On August 9, 2023, the Biden administration issued its long-anticipated executive order (E.O.) that will prohibit, or impose notification requirements on, U.S. investment in a targeted set of advanced technology sectors in the People's Republic of China (PRC) deemed to pose national security risks. The E.O. finally took shape after an almost two-year discussion and negotiation in Washington over the scope and implementation of the outbound investment restrictions. The Department of the Treasury is charged with implementing the new requirements; it has developed a new web page and issued an advance notice of proposed rulemaking (Proposed Rule), which outlines the implementation details and seeks feedback from industry. While publication of the E.O. has been a long time in the making, it marks the starting point rather than the finish line for new regulatory requirements to be imposed on outbound investment.
"Countries of Concern" and a Narrowly Tailored Set of PRC-Bound Investment Regulations
This August 9, 2023 E.O. is intended to significantly restrict the ability of "countries of concern" to exploit U.S. outbound investment in certain advanced technologies that pose significant national security risks due to their potential military, intelligence, surveillance, and cyber applications. The obvious focus of the E.O. is the PRC, along with the special administrative regions of Macau and Hong Kong, although the Order's use of the term "countries of concern" allows flexibility to impose similar restrictions on U.S. investment in other countries at a later time. The immediate security concern is that high-tech military and other applications facilitated by U.S. investment in the PRC, such as sophisticated weapons systems or cryptographic code-breaking, could result in PRC military advantages that threaten U.S. security. Therefore, the E.O. calls for new regulations to prohibit or impose notification conditions on U.S. investment in the PRC involving three cutting-edge tech sectors, namely semiconductors and microelectronics (e.g., advanced chips), quantum information technology, and artificial intelligence (AI). Investments in these sectors involving particularly acute national security threats will be banned as "prohibited transactions." Other investments in these sensitive technology sectors will be "notifiable transactions" subject to reporting requirements.
Forthcoming Regulations from Treasury
The E.O. charges the Treasury Department, in consultation with the Commerce Department and other relevant agencies, with developing the new regulations to establish the outbound investment program. No longer than one year after the effective date of those regulations and periodically thereafter, the Treasury Department is required to conduct an assessment of the effectiveness of the regulations and whether they should be further updated. Treasury will soon publish its Proposed Rule seeking early stakeholder input on dozens of questions related to the implementation of the E.O.
Under the forthcoming regulations, the Treasury Department's program will restrict outbound investments by U.S. persons in certain entities that are located in or subject to the jurisdiction of the PRC or owned by PRC persons, which are involved in the targeted categories of semiconductors and microelectronics, quantum information technology, and AI. According to the Proposed Rule, Treasury expects to impose prohibitions on certain transactions in all three categories, while imposing a notification requirement for certain other transactions related to semiconductors or AI technology. Treasury expects the notification process to be a post-closing requirement rather than a pre-closing review process, although the Department is soliciting feedback on the measure.
The comment period for Treasury's advance notice of the forthcoming regulations will be open for 45 days once the Proposed Rule is published in the Federal Register, and the response deadline is expected to be September 28, 2023. In an August 9, 2023 press release, the Treasury Department emphasized that it will be seeking input, in particular, about the exact parameters and scope of those subsets of technologies and products to be regulated. All told, Treasury is requesting industry feedback on over 80 questions related to implementation of the E.O.
Broader U.S. Government Action to Limit Risks of Chinese Big Tech
The August 9, 2023 E.O. is the most recent implementation of the broader U.S. government policy push to reduce U.S. technological dependence on the PRC while simultaneously curbing the PRC's ability to surpass the United States in military technological developments that could risk U.S. security. The White House timed the announcement of the new E.O. to coincide with the one-year anniversary of the CHIPS and Science Act, the high-profile law designed to lay the foundation for U.S. preeminence in the semiconductor industry. Subsequent to the passage of that law, in October 2022 the Biden administration introduced new export controls on the PRC with respect to high-end, sophisticated semiconductors, supercomputers, and related components, which themselves aligned with the Commerce Department's earlier moves to restrict the Chinese technology company Huawei's access to certain U.S. semiconductors and related software and technology.
Notably, Congress continues to consider additional future limits on U.S. outbound investment heading toward key tech sectors in the PRC. For instance, on July 25, 2023, the U.S. Senate, with overwhelming bipartisan support, passed an amendment to the National Defense Authorization Act (NDAA) for fiscal year 2024 that would establish a process requiring U.S. firms to notify the Treasury Department when participating in certain "covered activities" with "countries of concern," including outbound investments in China. The proposed legislation would also require the State Department to institute an outbound investment screening mechanism and work with partner countries to develop comparable measures. The pending defense legislation's list of targeted jurisdictions is longer than that of the August 9 E.O., counting North Korea, Iran, and Russia among the countries of concern. The NDAA, which will be passed later this year, has not yet been finalized.
Expect More to Come
The multi-front efforts of the U.S. executive and legislative branches underscore the Red Queen's race that continues to shape the regulatory environment for U.S.-China commercial dealings: U.S. businesses must continue running at full tilt just to keep pace with changes in this regulatory landscape. While the administration's new E.O. may feel like the finish line of a lengthy interagency discussion in Washington, in reality it serves as the starting gun for an outbound investment regulatory program that is certain to continue to evolve and grow. Venable's International Trade and Logistics team is available to answer any specific questions you may have about how the new E.O. and the forthcoming outbound investment program at Treasury may impact your business and investment activities.