President Biden escalated his confrontation with China on Wednesday by signing an executive order banning new U.S. investment in key technology industries that could be used to boost Beijing’s military capabilities.
The order would ban venture capital and private equity firms from paying more for Chinese ventures developing semiconductors and other microelectronics, quantum computers and some artificial intelligence applications. Administration officials insisted the move was designed to protect national security, but China is likely to see it as part of a broader campaign to contain its rise.
“The Biden administration is committed to keeping America safe and protecting America’s national security by appropriately protecting technologies critical to next-generation military innovation,” the Treasury Department said in a statement. The report emphasized that the executive order was a “short-term measure” to complement existing export restrictions and that the administration maintained its “long-standing commitment to open investment.”
In the early 1970s, President Richard M. Nixon and Secretary of State Henry A. The new order comes at the most critical moment in US-China relations since Kissinger opened talks with Beijing. Expanding export restrictions on key technologies for China have already prompted retaliation from Beijing, which recently announced cuts to metals such as gallium, which are critical to the Pentagon’s own supply chain.
Mr. Trump wants to stabilize relations with China following a Cold War-style standoff over a spy balloon shot down after crossing US airspace and the discovery of a broader Chinese effort to plant malware in power grids and communications systems. Biden insisted. He has in recent months sought to renew talks with Chinese officials under Secretary of State Anthony J. Blinken, Treasury Secretary Janet L. sent Yellen and other officials. Commerce Secretary Gina Raimondo is expected to visit China in the coming weeks.
In fact, the president appeared intent on not antagonizing Beijing with Wednesday’s order, leaving it to be announced through material and background briefings written by aides who declined to be identified.
However, China expressed “deep disappointment” with the order, saying it was designed to “politicize and weaponize business” and hinted at retaliation.
“The recent investment restrictions will seriously undermine the interests of Chinese and US companies and investors, hinder normal business cooperation between the two countries and undermine the international community’s confidence in the US business environment,” Chinese spokesman Liu Pengyu said. The embassy said in a statement.
Administration officials said the president’s order was part of an effort to “de-risk” relations with China, but not to “sever” it. Wednesday’s announcement, however, takes that effort to a new level. Although export restrictions and concerns about Chinese investment in the United States have a long history, the United States has never before attempted limits on investment into China.
Indeed, over the past few decades, the United States has encouraged American investors to deepen their ties to the Chinese economy as a way to expand the web of interdependence between the two countries and gradually integrate Beijing into the Western economy. Force them to play by western rules.
However, U.S. government reviews in recent years have fired back at China’s military and its intelligence-gathering capabilities, albeit implicitly, in new technologies and investments in joint ventures. U.S. officials have been actively sharing intelligence reports with allies to confirm that Western investment is key to China’s military modernization plans — especially in space, cyberspace and the computing power needed to break Western encryption of sensitive communications.
Administration officials see the initiative as motivated entirely by national security reasons, not an attempt to gain economic advantage. But the directive describes how difficult it is to separate the two, citing China’s moves to “remove barriers between the civilian and commercial sectors and the military and defense industrial sectors.” “It describes China’s focus on acquiring and diverting the world’s cutting-edge. technologies for the purpose of achieving military supremacy.”
(The text of Mr. Biden’s order refers only to “countries of concern,” although an annex covers the “People’s Republic of China” and its two special administrative regions, Hong Kong and Macau.)
At the recent 7th Group Summit held in Hiroshima, Japan, Mr. Biden and his aides discussed joint efforts to curb high-tech investment. Many allies, including Britain and the European Union, have publicly indicated they may follow suit. Access to other powers underscores that the U.S. deterrence may not be all that effective and will only work in tandem with other major countries, including Japan and South Korea.
The executive order would also require companies to declare certain investments to the government, consistent with a bipartisan effort in Congress to impose similar limits. An amendment by Senators Bob Casey, Democrat of Pennsylvania, and John Cornyn, Republican of Texas, was added to the Senate version of the annual defense authorization bill.
