Outbound Investment EO Seen as 'Victory for the Moderates'

Although the Treasury Department is accepting public feedback on how it should implement the new regime and still must write regulations to define and scope the various restrictions it will oversee, China hawks in Congress said they believe the rules will fall short of preventing China from using American funding to develop sensitive technologies for its military. Rep. Mike Gallagher, R-Wis., the chairman of the House Select Committee on China, in a statement called the executive order a “small step in the right direction, but the loopholes are wide enough to sail the [People’s Liberation Army] Navy fleet through.”

Treasury said the rules will prohibit investments or require notifications for certain, narrowly targeted investments in China’s semiconductor, quantum information and artificial intelligence industries, but some lawmakers had hoped for a regime that covered additional critical technology industries (see 2308040025). Foreign Affairs Committee Chairman Rep. Michael McCaul, R-Texas, called it “concerning” that the restrictions don't also cover China’s biotechnology industry. He also criticized the administration's “failure” to capture “existing technology investments” -- the regime will only prohibit investments made after the new rules take effect.

“We need to stop the flow of American dollars and knowhow supporting the [Chinese Communist Party’s] military and surveillance technology rather than solely pursuing half measures that are taking too long to develop and go into effect,” McCaul said.

The rules were outlined in an advance notice of proposed rulemaking that will include a 45-day public comment period beginning Aug. 14. It’s unclear how long the administration will take to draft a final set of regulations, and administration officials told reporters this week that they don’t plan to use the rulemaking period to expand the restrictions beyond the initial three technology categories. Once the prohibitions take effect, the administration “will evaluate the program after an initial period of no longer than one year” to “consider whether adjustments to the program are warranted,” the ANPRM said.

The process has been a “painfully long charade,” said Derek Scissors, a senior fellow with the American Enterprise Institute. He pointed to the months it has taken the administration to craft the restrictions, which included talks with trading partners and U.S. industry.

“After discussing the EO with half the planet, there will be an extended period for more comments,” he said, adding that the administration may not finish implementing the restrictions until months before the 2024 presidential elections. “After the election, a second Biden administration could simply drop the EO, with much less political accountability,” Scissors said.

He also said a new Republican administration might also abandon the regime, including one led by former President Donald Trump, whose administration saw the “biggest surge in American investment into China.” Congress also appears unable to act, he said, adding that it “condemns Chinese behavior, then asks for reports.”

The Senate in July passed its version of the FY 2024 National Defense Authorization Act with an amendment that could establish a notification regime for certain outbound investments (see 2307280052), but so far it has not been able to pass the National Critical Capabilities Defense Act, broader legislation that would give the administration the authority to block certain outbound investments (see 2305090046).

“It took the administration two years to do almost nothing, and Congress longer than that,” Scissors said. “If more is coming, it will be just as empty.”

Other technology policy experts had a more measured reaction, including Martin Chorzempa, a senior fellow with the Peterson Institute for International Economics, who called the order a “victory for the moderates, as long as it survives public comment.” In emailed statements, Chorzempa noted that the proposed, initial regulations won’t lead to “broad decoupling,” calling it a “very thoughtful, promising document.”

“Treasury has clearly thought through and is asking for feedback on all of the major ‘what ifs’ related to what it is proposing,” he said, adding that the impact on actual investment should be “quite small,” pointing specifically to the narrow set of technologies captured by both the prohibitions and notification requirements.

He said the technologies that will be prohibited -- including semiconductor electronic design automation tools, and other items used in design, semi-manufacturing, fabrication and advanced packaging -- are relatively clear and already have “well established” definitions. Chorzempa also said some of the thresholds align with export controls released as part of the Commerce Department’s Oct. 7 China chip restrictions (see 2210070049).

As a result, he said, he suspects U.S. investors have “been pricing in to some extent that these would get banned and stopped investing in those spaces in China already.” Administration officials made similar points this week, telling reporters that the White House has signaled its outbound investment screening intentions for months to give American investors a sense of where the guardrails will be. “It's already put us in a position where a number of market participants have already started to act even in advance of this,” an official said.

Chorzempa said even parts of the administration’s proposed outbound investment notification regime are fairly narrow. “Treasury seems clearly not to be interested in creating an onerous, broad reporting requirement except where really relevant for security,” he said. “Overall, many elements will certainly be criticized as loopholes, but this compromise is an excellent start to a regime that is much more likely to expand, for better or for worse, than it is to contract in the future.”

Emily Kilcrease, a senior fellow with the Center for a New American Security, said the administration appears to be “most uncertain” surrounding AI. She said the executive order “lacks a clear vision for what types of AI are most important for U.S. national security interests” and the proposed “coverage of AI transactions likely leaves a lot of the most exciting – and potentially risky – advances out of scope.”

She acknowledged the regime “will make many camps unhappy,” saying China hawks had hoped for a more “holistic decoupling of investment ties,” while industry officials will “chafe at the additional roadblocks” and economists will argue that China has no shortage of capital from sources other than the U.S.

“The administration is trying to throw a pitch straight down the middle, and with this EO they have largely succeeded,” Kilcrease said. “The scope hits on those transactions that present high national security risk, without burdening agencies with a program that is too big to properly enforce.”

Several industry groups said it is too early to give a full assessment of the rules, including the Semiconductor Industry Association, which said it hopes the final restrictions “allow U.S. chip firms to compete on a level-playing field and access key global markets, including China.” The U.S.-China Business Council said it hopes the administration convinces allies to impose similar restrictions rather than moving forward with a "unilateral U.S. policy." John Murphy, senior vice president of international policy with the U.S. Chamber of Commerce, said the chamber is looking forward to providing comments to “ensure the measure is targeted and administrable.”

Some lawmakers also welcomed the administration’s targeted approach, including Reps. Patrick McHenry of North Carolina, the top Republican on the House Financial Services Committee, and Blaine Luetkemeyer of Missouri, the top Republican on that committee's Subcommittee on National Security, Illicit Finance and International Financial Institutions. They said they were “glad” the order was a “more thoughtful and targeted approach than initially reported,” adding that the White House “listened to our concerns about the risks of undermining bedrock American principles, including the free flow of capital.”

“This is confirmation that we can confront the Chinese Communist Party with a smart approach rather than harmful policy,” they said. “Congress must look past ‘feel good,’ but inadequate, policies and take stronger action to confront the CCP by building on the tried and tested sanctions and export controls regimes.”

Sen. Bob Casey, D-Pa., who helped introduce the Senate version of the National Critical Capabilities Defense Act, called the announcement a “welcome step” that will allow the U.S. to “reduce some of the risks we face” from China. “Now we need to pass strong bipartisan legislation to protect our national and economic security for decades to come.”