the confidence of the international community in the US business environment,” Liu said in a statement.
Xie Feng, China’s ambassador to the U.S., has warned that Beijing will respond.
“The Chinese government cannot simply sit idly by,” Xie said at the Aspen Security Forum in July. “There’s a Chinese saying: ‘We will not make provocations, but we will not flinch from provocations.’ So China definitely will make our response.”
State Department spokesman Matthew Miller said Wednesday that Washington had made clear in prior diplomatic engagements with China that the U.S. would always protect its national security interests but that open dialogue remained essential to preserving stability in the relationship.
“[E]ven though we will be taking these actions, just as they take policy actions that we don’t agree with, we think it’s still important that we have the ability to have conversations about our areas of disagreement so we can make sure that the relationship doesn’t deteriorate,” Miller said.
The measures come as China and the United States are increasingly locked in a technological arms race. Last October, the Commerce Department announced new restrictions on sales to China of advanced technology needed to build high-end semiconductors. The move was aimed at crippling China’s ability to develop its own domestic manufacturing capabilities and slow the development of supercomputers and some weapons, such as hypersonic missiles. This latest move is targeted specifically at capital flows out of the United States.
In June, Blinken said in an interview with “Face the Nation” moderator Margaret Brennan that the administration sought to build a “very high fence around a very small piece of land.” He added, “That small piece of land has very sensitive technology that could be used against us. We’re not going to let that happen.”
Some lawmakers, like House Foreign Affairs Chairman Michael McCaul, are concerned that the investment restrictions do not go far enough.
“While I’m pleased to see the Biden administration restrict new outbound investments in China, the failure to include existing technology investments as well as sectors like biotechnology and energy is concerning,” McCaul said in a statement.