US imposes limits to restrict investment in Chinese artificial intelligence and technology sectors

On Friday, the US unveiled its draft of legislation that will allow or require the ban or reporting of particular Chinese ownership in AI and other strategic technology sectors deemed risky for US national security as reported by Reuters.

In that normative endeavor, details of which were unveiled after President Joe Biden signed an order in August, the U.S. The Treasury Department came up with the proposed guidelines and accompanied them with an array of exceptions. The regulations shift the burden of identifying which transactions are to be prohibited or restricted to US people and businesses.

The specific executive order signed by Biden pertained to the regulation of the semiconductors and microelectronics in selected U.S. investments, Artificial Intelligence, and Quantum Computing. This order is an attempt to counter what the USA deems as China building new capacity for developing hi-tech technologies and holding the world markets hostage.

As expected the most active country in this aspect, that is the United States, is also on its schedule to pass regulations during the end of the year. These rules are still available to the public for comment and input on /before 4th August, 2012.

According to Treasury Assistant Secretary for Investment Security Paul Rosen, “This proposed rule promotes our national security by denying the many positives, and apart from capital, that some US investments bring in, to the building of sensitive technology in countries that might use it in threatening our national security.

The Treasury explains that the intended changes are expected to establish only a “focused and limited” national security program whereby the focus will be placed only on certain outbound investments in countries of interest.

In August it had outlined the broad ethical framework of the new rules for the Treasury. Other restrictions or latitude including those governing transactions considered in the best national interest of the United States were released by the Treasury Department on Friday only.

The proposed regulations would prescribe the reporting of transactions that are connected with the development of new AI systems or semiconductors but are not prohibited. They would also outlaw using AI to comprehensively be used for certain purposes and cover systems that are designed to utilize a certain level of computing resources.

While the three areas of concern are all about China, Macau, and Hong Kong respectively it is advisable to major in the three areas.

Furthermore it comprises Country of Concern Ownership Purchase, deals between a U.S parent and a majority-controlled subsidiary, contractual obligations executed before issuance of the order and limited partnership investments and purchase of securities that are public and diversified like index funds or mutual funds and some syndicated debt arrangements.

Treasury noted that relations with third countries that were deemed to be addressing problems that are to do with national security or where the third country adequately addresses issues ON_security_ would possibly qualify for exclusion.

The order was initially directed towards China, Macau and Hong Kong, although according to the US authorities, may in the future expand its remit.

Laura Black, a lawyer with Akin Gump in Washington and a former Treasury official said that the Treasury is doing the best it can to restrict the application of the rule in as little capacity as possible, however there is still more caution required where companies hoping to invest in China are concerned.

”He stated that prior to making an investment in China or in businesses associated with China that fit under the industries covered, American investors will need to conduct due diligence  because the agreement will be more rigid ,” she said.

Black finds that Treasury target regulations impose risks to some of American LPs’ investment in foreign-managed funds and convertible debt, and American-managed venture capital as well as private equity funds.

It would also prevent certain investments undertaken by American corporations in overseas countries as well as apply to certain Chinese subsidiaries and parents, she continued.

It also means that by converting the source into equity, default debt may also be earnings from thus, aside from stock investments, joint ventures, and Greenfield projects.

The rules supervise restrictions on exportation on some technologies to China with the exception of the prohibition of exportation of certain advanced semiconductors.

For that purpose, namely, preventing China from using American funding to beef up its military modernization in those spheres, the US is willing to risk sealing off American society.

However, if rule violators get to the penalty stage, there are more severe consequences that can be inflicted on them: monetary punishments; potential unwinding investments; criminal proceedings; and civil actions.

By the summer of 2015, the European Commission and the United Kingdom had begun considering how, or if, they planned to address outbound risks, while the Treasury maintained that it had informed the allies and partners of the United States regarding the goals of the investment limitations.