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What is this executive order, and why did it make headlines?
President Joe Biden signed the executive order last week to protect a narrow set of sensitive technologies critical to military innovation. The order requires active investment funds—such as those dealing with private equity and venture capital—to notify the Treasury Department of and to seek approval for investments into so-called countries of concern for semiconductors and micro-electronics, quantum information technologies, and certain artificial intelligence systems.
The order’s stated aim is to complement existing U.S. export controls and inbound investment screening tools to address the national security threats posed by countries such as the People’s Republic of China (PRC) that are acquiring and advancing these sensitive technologies. Although the PRC is not the only country for which the screening mechanism could apply, it was the first and only country labeled as a country of concern in the executive order. For the first time, the United States is limiting exchanges of not only people and products, but now capital.
How does the executive order fit into the Biden administration’s approach to economic relations with China?
In a speech delivered in April at Johns Hopkins University, Treasury Secretary Janet Yellen summed up the approach in three parts: protect U.S. national security, engage in healthy economic competition with Beijing, and cooperate on global challenges.
The executive order falls under the first part of this strategy by limiting U.S. investments into selected products that could bolster the Chinese military’s technological edge. Beijing has a stated goal to acquire and produce sensitive technologies to support its ongoing military modernization programs and weapons development and is increasingly engaging in provocative military behavior and actions. China also has track record of exploiting U.S. investments to develop Chinese domestic military and intelligence capabilities that undermine U.S. national security, so slowing down China’s military modernization is a high priority for the Biden administration.
How is the administration balancing economic security and national security concerns?
The executive order was designed to thread the needle between the two priorities. The categories are intentionally aimed to be narrow in scope so that the new rules can effectively curb U.S. investment into Chinese high-tech sectors while demonstrating America’s longstanding commitment to open international investment and capital flows.
The order fits into the administration’s agenda of maintaining a “small yard, high fence” approach to addressing national security concerns. By only targeting a small slice of potential “active” investments into China, which in total amounted to less than $10 billion in 2022, the order avoids restricting large swaths of “passive” investments in publicly traded Chinese bonds and equities.
The measure is a significant step forward in creating new U.S. tools to reduce risk exposure and prevent U.S. capital from being used to embolden China’s military. The U.S. Senate had concurrently introduced its own investment screening amendment to the defense spending bill, demonstrating significant bipartisan support for “de-risking” from China.
What impact will the executive order have on China’s economy?
The order comes at a bad time for China. China’s economic recovery from the coronavirus pandemic has been much worse than expected: consumer prices tipped into deflation in July, youth unemployment is over 20 percent, and wages grew at the slowest pace in years. Meanwhile, the property sector remains under pressure with high debt loads and falling prices. This new mechanism will certainly not help China’s economic recovery. Even Biden recently pointed out the challenges facing China’s economy, calling it a “ticking time bomb.”
The mechanism’s narrow scope means that it is unlikely to have a major impact on China’s macroeconomy. In addition, because Chinese citizens save an average of over 40 percent of their income, Chinese financial institutions have access to significant amounts of domestic capital to invest in dual-use technology development.
That said, the new restrictions on access to U.S. venture capital ecosystems and expertise could hinder China’s technological innovation. Beijing itself is seeking to attract private and foreign investors as its post-pandemic recovery stalls. The Chinese leadership recognizes that foreign knowhow is necessary to make leaps in its domestic innovation programs as it seeks to transition into more advanced industries.
Hasn’t the Biden administration recently emphasized stability with China? How might China view these mixed signals?
Yes. The executive order comes after months of diplomatic efforts to sooth relations between the United States and China, particularly since the spy balloon incident. A number of senior officials have traveled to Beijing to restart dialogue and establish “guardrails” for the bilateral relationship. At the Cabinet level, Yellen visited China in July, giving the assurance that the global economy is big enough for both the U.S. and China to thrive, and Commerce Secretary Gina Raimondo is planning to visit later this month. These recent efforts to reestablish high-level communication demonstrate the White House’s commitment to maintaining overall economic relations with China and not fully decoupling.
Despite increased diplomatic engagements, the executive order is consistent with Biden’s economic policies toward China. The administration has blocked Huawei and China Telecom from the U.S. market, prevented Beijing from building up its domestic high-end microelectronics industry, and banned importing lithography equipment for chip production. The administration identified the order as part of its de-risking strategy but limiting the flow of investment into China takes the approach to a new level.
Beijing was not surprised by the order. For some time the Biden administration has used diplomatic channels to preview this action, as part of a broader view on the important role that communication plays in managing competition and growing tensions. Nevertheless, China’s official response to the announcement was unsurprisingly prickly. Rhetorically, the Foreign Ministry has slammed the United States for “economic coercion” and “bullying,” while the Chinese embassy in Washington stressed that it will “hinder the normal business cooperation between the two countries and lower the confidence of the international community in the U.S. business environment.” China has complained that the United States is politicizing and weaponizing international trade as it attempts to boost its own development, while the U.S. government stresses that China has for decades had its own investment restrictions that are broad, arbitrary, and opaque. The Biden administration has said that it is doing its best to make these actions more narrowly focused on a few key sectors and executed more transparently.
Beijing has implemented countermeasures against the United States in recent months, including by banning U.S. Micron’s chip sales for critical infrastructure vendors in China, as well as announcing new restrictions on gallium and germanium, two minerals used for semiconductors. Nonetheless, Beijing has few options to respond to the new U.S. actions without inflicting collateral damage on its own economy.
Can the U.S. persuade its allies to follow its lead?
Leading up to the executive order, the Biden administration had been pushing its allies to adopt similar rules and restrict investment in Chinese tech sectors. American officials shared intelligence reports with allies about how Western investment assists China’s military modernization. In May, Biden raised his intention to limit high-tech investment at the Group of 7 summit. Some partners and allies, including the European Commission, the United Kingdom, and Germany, have indicated that they are exploring and developing their own similar programs.
Bringing allies and partners on board will ensure that the measures are as effective as possible. As investment policy remains the remit of European Union member states, U.S. officials have said that they will continue to work with individual countries on how to act in a way that will best protect their shared national security.
The author is grateful for research assistance provided by Nicole Weinrauch and Creighton Arrington.