The US is developing regulations to restrict investment in China’s artificial intelligence and technology sectors

WASHINGTON/NEW YORK:

The United States on Friday published draft rules to prohibit or require notification of certain investments in artificial intelligence and other technology sectors in China that could threaten U.S. national security.

The U.S. Treasury released proposed rules and a number of exceptions after an initial comment period following an executive order signed by President Joe Biden last August. The regulations require U.S. individuals and companies to determine which transactions will be restricted or prohibited.

Biden’s executive order, which imposed regulations on certain U.S. investments in semiconductors and microelectronics, quantum computing and artificial intelligence, is part of a broader effort to prevent U.S. know-how from helping the Chinese develop advanced technologies and dominate global markets.

As expected, the United States is on track to implement the regulations by the end of the year. Public comments on the proposed rules will be accepted until August 4.

“This proposed rule enhances our national security by preventing many of the benefits that some U.S. investments provide—beyond capital itself—from supporting the development of sensitive technologies in countries that could use them to threaten our national security,” said Paul, Assistant Secretary of the Treasury for Investment Security Rosen.

Treasury said the new rules are intended to implement a “narrow and focused national security program” focusing on specific outbound investments in countries of concern.

Treasury outlined the proposed regulations in August. The Treasury Department provided additional exceptions on Friday, for example for transactions deemed to be in the US national interest.

The proposed regulations would prohibit AI-related transactions for certain end uses and would cover systems trained to use a certain amount of computing power, but would also require notification of transactions related to the development of AI systems or semiconductors that are not otherwise prohibited.

Focus on China, Macau and Hong Kong

Other exceptions would apply to publicly traded securities such as index funds or mutual funds; certain limited partnership investments; property purchases in a given country; transactions between the US parent company and the majority-controlled subsidiary; binding pre-order obligations; and certain syndicated debt financing.

The Treasury has stated that certain transactions with third countries that are determined to address national security concerns or where the third country has adequately addressed national security concerns could also be exempt.

The order focuses initially on China, Macau and Hong Kong, but U.S. officials say it could be expanded later.

Former Treasury official Laura Black, an attorney at Akin Gump in Washington, said the Treasury Department is trying to define the scope of the rule as narrowly as possible, but it would require increased vigilance on the part of companies looking to invest in China.

“US investors will be required to conduct more extensive due diligence when making investments in China or investments involving Chinese companies operating in covered sectors,” she said.

Black said the Treasury Department’s proposed rules keep U.S.-managed private equity and venture capital funds in its crosshairs, as well as certain U.S. limited partners’ investments in foreign-managed funds and convertible debt.

She added that certain Chinese subsidiaries and parent companies would be covered by the provision, which would also prohibit some investments by U.S. companies in third countries.

In addition to equity investments, joint ventures and greenfield projects, debt resulting from a default can also be assumed when it becomes equity.

The regulations include restrictions on the export of certain technologies to China, for example banning the shipment of certain advanced semiconductors.

The goal is to prevent U.S. funds from helping China develop its own capabilities in these areas to modernize its military.

Violators of these rules may face both criminal and civil liability and investments may be suspended.

The Treasury Department said it had been engaging with U.S. allies and partners on the goals of investment restrictions and noted that the European Commission and the United Kingdom had begun to consider whether and how to address risks associated with outbound investments.