A New Biden Executive Order Restricts American Investing in Chinese Tech

An employee works at a factory of Jiejie Semiconductor Company in Nantong, in eastern China's Jiangsu Province, on March 17, 2021. (STR/AFP via Getty Images)

Commentary

At last, the Biden administration has issued a long-awaited executive order banning 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.

The investment bans parallel an order issued late last year to stop American exports of certain types of technology to China. The order, if effective, will surely slow the pace of China’s technological advance, but it cannot stop it. As the latest tit-for-tat exchange between Beijing and Washington, it will certainly evoke retaliation from Beijing.

Some in Congress would have preferred something more severe than the White House has issued. Rep. Mike Gallagher (R-Wis.) and the House committee dedicated to communist 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.

The information available at this early date indicates that the order will prohibit investments in Chinese firms engaged in quantum computing, microelectronics, sensors and networks, advanced semiconductors, and artificial intelligence (AI). It aims 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 gone out of its way to stress that the limitations are narrowly focused. On her visit to China last month, Treasury Secretary Janet Yellen 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 national security issues are involved. Even those framing the law claim to have had trouble defining what constitutes AI. As a consequence, investors will steer clear of any activity that even comes close to the forbidden list.

Indicative is how at least one U.S. venture capital firm, Sequoia Capital, has already split off its China business. Meanwhile, direct U.S. investment in 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.

The investment bans 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 U.S. allies in Europe, Japan, and South Korea yield to pressure from Washington to institute similar prohibitions. Japan and Germany have already shown signs of imposing similar rules. Even if other nations fall in 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.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.