On Wednesday, the White House introduced its proposal for screening investments U.S.-based funds make abroad, providing President Joe Biden with a fresh tool for “de-risking” from China. This move represents a strategic shift in Washington’s trade policy, transforming what had previously been perceived as a blunt force into a more nuanced and refined instrument.
Introduction to the New Rules
The regulations presented by the administration signify a carefully calibrated approach that adheres to Treasury Secretary Janet Yellen’s vision of a “highly targeted” strategy. The emphasis is on “a few sectors,” primarily including the Chinese semiconductor and quantum technology industries, as well as particular areas of artificial intelligence (AI).
Under this proposal, American investors will be obliged to inform the Treasury about transactions within these designated sectors. If these transactions reveal connections to the Chinese military or intelligence apparatus, the Treasury Department could then prevent the deal.
This measured approach contrasts with previous policies and rhetoric, which had been viewed by many as overly restrictive.
Comparison to Previous Proposals
Notably, this policy is less burdensome than other suggestions that had been floated. An investment-screening proposal passed by the House of Representatives last year could have led to a ban on over 40% of U.S. investments in China from 2000 to 2019, according to the research firm Rhodium Group. Such a ban would have impacted various sectors, including automotive, medical, and chemical industries.
Further, an executive order from Biden in September 2020 identified the biotechnology and clean energy sectors as “critical to U.S. national security,” possibly foreshadowing more widespread restrictions. The new proposal seems more restrained and focused, which is likely to be viewed positively by many stakeholders.
Targeting Specific Investments
Rather than casting a wide net, the proposed rules zero in on specific forms of investment. These include private equity, venture capital, and greenfield investments. The focus on these areas is not due to financial considerations alone. There’s a recognition of intangible benefits such as higher standing and access to experts, which are seen as valuable assets.
Considering the more passive nature of Chinese stocks, mutual funds, and investments made by limited partners, the Treasury is contemplating exclusions for these assets. As expressed by a senior administration official, “China doesn’t need our money… the thing they don’t have is the know-how.”
Implications for Existing and Future Investments
For firms already invested in sensitive Chinese sectors, the policy won’t operate retroactively, providing a sense of relief. Moreover, those considering future deals might have a window of opportunity, as the rule may not be finalized until 2024, following multiple rounds of public comment.
Responses and Reactions
Responses to this proposal have been mixed. A spokesperson for the Chinese embassy in Washington expressed concerns to Reuters that the new restrictions could harm businesses in both the U.S. and China. This statement needs to be seen in the broader context of U.S.-China relations, which have been marked by escalating tensions, fueled by measures like export controls, tariffs, and investment blacklists.
However, the narrow scope of the program could serve as a diplomatic asset, offering a chance at more nuanced negotiations compared to the more comprehensive rules previously proposed by Congress. It may also allow most investors to breathe a sigh of relief, recognizing that a more refined tool rather than a hammer is being employed.
Concluding Remarks and Future Steps
President Joe Biden’s executive order on August 9 tasks the Treasury Department with developing this outbound investment screening program. It is designed to enable the U.S. to monitor and control investments that could potentially aid China’s military and intelligence capacities. The focus is on private equity, venture capital, and greenfield investments that can offer intangible benefits, such as access to American expertise.
Following the executive order, the Treasury Department issued an Advanced Notice of Proposed Rulemaking, seeking public feedback on the program. The U.S. populace has 45 days after the rule’s publication on August 14 to provide comments.
In sum, the proposed rules represent a strategic shift towards a more nuanced and precise tool in Washington’s approach to investments in China. By focusing on specific sectors and types of investments, the administration seems to be striking a balance between protecting national security interests and maintaining a functional relationship with the world’s second-largest economy.
The ultimate impact of this policy, however, will depend on its final form and implementation, the responses from both domestic and international stakeholders, and the broader dynamics of U.S.-China relations. It is a complex issue that reflects the intricate interplay of economics, politics, and international relations in today’s rapidly changing global landscape.
Read More: