NRPLUS MEMBER ARTICLE O n Wednesday, the Biden administration released its executive order: Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern (read: China and its “special administrative districts” of Hong Kong and Macau). While the order appears defensible on national-security grounds prima facie, closer scrutiny reveals trouble spots.
The order empowers the Treasury and Commerce Departments to designate transactions that have the “potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities of countries of concern” as notifiable or outright prohibited.
The Biden administration’s purported motivation for empowering the treasury and commerce secretaries to take such actions is a desire to answer China’s elimination of barriers between civilian and commercial sectors and military and defense industrial sectors. In announcing its executive order, the Biden administration is guilty of the very behavior it accuses China of: blurring the line between international competition and economic exchange.
Even if one agrees with the spirit of the order, its language is overly broad: Agencies have carte blanche to determine what “may contribute to the threat to the national security of the United States.” While it’s prudent to preclude Americans from investing in Chinese matériel manufacturers, the order’s prohibited transactions include “microelectronics, quantum information technologies, and artificial intelligence sectors” that enhance China’s “cyber-enabled capabilities.”
So, pretty much any investment in Chinese production of computer components can be prohibited, under penalty of criminal law, by the Treasury and Department of Commerce? Not quite: The current category of prohibited technology significantly overlaps with preexisting export controls from October 7, 2022, as Martin Chorzempa explains for the Peterson Institute for International Economics. Still, there’s nothing preventing the departments from expanding “the definition of ‘covered national security technologies and products.’”
The breadth of products covered by the executive order makes it difficult to believe Treasury Secretary Yellen’s recent assurance to China that the measures were intended to be “very narrowly targeted, and . . . not be something that will have a significant impact on the investment climate between our two countries,” as she said during her July 9 interview on Face the Nation.
Despite stating that its commitment “to open investment is a cornerstone of [its] economic policy” in the executive order, the administration appears intent to substitute open investment with industrial policy.
In the same interview, Secretary Yellen said the U.S. will take whatever actions are necessary to preserve national security, “even if harms our own narrow economic interests.”
Fair enough; all Americans should prioritize the security of the republic over personal wealth.
Even Adam Smith, free-trader par excellence, made such allowances: “As defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all commercial regulations of England.”
However, such poorly targeted investment restrictions not only hamper American “opulence” but will further depress China’s stagnating economy and isolate the two nations from each other. That’s not necessarily a positive: In the words of the 19th century’s prolific free-trade pamphleteer Frédéric Bastiat, “Barriers result in isolation; isolation gives rise to hatred; hatred, to war; war, to invasion.”
It is clearly not the end of history; China has become more authoritarian under Xi’s regime, as evidenced by its treatment of Uyghurs, anti-corruption campaign, digital censorship, draconian Covid-19 policies — take your pick from the laundry list of civil-liberties violations. The CCP shows no sign of liberalizing, to say the least. Although China is a far cry from the democratic West, antagonizing one of the world’s largest economies, populations, and militaries is not likely to facilitate its transition thereto. China’s frustration with the Biden administration’s actions was vocalized by China’s spokesman to the U.S., Liu Pengyu, who described the order as evidence of “continuously escalated suppression and restrictions on China.”
Given its official spokesman’s statement, it’s unlikely the Chinese regime will take the investment restrictions lying down. China has a history of responding to such sanctions with its own: Following the Trump and Biden administrations’ blacklisting of suppliers to China’s military and ban on advanced semiconductors, respectively, China introduced “controls on exports of minerals critical to green technology and [banned] products from U.S. chip maker Micron Technology,” as explained by Charles Hutzler at the Wall Street Journal. It would be naïve to think this time will be any different.
Considering the short-term economic costs and the tail risk of military conflict, President Biden should reconsider the scope of his order — particularly when U.S. firms have already begun to factor the value of redundancy into their private business decisions, as indicated by “investment in Chinese startups [falling] by more than 30% from 2021 to 2022,” according to Hutzler. The case for restricting investments is further weakened by the fact that American investments account for merely 5 percent of China’s foreign direct investment, as economist Nicholas Lardy told the New York Times.
Adding insult to injury, the administration doesn’t commit itself to the same standard to which it holds American citizens: “Sec. 6. Official United States Government Business. Nothing in this order or the regulations issued under this order shall prohibit transactions for the conduct of the official business of the United States Government by employees, grantees, or contractors thereof.”
The Biden administration should heed the wisdom of Frédéric Bastiat.