To countering perceived threats to national security, the Biden administration has finalized rules to restrict U.S. investments in sensitive Chinese technologies. The new guidelines, announced by the Treasury Department on Monday, October 28, will effectively prohibit U.S.-based firms, citizens, and permanent residents from investing in advanced technologies—such as semiconductors, artificial intelligence (AI), and quantum computing—if they are linked to China.
These regulations, set to come into force on January 2, 2024, expand upon an executive order signed by President Joe Biden in August. The decision highlights Washington’s resolve to control the flow of capital, intellectual property, and expertise from the U.S. to Chinese tech sectors that could potentially impact the U.S. military, surveillance, intelligence, and cybersecurity capabilities. “This final rule takes targeted and concrete measures to ensure that U.S. investment is not exploited to advance the development of key technologies by those who may use them to threaten our national security,” Paul Rosen, Treasury assistant secretary for investment security, stated in a press release.
The Treasury Department’s final rule has a clear focus on preventing American resources from contributing to China’s advancements in technologies that can be repurposed for military applications or surveillance operations. Under these new rules:
- U.S.-based companies, citizens, and permanent residents will be barred from engaging in specific transactions involving Chinese firms involved in the production or development of semiconductors, AI technologies, and quantum computing.
- The rules will also mandate U.S. investors to notify the Treasury Department about their investments in a category of less advanced technologies, including legacy semiconductors, which may still pose indirect risks to U.S. national security.
- The objective, as stated by officials, is to protect the national security interests of the United States by managing how capital flows from the U.S. may be assisting China in its pursuit of developing high-stakes technologies.
The finalization of these restrictions stems from an executive order signed by President Biden in August 2023. This order was aimed at creating “a tailored set of prohibitions and notification requirements” for sensitive technologies that have the potential to bolster China’s military or intelligence operations. The Treasury Department, alongside the Commerce Department, conducted a review to determine the most critical areas for restriction. Their analysis identified the above-mentioned sectors—semiconductors, AI, and quantum technologies—as particularly significant to U.S. security interests.
Semiconductors: Widely regarded as the “brains” of modern electronic devices, semiconductors are fundamental to almost every form of technology, from smartphones to missile systems. Advanced semiconductor technology, in particular, is crucial for next-generation military and cybersecurity applications.
- Artificial Intelligence (AI): AI technology has implications for intelligence gathering, data processing, surveillance, and autonomous weaponry, all of which could enhance a nation’s defense and espionage capabilities.
- Quantum Computing: Quantum technologies represent a frontier that could revolutionize fields like encryption and cryptography. Countries leading in quantum computing may gain significant advantages in breaking encryption codes, which is a critical component of national defense and secure communications.
These technologies are each considered potential “dual-use” technologies—commercially viable but with significant military and strategic applications.
Paul Rosen, Treasury assistant secretary for investment security, emphasized that these technologies form the backbone of future warfare and intelligence strategies, stating, “Artificial intelligence, semiconductors, and quantum technologies are fundamental to the development of the next generation of military, surveillance, intelligence, and certain cybersecurity applications.”
By restricting the financial and intellectual support that American entities might inadvertently lend to adversarial advancements, the administration aims to prevent U.S. investments from enhancing Chinese capabilities in domains that are key to the U.S. defense infrastructure. Senior administration officials argue that permitting unregulated investments in such technologies could create risks that are increasingly challenging to mitigate through traditional security measures alone.
Following the release of the executive order, China responded with sharp criticism, accusing the U.S. of taking anti-globalization measures and attempting to marginalize Chinese advancements in the global tech landscape. A spokesperson for the Chinese Ministry of Foreign Affairs condemned the new U.S. policies, claiming that they seek to “engage in anti-globalization and de-sinicization.”
The spokesperson added, “China is strongly dissatisfied with the U.S. measures and reserves the right to protect its interests,” hinting at potential retaliatory measures. This response underscores the growing geopolitical tension between the U.S. and China over technology development and international competition for technological superiority.
The Biden administration’s move follows a broader trend among Western nations of scrutinizing their relationships with China, particularly in areas such as technology and defense. The new U.S. policy comes after the European Union’s recent measures to address Chinese investments and influence in sensitive sectors within its borders. Countries including Japan, South Korea, and Australia have also undertaken similar reviews of their trade and investment policies to safeguard national security in light of perceived threats from China’s technological ambitions.
The investment restrictions could further shift the dynamics of global tech innovation, as companies with significant operations in both China and the U.S. may face difficult decisions. These firms, particularly in the semiconductor industry, may now have to reassess their strategies and potential collaboration with Chinese firms
The restrictions could have substantial implications for the U.S. technology and investment sectors. Major U.S.-headquartered firms with business operations in China, including tech giants and investment firms with exposure to semiconductor manufacturing, AI research, or quantum computing, may face operational challenges. Additionally, some experts speculate that these restrictions could reduce venture capital flows into Chinese tech startups, impacting innovation and competition in the Chinese tech sector.
- Potential Supply Chain Reconfiguration: As U.S. firms reconsider their supply chains to avoid potential entanglement with Chinese entities in restricted sectors, the demand for alternative manufacturing hubs, such as India or Southeast Asian nations, may increase.
- Impact on Innovation: Curtailing U.S. investments in Chinese technologies may slow China’s technological progress in certain fields but could also have unintended consequences for U.S. firms that have relied on collaborative R&D projects or specialized materials sourced from China.
- Financial Sector Adjustments: Financial firms, particularly those specializing in tech investments, may need to adapt to the new regulatory landscape, potentially by reallocating funds to tech firms in other regions or to domestic sectors focusing on similar high-tech advancements.
Industry experts have noted that while the Biden administration’s decision marks a significant step in safeguarding U.S. interests, it also highlights the intensifying “tech war” between the two global powers. Some proponents believe the move will effectively hinder China’s ability to leverage American capital for strategic advancements. Critics, however, warn that the restrictions may spur further division and technological decoupling between the U.S. and China, potentially impacting global innovation and development.
Emily Jones, a technology policy analyst at the Brookings Institution, described the move as a “double-edged sword.” She noted that “while the intention is to prevent U.S. capital from contributing to China’s advancements in militarily sensitive technologies, it may also push China to accelerate its domestic innovation efforts and become even more self-sufficient in these areas.”
On the other hand, proponents of the restrictions argue that the benefits of securing national interests outweigh potential economic drawbacks. “This is a critical step toward ensuring that American technology and investments are not inadvertently used against our own security,” stated Representative Mike Gallagher, a member of the House Select Committee on Strategic Competition between the United States and the Chinese Communist Party.
