A new Presidential Executive Order authorizes the Secretary of the Treasury to regulate U.S. investments in “countries of concern” (a nice euphemism that avoids calling China an “adversary”). The E.O. identifies three categories of “national security technologies” covered by the program: semiconductors and microelectronics; quantum information technologies; and artificial intelligence. Reflecting conflicting stakeholder pressures, the EO was two years in the making. The White House publicity accompanying the Order tried hard to characterize the scope of the controls as narrow (“small yard, high fence”). The three areas targeted, however, are broad categories that cover industries in some of the fastest growing areas of ICT. While the regulations implementing the program may turn out to be narrow; the covered technologies are not.

The Treasury Department released an Advanced Notice of Proposed Rulemaking on the same day as the E.O., with proposed definitions to elaborate the scope of the program. Some investments will require only notification, others may be flatly prohibited. A fact sheet clarifies some of the ways they may define proscribed investments. The rules will be subject to public notice and comment before they go into effect. In one sign that the rules will be reasonable, the notice says:

“Treasury is considering excepting from the program’s coverage certain U.S. investments into publicly-traded securities, index funds, mutual funds, exchange-traded funds, certain investments made as a limited partner, committed but uncalled capital investments, and intracompany transfers of funds from a U.S. parent company to its subsidiary.”

So, no, the EO probably will not – and really should not – fully decouple the Chinese and American economies. For that reason, the China hawks are very unhappy. But nothing short of war is going to make them happy.

While bans on the export of finished, clearly identified technologies with direct military applications have existed for some time, and limits on incoming foreign acquisitions of military or closely-related assets have existed since the 1970s, the United States has never attempted to limit the flow of capital into China. On the contrary, our trade negotiators have fought against Chinese limits on foreign investment for the prior two decades. During the revision of the CFIUS law in 2018 (FIRRMA), some China hawks proposed controls on outgoing investment, but that was considered too interventionist at the time.

Not any more. To justify the new controls, the E.O. complains that:

[China] eliminates barriers between civilian and commercial sectors and military and defense industrial sectors, not just through research and development, but also by acquiring and diverting the world’s cutting-edge technologies, for the purposes of achieving military dominance.

This is an absurdly hypocritical claim. Huge expenditures by DARPA and other U.S. military agencies on academic and private sector research and development are certainly motivated by efforts to maintain or expand U.S. military dominance.  And it’s a two-way street: American private sector leadership in cloud computing, AI and semiconductors inevitably leads to purchases of applications by the U.S. military and intelligence agencies. Clear “barriers” between civilian and military chip, AI and quantum technology industries simply do not exist in the U.S.

The bigger issue is that EO and Treasury regulations are an attempt to draw a line that may not exist. Instead of small yards with high walls we have poorly defined territories surrounded by fog. Outgoing investment controls are an attempt to target China’s general technological and economic development, which contribute only indirectly to military capability. The US has not solved what is a very difficult puzzle: when foreign countries climb up the value chain and become players in high-tech industries, it is likely that those capabilities will also enhance their military capabilities in some way. (Indeed, all increases in the wealth and economic capacity of a country contribute to its potential military strength.) Economic nationalists respond to this dilemma with attempts to hoard the benefits of advanced technology, but this never really works when so much of ICT is dual use. Moreover, U.S. private sector leadership in these areas has been fueled by globalization of talent, trade and capital investment. Leadership in civilian industries contributes to military power and vice-versa. Attempts to prevent all spillover effects are likely to impede our own growth, innovation and know-how.

What if Chinese researchers and entrepreneurs turn out to develop the best quantum technology – wouldn’t openness to U.S. investment help ensure that we had access to it? How does one retain forms of trade and immigration that enhance the wealth of both countries, and all the benefits of a global division of labor, without also making other countries stronger? The answer may be that you can’t. Are controls on trade in technology really the best way to counter emerging threats from other states? This puzzle is the theme of IGP’s annual conference in 2023: What is National Security in a Global Digital Economy? Stay tuned for further information.

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