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A short, spoken-word summary from CSIS’s Emily Benson on her commentary with Gregory C. Allen, A New National Security Instrument: The Executive Order on Outbound Investment.
On Wednesday, August 9, 2023, the Biden administration released its long-awaited executive order on outbound investments. The establishment of this instrument in the United States signals a seismic broadening of the U.S. trade, investment, and technology tool kit that reflects a gap in existing U.S. government authorities. While export controls cover outbound items, technology, and software, inbound screening permits the review of transactions on national security grounds. This begs an obvious question about why the United States lacks authority to review outbound investments in countries of concern for certain end uses that pose national security threats. In other words, there is a conspicuous missing piece in the ability of the U.S. government to ensure that U.S. capital—both funding and know-how—is not used to advance foreign military capabilities. The August 9 executive order thus stands up the scaffolding for a system to close this gap.
Leaning on the International Emergency Economic Powers Act (IEEPA), the executive order declares a national emergency. The order directs the Treasury Department to establish a program to oversee a new instrument to review outbound investments in national critical sectors. Concurrent with the release of the executive order, the U.S. Treasury Department published an advance notice of proposed rulemaking (ANPRM) that seeks public comment on the creation of these rules. Public comments are due within 45 days, and the rules are likely to go into effect sometime in 2024.
The ANPRM defines an investment as more than rote capital flows, since other forms of capital transfer can result in intangible benefits. Per the ANPRM, “Intangible benefits that often accompany U.S. investments and help companies succeed include enhanced standing and prominence, managerial assistance, access to investment and talent networks, market access, and enhanced access to additional financing.” The Treasury Department foresees that covered activities would include mergers and acquisitions, private equity, venture capital, greenfield, joint ventures, and certain debt financing schemes.
The Treasury Department’s outbound investment program would consist of a mix of targeted prohibitions and mandatory notifications for investments in quantum technology, artificial intelligence (AI), and semiconductors. The targeted bans would address immediate national security risks, while the notification requirements are largely intended to facilitate the collection of data on the nature and volume of U.S. investments in these high-tech sectors in countries of concern. The ANPRM identifies China, Hong Kong, and Macau as jurisdictions of concern. Per the ANPRM, “The PRC government explicitly seeks to advance these technologies and to ensure that new innovations simultaneously benefit its military and commercial aims. The PRC government is aggressively pursuing these objectives to confer a decisive advantage to its military, intelligence, surveillance, and cyber-enabled services.”
The combined executive order and ANPRM highlight the administration’s desire to effectuate targeted bans in areas that constitute immediate national security threats, while creating a data-generating system that would elucidate the nature and volume of certain transactions in high-tech sectors in countries of concern. The Treasury Department does not foresee a case-by-case review of transactions, and transactions subject only to notifications would be required to provide said notification 30 days after the conclusion of the transaction.
On July 25, the Senate voted to add an amendment, the Outbound Investment Transparency Act, to the 2024 National Defense Authorization Act in a 91 to 6 vote. The legislative proposal covers a wider range of technology sectors, adding hypersonics, dual-use networked laser scanning systems, and satellite-based communications. However, this amendment, unlike the executive order, does not ban investments into these sectors but requires notification 14 days prior to the conclusion of a covered transaction. Despite potential differences with the White House executive order that will need to be resolved during the House and Senate conference, the recent Senate vote signals a resounding bipartisan consensus to act on this critical matter for national security.
Again, growing legislative enthusiasm for a new instrument is based on mounting evidence that U.S. capital is being used to advance Chinese military capabilities and that the United States lacks a sufficient means of combating this activity. On August 3, Representative Mike Gallagher (R-WI), chairman of the United States House Select Committee on the Chinese Communist Party, wrote a letter to the White House requesting a more expansive instrument. In the letter, Representative Gallagher argued that “For too long, America has funded the CCP’s military buildup, technological ambitions, and human rights abuses and allowed the CCP unconstrained access to our capital markets and the dynamism and efficient capital allocation that they enable.” The letter itself includes estimates that over $200 billion of U.S. capital is invested in Chinese firms with military ties, although the lack of available data makes it nearly impossible to confirm.
