The Journal. - Biden's New Move Against Chinese Tech

Episode Date: August 11, 2023

Earlier this week, President Biden issued an executive order banning American firms from investing in some Chinese technology companies, citing national security concerns. WSJ's Andrew Duehren explains how the move fits into the complicated relationship between the two countries. Further Reading: - Biden Restricts U.S. Investment in China  - Sequoia Made a Fortune Investing in the U.S. and China. Then It Had to Pick One.  Further Listening: - The U.S. Wants American-Made Chips. Can Intel Deliver?  - China’s Crackdown on Foreign Consulting Firms  - Are Apple and China Breaking Up?  Learn more about your ad choices. Visit megaphone.fm/adchoices

This summer, the U.S. has sent top-level officials to China. There was Secretary of State Antony Blinken. Secretary of State Antony Blinken's high-stakes diplomatic mission to China. He's the first Secretary of State to visit the country in five years. There was Treasury Secretary Janet Yellen. The visit comes, of course, at a time of strained relations, at best, between the two superpowers. There's this effort right now to try and re-engage between the two countries, to have more meetings, to have more conversations, and to put a floor under the relationship.

That's our colleague Andy Duren. But also at the same time, the U.S. and China are increasingly competitive, increasingly adversarial, increasingly second-guessing the extent to which they should be trading and investing with each other. And this week, the U.S. upped the tension. President Biden signed an executive order preventing American firms from investing in certain Chinese technology companies. The reason? National security. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Friday, August 11th.

Coming up on the show, the U.S.-China relationship. Is it getting warmer or colder? Summer's here, and you can now get almost anything you need delivered with Uber Eats. We'll be right back. can you describe the state of u.s china relations right now um it's very complicated they are the two largest economies and the two kind of superpowers in the world right now and they have a whole host of disagreements over trade issues, over national security and military issues, over the status of the island of Taiwan. And so that's been kind of simmering for a long time. But even with those disagreements, the two countries have tried to work together economically. Because American businesses want access to China's growing consumer base. And Chinese businesses want access to American know-how. How important is U.S. investment to China's economy? In terms of all the different types

of American investment that goes into China, it's quite significant. And so that includes kind of index fund investments, kind of general, more passive portfolio investments that American investors put into Chinese stocks and bonds. And then there's also this type of active venture capital and private equity and joint venture investments in China. And I mean, whether it's American investment or Western investment in general, I mean, China's access to this type of money and expertise

has been a major factor in their ability to develop and become the world's second largest economy in the last few decades. Over the years, lots of U.S. companies have established significant Chinese operations, from automakers to retailers, investment banks to venture capitalists. In the last few years, some of these U.S. venture capital firms were really ramping up their investments in advanced Chinese technology companies and semiconductors in particular, that they were getting increasingly involved in this type of technology in China. One of the big ones is Silicon Valley giant Sequoia Capital. It's known for its early investments in tech standouts like Apple,

Airbnb, and PayPal. Sequoia has certainly been the most prominent and visible example of a U.S. venture capital fund that was doing a lot of business in China. Their company that, for a long time, had a very significant China presence, that they had a kind of wing of their firm that did a lot of, was focused on investing in China, that helped propel a lot of important Chinese companies. Sequoia launched its Chinese operation in 2005. It was overseen by a group of U.S. partners, but it had a lot of autonomy.

And it made some prominent investments, like in TikTok's owner ByteDance and fashion company Shein. But earlier this year, its China business came under major scrutiny. There was this report by a team of researchers at Georgetown that looked at U.S. investment in Chinese AI companies in general. And there were a few very interesting examples, including Sequoia Investment, a Chinese AI company that was working with the Chinese military. There were other examples like this where Chinese companies, you know, American investors had been investing in Chinese AI companies

that seemed like they were kind of general purpose AI, and then they end up being used for or working with the Chinese military or Chinese kind of surveillance apparatuses. This report from a Georgetown think tank, which came out in February, raised alarm bells in Washington. People started to wonder, why are you making all of these investments in these types of Chinese technology companies? Do you understand that this is something that we consider as being kind of counter to American security interests? You know, do you understand the risk that this presents to the U.S.?

And maybe you should consider stopping this. A senior Biden official confronted Sequoia over the investment, according to Wall Street Journal reporting. And Sequoia later told lawmakers that it hadn't anticipated that this Chinese company it helped get off the ground would later work for the Chinese military. This summer, Sequoia separated its Chinese operation from its U.S. business. But the Sequoia situation would have big ramifications. business. But the Sequoia situation would have big ramifications.

And I think lawmakers saw that and they said, this is something that we're worried about and we don't like this. And, you know, this is an instance of kind of American capitalism and American greed running counter to American security values. You know, Sequoia's activities in China was one of the major inputs to inspire the Biden administration to want to do something about this type of investment in general. And then this week, Biden did do something. So President Biden signed an executive order that will prohibit American investment in high tech sectors in China. American investment in high-tech sectors in China. So this ban will apply to investments in Chinese companies that are developing really sophisticated technology that the Biden administration thinks could have dangerous military applications.

