In the complicated relationship between the US and China, a deep trade relationship as the world’s two largest economies and a geopolitical competition for influence, the US has limited the export of advanced computer chips, sought to restrict investments in China, and kept the expanded tariffs set up by former President Donald Trump.
Declaring a national emergency to deal with “sensitive technologies and products critical to the military, intelligence, surveillance, or cyber-enabled capabilities,” President Joe Biden signed an executive order that will narrowly prohibit certain United States investments in sensitive technology in China and require government notification of funding in other tech sectors:
The commitment of the United States to open investment is a cornerstone of our economic policy and provides the United States with substantial benefits. Open global capital flows create valuable economic opportunities and promote competitiveness, innovation, and productivity, and the United States supports cross-border investment, where not inconsistent with the protection of United States national security interests. However, certain United States investments may accelerate and increase the success of the development of sensitive technologies and products in countries that develop them to counter United States and allied capabilities.
There is mounting evidence that US capital is being used to advance Chinese military capabilities and that the United States lacks a sufficient means of combating this activity. The order, focused on private equity, venture capital, joint ventures and greenfield investments, aims to prevent US capital and expertise from helping develop technologies that could support China’s military modernization and undermine US national security.
Last month, Representative Mike Gallagher (R-WI), chairman of the United States House Select Committee on the Chinese Communist Party, wrote a letter to the White House arguing that:
For too long, America has funded the CCP’s military buildup, technological ambitions, and human rights abuses and allowed the CCP unconstrained access to our capital markets and the dynamism and efficient capital allocation that they enable.
The letter includes estimates that over $200 billion of U.S. capital is invested in Chinese firms with military ties, although the lack of available data makes it nearly impossible to confirm.
Critics have declared the action one of economic interest rather than national security. Still, the order is narrow in scope and has little impact on exports. It authorizes the US treasury secretary to prohibit or restrict only certain US investments in Chinese entities in three sectors: semiconductors and microelectronics, quantum information technologies, and specific artificial intelligence systems.
The move could fuel tensions between the world’s two largest economies. However, US officials insisted the prohibitions were intended to address “the most acute” national security risks and not to separate the two countries’ highly interdependent economies.
According to the White House, the moves resulted from two years of internal deliberations. There are already restrictions on the export of some of these technologies. They are trying to prevent the indigenization of China’s capabilities to become dominant in sensitive technology.
Paraphrasing from the order, these include:
Country of Concern: A country or territory engaging in a comprehensive, long-term strategy that directs, facilitates, or otherwise supports advancements in sensitive technologies and products that are critical to military, intelligence, surveillance, or cyber-enabled capabilities to counter United States capabilities in a way that threatens the national security of the United States
Covered national security technologies and products: Sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and Artificial Intelligence sectors that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern. Covered national security technologies and products may be limited by reference to certain end-uses of those technologies or products.
China has been clear in responding to recent US measures. In May 2023, China banned US company Micron’s chips from being used in critical infrastructure. China announced new licensing restrictions in July on gallium and germanium, two semiconductor inputs.
There will undoubtedly be some degree of Chinese backlash from establishing a new mechanism. However, this time might be different. Amid a steep decline in foreign direct investment in China and increasingly precarious macroeconomic conditions, even targeted rules on foreign investments in China could have an outsize effect.
Beijing’s desire to stabilize China’s economy means it is unlikely to respond in kind to the creation of this new tool. To the extent that China retaliates, the response is likely to be asymmetrical to avoid deterring third countries from additional investment in the country. In other words, China cannot currently afford the risks that come with a significant retaliation.
It is difficult to predict what unintended consequences may ensue. Restrictions could chill standard business investments in China and potentially reduce foreign appetite for investment in the United States over the long run. Conversely, suppose the administration succeeds in keeping this instrument lean and can demonstrate its utility in bolstering national security. In that case, allied economies and the U.S. private sector should see value in this agenda.
The US exported $151 billion in goods to China in 2022. The top US goods exports to China are oilseeds and grains, semiconductors and their componentry, oil and gas, and motor vehicles. Many states also generate substantial economic value from service exports like travel, education, and financial services. Semiconductors and components totaled $11.2 billion. Other categories of goods might also be affected by the executive order, such as $11.2B in Navigational & Measurements Instruments and $5.5B in Aerospace Parts & Products.
The volume and quantity of covered transactions would likely remain relatively low, and the US impact on Chinese AI development also remains minimal. Nevertheless, the national security justifications for the new instrument represent a step forward in creating U.S. authorities to reduce risk exposure and prevent the outflow of US capital that could advance foreign military capabilities. However, according to Fortune Business Insights, the global semiconductor market is projected to grow from $573 billion in 2022 to $ 1,380 billion by 2029, at a CAGR of 12.2% in forecast period, 2022-2029. Disruptions in the flow of this critical component, from natural disasters to political upheavals and trade intervention, can and will have a reverberating effect on an increasingly digital world economy.