Treasury issues rule to block U.S. investors from helping China develop advanced military technology

The U.S. Treasury Department on Friday issued a new rule aimed at preventing American investors from providing financial support to Chinese companies involved in developing advanced military technologies, escalating the economic war between the two superpowers.

The rule, issued under the authority of the Foreign Investment Risk Review Modernization Act (FIRRMA), will prohibit U.S. investors from making investments in certain Chinese companies that are engaged in the development of advanced military technologies, including artificial intelligence (AI), quantum computing, and hypersonic weapons.

“The United States is committed to protecting its national security interests and preventing the transfer of critical technologies to adversaries,” Treasury Secretary Janet Yellen said in a statement. “This rule is a necessary step to safeguard our technological edge and ensure that our adversaries do not benefit from U.S. capital.”

The rule is the latest in a series of measures taken by the Biden administration to restrict China’s access to advanced technologies, including semiconductors, artificial intelligence, and quantum computing. These measures are part of a broader effort to counter China’s growing economic and military power.

The Chinese government has condemned the U.S. efforts to restrict its technological development, arguing that they are driven by economic competition and fear. China has also accused the U.S. of trying to stifle its technological innovation.

“The U.S. is trying to suppress China’s technological development through all means possible,” said Chinese Foreign Ministry spokesperson Zhao Lijian in a statement. “This is not in the interests of either country. It is counterproductive and ultimately harmful to the global economy.”

The new Treasury rule is expected to have a significant impact on U.S. investment in Chinese companies, particularly those operating in the technology sector. While the rule is designed to prevent investment in companies involved in developing advanced military technologies, it is likely to have a broader chilling effect on U.S. investment in China.

“This rule will create significant uncertainty for U.S. investors and make it much more difficult to invest in Chinese companies, even those not directly involved in military technology,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies. “It is a clear sign of the U.S. government’s willingness to use its economic leverage to advance its geopolitical goals.”

The rule is also likely to further strain relations between the U.S. and China, which have been deteriorating in recent years over a range of issues, including trade, human rights, and security. The Biden administration has indicated that it is prepared to take a tough stance on China, particularly with regard to national security and economic competition.

The new rule is a clear indication that the U.S. is prepared to take a more aggressive approach to counter China’s technological advancements, particularly in areas that could have national security implications. It is also likely to serve as a warning to other countries that are collaborating with China on advanced technologies.

The implications of the Treasury rule:

The new Treasury rule will have several significant implications for U.S. investors, Chinese companies, and the broader technological landscape. Here are some key points:

U.S. investors:

• Increased uncertainty: The rule creates significant uncertainty for U.S. investors, who will have to navigate a more complex and riskier investment landscape in China. The vague definitions of “advanced military technology” and “support” in the rule will make it difficult for investors to assess the potential impact on their investments.
• Potential for investment losses: Investors who have already invested in Chinese companies could face significant losses if their investments are deemed to violate the new rule. The Treasury Department has indicated that it will use enforcement tools to ensure compliance with the rule, which could include fines or other penalties.
• Reduced appetite for investment in China: The rule is likely to dampen U.S. investor enthusiasm for investing in China, particularly in the technology sector. This could lead to a significant decrease in U.S. investment in Chinese companies, which could have broader economic implications for China and the global economy.

Chinese companies:

• Restricted access to capital: Chinese companies, particularly those involved in advanced military technology development, will face a significant hurdle in attracting U.S. investment. This could limit their access to capital and make it more difficult for them to grow and innovate.
• Impact on research and development: The rule could also impact the ability of Chinese companies to conduct research and development in sensitive areas. This could hinder their ability to compete globally and stay at the forefront of technological innovation.
• Strained relationships: The rule is likely to strain relationships between Chinese companies and U.S. investors, particularly those that have had long-standing business ties. This could further erode trust and cooperation between the two economies.

Technological landscape:

• U.S. technological dominance: The rule reinforces the U.S.’s commitment to maintaining its technological dominance. By preventing U.S. capital from supporting China’s technological advancements, the U.S. aims to limit the competitive threat from China.
• Increased competition: The rule could also lead to a more fragmented technological landscape, with increased competition between the U.S. and China in critical areas such as artificial intelligence and quantum computing. This could slow down the pace of technological development and innovation globally.
• Heightened geopolitical tensions: The rule is a further sign of escalating geopolitical tensions between the U.S. and China. The two countries are increasingly engaged in an economic and technological rivalry that has the potential to destabilize the global order.

The Treasury rule is a significant step in the U.S.-China economic and technological rivalry. It is likely to have profound consequences for U.S. investors, Chinese companies, and the broader technological landscape. The impact of the rule will unfold in the coming months and years, and it is likely to continue to shape the relationship between the world’s two largest economies.