The US government is set to introduce new regulations requiring American companies to disclose their investments in high-tech sectors in China, including artificial intelligence. Additionally, certain investments will be prohibited altogether. This move aims to enhance the government’s oversight of foreign dealings by private companies.
While the US claims that the measure will be narrowly targeted, it is expected to further strain economic relations between the two global powers. China has criticized the plans as arbitrary and expressed opposition to the politicization and weaponization of trade and tech issues.
Under President Joe Biden’s order, the US will begin developing rules that will prevent American businesses from investing in firms from countries of concern. These countries are actively involved in quantum computing, advanced semiconductors, and specific areas of artificial intelligence. Furthermore, US firms will be required to notify the Treasury Department about investments in companies working on a broader range of artificial intelligence and semiconductor technology.
It’s worth noting that these regulations are unlikely to apply to portfolio investments, wherein firms passively invest in companies through the stock market. Rather, they focus on active investments made by private equity, venture capital, and other firms. The actual implementation of the rules is expected to occur several months after the public comment period, which will provide further clarification regarding prohibited investments.
Senior administration officials have clarified that this measure is primarily a national security action rather than an economic one. They emphasized that the US remains committed to open investment. However, experts argue that the outlined approach represents an unprecedented expansion of government oversight.
Compared to other proposals, the US regulations appear to be narrower in scope. Nevertheless, they still hold significant implications for companies and mark a departure from previous policies. While controls on outbound investment remain uncommon among advanced economies, Japan and Korea are among the few countries that currently enforce such restrictions.
In the past, the US implemented restrictions on China trade by limiting the sale of sensitive technology by US firms and scrutinizing Chinese investments in American companies. Additionally, the Trump administration prohibited investments in firms linked to China’s military.
The latest regulations have garnered widespread support in Washington, as they address a regulatory gap relating to financial flows that could inadvertently support China’s military ambitions. The US has been working to build international support for these investment curbs, and there have been some indications of success with other countries considering similar measures.
China is presently the second-largest destination for foreign investment, trailing behind the US. However, the deteriorating geopolitical relations have resulted in a substantial decline in money flowing from the US and other countries into China. Geopolitical tensions have prompted one in five UK importers to redirect their investments away from China, according to a recent survey by the Institute of Directors.
In response to the US regulations, China has implemented its own rules, including restrictions on exports of critical minerals used in computer chip production. In July, Treasury Secretary Janet Yellen visited China in an attempt to ease tensions and stated that the forthcoming regulations would not fundamentally impact the investment climate in China. However, experts caution that the ill-defined nature of some of the technologies being targeted, many of which also have consumer applications, could lead to an overly broad clampdown.
There are concerns that such measures may ultimately backfire by increasing costs for businesses and isolating the US from cutting-edge technological advancements. Striking a balance between national security and the promotion of scientific discoveries will be crucial. The US government must exercise caution during the implementation process to prevent unintended consequences and preserve opportunities for technology cooperation.
Overall, the US move to require companies to disclose investments in Chinese tech and impose certain restrictions represents a significant development in the ongoing trade and tech tensions between the two countries. As the regulations progress, their impact on investment flows and the broader economic relationship between the US and China remains to be seen.
