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We are committed to ensuring that western technology does not contribute to the military modernization and expansion of China, our chief strategic adversary. It is clear that US money, products, and expertise should not aid the military strength of China.
The decoupling of technology between the US and China encompasses various issues, but a key factor is the belief that western technology should not support China’s military advancements. From the American perspective, this is a straightforward idea. Why should the US contribute to the military capabilities of its primary strategic adversary?
This rationale underlies the recent executive order from the White House, which restricts US investment in China’s technology sectors that pose significant national security risks, such as semiconductors, quantum computing, and artificial intelligence. The aim is to build upon existing export bans and limitations on Chinese acquisition of US technology by imposing restrictions on how US investors allocate capital in China’s most strategically important sectors.
It is important to note that this rule is primarily about expertise rather than capital. As deputy national security adviser Mike Pyle stated, “It’s not capital that’s in short supply. It’s capital plus the access to experts and additional assistance.” In other words, the goal is to prevent top US venture capitalists and private equity funds from transferring valuable western-made intangible assets, such as patents, data, software, and intellectual property, along with their investments.
In recent years, strategic investments from the US to China have significantly declined. Funding in US dollars for China-focused venture capital and private equity funds dropped from $95 billion in 2021 to $14 billion in 2022. The new executive order will likely further reduce these flows.
The proposal reflects the administration’s approach of implementing targeted restrictions in crucial areas of national security. However, determining the potential uses of general-purpose technologies like artificial intelligence presents a challenging task. For example, should measures be taken to prevent algorithmic attacks on the dollar-based financial system or to curb the creation of machine-generated songs imitating popular K-pop bands? The complexities of these questions are acknowledged by Pyle, who admits, “We think this is a hard problem.”
The White House has engaged in consultations with numerous stakeholders, including industry representatives, foreign allies, and partners, to determine the scope of these restrictions. More discussions will take place as the administration solicits formal comments on the proposal in the coming months. It is worth noting that the Business Roundtable has embraced the administration’s approach, suggesting that the executive order may be viewed as less stringent on the tech industry and industry in general than anticipated by some.
Determining boundaries for dual-use technologies is not the only difficult problem. The White House has sought to address defense-related technology transfers separately from broader discussions on US industrial policy, which encompasses issues like securing critical mineral supplies and key pharmaceutical inputs monopolized by China and increasing global semiconductor manufacturing capabilities. However, China’s communist regime does not make the same distinctions, as the state always takes precedence over the free market.
This presents a fundamental challenge for the White House. Even if dual-use technologies are effectively contained, critical national security vulnerabilities would still exist in areas such as pharmaceuticals, biotech, green batteries, and shipbuilding. Securing these sectors requires a comprehensive approach to tracking global supply chains and identifying potential chokepoints controlled by states or corporations.
The US has not prioritized thinking about national security in broader economic terms for quite some time. The Reagan era marked the decline of using trade as a tool for modern industrial policy. However, the Biden administration recognizes the need for government intervention to safeguard the strength of the country’s industrial base, labor force, and defense readiness. Yet, a cohesive plan on how to achieve these goals has not yet materialized.
This topic is likely to gain prominence in the autumn as Congress reconvenes and considers whether to expand the restrictions outlined in the executive order. The current Senate proposal on outbound investment has provisions that are less stringent than those of the White House, but it also requires reporting of activities in China by passive portfolio investors, joint ventures, and research projects. Additionally, there are politicians from both parties, such as Senator Marco Rubio and Representative Rosa DeLauro, who call for increased scrutiny of trade and capital flows in a wider range of sectors.
Some may argue that actions like the new executive order escalate the conflict with Beijing. However, these measures simply draw attention to uncomfortable truths that have long been evident. While the West may have viewed security and market concerns as separate entities, China sees national security and economic security as intertwined. The story of decoupling is far from over.
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