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Biden Directs Restrictions on Specific U.S. Tech Investments in China, Big News Need to See China Retaliation

On Wednesday, Joe Biden issued an executive order that specifically restricts particular U.S. investments in sensitive technology sectors in China, while also mandating government notification for funding in other areas of the tech industry.

This highly anticipated order grants authority to the U.S. Treasury Secretary to either prohibit or impose limitations on specific U.S. investments in Chinese entities operating within three sectors: semiconductors and microelectronics, quantum information technologies, and select artificial intelligence systems.

In a letter addressed to Congress, Biden explained that he was declaring a national emergency to address the potential advancement in sensitive technologies and essential products crucial to military, intelligence, surveillance, and cyber-enabled capabilities, emanating from countries like China.

The primary focus of this proposal is to target investments in Chinese companies engaged in the development of software for chip design and manufacturing tools. Notably, the U.S., Japan, and the Netherlands currently dominate these fields, and China’s government has been actively working on cultivating domestic alternatives.

Although this move may escalate tensions between the world’s two largest economies, U.S. officials have emphasized that these prohibitions aim to tackle the most immediate national security risks and do not intend to sever the deeply interconnected economies of both countries.

Chuck Schumer, the Senate Democratic leader, commended Biden’s executive order, asserting that it takes a critical initial step to prevent American investments from aiding Chinese military progress. However, he also emphasized the need for Congress to enshrine these restrictions into law and further refine them.

Conversely, some Republicans criticized the order for not going far enough. While they appreciated the restrictions on new outbound investments to China, they expressed concern over the omission of existing technology investments and sectors like biotechnology and energy.

The executive order’s core objective is to prevent American capital and expertise from contributing to the development of technologies that could bolster China’s military modernization efforts and potentially compromise U.S. national security. The order particularly targets private equity, venture capital, joint ventures, and greenfield investments.

Under this order, most of the covered investments will necessitate government notification, and certain transactions may be outright prohibited. The Treasury Department anticipates exemptions for certain transactions, including those involving publicly traded instruments and intra-company transfers between U.S. parents and subsidiaries.

China’s embassy in Washington expressed disappointment over the decision, with a spokesperson highlighting potential negative impacts on both Chinese and American companies and investors. The embassy vowed to closely monitor the situation and safeguard their rights and interests.

In response, China’s commerce ministry accused the U.S. of disrupting global industry and supply chains, asserting that the order deviates from market economy and fair competition principles.

Expected to be enforced next year, the order will undergo multiple rounds of public comment, including an initial 45-day comment period. Regulators plan to release an advance notice of proposed rule-making to further delineate the program’s scope and solicit public feedback before formalizing the proposal.

Analysts anticipate that investments in artificial intelligence (AI) will be prohibited for military users and purposes, while other AI investments will only require government notification. The challenge lies in the administration’s responsibility to define what constitutes a military application of AI. Regulations concerning AI are still in development, and similar work is ongoing for quantum computing, which is expected to have restrictions related to specific sensors and technology aspects, possibly with exemptions for universities and research.

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