A New Rift*

*Editor’s note: On March 4, 2022, Russia enacted a law that criminalizes public opposition to, or independent news reporting about, the war in Ukraine. The law makes it a crime to call the war a “war” rather than a “special military operation” on social media or in a news article or broadcast. The law is understood to penalize any language that “discredits” Russia’s use of its military in Ukraine, calls for sanctions or protests Russia’s invasion of Ukraine. It punishes anyone found to spread “false information” about the invasion with up to 15 years in prison.

Analyst Tigran Meloian discusses how the U.S. and China have moved from being partners in tech and investment sectors to becoming global competitors.

Recently, the White House announced a ban on certain U.S. investments in sensitive Chinese technologies. According to President Joe Biden’s executive order, the restrictions will affect direct, venture capital, joint and new U.S. investments in Chinese companies in the sectors of microelectronics and semiconductors, quantum computing and artificial intelligence. In this way, Washington intends to strike a blow against sectors of crucial importance for China’s military-industrial complex, the rapid development of which increases China’s “ability to conduct activities that threaten the national security of the United States,” including its goal of achieving and maintaining global dominance.

In essence, the executive order instructs the U.S. Treasury Department, in consultation with the Department of Commerce and, if necessary, other agencies, to establish control over the transactions relative to sensitive high tech by American citizens and foreign companies they control in “countries of concern.” The countries in question are China, Hong Kong and Macau because of their alleged “potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities.”

The White House commented that the restrictions on China’s sensitive technology investments are imposed on a “small yard, high fence” basis. That is, the U.S. wants to reduce risk in this particular area but does not wish to cut off cooperation with China completely. Washington sees this as a form of “healthy competition,” which would ensure its ability to protect national interests while not causing significant damage to economic ties with foreign partners. Notably, the Biden administration had also considered limiting investments in Chinese biotechnology and mining companies. However, at some point, it decided to limit restrictions to sensitive technologies and push back against the hawks in the political establishment.

Washington’s moderate, step-by-step approach to China is understandable, as it cannot afford to target one of its leading trade partners more extensively. Indeed, U.S. trade with China totaled about $690 billion in 2022 (the third-highest figure after its trade with Mexico and Canada), comprising about 13% of all foreign trade of the U.S. in the previous year. As such, if the U.S. decides to go for a full-fledged break in trade and economic ties with China, it will negatively impact American consumers and the economy as a whole, of which the White House is well aware. For example, the availability of cheap Chinese goods and services of sufficiently high quality in America makes it possible to reduce the expenditure of local households and thus maintain a high standard of living in the U.S.

Indeed, this measure came as no surprise to Beijing. Hence, the well-timed publication of a new strategy for attracting foreign investment, an ambitious 24-point plan by China’s State Council. It’s not surprising, as the debate on controlling U.S. investments in Chinese technology has been going on for years, with the Atlantic Council as one of the main discussion forums. For instance, in September 2022, the Atlantic Council issued a report that included recommendations to “focus outbound investment review authorities on slowing indigenous technology capabilities in China” and to “limit government action to those investments that present national security risks.” Accordingly, the new executive order released by the White House on Aug. 9 resulted from this lengthy debate.

Notably, for now, the U.S. will be going it alone with this initiative, despite the Group of Seven countries’ agreement that “appropriate measures designed to address risks from outbound investment could be important to complement existing tools.” Therefore, while the U.S. dominates the venture capital market, the adopted controls are unlikely to be effective as long as they remain unilateral.

At the same time, it should be emphasized that the new measures will supplement the previously imposed restrictions on exports of U.S. high-tech products (including dual-use items) to China. Also, as of today, dozens of Chinese high-tech companies are already restricted in their access to the U.S. financial market. Nevertheless, in practice, the measures introduced on the U.S. side do not remain unanswered. For example, in October 2022, the U.S. imposed restrictions on selling advanced microchips used for producing supercomputers and artificial intelligence to Chinese companies. In response, in December, Beijing filed a trade dispute with the World Trade Organization to challenge U.S. export controls. And in July 2023, Beijing responded by reducing its U.S.-bound exports of gallium and germanium — two materials critical for semiconductor production.

Thus, given that the U.S.-China technological war has reached a new level over the past two years, U.S. experts and politicians are rethinking investment relations with Beijing. This is a difficult task, given that China is currently the second largest economy in the world and remains the second largest recipient of direct foreign investment after the U.S.

So, until recently the Americans did everything to pump investments into China to create a powerful industrial base, having invested about $1.29 trillion from 2000 to 2021. Now, the White House is wracking its brains over what kind of a global competitor the U.S. has created and what tools could be used to curb its economic and military-technical growth. However, there is a critical nuance in the current situation — sanctions against China will negatively affect the U.S. due to the close interconnectedness of the two countries’ economies.

In general, global capital distribution will no longer be the same. If, before the COVID-19 pandemic, American investors were ready to bet big on investments in China, now the balance of risk and return will shift to a more cautious approach, including the redirection of direct American investment to other developing countries, such as India.

The author is an analyst at the Center for Mediterranean Studies at the National Research University Higher School of Economics. The author’s opinion does not necessarily reflect the views of Izvestia’s editorial board.