Biden Administration Issues Executive Order and Proposals Targeting Outbound Investment in China

• Publication year: 2024
• Citation: Vol. 1 No. 2

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Daniel P. Brooks, Nova J. Daly, Nazak Nikakhtar, Paul J. Coyle, and Patrick Griffo ^*

In this article, the authors discuss an executive order outlining how the U.S. government will begin to regulate U.S. investments in the People's Republic of China.

After much anticipation, the Biden administration has released an executive order (E.O.) ¹ outlining how the U.S. government will begin to regulate U.S. investments in the People's Republic of China. This E.O., when implemented, will regulate U.S. investments in certain Chinese companies engaged in activities related to semiconductors and microelectronics, quantum information technologies, and artificial intelligence (AI).

The announcement follows months of discussion at both the White House and within Congress regarding whether and how to curb capital flows into Chinese companies that are developing advanced technologies with military and intelligence applications.

Alongside the E.O., the U.S. Department of the Treasury issued an advance notice of proposed rulemaking (ANPRM) ² on implementation of the E.O. and the scope of the program.

Background

The new restrictions on outbound investments in Chinese companies will in some ways build on prior initiatives.

In November 2020, then-President Trump issued an E.O. restricting specific types of investments in Communist Chinese Military Companies designated by the U.S. Department of Defense pursuant to the Section 1237 of the 1999 National Defense Authorization Act.

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President Biden subsequently replaced Trump's E.O. in June 2021 by issuing another E.O. ³ that similarly restricted outbound investments in Chinese military-industrial complex companies.

Both E.O.s prohibited U.S. persons from transacting in the publicly traded securities of Chinese companies that were linked to the China's defense sector.

Since 2021, Senator Cornyn, Senator Casey, and others within Congress have introduced various iterations of the National Critical Capabilities Defense Act, ⁴ which would establish a review process for outbound transactions related to the offshoring of certain supply chains and other "national critical capabilities" to "countries of concern." More recently, Cornyn and Casey introduced the Outbound Investment Transparency Act as an amendment ⁵ to the National Defense Authorization Act (NDAA), also aiming to regulate a broad range of investments in China and other "countries of concern."

The E.O.

The new E.O., "Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern," will build on these prior efforts and add to the financial restrictions. The E.O. directs Treasury, in consultation with the U.S. Secretary of Commerce and other relevant executive agencies and departments, to issue regulations that (1) require U.S. persons to notify the U.S. government of certain transactions involving "covered foreign persons" that "may contribute to the threat to the national security of the United States" (notifiable transactions), and (2) prohibit U.S. persons from engaging in certain other transactions involving covered foreign persons that "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" (prohibited transactions).

The E.O. defines a "covered foreign person" as any "person of a country of concern" engaged in activities involving one or more "covered national security technologies and products." The only "country of concern" identified in the E.O. is the People's Republic of China (including the Special Administrative Regions of Hong Kong and Macau), though additional countries could be added in the future. "Covered national security technologies and products"

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include "sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern." The E.O. contemplates that additional industry sectors could be identified in the future.

The ANPRM outlines how Treasury proposes to implement the E.O.'s objectives and clarifies the intended scope of the program by elaborating on certain definitions included in the E.O. and proposing additional definitions for other key terms, providing details on the proposed notification requirements and timelines, and describing Treasury's investigatory authority and enforcement...