The Notice of Proposed Rulemaking (NPRM) on Implementation of Outbound Investment Executive Order (E.O. 14105), issued by the U.S. Department of the Treasury on June 21, symbolizes a substantive stifling of the U.S. hi-tech investment in China.

The notice is an implementation of President Joe Biden's executive order on August 10, 2023, elaborating details of the rules. The rules impose notification requirements and in some cases prohibitions with respect to U.S. investment in technologies related to national security in China, including in Hong Kong and Macao special administrative regions. The notice defined these technologies in the following three ways.

First, semiconductors and microelectronics: Prohibited transactions include transactions related to electronic design automation software, certain fabrication and advanced packaging tools, the design, fabrication, or packaging of certain advanced integrated circuits (ICs) and supercomputers.

Second, quantum information technologies: Prohibited transactions include those related to the development of quantum computers and production of critical components, the development or production of certain quantum sensing platforms and the development or production of quantum networking and quantum communication systems.

Third, certain artificial intelligence (AI) systems: Prohibited transactions are related to the development of any AI system designed to be exclusively used for, or intended to be used for, certain end uses, including those transactions related to the development of any AI system that is trained using a specified quantity of computing power and trained using primarily biological sequence data.

Violations of the rules will be subjected to civil and criminal penalties.

Small yard or huge yard? 

The latest NPRM issued by the U.S. Treasury Department is a sweeping restriction of U.S. investment in China in key cutting-edge technologies. The prohibition and reporting regime covers the cutting-edge big data economy almost in entirety.

The first category—semiconductors and microelectronics—does not specify the technology threshold, meaning semiconductors in any stage of processing are to be covered. Semiconductor manufacturing equipment is also covered, also without specifying the technology threshold.

The second category—quantum information technology, including quantum telecommunications, quantum computing and quantum measurement—is at the vanguard of the global information and communication technology revolution, and is already widely applied in both the United States and China. Again, the NPRM has not articulated the nomenclatures subject to prohibition or restriction, but only includes the wide area in general, which means that any investment involving quantum information technology may be subject to prohibition.

The third category—certain AI systems—is an even broader and more ambiguous definition. AI systems are increasingly applied in almost all investment projects. According to the NPRM, any deal using AI systems entails a prohibition.

After President Biden announced the executive order last August, Janet Yellen, U.S. Treasury Secretary, said that it would be targeted at a selected area, or still a "small yard." However, the latest NPRM points to a huge yard.

Three years ago, U.S. National Security Advisor Jake Sullivan said at an AI summit that the Biden administration was "looking at the impact of outbound U.S. investment flows that could circumvent the spirit of export controls or otherwise enhance the technological capacity of our competitors in ways that harm U.S. national security."

The latest NPRM, if it enters into force after the public hearing, will cause a tremendous setback in U.S. investment in China, and China-U.S. business environment at large. It will exceed the traditional U.S. outbound investment control to include even greenfield investment. It will introduce serious political risk and tension into the China investment plans of U.S. multinationals and tech corporations. It will also introduce serious uncertainties and delays, as investors wait for the Treasury Department's judgment on whether the proposed investment plan entails any of the prohibitions.

Quixotic move 

The latest prohibition comes at a time when U.S. investment in China has been in serious decline, from an annual average of $14

billion from 2005 to 2018, to $10 billion from 2019 to 2021, to a mere $1.3 billion in 2022, according to Rhodium Group, an independent U.S. research body. Further falls will be inevitable.

The U.S. sweeping investment prohibition and restriction is a blunt violation of WTO rules governing free trade and investment, and abuses the concept of national security to destroy normal U.S. business in China. It is also unrealistic to impose bans or restrictions on day-to-day activities. It is common knowledge today that dual-use technologies and products exist widely in the world. Even apparel, socks and shoes can be used in military applications, as can mobile phones.

The U.S. and China are already the world's two largest markets by far for semiconductors, microelectronics and quantum telecommunications. AI has been used widely in both China and the U.S. According to a report by Crunchbase, the global market size of AI was 1,637.7 billion yuan ($225.2 billion) in 2023, with the U.S. accounting for 33 percent and China for 16 percent, the UK as a distant third (7 percent). The report also estimates that by 2030, the world market size will hit 11.5 trillion yuan ($1.6 trillion), or an aggregate of 38.2 percent per year for the next seven years. How can the U.S. Treasury Department control such a huge market and tremendous investment activities?

The ban and restrictions will do little to hinder China's fast growth in those three areas. The world semiconductor market is experiencing a boom, with the total IC market size to hit $1 trillion by 2030, doubling the current size of $500 billion. China will account for 40 percent of the total world IC market by 2030. According to the relevant industry studies, 109 fabs (semiconductor fabrication plants) have to be added worldwide in the next five years. Out of the total, over 40 fab factories will be built in China.

It is also absurd that the American semiconductor giants will be blocked from engaging with the China market. Intel has announced it will continue investing in China, which accounts for a quarter of its global revenue, and Micron has also announced a major chip storage investment in Xi'an, Shaanxi Province, of 4.3 billion yuan ($591 million). Tim Cook, CEO of Apple, talked with Chinese automobile giant BYD last March about AI cooperation for clean energy.

If American investors are out of the Chinese market, European, Republic of Korea and Japanese players will immediately take the place of the U.S. companies. However, the NPRM runs counter to the global supply chain, to the complementary advantages between Chinese and American businesses in the above three areas, and thus will ultimately be ineffective and counterproductive. BR 

The author is a senior fellow at the Center for China and Globalization, and former economic and commercial counsellor at Chinese Consulate General in San Francisco and New York City. This article was first published on the China Focus website 

Copyedited by G.P. Wilson 

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