The U.S. wants to stop American companies from funding advanced technology in China

The U.S. is ramping up its efforts to limit China’s access to critical technologies, as Washington struggles to balance heightened national security fears at home with its deep economic ties to the world’s second largest economy.

Washington is weighing new rules to stop American investments in advanced technologies in China, such as quantum computing, cutting-edge chips, and certain artificial intelligence (AI) capabilities. The measures could be issued within the next two months.

“There are legitimate national security concerns animating this effort, which is a rare example of bipartisan consensus. Many of the technologies in question — quantum, biotechnology, advanced batteries, AI — are in relative infancy, so this is also a rare example of policymakers in D.C. getting ahead of a potential problem instead of reacting to it,” Malia Du Mont, a former Pentagon official with China expertise, told The China Project.

The news comes just days after the U.S. Air Force shot down a Chinese “spy balloon” that drifted into its territory, drawing outrage in Washington and setting off newfound security fears. (Today there was further confirmation from U.S. officials that the balloon’s payload included intelligence gathering equipment.)

Deep economic ties are slowing down decoupling efforts

“The U.S. and China clearly have a lot to gain from continuing to trade with each other, even as mutual mistrust is high and continues to grow. The investment restrictions likely to come are an extension of this mistrust,” Rorry Daniels, managing director at the Asia Society Policy Institute, told The China Project. “The question moving forward is whether both sides can manage the process of partially decoupling in some strategic areas without the damage caused by this mistrust spreading to areas where no such restrictions are needed.”

Despite Washington’s persistent efforts and the political furor over the balloon, U.S. Treasury Secretary Janet Yellen still wants to visit China.

“I still hope to be able to visit China to meet with economic counterparts. But I don’t have any detail to offer you on just when, and I really think that’s up to State [department] and DoD [Department of Defense],” Yellen said. China’s commerce ministry welcomed Yellen’s willingness to visit the country.

Yellen’s trip to Beijing “will be an important opportunity to clarify U.S. intentions to maintain a robust and healthy economic trading relationship with China,” Daniels told The China Project. “It’s also an opportunity for Beijing to offer alternative approaches moving forward that address U.S. concerns.”

Plans for Secretary of State Antony Blinken to visit China this month were abruptly postponed after the Chinese balloon hovered into U.S. territory. The geopolitical fallout and heightened fears about PLA espionage have curtailed what was widely seen as a thaw in diplomatic tensions between the two superpowers. Domestic politics may prevent any warming in the short term future: Today “visibly angry” Republican senators grilled Pentagon officials and castigated Biden for letting the balloon drift over the U.S., instead of shooting it down as soon as it entered U.S. airspace.

However, trade between the U.S. and China hit a record high of $690.6 billion last year, demonstrating the deep links that remain between the world’s two biggest economies despite government-led decoupling efforts. Although the figure was part of a broader surge in U.S. trade with 90 other countries, it was eye-opening given years of deteriorating bilateral ties and ongoing tariffs on more than $300 billion worth of Chinese goods.

“U.S. national security and economic security are increasingly intertwined. Protecting U.S. national interests and doing business with China are not mutually exclusive,” Mercy A. Kuo, executive vice president and head of analysis at D.C.-based corporate risk intelligence consultancy Pamir, told The China Project.

“The Biden administration will need to be careful when crafting the implementation details of this policy, to ensure that it doesn’t inadvertently restrict less sensitive areas of bilateral trade — a relationship that continues to be rich and robust between the two largest economies in the world despite the rising political tensions between them, and is integral to the health of both,” Du Mont told The China Project.

‘A wake-up call for corporate America’

The potential rules on financing investments are part of a longer effort by the Biden administration to better target its restrictions on sensitive technologies to China.

“A lot will be determined by how these restrictions are spoken about, in bilateral channels and in public, as well as the content of the restrictions themselves and how widely they will be interpreted and applied in practice,” Daniels told The China Project.

Megan Cansfield*, who will begin work as an policy analyst for the U.S. Department of Homeland Security, told The China Project that “U.S. policymakers should take care that proposed limitations are carefully targeted and attentive to not overreach in scope or degree. Nor should diplomatic engagements on matters of contention be held political hostage against this backdrop.”

Washington has already barred American companies from directly selling some advanced technologies to China, and allies like Japan and the Netherlands have agreed to join its efforts in curbing Beijing’s semiconductor industry.

“As U.S.-China rivalry intensifies, U.S. companies would be well-served to understand China as a geostrategic challenge and apply the appropriate tools to mitigate Chinese industrial espionage risks,” Kuo told The China Project. “The China spy balloon fallout should be a wake-up call for corporate America. Chinese intelligence, surveillance, and reconnaissance efforts pursued through covert and increasingly overt methods are sophisticated and unrelenting in targeting U.S. industry.”

But concerns remain that any restrictions on such technologies will blunt the competitiveness of American businesses against foreign rivals. Broader proposals put forth last year were widely criticized from industry goers and business groups. Other critics claim that China will still be able to draw on a wealth of other funding options, while also kneecapping any benefits from Chinese innovations.

“If we decouple, our risks actually will increase. We need to address our risks in a very forthright manner, but we need to do so without impoverishing ourselves,” Craig Allen, President of the U.S.-China Business Council, said in a podcast interview with The China Project. “And indeed, we can decouple from China, that’s a possibility, but we would be much poorer and less competitive, also an even more unequal society if we were to go down that road when no other country is doing so.”

“It’s important to realize that Chinese development of these technologies does not depend on U.S. investment,” Du Mont told The China Project. “The U.S. is increasing domestic investment in key technologies through the CHIPS and Science Act, but China has long been prioritizing their own investments in these technologies in a bid to become a global leader in scientific and technological innovation, and that trend will not stop.”

*The views expressed are solely that of the contributor and are not representative of the Department of Homeland Security or the U.S. Federal Government.