What is happening?
President Joe Biden’s executive order has initiated a critical turning point in US-China relations and investment dynamics. The order prohibits US new private equity, venture capital, and joint venture investments in certain Chinese technology companies, particularly those engaged in semiconductors, microelectronics, quantum information technologies, and artificial intelligence. The rule applies only on future investments and is driven by concerns about the United States’ national security and aims to prevent the advancement of sensitive technologies critical to military and intelligence capabilities in China.
What is causing it to happen?
The underlying cause of these measures is the escalating tensions between the United States and China, driven by a range of factors including technology competition, concerns about intellectual property theft, China’s military modernization, and broader geopolitical rivalry. Previous administrations, including that of Donald Trump, had already heightened scrutiny on Chinese investments and technology transfers due to concerns over national security and the potential for American technology to be used for military purposes. President Biden’s administration is continuing and expanding these efforts to prevent the transfer of sensitive technologies that could bolster China’s military and intelligence capabilities.
What could happen next?
China has strongly criticized President Joe Biden’s newly signed executive order that restricts US investment in technology, but for now, China has not announced any immediate retaliatory actions. The order comes at a challenging time for China’s economy, as recent economic data highlights signs of deflation, such as declining consumer and producer prices. A potential positive impact of a prolonged period of deflation in the country may be that it helps to curb rising prices in other parts of the world. However, if cheap Chinese goods flood global markets it could have a negative impact on manufacturers around the world. A period of falling prices in China could hit company profits and consumer spending globally, potentially leading to higher unemployment. It could result in a falling demand from the world’s largest marketplace for energy, raw materials, and food, which would hit global exports.
China is unlikely to match the US restrictions. American tech firms are not as dependent on Chinese investments as their Chinese counterparts are on the US capital. Secondly, China is dealing with deteriorating macroeconomic circumstances and declining investor confidence, factors that reduce its willingness to intensify an economic standoff. Instead, Beijing is more likely to respond in alternative areas, potentially enforcing additional export constraints on crucial materials where China’s dominating, such as rare earths or specific minerals.
As a US investor or business owner, it’s important to stay informed and monitor developments as the Treasury Department implements the public comment period, which is set to last for 45 days, starting August 9th, 2023. The Treasury is seeking stakeholder input as they are going to finalize the rules, then they’ll be turned into draft regulations which are expected to take effect in 2024. During the upcoming 45 days, you could participate in the public comment process to provide input and feedback on the proposed rules, expressing any concerns or suggestions you may have.
Reacting to the growing importance of safeguarding sensitive technologies, the European Union revealed plans to prevent European companies from making sensitive technologies such as supercomputers, artificial intelligence, and advanced microchips in countries like China and Russia. The EU aims to finalize this plan by year-end. The proposed initiatives include three areas: reviewing inbound investment screening to regulate foreign acquisitions of critical European assets, enhancing cooperation on export controls, and implementing outbound investment screening, a contentious move that would grant the EU authority to prevent the outsourcing of vital industries and technologies to autocracies. The plan reflects a balancing act between security concerns and economic ties, mirroring global debates on technological sovereignty.
For Further Reading:
- Financial Times – “US investors face uncertain future in China after tech ban” – https://www.ft.com/content/8de1cd77-fe94-45d5-aa23-09faf7f89f15
Sources:
- The Wall Street Journal -“U.S. and China Poised to Drift Further Apart After Investment Ban” – https://www.wsj.com/articles/u-s-and-china-poised-to-drift-further-apart-after-investment-ban-1e37427d?mod=economy_lead_pos1
- FirstPost -“‘Economic Coercion’: US bans tech investments in China, miffed CCP warns of impact on global supply chains” – https://www.firstpost.com/tech/news-analysis/economic-coercion-us-bans-tech-investments-in-china-miffed-ccp-warns-of-impact-on-global-supply-chains-12981112.html
- Investopedia -“Deflation: Definition, Causes, Changing Views on Its Impact” – https://www.investopedia.com/terms/d/deflation.asp
- Bloomberg – “China Slides Into Deflation as Consumer, Factory Prices Drop” – https://www.bloomberg.com/news/articles/2023-08-09/china-slides-into-deflation-as-consumer-producer-prices-decline
- BBC – “Deflation: Why falling prices in China raise concerns” – https://www.bbc.com/news/business-66435870
- The European Commission – “An EU approach to enhance economic security” – https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3358
- Politico – “EU looks to ban companies from making sensitive tech in China” – https://www.politico.eu/article/eu-ban-companies-make-sensitive-tech-china/
- The Wall Street Journal – “China’s Options for Retaliation Are Few After U.S. Investment Ban” – https://www.wsj.com/articles/chinas-options-for-retaliation-are-few-after-u-s-investment-ban-f539102e
- CNN – “US investment curbs deal ‘major blow’ to Chinese startups” – https://edition.cnn.com/2023/08/10/investing/us-china-bans-tech-investment-slump-intl-hnk/index.html
- US DEPARTMENT OF THE TREASURY – “Treasury Seeks Public Comment on Implementation of Executive Order Addressing US Investments in Certain National Security Technologies and Products in Countries of Concern” – https://home.treasury.gov/news/featured-stories/treasury-seeks-public-comment-on-implementation-of-executive-order-addressing-us-investments-in-certain-national-security-technologies-and-products-in-countries-of-concern
