Biden approaches China's investment restrictions with caution

 

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President Joe Biden of the United States signed an executive order last week that started the process of imposing limitations on American investment in China's semiconductor, quantum information, and artificial intelligence industries. The U.S. Treasury Department's proposed rulemaking that would limit some investments in Chinese technologies and require notification was included with the executive order. Cooler heads prevailed, restricting the draft regulations' application to these three areas and giving priority to restrictions on military applications of these technologies, despite hawks in Congress pressuring the administration to approve broader prohibitions on such investments.

The U.S.-China tech conflict will also heat up if China's technology industry is subject to even minimal restraints. The administration's overarching plan, which includes blacklisting hundreds of companies, preventing the sale of vital technologies, and limiting China's dominance in supply chains, is in line with Biden's executive order. Just as past U.S. sanctions programs have seen goal creep, investment prohibitions will undoubtedly become more stringent.

The Treasury Department has been tasked by Biden with carrying out his executive order, which has prompted it to publish an advance notice of proposed rulemaking asking for feedback on how the government should restrict American businesses' investment in chips, quantum technology, and artificial intelligence (AI) in China and establish notification requirements for related investments. Although the executive order's wide prohibitions on investment in important technologies were misrepresented in headlines, Treasury's advance warning is actually somewhat limited in its application.

Treasury is contemplating banning U.S. investment in the same sectors that are subject to the Commerce Department's October 2022 semiconductor export limitations, cutting one more door for businesses to help China develop these sanctioned technology. Treasury wants to prevent American companies from acquiring Chinese technology, in particular that is used in supercomputer installation, advanced logic and memory chip design, fabrication, and packaging, chip manufacturing software, and machine tools.

When it comes to quantum information technologies and AI systems in China—two fields where the Biden administration has yet to establish comprehensive export controls—Treasury's proposed investment restrictions are more restricted. A prospective ban on investments in the manufacturing of quantum computers and their parts would be the biggest of these limitations. Investing in Chinese quantum sensing platforms would be prohibited if they are intended for use in military, intelligence, or surveillance applications, and investing in Chinese quantum communications systems would be prohibited if they are "designed to be exclusively used for secure communications."

Similar to this, funding for the creation of AI-based software in China would be outlawed only if such software is intended for "military, government intelligence, or mass-surveillance end uses." These end-use limits are crucial because they restrict the restrictions' reach and prevent American investment in helpful civilian technology in China, such as the use of machine learning to improve disease diagnosis or forecast the effects of the climate catastrophe, from being blocked.

Treasury has recommended notice requirements for several types of investment in semiconductors and AI in China in addition to these restricted investment bans. since of the notification requirements, observers have begun to refer to these regulations as "outbound CFIUS" since they establish an external counterpart to the Committee on Foreign Investment in the United States, which evaluates incoming investments. Treasury is considering requiring companies to alert the government within 30 days of any investments they make in China-based design, manufacturing, and packaging of legacy chips, as well as in artificial intelligence (AI) systems primarily used for robotics, facial recognition, cybersecurity, and intelligence gathering.

Overall, Treasury's advance notification includes a variety of actions that lessen the effects of outbound investment restrictions. Intracompany transfers from American parent businesses to already-existing Chinese subsidiaries, investments in exchange-traded funds, and passive limited partner investments below a yet-to-be-determined level would not be subject to the regulations. Only if at least 50% of an entity's operations are made up of Chinese subsidiaries engaging in illegal activities would investment in non-Chinese firms be barred. In addition, Treasury will not assess deals on a case-by-case basis, unlike CFIUS, according to the advance notice, which lessens the likelihood that each investment notification will result in a veto.

Biden's proposed overseas investment rules are scope-restricted in part because of the fierce lobbying from the private sector. Companies have criticized such limits since they may result in high legal fees and hamper the expansion of current business lines in China. Treasury's advance notice will be a boon to lobbyists, who will flood the Treasury with hundreds of comments by the deadline in late September.

Treasury's early warning solely targets semiconductors, quantum, and AI, although earlier versions of the executive order reportedly contained limitations on investment in Chinese biotechnology and green innovation. However, the advance notice also asks for feedback on additional technologies where investment should be limited and includes an annual assessment to see if outward investment rules need to be adjusted.

