On August 9, President Joe Biden signed a long-anticipated Executive Order to restrict US outbound financial investments in a “narrow set of technologies” in “countries of concern” – China including the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau.[1] The Order covers three industries: semiconductors and microelectronics, quantum computing, and artificial intelligence. This idea of limiting outbound investment came up during the Trump Administration as part of The Foreign Investment Review Risk Modernization Act of 2018,[2] but was removed from the bill due to pressure from the business sector.[3] There followed a series of measures against China focused on the tightening of export controls. With its embrace of restrictions on outbound investment, the new Executive Order constitutes a stunning reversal of US policy, which for decades has pressed coercively for open cross-border investment. Thus, it offers another sign that the US is turning away from freedom of investment and trade and toward digital protectionism.
The new rules mostly target US venture capital, private equity and joint venture investment, the key drivers of the US/China integration that nurtured the expansion of the Chinese internet sector even as they also enriched US investors. With the current geopolitical tension, US venture capital investment into China has already dropped to a 10-year low at $1.3 billion, down from a high of $14.4 billion in 2018.[4] Private equity plummeted to $ 1.4 billion in the first half of 2023 from a peak $48.48 billion in 2021.[5] It is an open question whether the Executive Order will be sufficient to choke off China’s tech power and Chinese tech start-ups from US capital;however, this move is sure to intensify the existing geopolitical competition and further divide the two largest global economies.
The Biden administration has stated that “national security risk” is the reason behind the measures, emphasizing that these are “narrowly targeted actions to protect our national security.”[6] It is clear, however, that the rationale is economic as well as military. It is intended to further contain and retard China’s tech power in advanced technology and, reciprocally, to make more room for the US’s own market and strategic interests in this key field.
The US dubs its approach “a small yard and high fence” strategy, to preserve US tech primacy. The goal is not to completely disintangle Chinese tech companies from US capital and markets; ostensibly, it aims only to target and guard a small set of critical technologies.[7] However, these technologies are rapidly penetrating all spheres of political economy and social life: it’s by no means clear that the “small yard” metaphor is valid.
The White House press secretary has stated that the Biden administration consulted about the Executive Order with industry stakeholders, foreign allies and partners.[8] The rules were indeed discussed at the recent G7 meeting in Hiroshima, Japan, with the US encouraging participants at this elite club to join a united front.[9] After Biden’s announcement, the US’s Western allies expressed a cautious interest in reviewing the new rules on outbound investment for possible future actions; however, no pounding enthusiasm has yet been expressed.[10]
The Order came shortly after US Treasury Secretary Janet L. Yellen’s visit to China, supposedly to thaw the two countries’ fractured relationship. During her visit, Secretary Yellen mentioned the upcoming edict, and insisted that the new restriction would be narrowly targeted and wouldn’t significantly affect US capital flows to China.[11] Yellen said that the world is big enough for both countries to flourish;[12] however, the Order sends a clear message about under what conditions the US deems China’s growth permissible – that is, without undermining US world supremacy.
China is certain to reject this formula, and has already stepped-up countermeasures to build an alternative world order.
[1] The White House, “President Biden Signs Executive Order on Addressing United States Investments In Certain National Security Technologies And Products In Countries Of Concern,” August, 9, 2023.
[2] See H.R. 5841 (115th): Foreign Investment Risk Review Modernization Act of 2018.
[3] Jack Stone Truitt, “Biden executive order on investments in China faces hurdles,” Nikke Asia, June 10, 2023.
[4] Andrew Duehren, “Biden Restricts U.S. Investment in China,” Wall Street Journal, August 9, 2023.
[5] Rebecca Feng, “China Has Become a Strain on Private-Equity Firms,” Wall Street Journal, August 3, 2013.
[6] The White House, “President Biden Signs Executive Order on Addressing United States Investments In Certain National Security Technologies And Products In Countries Of Concern,” August, 9, 2023.
[7] The White House, “Remarks by National Security Advisor Jake Sullivan on Renewing American Economic Leadership at the Brookings Institution,” April 27, 2023.
[8]The White House, “President Biden Signs Executive Order on Addressing United States Investments In Certain National Security Technologies And Products In Countries Of Concern,” August, 9, 2023.
[9] Peter Baker and David E. Sanger, “Biden Orders Ban on New Investments in China’s Sensitive High-Tech Industries,” New York Times, August 9, 2023.
[10] Anna Issac, “UK considers tighter rules on investment in China after US clampdown,” Guardian, August 10, 2023.
[11] Christopher Condon, “Yellen Says US Investment Curbs Won’t ‘Fundamentally’ Hurt China,” Bloomberg, July 27, 2013.
[12] Emma Graham-Harrison, “Janet Yellen tells China the world is ‘big enough for both our countries to thrive’,” Guardian, July 9, 2023
