Biden administration restricts US investment in tech China's military might employ

Venture capital is helping Beijing arm and Washington wants that to stop

US president Joe Biden on Wednesday issued an executive order restricting stateside investors from sinking their funds into Chinese firms developing certain technologies, as part of an effort to prevent such products being used by China's military.

The order requires scrutiny of investments in Chinese companies that work on semiconductors and microelectronics, technologies used in quantum computers and networks, and certain software that incorporates AI and which is designed for military or intelligence-related uses.

As explained in the order, rapid advancement of technologies in the above fields "significantly enhances" the ability for "countries of concern" to conduct activities antithetical to US national security interests.

The US Treasury Department refers [PDF] to the effort as "narrowly targeted." Indeed the annex to the order identifies only China as a country of concern, along with Hong Kong and Macau – which are special administrative regions of China. The administration is open to expanding the list.

The White House reckons that "barriers between civilian and commercial sectors and military and defense industrial sectors" in these countries range from thin to non-existent, as tech developed in the private sector is funneled to military interests.

Advancements in the tech covered by the order is therefore felt to represent a risk as they potentially enable US adversaries to develop sophisticated weapons systems or crack encryption.

Biden called investment a "cornerstone" of US economic policy and clarified that the the nation supports cross-border investment when it is not inconsistent with US national security interests.

But investment provides "intangible benefits" – like managerial assistance, investment, talent networks and market access. And in the case of China, it must be controlled, he reasoned.

The program will target transactions involving acquisition of equity interests (e.g., via mergers and acquisitions, private equity, venture capital, and other arrangements); greenfield investments; joint ventures; and certain debt financing transactions that are convertible to equity, said the Treasury Department.

The Department stated it is considering exemptions for passive investment. Exemptions could include "publicly-traded securities, index funds, mutual funds, exchange-traded funds, certain investments made as a limited partner, committed but uncalled capital investments, and intracompany transfers of funds from a US parent company to its subsidiary.”

The public has 45 days to provide comments on the order and the policy it outlines, which the Treasury says will informs its draft regulatory text. Implementation is expected next year.

The order is likely to increase tension in US-China relations, which have in recent years seen tit-for-tat sanctions.

Most recently China banned exports of drones without a license and placed controls on the export of semiconductor precursors gallium and germanium.

Those restrictions followed a multitude of US export restrictions on semiconductors, telecom equipment and more, and bans on Chinese products from the likes of Huawei and ZTE.

"The EO follows the Biden administration approach to de-risk but not de-couple US-China economic, investment and trade relations. The major categories for the screening mechanism aim to be targeted and precise," Steven Okun, a senior advisor at trade consultancy McLarty Associates, told The Register.

"Still, 'certain AI systems' can be broadly interpreted, and more work needs to be done. Neither businesses nor Beijing should be surprised by the EO, and the fragile stability in US-China relations following the various recent high-level meetings between the governments should remain,” Okun added.

China's Foreign Ministry has unsurprisingly slammed the order.

In a Thursday statemenent, the Ministry labelled it "a clear act of overstretching the concept of security and politicizing business engagement."

"The move's real aim is to deprive China of its right to develop and selfishly pursue US supremacy at the expense of others," the statement adds, going on to describe the order as "blatant economic coercion and tech bullying."

"This is de-globalization and a move to phase China out."

The US is, however, not alone in requiring scrutiny of outbound investments. Taiwan and South Korea already have policies in place to do the same thing. ®

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