One year after Joe Biden announced that the US would screen outbound investment in sensitive technologies on national security grounds, the first-of-its-kind regime is close to becoming reality with a final rule expected before the November election. 

Attention is now turning to how President Biden’s Democrat would-be successor Kamala Harris would approach the mechanism, with geopolitical experts predicting that curbing Beijing’s technology ambition would be a plank of her trade and investment policy.

On August 9, 2023, after five years of debate over how to stop homegrown capital and know-how from advancing dual-use Chinese technology, Mr Biden issued an executive order that limits US investment in semiconductors, quantum computing and artificial intelligence (AI) in China, including the special administrative regions of Hong Kong and Macau. 

The Treasury followed up by issuing a draft rule in June, the public comment period for which closed in early August, meaning investors’ wait to see the final regime is coming to an end. 

“It would be unusual for the revision of a rule to not come out on a timely basis. So I’d be shocked if [the] Treasury waited until after the election,” says Harry Broadman, senior economist at the RAND Corporation and a former US assistant trade representative. His comments echo analysis from law firms including DLA Piper, which expect the final regulations to be published as early as the third quarter.  

It will be the world’s first outbound investment screening regime, following in the footsteps of the Committee on Foreign Investment in the United States — or Cfius — which has been screening inbound acquisitions for national security threats since the 1970s.

National security costs and benefits

June’s draft rule clarifies finer details regarding the scope of captured technologies, but it does not impose new obligations or capture sectors beyond those laid out by Mr Biden and the Treasury last August. 

It confirms that greenfield FDI and joint ventures are among the transactions set to be monitored, meaning they must be announced to the government and in some cases will be prohibited. Investors captured by the rule include US subsidiaries of foreign companies, and foreign firms majority-controlled by a US parent. 

“The new regime is narrowly tailored to address what the US government sees as the technologies that contribute the most to China’s military-industrial complex, and which the administration believes pose the greatest threat to US national security,” says Mario Mancuso, partner at Kirkland & Ellis in Washington DC.  

Aside from tweaking technical definitions, lawyers in DC agree the final regime will largely reflect the current draft form. “We don’t expect material changes to the types of transactions that would be reviewable under the proposed rules,” says Mr Mancuso. 

Based on the 46 comments received during the draft rule’s public consultation, this could pose a problem for some groups. The National Venture Capital Association says in its current form the rule is “likely to create significant cost in cases where that cost brings effectively no national security benefit”. The Alliance for Automotive Innovation warns the new regime could exacerbate semiconductor supply chain weaknesses, adding to the risk of another global shortage. 

The Semiconductor Industry Association says the US unilaterally imposing such restrictions will “decrease the global competitiveness” of the country’s chipmakers which “undermines national security”. In 2023 the European Commission announced it would investigate its own outbound screening tool. However it has not publicly progressed its plans beyond a public consultation earlier this year. 

More on outbound FDI screening:

• US outbound screening rules narrower than feared
• Business groups hit back at EU outbound screening plan
• EU seeks tighter grip on FDI screening

Floor not a ceiling

Irrespective of the rule’s final form, it should be viewed “as a floor, not a ceiling”, says Mr Mancuso. “We expect the regime will evolve over time to incorporate new technologies that pose similar risks,” he adds. The government has also left the door open to extend the rule to countries beyond China. 

This possibility is exemplified by Mr Biden leaving the White House in January, and his successor having the power to strengthen — or overturn — this and other executive orders. 

Republican nominee Donald Trump has taken a tough stance on China, including banning Huawei’s access to US technology when president and clamping down on TikTok before embracing the app when Mr Biden moved to ban it in April. However attention is now turning to presumptive Democratic nominee Kamala Harris.  

“At this point we expect Harris to largely follow Biden’s direction on outbound investment restrictions,” says Xiaomeng Lu, director of geotechnology at Eurasia Group. “This means gradually ratcheting up pressure on AI and quantum technology-related projects going forward.”

However, she suggests that Ms Harris in the Oval Office could go even further than the current president. “The central theme of new investment and trade policies would be technology: the strategic driver of her administration’s China strategy is curbing Beijing’s technology ambition,” adds Ms Lu. 

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