Biden Takes Measured Approach on China Investment Controls

Last week, U.S. President Joe Biden signed an executive order that began the process of enacting restrictions on U.S. investment in three technology sectors in China: semiconductors, quantum information technologies, and artificial intelligence. The executive order was accompanied by proposed rulemaking from the U.S. Treasury Department that would impose prohibitions and notification requirements on some investments in Chinese technologies. Although hawks in Congress pushed the administration to adopt broader controls on such investments, cooler heads prevailed, limiting the scope of the draft regulations to these three areas and prioritizing curbs on military applications of these technologies.

At the same time, even moderate restrictions on China’s technology sector will increase the temperature in the U.S.-China tech war. Biden’s executive order aligns with the administration’s broader strategy to slow the growth of China’s tech sector by blacklisting hundreds of companies, blocking exports of critical technologies, and reducing China’s dominance in supply chains. Investment restrictions will likely expand, just as other U.S. sanctions programs have undergone mission creep.

Biden tasked the Treasury Department with implementing his executive order, leading it to issue an advance notice of proposed rulemaking that requests comments on how the government should limit U.S. companies’ investment in chips, quantum, and AI in China and establish notification requirements for related investments. Though headlines portrayed the executive order as enacting broad bans on investment in key technologies, Treasury’s advance notice is actually relatively narrow in scope.

With respect to semiconductors, Treasury is considering prohibiting U.S. investment in the same areas covered by the Commerce Department’s October 2022 semiconductor export controls, closing another avenue for companies to assist China in developing these sanctioned technologies. In particular, Treasury is planning to bar U.S. entities from investing in Chinese technology relating to the design, fabrication, and packaging of advanced logic and memory chips; the installation of supercomputers powered by advanced chips; and the software and machine tools required to manufacture chips.

Treasury’s proposed limitations on investment are more circumscribed when it comes to quantum information technologies and AI systems in China—two areas where the Biden administration has yet to enact sweeping export controls. The broadest of these restrictions is a potential ban on investment in the production of quantum computers and their components. Other investment prohibitions related to quantum would apply only to certain end uses: investment in Chinese quantum sensing platforms would be prohibited if they are designed for use in military, intelligence, or surveillance applications, while investment in Chinese quantum communications systems would be prohibited if they are “designed to be exclusively used for secure communications.”

Similarly, investment in the development of Chinese software that incorporates AI systems would be prohibited only if such systems are designed to be used for “military, government intelligence, or mass-surveillance end uses.” These end-use controls are important because they limit the scope of the restrictions and would not block U.S. investment in beneficial civilian technologies in China such as using machine learning to better diagnose diseases or predict the impact of the climate crisis.

In addition to these limited prohibitions on investment, Treasury has proposed notification requirements for some types of investment in chips and AI in China. This notification regime has led observers to refer to such rules as “outbound CFIUS” because they create an external complement to the Committee on Foreign Investment in the United States, which screens inbound investments. Treasury is considering requiring firms to notify the government within 30 days of making investments in the design, fabrication, and packaging of legacy chips in China, as well as for investments in AI systems that are primarily designed for cybersecurity, facial recognition, robotics, and intelligence gathering.