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U.S. Moves Toward Restricting Investments in China’s AI and Technology Sectors

ByYasmeeta Oon

Jun 25, 2024

U.S. Moves Toward Restricting Investments in China’s AI and Technology Sectors

On June 21, the U.S. Treasury Department issued draft rules aimed at curtailing or requiring notification of investments by U.S. entities in China’s artificial intelligence (AI) and other sensitive technology sectors. These proposed regulations, which follow an executive order from President Joe Biden last August, are designed to safeguard U.S. national security by limiting the transfer of advanced technological capabilities to China.

The rules place a significant responsibility on U.S. individuals and companies to evaluate and determine which transactions are restricted or outright banned. This self-assessment framework is intended to prevent U.S. capital and technological expertise from aiding China’s development of sophisticated technologies, which could be used in ways that threaten U.S. security interests.

Key Aspects of the Proposed Regulations

Targeted SectorsAI, semiconductors, microelectronics, quantum computing
Notification RequirementsCertain AI and semiconductor investments not otherwise prohibited
Investment BansTransactions involving AI for specific end uses and high-computing power systems
ExemptionsPublicly traded securities, certain partnerships, pre-existing commitments
Initial Focus RegionsChina, Macau, Hong Kong
Penalties for ViolationsBoth criminal and civil penalties, potential for unwinding investments

The Treasury Department has outlined that these rules are part of a broader strategy to prevent U.S. expertise from bolstering China’s technological advancements, which could have military implications. Public comments on the proposed rules are open until August 4, with full implementation expected by the end of the year.

Treasury Assistant Secretary for Investment Security, Paul Rosen, emphasized the importance of these rules in a statement, asserting, “This proposed rule advances our national security by preventing the many benefits certain U.S. investments provide – beyond just capital – from supporting the development of sensitive technologies in countries that may use them to threaten our national security.”

The draft regulations specifically target investments in technologies like semiconductors, microelectronics, quantum computing, and AI. These areas are considered critical due to their potential applications in developing military capabilities and enhancing China’s strategic position globally.

The initial focus is on investments in China, Macau, and Hong Kong, but U.S. officials have indicated that the scope could be expanded to include other regions as necessary. The regulations align with broader U.S. efforts to limit technology exports that could support China’s military modernization.

While the proposed rules set stringent controls on certain transactions, they also include a range of exceptions. For instance, transactions involving publicly traded securities, such as index or mutual funds, are exempt. Other exceptions apply to limited partnership investments, buyouts of country-of-concern ownership, and transactions between U.S. parent companies and their majority-controlled subsidiaries.

Furthermore, the rules allow for certain third-country transactions to be exempt if they address national security concerns satisfactorily or if the third country has implemented adequate measures to mitigate these concerns. These nuanced exemptions highlight the Treasury’s attempt to narrowly tailor the rules to balance national security interests with economic considerations.

The proposed rules will require U.S. investors to exercise greater due diligence when making investments in China, particularly in sectors covered by the new regulations. Former Treasury official Laura Black, now a lawyer at Akin Gump in Washington, remarked on the implications for U.S. managed private equity and venture capital funds, as well as investments in Chinese subsidiaries and parents.

Black noted that “U.S. investors will need to engage in more extensive due diligence when making investments in China or investments involving Chinese companies that operate in the covered sectors.” This increased scrutiny will also extend to U.S. limited partners’ investments in foreign-managed funds and convertible debt, which could be subject to restrictions if they involve equity stakes in sensitive technologies.

These regulations are part of a broader U.S. strategy to counter China’s growing influence in critical technology sectors. By restricting the flow of U.S. funds and expertise, the U.S. aims to prevent China from gaining an edge in areas that could bolster its military capabilities and geopolitical position.

This initiative follows earlier measures to limit the export of advanced semiconductors and other high-tech components to China. The goal is to curb China’s ability to develop its technological capabilities independently and maintain U.S. dominance in key technology areas.

Treasury’s engagement with U.S. allies and partners underscores the international dimension of these regulations. The European Commission and the United Kingdom are also considering how to address outbound investment risks, signaling a potential for coordinated international efforts to manage the flow of critical technologies.

As the public comment period progresses and the rules move towards final implementation, the Treasury Department will continue to refine the regulations. The focus will remain on creating a targeted and effective framework to protect U.S. national security without unnecessarily stifling legitimate economic activity.

In conclusion, the proposed regulations represent a significant step in the U.S. strategy to control the transfer of sensitive technologies to China. By setting clear guidelines and responsibilities for U.S. investors and companies, the Treasury aims to safeguard national security while balancing economic interests.

  • Draft Rules Introduction: The U.S. Treasury Department’s draft rules aim to restrict or require notification for investments in AI and other technologies in China.
  • Focus Areas: The regulations target sectors like AI, semiconductors, and quantum computing to protect U.S. national security.
  • Exceptions and Exemptions: Several exceptions, such as publicly traded securities and certain partnerships, are included to balance security with economic considerations.
  • Investor Impact: U.S. investors will need to conduct thorough due diligence when investing in China, especially in sensitive sectors.
  • International Coordination: The Treasury is working with allies to align strategies on managing outbound investment risks related to critical technologies.

This comprehensive approach underscores the U.S.’s commitment to protecting its technological edge and national security in the face of rising global competition.

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Featured Image courtesy of DALL-E by ChatGPT

Yasmeeta Oon

Just a girl trying to break into the world of journalism, constantly on the hunt for the next big story to share.

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