President Joseph R. Biden, Jr. has issued an executive order that will restrict outbound investment in national security technologies and products. The order directs the Treasury Department to prohibit U.S. persons from “engaging in . . . transactions involving” foreign persons from “countries of concern” that relate to “sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern.”Footnote ¹ While the order is written generically, its annex names only one “country of concern”:Footnote ² the People's Republic of China.Footnote ³ The order's prohibition on outbound transactions involving sensitive technologies and products, and its notification requirement for other such transactions, supplement three initiatives previously taken by the United States to counter China's acquisition of U.S. high-tech: the tightening of the Committee on Foreign Investment in the United States's (CFIUS) review of inbound foreign investment; the placement of restrictions on the export of semiconductors and semiconductor manufacturing equipment; and the increased focus of U.S. law enforcement and counterintelligence authorities on Chinese economic espionage.Footnote ⁴ Together, these four mechanisms establish a comprehensive system for implementing the administration's policy of constraining China's development of advanced technologies that enhance and strengthen national security capabilities.Footnote ⁵

The executive order controls outbound investment, a topic long debated within the executive branch and in Congress, and the subject of much lobbying by business interests.Footnote ⁶ The order's scope is unprecedented yet narrower than some had advocated. It targets investments that raise national security concerns but not those pertaining to human rights or supply chain resilience; it omits the biotechnology and energy sectors from its national security focus; and it concentrates (at least for now) only on China and not other countries, such as Iran and Russia.Footnote ⁷ Wishing to emphasize the U.S. commitment to open investment that might be called into question by the order, administration officials stressed that it was “a national security action, not an economic one,” and “narrowly targeted.”Footnote ⁸ “[W]e are for de-risking and diversifying, not decoupling,” said National Security Adviser Jake Sullivan in April, referring to measures taken and planned to restrict trade and investment between the United States and China.Footnote ⁹ The order's precise coverage is still to be determined, however, as it provides only a general framework, directing and empowering the Treasury Department to establish the requirements of an outbound investment program and elaborate its details through forthcoming regulations. Congress too may yet enact legislation that provides a statutory basis for, and expands the purview of, the program outlined in the president's order.

The executive order is legally and factually premised on the president's determination that an emergency exists under the International Emergency Economic Powers Act (IEEPA).Footnote ¹⁰ The order posits that “advancement by countries of concern in sensitive technologies and products critical for the[ir] military, intelligence, surveillance, or cyber-enabled capabilities [such as semiconductors and microelectronics, quantum information technologies, and artificial intelligence] . . . constitutes an unusual and extraordinary threat to the national security of the United States.”Footnote ¹¹ This is because such advancement “accelerate[s] the development of advanced computational capabilities that will enable . . . more sophisticated weapons systems, breaking of cryptographic codes, and other applications that could provide these countries with military advantages.”Footnote ¹² The order explains that, as part of a “strategy of advancing the[ir] development of these sensitive technologies and products, countries of concern are exploiting or have the ability to exploit certain United States outbound investments.”Footnote ¹³ These foreign investments provide capital to countries of concern. They also provide those countries with “certain intangible benefits . . . that help companies succeed, such as enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing.”Footnote ¹⁴ Consequently, the order concludes, “certain United States investments risk exacerbating th[e] [national security] threat” posed by countries of concern.Footnote ¹⁵

To counter this threat, the order directs the secretary of the treasury, in consultation with the secretary of commerce (and other department and agency heads, as necessary) to issue regulations requiring United States persons to report of information about “transactions involving covered foreign persons (notifiable transactions)” and prohibiting “other transactions involving covered foreign persons (prohibited transactions).”Footnote ¹⁶ These regulations will “identify categories of . . . transactions that involve covered national security technologies and products” that, in the case of notifiable transactions, “may contribute to the threat to the national security” and, in the case of prohibited transactions, “pose a particularly acute national security threat.”Footnote ¹⁷ The treasury secretary may also: “investigate and make requests for information” from parties to the covered transactions or other relevant persons, including by civil administrative subpoena; “nullify, void, or otherwise compel the divestment of any prohibited transaction”; and “refer potential criminal violations” to the attorney general.Footnote ¹⁸

In accordance with the order, the Treasury Department published an advance notice of proposed rulemaking (ANPR) that outlined the Department's expectations for the outbound investment program's coverage.Footnote ¹⁹ Though it has been characterized as a “reverse CFIUS,” the notice anticipates that, unlike CFIUS, “the program will [not] entail a case-by-case review of U.S. outbound investments.”Footnote ²⁰ Instead, the parties to a transaction will “have the obligation to determine whether a given transaction is prohibited, subject to notification, or permissible without notification.”Footnote ²¹ Covered transactions “would include certain acquisitions of equity interests (e.g., mergers and acquisitions, private equity, and venture capital), greenfield, joint ventures, and certain debt financing transactions” but not include “certain investments into publicly-traded securities or into exchange-traded funds” (passive investments).Footnote ²² The ANPR also provides details about specific technologies and products likely to fall within the three covered categories.Footnote ²³ Pursuant to the executive order, final regulations will be issued following notice and comment.

