President Biden escalated his confrontation with China on Wednesday by signing an executive order banning American investments in key technology industries that could be used to enhance Beijing’s military capabilities, the latest in a series of measures that put further distance between the world’s two largest economies.
The order would ban venture capital and private equity firms from pumping money into Chinese efforts to develop semiconductors and other microelectronics, quantum computers and some artificial intelligence applications. Administration officials have stressed that the move is tailored to safeguard national security, but China is likely to see it as part of a broader campaign to curb its rise.
“The Biden administration is committed to keeping America safe and defending America’s national security by appropriately protecting technologies critical to the next generation of military innovation,” the Treasury Department said in a statement. The statement emphasized that the executive order is a “narrowly targeted action” that complements existing export controls and that the administration maintains its “longstanding commitment to open investment.”
Narrow or not, the new order comes at perhaps the most fraught moment in US-China relations since President Richard M. Nixon and Secretary of State Henry Kissinger opened a dialogue with Beijing in the early 1970s. A series of expansions of export controls on key technologies in China have already triggered retaliation from Beijing, which recently announced a cutoff of metals such as gallium that are critical for its own supply chain. of the Pentagon.
Mr. Biden has stressed that he wants to strengthen ties with China following a Cold War-style standoff over a spy balloon shot down after crossing American airspace and the discovery of extensive Chinese efforts to plant malware in power grids and communication systems. He has sent Secretary of State Antony J. Blinken, Treasury Secretary Janet L. Yellen and other officials to reopen communications in recent months. Gina Raimondo, the commerce secretary, is expected to go to China in the coming weeks.
Administration officials have argued that they are acting with caution that they say should have been used years ago around key technologies.
But Wednesday’s announcement takes that effort to a new level. While export bans and concerns about Chinese investment in the United States have a long history, the United States has never before attempted broad limits on the flow of investment to China.
In fact, for much of the past few decades, the United States has encouraged American investors to deepen their ties to China’s economy, seeing it as a way to expand the web of cooperation between the two countries that is gradually expanding. Beijing will be included in the West. economy and force it to play by Western rules.
However, analyzes over the past few years have concluded that investments in new technologies and joint ventures are strengthening China’s military and its intelligence-gathering capabilities, albeit indirectly. American officials have been actively sharing intelligence reports with allies to make the case that Western investment is key to China’s military modernization plans — especially in space, cyberspace and that kind of computer power. which would be needed to break Western encryption of critical communications.
Mr. Biden’s delegation discussed joint efforts to limit high-tech investment with its counterparts at the recent Group of 7 summit in Hiroshima, Japan. Several allies, including Britain and the European Union, have said publicly that they may follow suit. Outreach to other powers underscores that the US ban may not be that effective and will only work in conjunction with other major countries, including Japan and South Korea.
The executive order coincides with a bipartisan effort in Congress to impose similar limits. An amendment by Senators Bob Casey, Democrat of Pennsylvania, and John Cornyn, Republican of Texas, was added to the Senate version of the annual defense authorization bill. Administration officials have said they will try to align their upcoming policies with the congressional framework.
Industry officials reacted cautiously to the new order.
“We hope that the final rules allow US chip companies to compete on a level playing field and access key global markets, including China, to promote the long-term strength of the semiconductor industry. US and our ability to out-innovate global competitors,” the Semiconductor Industry Association said in a statement.
Gabriel Wildau, a managing director at consulting firm Teneo that focuses on political risk in China, said the direct impact of the executive order would be modest, given its limited scope, but the disclosure requirements embedded in order can have a chilling effect.
“Politicians increasingly view corporate investments in China as a form of collusion with a foreign enemy, even without allegations of illegality,” he said.
The Treasury Department, which has already spoken to American executives about the upcoming order, will begin a process of formally taking comments before drafting the rules to be put in place next year. But American companies can change their investment strategies even before the rules take effect, knowing they are coming.
The Chinese government will almost certainly criticize Mr. Biden’s order, though the full response may be a little slow in coming. The foreign ministry is not holding its usual daily news conferences in Beijing this week, as many from China’s leadership head to the country’s Beidaihe beach resort for their usual summer retreat. day and discussions of policy and personnel.
In March, according to an account published by the official Xinhua news agency, China’s president, Xi Jinping, declared that “Western countries, led by the United States, have implemented all-around containment , siege and oppression against us, bringing an unprecedented severe challenge to our development.”
China’s own investment restrictions are broader than the new American rules — they apply to all outbound investments, not just those in the United States. And they reflect a technology policy that is in some ways the opposite of America’s new restrictions.
China restricts or stops most low-tech outbound investments, such as purchases of real estate or even European soccer clubs. But China has allowed and even encouraged additional acquisitions of businesses with technologies that could offer geopolitical advantages, including investments in overseas businesses involved in aircraft production, robotics, artificial intelligence and heavy manufacturing.
The latest move from Washington comes at a rare moment of weakness for China’s economy. Chinese cities and some businesses have declared 2023 a “Year of Investment in China” in hopes of a post-Covid revival of their local economies. But Mr. Xi has created an environment that has made many American venture capital firms and other investors more cautious.
Western companies that assess investment risk, such as the Mintz Group, have been investigated and in some cases have had their offices raided. A Japanese executive has been accused of espionage, and a new anti-espionage law has raised fears that ordinary business activities will be viewed by China as espionage.
Previous moves by the Biden administration to curb sensitive economic ties have taken a toll. China’s telecommunications champion, Huawei, has been almost completely blocked from the US market, and America’s allies, starting with Australia, are removing Huawei equipment from their networks. China Telecom was banned by the Federal Communications Commission, which said it was “subject to the exploitation, influence and control of the Chinese government.”
At the same time, the United States – with somewhat reluctant help from the Dutch, Japanese and South Korean governments – has gone to extraordinary lengths to prevent China from developing its own domestic capability to produce the highest -end microelectronics alone.
It banned the export of multimillion-dollar lithography equipment used to make chips, using precision lasers and mirrors in hopes of limiting China’s progress as the United States tries to restore its own semiconductor industry. Taken together, this is an unprecedented effort to slow down an adversary’s capabilities while accelerating America’s own investments.
Keith Bradsher, Ana Swanson and Sarah Kessler contributed reporting.