Last week the White House published a new Executive Order (EO) that restricts investments in critical technologies and products tied to China.
Here are the seven takeaways you need to know:
1. Emerging technologies are treated as sensitive to U.S. military and intelligence.
The EO identifies semiconductors and microelectronics, quantum information technologies and AI capabilities as sensitive technologies, specifically required for military, intelligence, surveillance or cyber-enabled dominance. This isn’t a revolutionary concept – and this reality is explicitly recognized in defense and security circles – but it should signal alarm bells in companies in the tech, advanced manufacturing, aerospace and auto sectors. The tracking and management of your IP across your supply chain and downstream value chain is going to quickly come into focus, and be prepared for increased enforcement in export controls and ITAR violations in the near future.
2. Technology developed in China is presumed captive to the CCP’s military aspirations.
China, Hong Kong and Macau are labeled as “countries of concern.” The EO states, “these countries eliminate barriers between civilian and commercial sectors and military and defense industrial sectors.” This gets at the heart of the acute risk the EO aims to address and treats any technology developed in China as potentially captive and susceptible to the military aspirations of the Chinese Communist Party.
3. VC and PE investments may be used as a backdoor to gain strategic advantage.
The EO restricts investment but also recognizes that there are other avenues that can be used to gain influence and insight in the U.S. market for these technologies and products. The White House underscores the strategic advantages that come with investments from VC and PE firms. The EO says, “countries of concern are exploiting or have the ability to exploit certain United States outbound investments, including certain intangible benefits that often accompany United States investments and that help companies succeed, such as enhanced standing and prominence, managerial assistance, investment and talent networks, market access and enhanced access to additional financing.”
4. The U.S. remains committed to open global capital flows.
The specificity and targeted nature of the EO reiterates the U.S.’s commitment to open, global capital flows as important drivers of “competitiveness, innovation and productivity” and reinforces support for cross-border investment, so long as it does not conflict with national security interests.
5. Target transactions and investments will be subject to Treasury enforcement.
Covered transactions and outbound investments into these technology sectors in China will be subject to notification and prohibitions monitored and enforced by Treasury (similar to CFIUS but in reverse). You can also expect to see non-notify enforcement activity where Treasury is investigating unreported transactions.
6. There is likely to be overlapping regulatory oversight from the Department of Commerce.
Treasury is taking the lead in developing these rules and processes, but Commerce is explicitly consulted in the EO, showing the overlap between this effort and the October 7, 2022, export controls implemented by Commerce. The additional administrative measures also signal increased scrutiny of AI, supercomputer, microelectronics and quantum computing technologies, and the supply chains and critical materials that they leverage, in both imports and exports with China. Ensuring that there are guard rails to protect cutting-edge IP and the assets that support innovation are how these two actions complement each other.
7. One-year assessment opens the door for continued action in the market.
There is time, but Treasury is on the hook for “an assessment” within one year “of the effectiveness of the measures imposed under this order in addressing threats to the national security of the United States described in this order; advancements by the countries of concern in covered national security technologies and products critical for such countries’ military, intelligence, surveillance, or cyber-enabled capabilities; aggregate sector trends evident in notifiable transactions and related capital flows in covered national security technologies and products.” So, there will be sustained movement in the market.
The legislation, regulation and policy in this area will evolve quickly. Exiger will be watching this space closely and updating our risk models accordingly.