President Joe Biden issued an executive order on Wednesday that appears to restrict American investment in Chinese companies in the semiconductor, quantum computing, and artificial intelligence (AI) industries.
The executive order justified the ban on national security grounds, pointing out that:
[China and other authoritarian regimes] eliminate barriers between civilian and commercial sectors and military and defense industrial sectors, not just through research and development, but also by acquiring and diverting the world’s cutting-edge technologies, for the purposes of achieving military dominance.
Critics of the order lamented that it does little to limit Chinese national security threats and has unclear enforcement mechanisms. Sen. Marco Rubio (R-FL) described it as “almost laughable.”
The White House said:
Advancements in sensitive technologies and products in these sectors will accelerate the development of advanced computational capabilities that will enable new applications that pose significant national security risks, such as the development of more sophisticated weapons systems, breaking of cryptographic codes, and other applications that could provide these countries with military advantages.
The order established a regulatory process in which the Commerce Department will examine all proposed investments in the industries of concern in consultation with the Defense and Energy Departments and the Director of National Intelligence (DNI). The order cautioned that most U.S. investments in Chinese semiconductors, quantum computing, and AI would likely be prohibited after review by these agencies.
Senior administration officials held a conference call with reporters to preview the executive order on Wednesday afternoon. The officials noted that China has “exploited U.S. investments to develop domestic military and intelligence capabilities.”
“It’s important to recognize this is a national security action, not an economic one,” the administration said. “This executive order protects our national security interests in a narrowly targeted manner while maintaining our longstanding commitment to open investment.”
According to these senior U.S. officials, some U.S. allies — including the European Commission, United Kingdom, and Germany— are considering similar investment bans. They took pains to describe the Biden executive order as an example of “de-risking” rather than “decoupling” from China.
The administration was reluctant to discuss possible criminal penalties for violating the executive order, preferring to describe it as a “guidance” effort to “provide the industry with clarity so that they recognize what is permissible, which is a great deal of investment, and what isn’t permissible, which is going to be a narrow scope of investment.”
The conference grew awkward when a reporter pointed out that China has plenty of money earmarked for tech research that could be useful for its military and plenty of financial strategies that could help it evade the Biden investment ban. One of the administration officials said the goal of the executive order was to choke off not just money but the flow of “intangibles” from the U.S. into China’s tech industry, such as expertise and skilled employees.
“The thing we’re trying to prevent is not money going into China overall because they have plenty of money. The thing they don’t have is the know-how. And the know-how in our — I believe — know-how we have seen is often very connected to specific types of investments,” the official said.
The general consensus from analysts was that Biden’s order was underwhelming, a vaguely worded effort to make American investors a bit more reluctant to invest in cutting-edge Chinese tech firms because a more imposing regulatory action with real teeth might be coming at some point in the future.
“Certain U.S. investors may just choose to wait for the implementation rules before making investment decisions in these covered sectors,” a skeptical Weiheng Chen, senior partner at the Wilson Sosini law firm, told Reuters on Thursday.
China Growth Capital partner Wayne Shiong thought Biden’s order was mostly for show since “the situation is already very bad for dollar-based funds to invest in China’s tech sector,” and “there isn’t much room for things to get worse.”
Even more cynical observers thought the executive order could turn into another embarrassing debacle for the Biden administration, as China could use its economic leverage to keep other countries from imposing similar restrictions and then secure all the foreign money it needs to replace prohibited American investments.
“China could act in non-reciprocal fashion, retaliating somewhere other than on the investment side. But the executive order is barely going to do anything, and China escalating would risk turning a molehill into a mountain,” said American Enterprise Institution Senior Fellow Derek Scissors.
The Wall Street Journal (WSJ) thought the new restrictions might make American companies already nervous about investing in China after years of lockdowns and crackdowns just a bit more nervous.
“What we see is a lot of companies fundamentally rethinking their China strategies. It doesn’t mean they’ll necessarily change them, but they’re stress testing them now, because we’re clearly in a new environment,” Andrew Polk, a partner with the Trivium China research firm, told the WSJ.
The WSJ feared Biden’s team might have underestimated how much leverage China has gained over the U.S. economy through the mad dash for electric vehicles and solar power, industries where the U.S. has made itself almost entirely dependent on Chinese imports.
Congressional Republicans were unimpressed with Biden’s order, saying it contains too many loopholes and does not go far enough to halt the flow of money and “intangibles” from the U.S. into China’s tech sector.
Rubio said the administration’s “narrowly tailored proposal” was “almost laughable.”
“It is riddled with loopholes, explicitly ignores the dual-use nature of important technologies, and fails to include industries China’s government deems critical,” Rubio said, vowing to introduce legislation that would impose much stricter provisions.
Asia Times columnist David P. Goldman offered the most cynical take of all, saying the Biden administration was simply panicking because China had proven so adept at working around previous export controls to advance its high-tech goals.
“Emergency declaration from Biden: The horse has bolted, so nail the barn door shut!” Goldman wrote sarcastically, suggesting the executive order was merely the Biden White House’s effort to look like it was doing something about a problem that has already spiraled out of control.
The Chinese Commerce Ministry on Tuesday said it was “gravely concerned” about the effect Biden’s order might have on global supply chains and accused the administration of pursuing “decoupling” under the guise of “de-risking.”
“China opposes the U.S.’ overuse of national security to politicize and weaponize trade, scientific and technological issues and deliberately making obstacles to normal economic and trade exchanges and technological cooperation,” Liu Pengyu, spokesman for the Chinese embassy in Washington, told Radio Free Asia (RFA) on Wednesday.
“The U.S. side has repeatedly expressed its non-intention to ‘decouple’ with China, but what it actually did is repeatedly ‘decoupling and severing supply chains’ from China,” Liu said, echoing the Chinese Commerce Ministry’s talking point.
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