Biden Administration Moves to Restrict Outbound Investment to China
The Executive Order
The EO identifies each of the People’s Republic of China, the Special Administrative Region of Hong Kong, and the Special Administrative Region of Macau as a country of concern (Country of Concern). Concurrent with the EO, the U.S. Department of the Treasury issued an Advance Notice of Proposed Rulemaking (ANPRM) that provides additional details on the intended scope of the new program and solicits public comments on various issues related to the program’s development and implementation.
Although the EO does not itself prohibit any activity, it directs the Treasury Department, in consultation with the U.S. Department of Commerce and other U.S. government agencies, to establish a targeted national security program to prohibit – or require notification of certain types of – outbound investment into (i) certain entities located in or subject to the jurisdiction of a Country of Concern, and (ii) certain other entities owned by persons of a Country of Concern (such persons, covered foreign persons).
More specifically, the EO requires the Secretary of the Treasury to issue implementing regulations that:
- Require U.S. persons to notify the Treasury Department of certain investments involving “covered national security technologies and products”; and
- Prohibit U.S. persons from engaging, directly or indirectly, in certain other investments involving “covered national security technologies and products” that pose a particularly acute national security threat due to their potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities of Countries of Concern.
The EO defines “covered national security technologies and products” as sensitive technologies and products (as determined by the Secretary of the Treasury) in the following three sectors:
- Semiconductors and microelectronics;
- Quantum information technologies; and
- Artificial intelligence.
The EO also gives the Treasury Department authority to investigate violations of the EO and pursue available civil penalties for such violations.
Advance Notice of Proposed Rulemaking
The ANPRM lays out a framework for implementation of the program. The ANPRM identifies a number of key issues for public comment, including:
- The definition of “U.S. person” and “covered foreign person”;
- The scope of covered transactions and excepted transactions;
- The types of technologies and products that will qualify as “covered national security technologies and products” within the three sectors identified in the EO; and
- Various other considerations relating to how the program will operate in practice.
The comment period will remain open until September 28, 2023. These comments will help inform the Treasury Department’s drafting of the implementing regulations.
Related Developments in the European Union
In a related development, on June 20, 2023, the European Commission and the High Representative of the Union for Foreign Affairs and Security Policy announced a European Economic Security Strategy (the Strategy) which aims to help the EU manage:
- Risks to the resilience of supply chains, including energy security;
- Risks to physical and cyber security of critical infrastructure;
- Risks related to technology security and technology leakage; and
- Risks of the weaponisation of economic dependencies or economic coercion.
One strand of the Strategy is that it seeks to develop a framework to assess risks affecting the EU’s economic security, and to enable the maintenance of control over certain technologies deemed critical. Full implementation of the EU's Dual-Use Regulation is emphasised and a proposal to ensure its effectiveness and efficiency is contemplated. Additionally, the Strategy proposes to extend the EU’s control of both inbound and outbound investments. Taken together, the aim is to ensure that the EU is able to control in a more comprehensive way the promulgation of advanced technologies that may enhance military and intelligence capabilities. The Strategy states that the aim is to propose an initiative by the end of the year addressing outbound investments with consultations taking place in the meantime.
The UK considers following the U.S.’ lead
The UK’s economic policy over the last couple of years has highlighted a desire to improve economic security. The National Security and Investment Act 2021 (NSIA) gave the UK Government broad powers to screen investments on national security grounds, while the Atlantic Declaration, agreed in June 2023 with the U.S., puts economic security at the heart of the UK – U.S. transatlantic relationship. See our article here on key takeaways from the second annual report relating to the operation of the NSIA.
The UK is now considering restricting outbound investment on national security grounds. As set out in the Atlantic Declaration, the UK Government is reportedly surveying British businesses to ask them about their investments in a list of sensitive sectors, such as advanced materials and transport, in countries such as China, Canada, Hong Kong, and the U.S. The survey appears to be intended to meet the UK’s pledge in the Atlantic Declaration to engage with a range of business and financial stakeholders to develop an evidence base to assess and inform how the UK can best calibrate its response to the perceived national security risks posed by certain types of outbound investments. It remains to be seen how and when any UK restrictions in this regard will be introduced, but it is evident the UK Government is now moving towards the potential introduction of such a regime.
Key Takeaways
The different measures proposed by the U.S., EU, and UK are at varying stages in their respective development, but all share a common goal – economic security. While the measures, if they are introduced, will likely be broadly aligned, any efforts at de-risking will likely target different subsets of outbound investment, as well as different countries. Businesses investing in potential “countries of concern” should keep a close eye on upcoming developments.
With respect to the U.S. in particular, the EO is narrowly tailored to target a specific subset of U.S. outbound investment into China. However, the impact of the EO on Chinese investment more broadly will depend largely on how the implementing regulations evolve over the next several months. We also expect Congress to play a larger role in the implementation of the program going forward.
A&O’s Global Investment Compliance Group will continue to track these developments closely and provide further updates as the various proposals develop. For more information, please contact the authors or your usual Allen & Overy contact.