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President Joe Biden’s June 3 executive order (EO) is in my view another important milestone in the long-term deterioration of US-China bilateral relations. The order, which takes effect August 2, aims to limit US investors’ ability to fund Chinese companies seen as supporting China’s military-industrial complex. It builds on the Trump administration’s executive actions but is broader in approach, clearer in detail, and more market friendly.
Under the terms of the EO, the list of targeted Chinese companies increases from 44 to 59. As expected, the focus is on emerging or frontier technologies critical to military power, such as avionics, advanced communications, nuclear, and space. However, while this EO largely represents a continuation of Trump’s policy, it has a new focus on Chinese surveillance and human rights issues, which is consistent with the Biden administration’s general approach to foreign policy.
By adding further guidance and details, the new EO is a bit more market friendly than measures put forward by the Trump administration. It also shifts the authority for designating which companies appear on the list from the Pentagon to the Treasury, which I expect will be more cautious and more sensitive to market implications than the Department of Defense. In addition, divestment from firms on the list is no longer mandatory, and there is no mention of delisting of Chinese firms from US exchanges.
This latest EO represents the “whole of government” approach the US is now taking in its managed-competition strategy with China as the role of capital markets more broadly, and the national security implications of these kinds of investments in particular, will likely face greater regulatory scrutiny in the future.
This tougher approach toward Beijing has strong bipartisan support in Washington, and I expect this to continue at least into the midterms, as neither party in Congress will want to be seen as weak on China.
Actions like President Biden’s latest EO are consistent with my expectation that US-China decoupling will accelerate in industries that are deemed strategic to US national security and to its allies. I see this as a long-term trend driven by great-power competition, and one likely to deepen as the Biden administration’s China strategy continues to place national security at the forefront of policy priorities.