Many Republicans criticized the president’s order as too little, too late and “full of loopholes,” as Senator Marco Rubio, Republican of Florida and vice chairman of the Senate Intelligence Committee, said.
“It’s long overdue, but the Biden administration has finally recognized that there is a serious problem with US dollars financing China’s rise,” Mr Rubio said. “However, this concisely designed plan is almost laughable.”
Representative Michael McCaul, Republican of Texas and chairman of the House Foreign Affairs Committee, said the new order should go after existing investments and sectors such as biotechnology and energy.
“We need to stop the flow of US dollars and support China’s military and surveillance apparatus,” Mr. McCall said.
The US has already banned or restricted the export of certain technologies and products to China. The new order means that U.S. money, expertise, and prestige cannot be used to help China build its own versions of what it cannot buy from U.S. companies.
It is not known how much money will be affected. US investors have already pulled back dramatically over the past two years. Venture capital investment in China fell from a high of $43.8 billion in the last quarter of 2021 to $10.5 billion in the second quarter of this year, according to PitchBook, which tracks such trends. But the latest order could have a chilling effect on investment beyond specific industries.
In a capital that has been the target of China’s opposition to some parts of the bilateral agreement, the sounds of alarm in Washington came from the business community. While trade groups praised the administration for its deliberations, there were concerns that a downward spiral in relations could accelerate a widening gap between the world’s two largest economies.
“We believe the final rules will improve the long-term strength of the U.S. semiconductor industry and its ability to outperform global competitors by allowing U.S. chip companies to compete on a level playing field and access key global markets, including China,” the Semiconductor Industry Association said in a statement.
Gabriel Wildau, managing director of Teneo, a consultancy that focuses on political risk in China, said the direct effect of the executive order would be modest in its limited scope, but the disclosure requirements embedded in the order would have a chilling effect.
“Politicians increasingly view corporate investments in China as collusion with a foreign adversary, even when there are no allegations of illegality,” he said.
The Treasury Department, which has already consulted with U.S. executives about the upcoming order, will begin formally taking comments before drafting rules that will take effect next year. But U.S. companies may change their investment strategies before the rules take effect.
China’s own investment restrictions are broader than the new US rules – they apply to all outbound investment in the US. In some ways they reflect a technology policy against the new US restrictions.
China discouraged or stopped low-tech outbound investments, such as purchases of real estate or European soccer clubs. But China has allowed and encouraged more acquisitions of businesses with technologies that could provide geopolitical advantages, including investments in foreign businesses involved in aircraft manufacturing, robotics, artificial intelligence and heavy manufacturing.
Washington’s latest move comes at a rare moment when the Chinese economy is suffering. Consumer prices in China fell in July for the first time in more than two years, after barely rising in recent months, the country’s National Bureau of Statistics reported on Wednesday.
With Chinese cities and some businesses declaring 2023 the “Year of Investing in China,” hoping for a post-Covid revival of local economies, President Xi Jinping has created an environment that has made many US venture capital firms and other investors more cautious. .
Western companies that assess investment risk, such as the Mintz Group, have been investigated and in some cases their offices raided. A Japanese executive has been charged with espionage, and a new anti-espionage law has raised fears that normal business activities could be viewed as espionage by China.
Previous moves by the Biden administration to rein in key economic ties have backfired. Huawei, China’s telecoms champion, has been completely barred from the US market, and US allies, starting with Australia, have been removing Huawei equipment from their networks. China Telecom was banned by the Federal Communications Commission, which it said was “subject to exploitation, influence and control by the Chinese government”.
At the same time, the United States—with somewhat reluctant assistance from the Dutch government, Japan, and South Korea—has made extraordinary efforts to prevent China from developing its own domestic capacity to produce highly advanced microelectronics on its own.
Washington has banned the export of multimillion-dollar lithography equipment used to make chips in hopes of curbing China’s progress as the United States tries to revive its own semiconductor industry. Taken together, this is an unprecedented effort to slow down adversary capabilities while accelerating America’s own investment.
Keith Bradsher, Ana Swanson And Sarah Kessler Contributed report.