Narrow-gauge, high stakes: Biden sets new investment restrictions on China

The administration characterized these steps as narrowly targeted to protect US national security. The order piles on to a suite of policies aimed at boxing in China’s ongoing efforts to develop innovation that would enhance its ability to project state power including military and intelligence gathering capabilities. This move comes on the heels of escalating tensions between the countries over Taiwan, trade, US efforts to “de-risk” semiconductor supply chains, human rights practices in China, and China’s spy balloon debacle. High-level bilateral dialogues have only recently resumed starting with Secretary of State Antony Blinken’s visit to Beijing in June.

The new restrictions apply to the semiconductor, quantum information technology, and artificial intelligence sectors and are expected to primarily affect private equity, venture capital firms, and US investors in joint ventures with Chinese companies. They are expected to come into effect next year.

Practical impact less than initially thought: The existing parameters – both in terms of outright restrictions as well as the notification requirements – have been considerably watered down from what was originally under consideration. However, regulations like these typically include administrative leeway that can make them more – or less – onerous, so a precise read on its impact will have to await its implementation. Moreover, since US capital infusions into China in these sectors have been sharply slowing anyway, the real impact lies in curtailing the flow of tech expertise and know-how. Assessing whether this policy does the trick will be more difficult – and take more time – than tracking investment flows.

Is the US out on a limb? The Biden administration has made some progress in galvanizing a broad coalition of like-minded partners to create a united front on technology and trade issues with China. But, with these new measures, the White House has inched out a bit further on the limb. It is unclear if its partners will follow. Many US partners share US concerns but are less willing to damage trade and investment ties with China.

Should US partners particularly in Europe and Asia fail to follow suit, it could open a strategic weakness in the nascent united front and could undermine the US measures. Investment from US partners into China could simply backfill any prohibited American investments. If, on the other hand, US partners develop similar measures of their own, it would magnify their impact, denote a strong cohesion of purpose, and signal to Beijing that its efforts to split partners off from the US’ more aggressive stance is faltering. Beijing would be facing a considerably more daunting chess board. In that sense, the US moves up the ante in an already-dicey foreign policy gamble.

Not yet a done deal: The regulatory text to implement the order has not yet been drafted and modifications are possible, though definitely likely. The Treasury Department will oversee a 45-day public comment period that will allow interested parties to weigh in. The US business lobby will continue its efforts to reduce the scope and impact of the regulations, while China hawks will call for a substantial tightening. Before all is said and done, these measures could look a bit different than what is contained in the existing order.

Domestic politics: As the presidential campaign intensifies, the Biden administration will take fire from at least some segments of the Republican party for being too “soft” on China. Republican presidential contender Nikki Haley has already characterized the new restrictions as “not even a half-measure” while Republican Sen. Marco Rubio called them “almost laughable”. Depending on how much electoral traction these criticisms gain, further “toughening” is possible if Biden’s reelection team senses significant political liability.