As part of a building effort to shield national security and maintain its technological lead, the U.S. government is fine-tuning reviews of proposals that would set strong curbs on American investments in China’s artificial intelligence and semiconductor sectors. It is part of a wider strategy forming the bedrock of efforts to restrain China’s accelerated strides in critical technologies, increasingly considered a strategic challenge to the US and its allies.
Background and Context
Over the past decade, the United States and China have been locked into an ever-escalating rivalry across many fronts, from trade and intellectual property to military capabilities and global influence. Nowhere has this rivaled tension been more pronounced than in the field of advanced technologies. China has poured billions of dollars into developing its domestic AI and semiconductor industries, sectors that are key not only to economic growth but to national defense.
The question is how the U.S. is facilitating that ascent by investing in China and inadvertently allowing Chinese scientists to appropriate American intellectual property, particularly in areas like semiconductors, which are crucial to everything from smartphones to military systems, and artificial intelligence, which is a dual-use technology. It has enormous potential to reshape economies and militaries alike. As China begins closing that gap in these fields, U.S. policymakers have sounded the alarm on the national security effects of unregulated investment.
Proposed Measures
The Biden administration has been quick to limit access to advanced technologies from China, and the new proposals reflect those measures undertaken earlier—most notably by restricting exports of advanced chips and AI software to Chinese companies. Such proposals are more severe since they seek to limit U.S. capital inflow to companies in China focused on AI and semiconductors—even if that investment is through private sector ventures and not government-sponsored ones.
An entirely new screening mechanism for outbound investments is at the heart of the proposal. Under this mechanism, U.S. regulators will be empowered to review and, where feasible, block certain firms or investors located in the United States from funding some Chinese companies working in sensitive technological fields. The focal areas are Artificial Intelligence and semiconductors. Quantum computing and biotechnology are expected to make the list as well.
Such proposals are regarded as a spin-off of a broader concept of “economic statecraft,” whereby economic measures are increasingly used to meet strategic goals. According to the U.S. officials, such measures are necessary to prevent American innovation and capital from contributing toward undermining national security. China is increasingly using AI and semiconductors not only for civilian purposes but also for military modernization and surveillance, directly challenging U.S. interests, the officials warn.
Industry Responses
As expected, the proposed measures are welcoming mixed reactions from industry stakeholders. For one, US technology companies and industries protest the loss of access to the profitable Chinese market. China is one of the world’s largest consumers of semiconductors, and it also includes an expanding market for AI research and development. For several years already, American venture capitalists and tech firms have heavily invested in China’s startups. The investments are huge; Chinese firms seek to break into its burgeoning tech sector. Blocked investments would deal a serious blow to the global competitiveness of US firms.
Another industry-wide concern is the broader implications of this decision for global supply chains. The global nature of the semiconductor industry implies that these production processes are often conducted not in one but several countries. Further restriction on investment fuels the restiveness in fragile supply chains, adding to shortages at a higher price for consumers.
But most in Washington and the national security community see the proposals as necessary, if unfortunate, to anoint China’s technological ascension-to-the-top. This is despite the risk of enabling China’s technological rise being greater than the economic downsides. The new rules also reflected a U.S. government determination to ensure that the policies don’t unduly harm “legitimate commercial activity.”
China’s Response
China, however, quickly condemned the planned curbs, branding them as a move that intended to slow its economic growth. Beijing has accused Washington of “economic containment” and violating the principles of fair competition. Chinese officials have also warned that they would retaliate if the U.S. goes ahead with the curbs.
Because China has sunk a pretty large investment into the domestic semiconductor industry and this is something the government has targeted as the way to reduce dependence on foreign suppliers and grow further because of increasing sanctions by the U.S., recent improvements have been nothing short of significant, primarily because China broadly relies on technology for designing and manufacturing chips from the U.S. The analysts said that though U.S. investments would be contained, and China would likely go on with its technological agenda but at a slower pace.
Global Impacts
The U.S. proposals affect more than the simple bilateral relationship between Washington and Beijing. Allies such as Japan, South Korea, and the European Union are closely monitoring this development. Many of these countries share U.S. concerns about the rise of Chinese technology but are also economically much deeper into China. How the United States balances its national security interests with the imperatives of global commerce will set the tone for future debates over technology and investment in the 21st century.
Moreover, plans pay special attention to the enhanced “decoupling” between the US and China that can be described as the world’s two biggest economies that are becoming more and more detached on important trade and technological matters. However, it is unlikely that there will be full decoupling because of the presently high interdependence of the global economy. This increasing demand for controlling critical industries is a phenomenon that is likely to remain volatile in the short term.
And as the U.S. government moves closer to finalizing its proposals to limit investments in Chinese-made AI and semiconductors, the stakes become very clear: the battle will be over market access and profits no longer, but control over the technologies that will shape the future of the world. Even as the end of this new chapter remains unknown, one thing is sure: The race of this time, the technological competition between the U.S. and China, is shifting into a new dimension of fierce and intense plays of each other for the future – with consequences far-reaching for both countries and for the world.