A report from the Center for Security and Emerging Technology, for example, found that a U.S. company invested alongside a Chinese company that, at the time, was on the U.S. Entity List. The same report noted that U.S. investors also transacted with SenseTime, which has since been added to the Entity List. The reality is that the volume and quantity of covered transactions would likely remain quite low and the U.S. impact on Chinese AI development also remains minimal. Nevertheless, the national security justifications for the new instrument represent a step forward in the creation of U.S. authorities to reduce risk exposure and prevent the outflow of U.S. capital that could advance foreign military capabilities.
As the Biden administration expands its national security trade and investment tool kit, one question has featured prominently: whether allies buy into this agenda. Several partners in East Asia maintain screening regimes, such as Japan, the Republic of Korea, and Taiwan, and each of those jurisdictions maintains a robust and highly globalized tech ecosystem. Nevertheless, these tools do differ significantly from the U.S. instrument and have been sparsely used, making the U.S. tool unique in form and function. Onboarding allies to this type of regime will thus require concerted effort, a politically intensive process, and significant time commitments among leaders.
The United States attempted to prioritize outbound investment screening at the May 2023 G7 summit in Hiroshima. Per the leaders’ statement, “We recognize that appropriate measures designed to address risks from outbound investment could be important to complement existing tools of targeted controls on exports and inbound investments, which work together to protect our sensitive technologies from being used in ways that threaten international peace and security.”
In a sign of support for the United States, European Commission president Ursula Von der Leyen has urged the European Union to introduce its own equivalent measure, with an update due in December. Member states, however, remain reluctant about a potential shift in screening authority away from member states and toward Brussels, and it is unclear whether or not an instrument similar to the U.S. tool would attract sufficient political backing to make it a reality in the near term. More recently, Germany signaled potential interest in the July 2023 Strategy on China. Partner countries have thus partially endorsed the potential utility of this new instrument but are curious to see how the U.S. policy unfolds.
China has not been shy about responding to recent U.S. measures. In May 2023, China banned U.S. company Micron’s chips from being used in critical infrastructure. In July, China announced new licensing restrictions on gallium and germanium, two inputs to semiconductors. It is thus reasonable to anticipate some degree of Chinese backlash from the establishment of a new mechanism. However, this time might be different. Amid a steep decline in foreign direct investment in China and increasingly precarious macroeconomic conditions, even targeted rules on foreign investments in China could have an outsize effect. Furthermore, Beijing’s desire to stabilize China’s economy means it is unlikely to respond in kind to the creation of this new tool. To the extent that China retaliates, the response is likely to be asymmetrical to avoid deterring third countries from additional investment in the country. In other words, China cannot currently afford the risks that come with a major retaliation.
The U.S. government has learned hard lessons in the wake of the October 7 export controls, including that allies and companies alike feel inadequately briefed on the underlying national security justifications for the controls. The establishment of this instrument creates an opportunity for the administration to articulate even more clearly to skeptics that these investments do pose a national security risk, thus meriting a new review regime.
The United States will also have to contend with unintended consequences of the new policy, which can be difficult—if not impossible—to predict. Even if restrictions do not enter into force until several months from now, the tool serves as an agenda-setting and signaling device that could chill standard business investments in China and potentially reduce foreign appetite for investment into the United States over the long run. On the other hand, if the administration succeeds in keeping this instrument lean and can demonstrate its concrete utility in bolstering national security, then allied economies and the U.S. private sector should see value in this agenda.
Emily Benson is the director of the Project on Trade and Technology and senior fellow of Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Gregory C. Allen is the director of the Wadhwani Center for AI and Advanced Technologies at CSIS.
The authors would like to thank Catharine Mouradian for her valuable insights and research support for this piece.