This deliberate approach is a welcome change from the method used by the Commerce Department to implement its limitations on China's semiconductor exports in October 2022. In contrast to those prohibitions, the executive order focused on specific end applications of developing technologies in China, was anticipated, and will be subject to the usual public notice and comment period before taking effect.

However, the end result was to unnecessarily alienate U.S. allies and partners. Members of the Biden administration have maintained that the element of surprise was required to properly implement last year's semiconductor export curbs. The export restrictions, according to Singapore's foreign minister at the time, were "all but a declaration of a technology war."

As expected, hawks haThe U.S. should carefully evaluate such costs, which could be significant, before adopting any outward investment controls. Casting a wide net may have an impact on a variety of technology firms in allies, which would make U.S. friends less willing to implement their own outbound investment restrictions. In industries where China is ahead of the U.S., including batteries and telecommunications, preventing U.S. investors from obtaining shares in Chinese technology companies—which enables them to learn about Chinese business practices—could hamper U.S. technological advancement. To put it bluntly, the International Monetary Fund predicted last year that a significant decoupling of foreign direct investment that created two blocs focused on the United States and China would cut long-term global economic production by 2%, or $2 trillion per year, taking 2022 as a baseline.

We responded harshly to Biden's executive order, asserting that even the most extreme limitations on foreign investment somehow show that Biden is soft on China. The loopholes are large enough for the PLA [People's Liberation Army] Navy fleet to sail through, according to Rep. Mike Gallagher, chair of the House Select Committee on Strategic Competition between the United States and the Chinese Communist Party (CCP). Congress must act quickly to stop subsidizing the CCP's military buildup.

There are several gaps in the idea, despite the fact that Treasury's advance notice calls for somewhat stricter limits than those in a Senate-passed bill that does not outright forbid investment. It doesn't discuss American involvement in a variety of technology

Quantum information technology investment limitations may have a considerably less impact than those placed on Chinese investment in semiconductors and artificial intelligence. Top Chinese quantum firms like QuantumCTek, CIQTEK, or Origin Quantum have little indication of American involvement, and the majority of China's quantum research is carried out by government-funded labs. In contrast to European rivals like Bluefors and Leiden Cryogenics, American suppliers of cryogenic technologies for quantum computing do not appear to collaborate with Chinese companies to market their goods in China.

Due to the limited number of uses for this developing technology, outbound investment constraints on quantum are likewise less important. Despite years of work, quantum computers have no useful applications. According to Biden's presidential order, quantum information

Investment restrictions on quantum information technology could have a much smaller effect than those imposed on Chinese investment in semiconductors and artificial intelligence. Most of China's quantum research is conducted by government-funded institutes, and top Chinese quantum enterprises like QuantumCTek, CIQTEK, or Origin Quantum show no sign of American involvement. American providers of cryogenic technologies for quantum computing do not appear to work with Chinese companies to advertise their products in China, in contrast to European counterparts like Bluefors and Leiden Cryogenics.

The few applications for this emerging technology also make the restrictions on quantum's offshore investment less significant. Despite years of research, there are no practical uses for quantum computers. President Biden's directive on quantum information

Limiting investment in huge AI models is one specific way the Biden administration can change outbound investment regulations. The proposed constraints on AI systems have drawn criticism for being overly restrictive because they only apply to certain end applications, thereby exempting many huge AI models with more generic capabilities. Large language models like OpenAI's GPT-4 or Baidu's Ernie, according to some observers, should be closely examined since they are "dual-use" technology that China may exploit for both military and civilian objectives.

Due to Chinese businesses creating hundreds of substantial language models, the AI buzz has grown in China similarly to the United States in recent months. Several Chinese big-language models do reasonably well in specific industries.

Blocking investments in massive AI model development in China, or the export of related technologies and services to China, is a risky move. Large AI models are a general-purpose technology that have the ability to drastically change economies by, for example, automating a lot of simple job-related chores. China's ability to create these models could be substantially hampered, which could have a negative impact on its economy.

It's unclear how much money the United States has invested in Chinese AI firms. The Center for Security and Emerging Technology estimates that from 2015 to 2021, one-third of investment deals involving Chinese AI startups had U.S. investors, while it is unclear what proportion of those investments came from American investors.

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