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Biden Implements Prohibition on Investment in China’s High-Tech Sectors of National Interest

President Biden has signed an executive order banning new American investment in key technology industries in China that could potentially enhance Beijing’s military capabilities. This move is part of a series of actions taken by the Biden administration to create distance between the United States and China, the world’s two largest economies.

The executive order specifically prohibits venture capital and private equity firms from investing further in China’s efforts to develop semiconductors, microelectronics, quantum computers, and specific artificial intelligence applications. Administration officials emphasized that the order addresses national security concerns, but China is likely to interpret it as part of a broader campaign to contain its rise.

The Treasury Department stated, “The Biden administration is committed to keeping America safe and defending America’s national security through appropriately protecting technologies that are critical to the next generation of military innovation.” The department also reassured that the executive order is a narrowly targeted action and does not contradict the administration’s longstanding commitment to open investment.

However, this order comes at a highly critical moment in the U.S.-China relationship, comparable to the early 1970s when President Richard M. Nixon and Secretary of State Henry A. Kissinger initiated talks with Beijing. China has already responded to expanding export controls on key technologies by implementing retaliatory measures, such as cutting off metal supplies critical to the Pentagon’s own supply chain.

President Biden has expressed his desire to stabilize relations with China and has sent senior officials to engage in talks. In announcing this order, the president made no public comment and left it to be revealed through written material and anonymous background briefings by aides.

China has expressed disappointment and denounced the order, claiming that it politicizes and weaponizes trade. The Chinese embassy issued a statement stating that the investment restrictions will undermine the interests of both American and Chinese companies, hinder business cooperation between the two countries, and decrease international confidence in the U.S. business environment.

The executive order is part of the administration’s efforts to de-risk the relationship with China, but not to completely decouple from it. Previously, the United States had encouraged American investors to deepen their ties in the Chinese economy to foster interdependencies and integrate Beijing into the Western economy. However, recent government reviews revealed that investments in new technologies and joint ventures were indirectly contributing to China’s military capabilities. The United States has been actively sharing intelligence reports with allies to demonstrate the link between Western investments and China’s military modernization plans.

This move by the Biden administration is entirely driven by national security concerns and not intended to gain economic advantage. However, it is challenging to separate the two, considering China’s focus on acquiring cutting-edge technologies for military dominance.

During the recent Group of 7 summit meeting, President Biden and his aides discussed joint efforts with other countries to limit high-tech investment. Britain and the European Union have already indicated their potential to implement similar restrictions. Such outreach highlights that a U.S. ban alone may not be effective and would require collaboration with other major nations, including Japan and South Korea.

While the executive order is in place, separate bipartisan efforts in Congress are also underway to impose similar restrictions. Senators Bob Casey and John Cornyn have added an amendment to the Senate version of the annual defense authorization bill to address this issue.

Some Republican critics argue that the executive order is insufficient, too late, and contains loopholes. They believe the restrictions should be more comprehensive, targeting existing investments and sectors like biotechnology and energy.

Previously, the United States already restricted the export of certain technologies and products to China. This new order means that American money, expertise, and influence will not contribute to China’s development of technologies it cannot acquire from U.S. companies.

The impact on investment is uncertain, as American investors have already significantly reduced their involvement in China over the past two years. Venture capital investment in China has significantly declined. However, this latest order could have broader implications beyond the specific industries mentioned.

The business community in Washington expressed cautious concerns about the downward trajectory of U.S.-China relations and how it could accelerate a broader economic separation between the two countries. Trade groups appreciated the administration’s consultation process but emphasized the importance of allowing U.S. chip firms to compete on a level playing field and access global markets.

Experts suggest that while the direct effect of the executive order may be modest, the disclosure requirements embedded within it could have a chilling effect. Politicians have increasingly regarded corporate investments in China as colluding with a foreign enemy, even if no illegality is alleged.

The Treasury Department will formally take comments and draft rules based on the executive order in the coming year. However, American firms may alter their investment strategies ahead of the rules’ implementation, as they are aware of the forthcoming changes.

China also has its own investment restrictions that apply to outbound investments, going beyond the limitations imposed by the new American rules. This reflects China’s technology policy, which encourages investments in foreign businesses involved in areas like aircraft production, robotics, artificial intelligence, and heavy manufacturing, offering geopolitical advantages.

China’s economy is currently vulnerable, with consumer prices registering a decline for the first time in more than two years. While some Chinese cities have declared 2023 as a “Year of Investing in China” in hopes of economic revival, President Xi Jinping’s policies have made venture capital firms and other investors more cautious.

China has investigated risk assessment companies and their offices, accused a Japanese executive of espionage, and introduced an anti-espionage law that raises concerns about regular business activities being deemed spying.

Previously, the Biden administration’s actions to restrain sensitive economic relationships have impacted China. Chinese telecommunications company Huawei has been significantly restricted from the U.S. market, and American allies, starting with Australia, are removing Huawei equipment from their networks. The Federal Communications Commission has also banned China Telecom, citing the company’s susceptibility to exploitation and control by the Chinese government.

Conversely, the United States, with the support of the Dutch government, Japan, and South Korea, has taken extraordinary measures to prevent China from developing its domestic capabilities in high-end microelectronics. By prohibiting the export of essential lithography equipment, the United States aims to limit China’s progress and reestablish its own semiconductor industry.

This executive order marks an unprecedented effort to hamper an adversary’s capabilities while simultaneously advancing America’s own investment.

Contributors to this report: Keith Bradsher, Ana Swanson, and Sarah Kessler.

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