US President Joe Biden has officially determined that the rapid advance of China’s semiconductor, microelectronic, quantum computing and artificial intelligence technologies constitutes “an unusual and extraordinary threat” to US national security.
Declaring a “national emergency,” the president has ordered new procedures to restrict US outbound investments that could exacerbate the supposed threat.
But while the wording of the White House statement is severe, the policy measures it outlines are neither new nor particularly extreme in the context of the administration’s escalating tech war on China.
Although US venture capitalists seem to be the primary target of the forthcoming restrictions, the Semiconductor Industry Association (SIA) quickly released a statement on the matter:
“The semiconductor industry recognizes the need to protect national security, and we believe ensuring a strong and globally competitive US semiconductor industry is a vital part of achieving that goal.
We are assessing today’s proposal and welcome the opportunity to provide feedback as part of the public comment period. We hope the final rules allow US chip firms to compete on a level-playing field and access key global markets, including China, to promote the long-term strength of the US semiconductor industry and our ability to out-innovate global competitors.”
On August 9, the White House issued an “Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern.”
The executive order states that “countries of concern are engaged in comprehensive, long-term strategies that direct, facilitate, or otherwise support advancements in sensitive technologies and products that are critical to such countries’ military, intelligence, surveillance, or cyber-enabled capabilities.”
It goes on to say that these advancements “will accelerate the development of advanced computational capabilities that will enable new applications that pose significant national security risks, such as the development of more sophisticated weapons systems, breaking of cryptographic codes, and other applications that could provide these countries with military advantages.”
The “countries of concern,” which are listed in an annex, are the People’s Republic of China, the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau.
These “countries of concern are exploiting or have the ability to exploit certain United States outbound investments, including certain intangible benefits that often accompany United States investments and that help companies succeed, such as enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing.”
President Biden has therefore ordered the Secretary of the Treasury, in consultation with the Secretary of Commerce and the heads of other relevant government agencies, to issue regulations that identify transactions fitting this description, require notification of such transactions, and prohibit transactions determined to “pose a particularly acute national security threat because of their potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities of countries of concern.”
According to the US Congress-funded Voice of America (VOA), the Biden administration “has been working on
the executive order at least since August 2022… Last October, the White House stated it was moving ahead with the program, mentioning ‘screening of outbound investment’ as an approach to address national security threats under its National Security Strategy.”
Biden has declared a national emergency, but this is a longer-term policy concern dating back to president Donald Trump. It may be regarded as a ratcheting up of diplomatic and economic pressure on China or a way of countering rising Republican allegations that Biden is weak on China.
In June, Sequoia Capital, the venerable Silicon Valley venture capital firm, announced plans to deal with the potential risk to its business by spinning off its operations in China, a process that should be completed by the end of March 2024. In fact, all US investors received advanced warning of the soon-to-be-imposed restrictions.
The measures appear to be a double-edged sword. In May, Patrick McHenry, chairman of the US House of Representatives Committee on Financial Services, sent Treasury Secretary Janet Yellen a letter saying:
“US venture capital firms typically acquire control, substantive decision-making rights, board seats, or material nonpublic technical information when they invest. As your colleagues in the Office of Investment Security know, these represent potential national security risks to the target country – in this case, China. It is inexplicable that the administration hopes to rescue China from these risks before Beijing can.”
The semiconductor industry’s concerns were put much more directly by Intel CEO Pat Gelsinger at the Aspen Security Forum in July.
“Right now, China represents 25% to 30% of semiconductor exports. Right, if I have 25% to 30% less market, I need to build less factories, right? You know, we believe you want to maximize our exports to the world. We want to maximize selling fish, not fishing rods, right, across the world, including China,” Gelsinger said.
“You can’t walk away from 25% to 30% and the fastest growing market in the world and expect that you remain funding the R&D and the manufacturing cycle… this is strategic to our future, we have to keep funding the R&D, right, the manufacturing, etc.
“We agree on the priority of national security, but, as (National Security Advisor) Jake Sullivan said, high walls, small garden. Today, we have over 1,000 companies on the entities list, many of which have nothing to do with national security… and nothing to do with security concerns in China.”
What Sullivan actually said was “…we are protecting our foundational technologies with a small yard and high fence.” But the yard is getting bigger, new fences are being built and US business and government clearly do not see eye to eye.
Some compromise may be reached during the period for public comment, but at this point it appears that the advance of Chinese technology will henceforth take place with less US participation and, therefore, less US understanding of what is happening in China.
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