President Joe Biden issued an executive order (EO) yesterday that takes broad aim at curbing U.S. investment in leading-edge technologies in China. This follows the black-listing of many Chinese companies from directly buying U.S.-made technology. Biden declared a “national emergency” in the EO and ordered creation of new regulations and reporting mechanisms around transactions and investing “in semiconductors and microelectronics, quantum information technologies, and artificial intelligence capabilities.”

The Wall Street Journal reported, “White House officials said, the order intends to deny China the know-how, market access and other benefits U.S. venture-capital and private-equity firms bring with their investments. That is likely to further rattle American companies doing business in China, coming on top of weakening Chinese growth, Covid lockdowns that made travel to China difficult and a recent pressure campaign against U.S. and other foreign companies amid rising tensions between Washington and Beijing.”

Here’s an excerpt from Biden’s executive order (Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern):

“I, JOSEPH R. BIDEN JR., President of the United States of America, find that countries of concern are engaged in comprehensive, long-term strategies that direct, facilitate, or otherwise support advancements in sensitive technologies and products that are critical to such countries’ military, intelligence, surveillance, or cyber-enabled capabilities.  Moreover, these countries eliminate barriers between civilian and commercial sectors and military and defense industrial sectors, not just through research and development, but also by acquiring and diverting the world’s cutting-edge technologies, for the purposes of achieving military dominance.  Rapid advancement in semiconductors and microelectronics, quantum information technologies, and artificial intelligence capabilities by these countries significantly enhances their ability to conduct activities that threaten the national security of the United States.  Advancements in sensitive technologies and products in these sectors will accelerate the development of advanced computational capabilities that will enable new applications that pose significant national security risks, such as the development of more sophisticated weapons systems, breaking of cryptographic codes, and other applications that could provide these countries with military advantages.

“As part of this strategy of advancing the development of these sensitive technologies and products, countries of concern are exploiting or have the ability to exploit certain United States outbound investments, including certain intangible benefits that often accompany United States investments and that help companies succeed, such as enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing.  The commitment of the United States to open investment is a cornerstone of our economic policy and provides the United States with substantial benefits.  Open global capital flows create valuable economic opportunities and promote competitiveness, innovation, and productivity, and the United States supports cross-border investment, where not inconsistent with the protection of United States national security interests.  However, certain United States investments may accelerate and increase the success of the development of sensitive technologies and products in countries that develop them to counter United States and allied capabilities.

“I therefore find that advancement by countries of concern in sensitive technologies and products critical for the military, intelligence, surveillance, or cyber-enabled capabilities of such countries constitutes an unusual and extraordinary threat to the national security of the United States, which has its source in whole or substantial part outside the United States, and that certain United States investments risk exacerbating this threat. I hereby declare a national emergency to deal with this threat.”

The executive order also states, “The regulations issued under this section shall identify categories of notifiable transactions that involve covered national security technologies and products that the Secretary, in consultation with the Secretary of Commerce and, as appropriate, the heads of other relevant agencies, determines may contribute to the threat to the national security of the United States identified in this order.  The regulations shall require United States persons to notify the Department of the Treasury of each such transaction and include relevant information on the transaction in each such notification.”

There are obviously many details yet-to-come. In the midst of what’s been termed a global economic slowdown, many observers have wondered if the current global business environment will disintegrate into more restrictive, smaller groups of nations who trade mostly with each other.

Liza Tobin, a former National Security Council official now with the Special Competitive Studies Project, a Washington-based group focused on technology policy, is quoted in the Wall Street Journal article, “That talk of diversification, de-risking, decoupling, disentangling—choose your ‘D-word,’ whichever one you like—it’s really baked into the minds in Washington, increasingly in Silicon Valley, and this is really being beamed right at Wall Street.”

The WSJ further reported, “Venture-capital firms, which once poured into China energetically, have already pulled back responding in part to sharpening tensions; U.S. investment in Chinese startups fell by more than 30% from 2021 to 2022 and is on pace to fall further this year, according to Crunchbase data.”

Link to President Biden’s executive order, https://www.whitehouse.gov/briefing-room/presidential-actions/2023/08/09/executive-order-on-addressing-united-states-investments-in-certain-national-security-technologies-and-products-in-countries-of-concern/

Link to Wall Street Journal article, written by Charles Hutzler, https://www.wsj.com/articles/u-s-and-china-poised-to-drift-further-apart-after-investment-ban-1e37427d?mod=hp_lead_pos3