Friday, August 11, 2023

Biden’s Crackdown on Investments in China Is Only a First Step

National Review Online

Friday, August 11, 2023

 

Americans should not help the Chinese Communist Party build weapons and perfect technologies that it might one day deploy on the battlefield. But that’s what we’ve been doing.

 

For decades, we have fueled China’s military buildup and the construction of a vast surveillance state by providing capital and technical know-how to Chinese technology firms enmeshed in Beijing’s military-civil fusion system. We’ve done this mostly unwittingly, through passive investments made through retirement-savings plans and other investment vehicles. Roger Robinson, the former chairman of the U.S.–China Economic and Security Review Commission, recently estimated that the total sum of U.S. investment in Chinese entities over the past decades is $2 trillion to $3 trillion.

 

On Wednesday, the White House rolled out an important executive order that will address a sliver of the problem. It will restrict U.S. investment in Chinese military–connected firms operating within certain critical technology sectors — semiconductors, quantum computing, and artificial intelligence.

 

This measure takes on the distinct challenge posed by investments made by private-equity and venture-capital firms in Chinese start-ups with ties to the military and security forces. In one case noted by the Washington Post, 4Paradigm, a Chinese artificial-intelligence start-up, received investment totaling hundreds of millions of dollars from prominent U.S. firms, while also holding a contract with a People’s Liberation Army institute that trains tank drivers on software with military applications. That’s not an unusual case.

 

The very promulgation of the rule is an important first step. But the executive order, which had been anticipated for months, has been significantly watered down, according to reporting on the matter and congressional China hawks. It only prohibits investment in three critical technology sectors, while a few other sectors had initially been considered. Administration officials unveiling the plan on Wednesday also said that it would apply only to investments in privately held companies and not to other types of investments. Or, as Representative Mike Gallagher, the chairman of the House’s new committee on China, put it: “The loopholes are wide enough to sail the PLA Navy fleet through.”

 

The White House told reporters that it had crafted the rule in consultation with industry, which explains its relatively restrained nature. No doubt, industry players with an interest in keeping the door open to making investments in Chinese tech firms will also seek to use the comment period to water it down even more.

 

Now, it’s up to Congress to make sure that this new regime has teeth. Previous attempts to pass a law heavily restricting outbound investment in Chinese military–linked firms have failed. But in July, the Senate overwhelmingly passed, as part of the annual defense-policy bill, a provision that would require notification of outbound investment. Ideally, the final version of the defense package would complement the new executive order in a way that strengthens this new tool — going further than the unambitious Senate-passed provision.

 

Some lawmakers in the House are expected to try to block even that measure from the final bill, arguing that existing U.S. sanctions and tools to block exports to Chinese military firms are enough. But this argument ignores the fact that these other tools did little or nothing to constrain significant investments that have already been directed toward companies within China’s military-civil fusion complex.

 

The situation on the Hill is even more important considering the White House’s continued effort to mollify the Chinese Communist Party. This was evident in Janet Yellen’s assurances to Chinese officials during her recent trip to Beijing that the outbound-investment rule would be very narrowly tailored. The administration is clearly trying to have it both ways by continuing to seek détente with Beijing while also advancing new measures to address its ongoing military buildup.

 

That’s not sustainable, and Congress should push the administration in the more realistic, prudent direction.

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