Reaction in Congress to the executive order was tepid due to its relatively narrow focus. Some wanted the program to cover additional sectors, such as biotechnology and energy. Representative Michael McCaul, chair of the House Committee on Foreign Affairs, stated that “[t]he administration scaling back—at a time where aggressive action is needed more than ever—continues the trend of appeasing industry at the cost of national security.”Footnote ²⁴ “We need to stop the flow of American dollars and know-how supporting the [Chinese Communist Party's] military and surveillance technology,” he continued, “rather than solely pursuing half measures that are taking too long to develop and go into effect.”Footnote ²⁵ Senator Bob Casey, who with Senator John Cornyn has proposed multiple bills on the topic over the past few years, “applauded” the order, but said: “[n]ow we need to pass strong bipartisan legislation to protect our national and economic security for decades to come.”Footnote ²⁶ Congress has been considering legislation restricting outbound investment since 2017 and 2018 when it debated the Foreign Investment Risk Review Modernization Act (FIRRMA).Footnote ²⁷ Inclusion of an outbound review mechanism in that law and in the CHIPS Act was proposed but rejected. The 2023 Consolidated Appropriations Act “encouraged [the Commerce and Treasury Departments] to consider establishing a program to address the national security threats emanating from outbound investments from the United States in certain sectors that are critical for U.S. national security” and required the submission of “a report describing such a program including the resources required over the next three years to establish and implement it.”Footnote ²⁸ Two weeks before the executive order, Senators Casey and Cornyn's Outbound Investment Transparency Act (OITA) was attached, by a bipartisan vote of 91 to 6, to the Senate's version of the National Defense Authorization Act (NDAA) for fiscal year 2024.Footnote ²⁹ Narrower than the senators’ prior proposals, the OITA would still broaden the scope of the outbound program beyond what the executive order provides to include passive investments, additional technology sectors, and transactions with Iran, North Korea, and Russia.Footnote ³⁰ The OITA, though, would not establish prohibitions; it would only require notifications. The Senate's version of the NDAA must be reconciled with the House's bill, which does not include an equivalent outbound investment mechanism.

Wishing to prevent the then-anticipated executive order from interfering with warming U.S.-China relations, Treasury Secretary Janet Yellen had sought to assuage China during her visit there in July,Footnote ³¹ but the Chinese government immediately decried the president's order when it was issued. “This is deglobalization and a move to phase China out,” the Foreign Ministry stated.Footnote ³² The United States, it continued, should “stop politicizing, instrumentalizing and weaponizing tech and trade issues, immediately cancel the wrong decisions, remove the restrictions on investments in China.”Footnote ³³ It is unclear whether China, which itself imposes restrictions on outbound investment (as do other countries, such as South Korea and Taiwan) and is trying to attract foreign investment to counter recent declines,Footnote ³⁴ will retaliate against the United States. China's ambassador to the United States indicated it would in a July statement.Footnote ³⁵ Even before the executive order was announced, some U.S. investment firms announced that they were pausing or cutting back on certain transactions or splitting off their Chinese operations.Footnote ³⁶ Others are preparing for tougher oversight, both from the executive branch and Congress.Footnote ³⁷ Although the order is narrow, it—and politics broadly, which portend more expansive regulation through statutes and administrative actions—will have a chilling effect on U.S. investment in China.

As with the controls issued in 2022 on exporting sophisticated chips and chip manufacturing equipment to China, the goals of the outbound investment program will only be realized if they are a part of a coordinated multinational initiative. This is especially true since U.S. investment in China is relatively small (five percent of all foreign investment there in 2021 and 2022) and has been contracting, currently at twenty-year low.Footnote ³⁸ For this reason, the administration consulted with allies and partners as it drafted the order and the ANPR.Footnote ³⁹ For this reason too, it has encouraged other governments to impose similar restrictions. In its statement in May, the Group of Seven's leaders, at the United States’ urging, noted that capital controls “could be important to complement existing tools of targeted controls on exports and inbound investments.”Footnote ⁴⁰ The same language appeared in the Joint Statement of the EU-U.S. Trade and Technology Council shortly thereafter.Footnote ⁴¹ In June, the European Commission announced that it is “examin[ing] possible measures to address security risks related to outbound investments, with a view to proposing an initiative by the end of” 2023.Footnote ⁴² Germany, the United Kingdom, and other countries are considering actions as well.Footnote ⁴³