President Biden’s new executive order prohibiting new US investments in China in semiconductors, quantum and AI represents a new chapter in US-China relations and a challenge to US companies that sell into China.
The order also kicks off a massive undertaking by the US Treasury Department as a 45- day public comment period gets started on ways to implement the order, considered to be sweeping in their coverage of entire technology categories.
While it is termed an emergency order, it will not have an immediate effect on US companies, investors and research groups. Written comments on Treasury’s proposed rulemaking seek comments by Sept. 28. New rules would not take effect until 2024.
The proposed rules affect new investments in semiconductors, quantum and AI with some specific prohibitions on work on advanced integrated circuit design all the way to bans on sales of the fastest supercomputers. Not prohibited would be university-to-university research or IP licensing arrangements.
Anthony Rapa, an attorney at Blank Rome who is versed in export matters said the use of the proposed rulemaking by Treasury shows the Biden administration is “trying to create as much space as they can to make it a consultative process with industry.” Many of the proposed regulations in Treasury’s 46-page document also show that it is “not a fully baked set of proposed regulations.”
In fact, Rapa said, it contains much of what the US Senate recently passed by 91-6 in the bipartisan Outbound Investment Transparency Act of 2023, which was attached as an amendment to the Defense Authorization Act which must be finally passed by Congress in December.
Biden’s executive order requires Treasury to promulgate regulations that define what the US considers prohibited transactions and, separately, those that require US citizens to notify authorities.
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On page 12, the document says Treasury is considering defining a covered transaction to be a direct or indirect acquisition of an equity interest or continued equity interest with a foreign person; provision of debt financing; and greenfield investment or creation of a joint venture.
Treasury “intends this definition to be forward-looking and not to cover transactions and the fulfillment of uncalled binding capital commitments with cancellation consequences made prior to the issuance of the order.” Examples of transactions that would be not prohibited include university-to-university research; IP licensing arrangements; contracts for buying raw materials; bank lending; debt rating services; and equity analysis or research.
On page 23 of the proposed rulemaking document, Treasury also describes technologies that would require organizations to notify the government of investments or those that are prohibited for investment. “The US Government is concerned with the development of semiconductor and microelectronic technology, equipment and capabilities that will enable the production and certain uses of integrated circuits that will underpin military innovations that improve the speed and accuracy of military decision-making, planning and logistics…” the document adds.
Under consideration for prohibition: technology or capabilities to enable design and prohibition of advanced integrated circuits or enhance their performance; advanced integrated circuit design, fabrication and packaging capabilities; and installation or sale to third party customers of certain supercomputers enabled by advanced circuits.
Treasury is also considering notification requirements on organizations in the US for design, fabrication and packaging of some integrated circuits.
Prohibitions on supercomputers sold to a person in China would include those with a theoretical compute capacity of 100 or more 64-bit petaflops or 200 or more 32-bit petaflops of processing power within a 41,600 cubic foot envelope.
Despite the complexity in the document, Rapa said Treasury is trying to make to clear that it favors a climate of open investment but “there is a subset of tech development in China that they do not want to benefit from investment. What they are trying to through rulemaking is they seem to be starting from a posture of a narrow focus and then later expanding.”
Rapa also predicted that the executive order and rulemaking “will play out over a period of years.”
What is being done is also somewhat historic.
“The US for the most part has never really regulated outgoing investment except in narrow categories,” Rapa added. “This is a new tool and now that the tool has been established, as time goes on, the usage of that tool could be expanded.”