U.S. President Joe Biden recently signed a restrictive order that gave the government extensive new powers to regulate investment in China. It prohibits U.S. citizens, permanent residents and companies from investing in China’s three major high-tech sectors: semiconductors and microelectronics, artificial intelligence and quantum computing. This means that America’s medium- to long-term tech offensive against China will accelerate.
The restrictions are part of a broader move that can be called “enhancing U.S. competitiveness against China." Along with previous high-tech export controls, entity sanctions and supply chain decoupling, they are key elements of the U.S. strategy to contain China’s technological progress.
In recent years, the United States has continuously strengthened its containment and suppression of China’s high-tech manufacturing sector. It has imposed restrictions not only on key technologies and resources but also on investments in certain fields. It has also expanded the government’s regulatory powers by implementing legal restrictions to protect high tech, thereby accelerating selective decoupling between China and the United States.
In 2018, the U.S. actively promoted centralized legislative reforms in areas such as export control systems and foreign investment reviews, completing such things as the National Defense Authorization Act (NDAA), the Foreign Investment Risk Review Modernization Act (FIRRMA), the Export Control Reform Act (ECRA), the National Defense Authorization Act, and the National Critical Capabilities Defense Act (NCCDA). These legislative acts clearly aim to protect the important technological and industrial foundation of the United States.
As high-tech competition between China and the United States further intensifies, the U.S. containment of China’s technology is also accelerating. It is difficult for export controls alone to cover all aspects of the industrial chain: Investment restrictions have a greater impact on cutting off technological cooperation, so these tools are an important consideration for the United States. To more specifically respond to what it sees as competition from China, the United States has begun to review investments flowing out of the United States — a new policy tool called the “foreign investment review mechanism,” or “reverse CFIUS” (Committee on Foreign Investment in the United States).
In fact, as early as August 2018, the U.S. Congress was pushing FIRRMA, which strengthened the regulatory authority of CFIUS and expanded the scope of review of Chinese investments in the United States to include areas such as venture capital and non-controlling strategic investments. After Biden took office, the United States further tightened investment restrictions in the high-tech sector against China. During the legislative debates on the Export Control Reform Act in 2018 and the CHIPS and Science Act in 2022, Congress discussed the establishment of a foreign investment security review mechanism.
Earlier, U.S. Treasury Secretary Janet Yellen and National Security Adviser Jake Sullivan stated on different occasions that the United States will continue its “small yard, high wall” policy to contain China, as well as strengthen policy coordination with allies, improve export controls in areas related to “national security” (such as semiconductors), strengthen foreign investment reviews and restrict investment in key technologies. Today, the Biden administration’s investment restrictions — under the pretext of national security — review or block investments in advanced semiconductors, microelectronics, artificial intelligence, quantum information science and other cutting-edge sectors with China, in order to “protect U.S. critical technologies.” This is another typical example of economic coercion and national intervention by the United States.
High-tech industries such as semiconductors, artificial intelligence and quantum computing are not only hot spots for global venture capital but also fiercely contested areas between China and the United States. Under the Biden administration’s investment restrictions, the United States will crack down on investments made through mergers and acquisitions, private equity and venture capital, as well as on joint ventures and financing arrangements. However, deals that were signed and legally binding before the issuance of this executive order are exempt. This means that existing investments will not be retroactively restricted. Even so, the new restrictions will inevitably further worsen the downward trend of U.S. investment in China in recent years.
According to the Rhodium Group, U.S. direct investment in China in 2022 was $8.2 billion, a new 20-year low. Venture capital investment in China was only $1.3 billion, a 10-year low. According to Chinese tech media Titanium Media, private equity and venture capital from the United States amounted to $7.02 billion in China, a significant decrease of 75.7 percent from the $28.92 billion invested in 2021 and the lowest in nearly three years.
In the future, it cannot be ruled out that the Biden administration will coerce allies to strengthen their own investment restrictions on China, a negative ripple effect. For example, the European Union may tighten its technology investments in China as well. The European Commission’s European Economic Security Strategy, which was released this year, includes a section on foreign investment, proposing the establishment of a new expert group to explore possible measures to safeguard foreign investment security. Germany’s first strategic policy on China includes provisions for foreign investment review and potential scrutiny of outbound investments.
Yet the extent to which the U.S. investment restrictions can effectively curb China remains uncertain. There are already divergences and concerns within the United States. Immediately after the restrictions were announced, the Semiconductor Industry Association of the United States issued a statement saying, “We hope the final rules allow U.S. chip firms to compete on a level-playing field and access key global markets, including China.” This implies that while the U.S. investment restrictions may have a short-term impact on China’s technological development, they could also potentially harm long-term U.S. interests.
In essence, in each area where the United States implements technology export controls and investment restrictions, there is an increasing possibility of substitution. The regulations and restrictions will further stimulate China’s research and development efforts in core technologies and its pursuit of open innovation cooperation globally. In the medium and long term, these measures could weaken the United States’ dominant position in the global high-tech industry.