The move of the United States to block and regulate high-tech U.S.-based investments going towards China will stymie the attempts by Beijing to upgrade the Chinese military.
On August 9, 2023, President of the United States Joe Biden signed an executive order preventing the free flow of American technology to China. The order covers advanced computer chips, micro electronics, quantum information technologies and artificial intelligence. Senior American officials said the efforts stemmed from national security goals rather than economic interests. With this aim, the categories covered under the order had intentionally been kept narrow in scope. The order sought to blunt the ability of China to use U.S. investments in technology companies to upgrade its military.
The U.S. has already limited the export of advanced computer chips to China. Officials previewing the order said on August 10 that China had exploited American investments to support the development of weapons and modernize its military. The new limits on exports were not tailored to disrupt the economy of China but these would complement the export controls on advanced computer chips from 2022.
The latest order adds to restrictions that limit Chinese access to US processor chips used in smart phones, artificial intelligence and other technology on security grounds. Dozens of Chinese companies that Washington says are linked to military modernization are barred from American financial markets. The Treasury Department of the U.S. Government, which would monitor the investments, would announce a proposed rulemaking with definitions that would conform to the presidential order and go through a public comment process. The administration had consulted with allies and industry in shaping the executive order.
Under the goals of the order, investors would have to notify the U.S. government about certain types of transactions with China as well as to place prohibitions on some investments. Officials say the order is focused on areas such as private equity, venture capital and joint partnerships in which the investments may give China and other countries of concern additional knowledge and military capabilities. The executive order by President Biden was in fact a sequel to a Congressional directive in 2023 asking the Treasury and the Commerce Departments to study how to track U.S. capital flows in tech sectors in China.
The order by President Biden said private equity and venture capital investments flowing into sectors could help Beijing gain a military advantage by developing “new applications that pose significant national security risks, such as the development of more sophisticated weapon systems, breaking cryptographic codes, and other applications that could provide it with military advantages.”
Chinese companies getting U.S. investments could also benefit from other intangible gains such as managerial know-how, market access and links to broader financial networks. It was noted that China did not respect “barriers between civilian and
commercial sectors and military and defence industrial sectors; not just research and development, but also by acquiring and diverting the world’s cutting edge technologies for the purpose of achieving military dominance.” The ban applies to the special administrative regions of Hong Kong and Macao as well.
Beijing has expectedly expressed “serious concern” over the order of the U.S. President and called it an attempt to prevent the development of China, but reports from Washington indicate that the public and political mood is grim against China, cutting across party lines. If anything, people want more stringent measures.
Lawyer and former Treasury official J. Philip Ludvigson was quoted in an AP report on August 10 as saying that the order was an initial framework that could be expanded. “The executive order issued today really represents the start of a conversation between the U.S.government and industry regarding the details of the ultimate screening regime,” Ludvigson said. “While the executive order is limited initially to semiconductors and microelectronics, quantum information technologies, and artificial intelligence, it explicitly provides for a future broadening to other sectors.”
Significantly, the issue of preventing Beijing from accessing American technology to strengthen the Chinese military has attracted bipartisan priority in the U.S. In July, the
U.S. Senate by a vote of 91-6 added as an amendment to the National Defense Authorization Act requirements to monitor and limit investments in countries of concern, including China.
Reaction to the orders of President Biden of August 9 showed the desire to push harder on China. Republican Raja Krishnamoorthi said the order was an “essential step forward,” but it “cannot be the final step.” Republican presidential candidate Nikki Haley, a former
U.S. ambassador to the United Nations, said President Biden should have been more aggressive, saying: “We have to stop all U.S. investment in China’s critical technology and military companies; period.”
Senate Democratic Leader Chuck Schumer has been quoted in Al Jazeera praising the order and saying: “For too long American money has helped fuel the Chinese military’s rise. Today the United States is taking a strategic first step to ensure American investment does not go to fund Chinese military advancement.”
The response from the American industry and stock market is not critical of the order either; they too understand the need to curb the aggressive military intentions of China. The U.S. Chamber of Commerce has said it has met a number of times with the White House and federal agencies as the order was being prepared and says its goal during the comment period will be “to ensure the measure is targeted and administrable.” The American market also understands the risks inherent in too much exposure in China, short-term gains notwithstanding. “The message it sends to the market may be far more decisive,” sayssenior director at the Foundation for Defense of Democracies Elaine Dezenski. “U.S. and multinational companies are already re-examining the risks of investing in China. Beijing’s so-called national security’ and anti-espionage’ laws that curb routine and necessary corporate due diligence and compliance were already having a
chilling effect on U.S. foreign direct investment. That chilling now risks turning into a deep freeze.”
The statement of the Chinese Ministry of Commerce in reaction to the order of U.S. President Joe Biden that it “seriously deviates from the market economy and fair competition principles that the United States has always advocated”exposes the double standards of Beijing as the Chinese rulers, wedded to the ideals of communism, do not respect either the market economy or the principles of fair competition. It reveals the anxiety in China over the way the economic growth of China has stumbled post- pandemic. Firmly in the grip of a deflation, there has been a 0.3 percent decline in the consumer price index in July 2023 compared to July 2022.
The restrictions imposed by the Joe Biden government on hi-tech investments in China are all the more worrisome to the rulers in Beijing as foreign direct investment in China has fallen by 89 percent in China in the second quarter of 2023 compared to what it was in the same period in the previous year, according to data released by the State Administration of Foreign Exchange. Most of the foreign investment that has flowed into China is believed to have been brought in by Chinese companies and disguised as foreign money to get tax breaks and other benefits, Chinese researchers themselves say.
On the other hand, foreign business groups say global companies are shifting business plans to other economies. Foreign companies have lost confidence in China following tighter security controls and a lack of action on promises for reforms. Calls by President of China Xi Jinping and other Chinese leaders for more economic self-reliance have left investors uneasy about their future in an economy dominated by the state.
“Worry about China, but don’t worry about China,” was the sardonic comment of U.S. President Joe Biden on the present condition about China while he was at a fundraising event in California in June 2023. What he meant was that people could feel sorry for the poor economic condition facing China now and all the hurdles they had to deal with but there was no reason for the people of the United States to worry about a possible military mischief committed by China. For, Beijing was steadily being divested from the wherewithal to do so. “They’ve got some problems,” President Biden said in yet another fundraiser for his re- election campaign in Utah on August 10. “And that’s not good because when bad folks have problems they do bad things. He observed that China was “a ticking time bomb in many cases” and said the U.S. had a China to deal with.
Author
