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US President Joe Biden gives a speech in New Mexico on his work on the economy on Aug. 9. (AP/Yonhap)

On Wednesday, US President Joe Biden signed an executive order limiting US investments in the sectors of quantum computing, artificial intelligence (AI), and high-tech semiconductors in China. As the order was issued following the institution of export controls on semiconductor manufacturing equipment, the climate of dialogue that had been fostered between Washington and Beijing after US officials visited China is expected to suffer a blow.

Biden’s executive order stipulates that US venture capital and private equity investing in the sectors of semiconductors and microelectronics, quantum information technologies, and AI receive authorization from the secretary of the Treasury, virtually banning any such investments. The executive order stated, “Rapid advancement in semiconductors and microelectronics, quantum information technologies, and artificial intelligence capabilities by these countries significantly enhances their ability to conduct activities that threaten the national security of the United States,” explaining the need to control outbound US investments.

The US Treasury explained that AI technology with military or intelligence applications, electronic design automation software for semiconductors, and quantum computing technologies that can neutralize encryption and damage military communication will be subject to investment controls. The executive order also requires investments in China in the three sectors specified to be reported to the Treasury even if the technology being invested in isn’t as advanced. As regulatory details will be finalized based on industry feedback, the executive order is expected to go into effect next year.

It is unclear how much this executive order will affect related industries in China. Bearing the possibility of such an order in mind, some US capitals had already split off their Chinese investment corporations or reduced their investments in China. According to Rhodium Group, a market research firm, US venture capital investments in China peaked at US$14.4 billion in 2018, reaching a 10-year low last year at US$1.3 billion. US direct investments in China totaled US$8.2 billion last year, recording a 20-year low as well.

During the two years in which the Biden administration prepared its executive order, some of the sectors originally considered for the regulation were excluded. Late last year, the electric vehicle and biotech sectors were excluded from consideration after review. US Secretary of the Treasury Janet Yellen, who visited China last month, remarked that the executive order is a “narrowly targeted action,” clarifying that it is not intended to subdue the Chinese economy as a whole. White House national security advisor Jake Sullivan used the expression, “small yard, high fence,” conveying that the US intends to put high-intensity pressure on limited sectors related to US security only.

But as Wednesday’s executive order demonstrates the US’ determination to apply unprecedented economic pressure on China to rein the country in, it is stirring backlash from Beijing. Last October, the US prohibited the export of semiconductor manufacturing equipment as well as chips used in AI and supercomputers to China. So far, Washington’s investment restrictions had targeted specific Chinese companies associated with the Chinese military. But the recent executive order put an extensive ban on investments in the high-tech industry on top of the export controls already in place.

As such, it seems inevitable that these moves will have a negative effect on the climate of dialogue that was cultivated thanks to US State Secretary Tony Blinken and Yellen’s visits to China.

In a message posted on the website of the Chinese Embassy in the US, the Foreign Ministry’s spokesperson stated, “Restricting US companies’ investments in China with national security as a front is a clear act of overstretching the concept of security and politicizing business engagement,” adding, “China will follow the developments closely and resolutely safeguard our rights and interests.” Earlier, China placed sanctions on Micron Technology, a US chip company, and announced export controls on gallium and germanium, materials used in the manufacture of semiconductors. As it has demonstrated its determination to shirk off its defensive stance and actively respond to the US, Biden’s executive order may prompt additional retaliatory measures from China.

The US may pressure allies including South Korea to follow suit. In May, during the Group of Seven summit, the US explained its plan to issue the executive order and asked for cooperation from its allies. During a press briefing, a senior administration official of the US said that “key allies and partners have recognized the shared importance of this issue,” revealing that the UK and Germany are preparing similar measures. Previously, after banning domestic companies from exporting high-tech semiconductor manufacturing equipment to China, the US pressured and ultimately elicited similar measures from Japan and the Netherlands.

By Lee Bon-young, Washington correspondent

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