On August 09, 2023, the Biden administration issued an executive order restricting certain US companies from investing in China. This revenue rule will forbid private and venture capital firms from investing in Chinese high-tech sectors that generate more than half of their revenue from technologies. These include quantum information technologies, artificial intelligence, computer chips, and micro-electronics. The Biden administration is making this move to curb Chinese access to sensitive technologies considering the growing competition between the two countries.

The Executive order aims to prevent American capital and expertise from helping the development of technologies that could support China’s military modernization.

This measure is likely to set the stage for further restrictions on investments in the future. The revenue rule might also impact the recent diplomatic engagement between the US and China. The Biden administration, while citing the national security threats, issued the executive order that states that “countries of concern” are engaged in long-term strategies to advance sensitive technologies and products critical to their military, intelligence, surveillance, and cyber capabilities. These countries aim to eliminate barriers between civilian and military sectors by acquiring cutting-edge technologies that pose a significant threat to the national security of the US. The order declares a national emergency prescribes regulations requiring notifications and prohibits transactions involving these technologies.

For months, the Biden administration has been preparing these restrictions on the investments that American companies are making in China, especially in technology-related areas. Many lawmakers were of the view that the present system allows American capital to flow into China and fund technologies that could ultimately pose a threat to the national security of the United States. Additionally, Emily Benson, the director of the project on trade and technology at the Center for Strategic and International Studies, a Washington think tank said, “There is mounting evidence that US capital is being used to advance Chinese military capabilities and that the US lacks a sufficient means of combating this activity.” Senior officials in the administration asserted that these efforts were driven by national security goals, not economic interests, and that the categories they covered investment restrictions were narrow in scope.

The order aims to limit China’s ability to use American investments in its technology companies to modernize its military while maintaining a broader level of trade that is vital for the economies of both countries. However, it is pertinent to note that these restrictions might be narrow in scope and other financial flows are untouched, but they have a strategic value.

This decision would be one of the first significant steps the US has taken amid a trade war with China to limit outgoing financial flows. This could pave the way for the imposition of additional restrictions on investments between the two countries in the coming years. In this context, the Biden administration has talked to allies in recent months to urge other governments to enact similar restrictions on China. With this development, Washington’s move to limit financial flows can be seen as a signal of its willingness to decouple certain economic aspects from China to protect its own interests. Many scholars believe that the decoupling will be a slow and steady decline in their economic interdependence. Considering this it can be argued that this revenue rule will likely set the stage for further investment restrictions in the future.

While the primary objective of this decision is to limit Beijing’s ability to leverage American investments for military modernization, it also has broader implications for the already delicate US-China relationship. Washington has recently increased its efforts to ease US-China tensions through diplomatic visits to Beijing. However, this revenue rule could undermine these efforts. The visit of US Treasury Secretary Janet L. Yellen to China in July was focused on investment restrictions that the Biden administration imposed on August 9. This action is likely to upset China and it would be the first test for the recent diplomatic engagement that aims to maintain open lines of communication channels. In response to the investment restrictions, the Foreign Ministry of China stated, “China strongly deplores and firmly opposes the US’s single-minded rollout of restrictions on investments in China. We have made serious demarche to the US”. China is already resistant to engaging with the US considering the divergence on several issues. With this development, the outcome of diplomatic engagement is becoming more and more uncertain. Many scholars already believed that Washington’s diplomatic outreach was unlikely to result since the US was unwilling to give in to Beijing’s demands to eliminate tariffs, technological restrictions, and bans on products made with forced labor.