On August 9, 2023, the Biden administration issued a much-anticipated Executive Order establishing a new regime to limit certain U.S. investments in key Chinese technology sectors to prevent the financing of Chinese military advancement. The order, once implemented via regulation, will prohibit U.S. persons from investing in, or engaging in certain other transactions with, Chinese companies engaged in specified conduct involving semiconductors and microelectronics, quantum information technologies, and artificial intelligence. The regulations will likely come into force in 2024 after multiple rounds of public comment, including an initial 45-day comment period that is now underway on an advanced notice of proposed rulemaking ("ANPRM") issued by the U.S. Department of the Treasury ("Treasury").
The regulations will prohibit some investments altogether, while others will be subject only to official notification requirements. Treasury, which will implement and enforce the restrictions, stated that it anticipates exempting "certain transactions, including potentially those in publicly traded instruments and intracompany transfers from U.S. parents to subsidiaries."
We here consider the Executive Order against the larger landscape of U.S.-China bilateral trade and investment. For an in-depth analysis of the details in the Order and Treasury's ANPRM, please see this recent entry in Steptoe's International Compliance Blog.
New Tools Represent a "Paradigm Shift"
Although both the Biden and Trump administrations had previously taken actions to prohibit U.S. persons from engaging in certain transactions involving publicly traded securities of specific companies linked to the Chinese military, the new Executive Order represents an unprecedented level of oversight by the U.S. government on outbound business investment. (See our prior blog post on the securities restrictions here).
Washington has traditionally scrutinized only inbound foreign investment that could pose a risk to national security, most notably via the Committee on Foreign Investment in the United States ("CFIUS"). CFIUS is the interagency body charged with conducting national security reviews for certain foreign investments in the United States. Although most CFIUS rules are country-neutral, CFIUS has long subjected investment from certain countries, including China, to heightened scrutiny, as reflected in the recently-released CFIUS Annual Report and President Biden's September 2022 Executive Order designed to "sharpen the Committee's focus on. . . national security risk factors," including supply chain security and U.S. technological leadership.
The August 9, 2023 Executive Order restricting outbound investment also represents a culmination of bipartisan efforts to harness broad industrial policy to curb the threat of Chinese dominance in key military and technology sectors.
Take, for example, the CHIPS Act. In August 2022, President Biden signed the landmark CHIPS and Science Act of 2022, a $53 billion package aimed at reshoring the semiconductor supply chain. It prohibits funding recipients from expanding semiconductor manufacturing in China or other "countries of concern". The Biden administration specifically cited countering China as a primary goal of the initiative.
The new restrictions on outbound foreign investments to China dovetail with Washington's more aggressive approach on export controls. In October 2022, the Department of Commerce's Bureau of Industry and Security (BIS) imposed new and expanded controls on advanced computing and semiconductor manufacturing items in an ambitious attempt to limit China's access to U.S. innovation in the sector. The move that was hailed by senior U.S. government officials as a paradigm shift in U.S. export controls policy toward China.
Finally, earlier this year, Congress established the "Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party" on a bipartisan 365-65 vote. The Select Committee has held a number of hearings on, in its own words, the "Growing Peril for American Companies in China", and "Ensuring U.S. Leadership in the Critical and Emerging Technologies of the 21st Century". The Select Committee Chairman, Mike Gallagher (R-WI), even urged President Biden to include prohibiting public market investments in the new Executive Order.
No End in Sight for U.S.-China Trade Tensions
President Biden has also exerted a more muscular trade policy with China, contrary to some early expectations that the end of the Trump administration would see a thawing of trade tensions between the two countries.
Earlier this summer, the United States and Taiwan signed their first-ever trade agreement under a framework called the U.S.-Taiwan Initiative on 21st Century Trade. Reflecting the more general refocusing of U.S. international trade policy, the agreement establishes commitments to support trade facilitation, adopt sound regulatory practices, reduce barriers to trade in services, bolster anticorruption efforts, and enhance trade between small and medium-sized enterprises. The agreement avoids more standard substantive advantages such as tariff reductions, rules of origin, access to public procurement, and investment protection, although additional negotiations on some of these topics are expected under the new framework. President Biden signed the authorizing legislation—which was passed unanimously by both chambers of the legislature—on August 7, 2023.
The Biden administration has also quietly maintained Trump-era tariffs on billions of dollars of Chinese imports under Section 301 of the Trade Act of 1974. The tariffs were widely-criticized by industry groups, trade observers, and even by President Biden himself, when he stated in 2019 that "Trump doesn't get the basics. He thinks his tariffs are paid for by China. Any beginning econ student at Iowa or Iowa State could tell you the American people are paying his tariffs." These tariffs are currently subject to a legal challenge by a large coalition of importers before the U.S. Court of Appeals. The U.S. Trade Representative ("USTR") is also expected to finalize its statutory four-year review of the necessity for the Section 301 tariffs later this year.
Potential Future Developments
China has criticized the action as "blatant economic coercion" that would "destabilize[] global industrial and supply chains", and recent reporting suggests Beijing is considering countermeasures.
This raises questions about the risks of the Executive Order's contemplated measures falling afoul of the United States' obligations under existing trade and investment agreements. For example, although the U.S. and China do not have a bilateral investment agreement, they are both signatories to the World Trade Organization's ("WTO") Agreement on Trade-Related Investment Measures ("TRIMs Agreement"), which prohibits certain trade-related investment measures that violate the national treatment and quantitative restrictions requirements of the General Agreement on Tariffs and Trade ("GATT").
Indeed, in December 2022, China initiated a WTO dispute against the United States under, inter alia, Article 8 of the TRIMS Agreement, challenging the above-referenced BIS export controls on advanced computing and semiconductor equipment. According to China, the measures "constitute investment measures related to trade in goods" in violation of the GATT. The Executive Order may provide an even larger target for disputes initiated under the TRIMS Agreement because investments—only an ancillary component of the previously challenged export controls—are the main thrust of measures contemplated by the Order.
In the meantime, Chinese imports in the first half of 2023 were down 24 percent from the same period one year ago, as China fell to Mexico as the United States' top trading partner at the beginning of 2023. Clearly, the shift in U.S. trade and investment policy and related push for "nearshoring" are having a decoupling effect on China-U.S. economic relations. The current Executive Order seems to accelerate that trend.
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