Commentary on Political Economy

Thursday 10 August 2023

Biden Walks a China Tech Tightrope

A narrow investment ban doesn’t eliminate the business risks.

Aug. 10, 2023 6:45 pm ET


President Biden’s executive order on Wednesday restricting U.S. investment in Chinese military technologies tries to balance national security and business interests. The problem is that Beijing doesn’t distinguish between the two, which is why business risk in China is rising.

This week’s executive order builds on the Administration’s prior restrictions on exports of advanced chips and semiconductor-manufacturing equipment. The White House concern is that the Communist Party will weaponize U.S. venture and private-equity investment in technologies such as artificial intelligence.

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As the order explains, China eliminates “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.” The transfer of U.S. know-how and managerial talent can accelerate China’s development of sensitive technologies with military applications.

At the same time, the order correctly notes that “open global capital flows create valuable economic opportunities and promote competitiveness, innovation, and productivity.” A complete de-coupling of the U.S. and Chinese economies probably isn’t possible, or desirable, given their interdependence.

Thus the Administration proposes a “small yard, high fences” approach. The order directs the Treasury and Commerce secretaries to prohibit investments in AI, quantum computing and advanced semiconductors specifically designed for military or intelligence uses. Think combat drones and code-breaking quantum computers.

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But most advanced technologies could serve dual commercial and military purposes. Mr. Biden’s order would require only that U.S. companies notify the government of investments in advanced technologies with dual-use capabilities if they “may contribute to the threat to the national security.” That’s a big if.

The order won’t block most venture and private-equity investments, as many U.S. businesses had feared. The Business Roundtable praised the Administration for developing a “targeted mechanism to address clear national security risks.” It stops well short of the sweeping investment restrictions that some China hawks urged.

Auto makers will still be able to invest in Chinese self-driving systems. Drug makers can join with Chinese companies to develop new drugs. The narrow restrictions also convey to Beijing that the U.S. wants to reduce bilateral tensions.

China still slammed the restrictions, but they brought this on with their own behavior. Consider how Beijing this spring amended its counterespionage law to target foreign businesses that share “state secrets,” which is broadly defined as information that may damage its political, economic, national defense or diplomatic interests.

This means Americans can be prosecuted merely for providing consulting services, engaging in academic research or criticizing the regime. Bain & Co. said in April that Chinese authorities questioned its employees in Shanghai. Chinese cops also raided the offices of U.S. consulting firm Capvision Partners.

The Chinese are punishing U.S. chip makers as retaliation against the Administration’s export controls. Beijing recently invoked national security to block the sale of Micron chips in “critical infrastructure.” Chinese regulators are holding up Intel’s purchase of Israel-based wafer foundry Tower Semiconductor.

China is waging a relentless cyber-espionage campaign to steal Western intellectual property and prepare for a cyber-attack. “We’ve seen China looking for ways to insulate their economy against potential sanctions, trying to cushion themselves from harm if they do anything to draw the ire of the international community,” FBI Director Chris Wray warned last year.


The narrow U.S. investment ban doesn’t mean U.S. businesses can afford to relax about Chinese risks. An invasion of Taiwan would trigger U.S. sanctions and blow up supply chains. Beijing might seize U.S. business assets. The economic impact would be far larger than what occurred after Russia’s invasion of Ukraine.

This is why businesses have been “de-risking” from China well before the Administration’s restrictions. U.S. investment in Chinese startups dropped by more than 30% from 2021 to 2022. U.S. investment in Chinese venture funds fell by nearly 80% between the first quarter of 2019 and this year.

China needs more foreign investment as its economy slows and its industrial policy fails to deliver faster growth. Mr. Biden’s order won’t block businesses from investing in China for the most part, but they may decide on their own that the risks exceed the benefits.

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