Coming up, why the Biden administration is taking this action now. Meeting friends a world away? You can use your travel credit. Squeezing every drop out of the last day? How about a 4 p.m. late checkout? Just need a nice place to settle in? Enjoy your room upgrade. Wherever you go, we'll go together. That's the powerful backing of American Express. Visit amex.ca slash yamex. Benefits vary by card. Terms apply.

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Bacardi. Do what moves you. Live passionately. Drink responsibly. Copyright 2024. Bacardi. It's trade dress and the bat device are trademarks of Bacardi and Company Limited. Rum 40% alcohol by volume. Biden's new executive order comes amid heightened tensions over Taiwan.

Though Taiwan is a self-governed democracy, Chinese leaders have said they want to reclaim control over the island. Biden and other American leaders have said that the U.S. would protect Taiwan if China were to invade. So that is a real and has long been a major flashpoint in the relationship between the U.S. and China. And there's concern that that could be a flashpoint that eventually leads to the U.S. and Chinese militaries potentially directly engaging each other. And so with moves like these investment restrictions the Biden administration rolled out this week, part of what that what underlies all of that is this

idea that, you know, if the U.S. and Chinese militaries are ever confronting each other directly, that we want to make sure that the U.S. isn't in one way or another helping China's military compete with the American military. This national security concern underpins the executive order Biden signed on Wednesday. The order bans U.S. investments in Chinese companies that could have military applications, like quantum computing, advanced semiconductor chips, and potentially some artificial intelligence. What is it about this technology in particular that the Biden administration is worried about? So it's really like a lot of it comes down to the potential that the Chinese, and this is something that, you know, the Americans are hoping to do themselves in some ways, I'm sure. basically supercomputers and super sophisticated AI systems that can help a military really quickly and readily deploy, make tactical decisions and evaluate intelligence. And

in the cases of AI and quantum computing, that these technologies could be used to develop really sophisticated cyber capabilities in terms of hacking the U.S. or breaking U.S. codes. And so there's this concern that this technology could significantly enhance Beijing's battlefield capabilities if deployed in such a way. Could it be used on weapons themselves or is it more kind of like cyber warfare and intelligence systems? I think it's both. I mean, I think it could be systems that maybe potentially decide how and when to shoot missiles or something like that. There's this idea with quantum or AI that you can have cyber systems or hacking methods that are kind of constantly adapting and evading defense. And they can do this computing at such a rapid clip that

they can break all sorts of sensitive U.S. military codes. And I mean, some of this, I think, is still hypothetical or theoretical or in some ways, but the Biden administration has decided that this is a big enough concern of theirs that they have to do something about it. The Chinese embassy in Washington criticized Biden's executive order. In a tweet, a spokesman said the country expresses serious concerns and reserves the right to take necessary measures. It's expected that Chinese officials will take more serious steps to retaliate for this. So there have been some instances over this past year where, as the U.S. takes these types of moves to restrict Chinese access to American technology that the Chinese

have started to move towards taking steps that will restrict American access to Chinese goods and technology. So whether that's critical minerals, rare earths that China is a major source of, or blocking American companies from having access to the Chinese market, there's certainly the possibility that we could continue to see a kind of escalation and kind of a tit for tat in terms of economic measures and countermeasures between the two countries. How is all of this being digested in Washington? So being a China hawk and being perceived as tough on China is very good politics for both Republicans and Democrats. There is a bipartisan desire and a bipartisan pattern of trying to show and say that you are very tough on China, on the Chinese Communist Party, on China's military. And so, yeah, there is this

dynamic in Washington where it's very advantageous to be as, you know, from just a purely domestic political perspective to basically be as tough on China as possible. What kind of relationship is Biden looking to have with China? I mean, I think the president uses a phrase that's like, we want to have competition, but not conflict. But I think it's an open question. I mean, I think everyone in Washington is still figuring out what type of economic relationship the U.S. can and should have with China. I mean, I think there's an overall consensus that it needs to be pared back, that the U.S. has become too intertwined with

China, too reliant on China in some ways. It's sending too much capital and technology to China that's helping China become competitive in ways that we see as risky. And what's your takeaway from this moment? For a long time, a major component of American economic policymaking had been we want to promote as much free and open investment as possible. We want to create as many opportunities for American investors as we can. But now with this executive order, the U.S. is taking the exact opposite approach and is now kind of step by step walking away from those ideas and is increasingly emphasizing national security concerns in how it shapes its economic policymaking, both internationally and domestically. And so this is just a further escalation of this trend. And I also think it represents significant and kind

of fundamental changes in how the U.S. thinks about these issues. And so the fact that basically nobody in Washington or very few people in Washington are saying we shouldn't do anything like this at all is a sign that the debate is now over how do we pare back our relationship with China and not whether we pare back our relationship with China. That's all for today, Friday, August 11th. Additional reporting in this episode from Kato Keefe, Berber Jin, and Aruna Vishwanatha. The Journal is a co-production of Gimlet and The Wall Street Journal. Our engineers are Our theme music is by

Additional music this week from Katherine Anderson, Peter Leonard, Bobby Lord, Emma Munger, Griffin Tanner, Nathan Singapak, So Wiley, and Blue Dot Sessions. Fact-checking by Nicole Pasolka. Thanks for listening. See you Monday.