US finalizes curbs on investment in AI and critical technology in China

The US government has announced new rules restricting investments in China’s AI and other tech sectors deemed threats to national security, expanding the existing restrictions that were so far limited to exports.

First introduced by the US Treasury in June, the rules are based on an executive order signed by President Joe Biden in August 2023.

They focus on three critical areas: semiconductors and microelectronics, quantum information technologies, and certain AI systems.

“This narrow set of technologies is core to the next generation of military, cybersecurity, surveillance, and intelligence applications,” the Treasury said in a statement.

The US already restricts or bans the export of many technologies covered by the new rules to certain countries. The new program complements existing export controls and inbound screening measures by blocking US investments from aiding the development of sensitive technologies in countries of concern, the Treasury added.

Fueling the trade war

This marks the latest development in the ongoing trade war between the US and China, which has already witnessed numerous restrictions.

Analysts are skeptical of the policy’s impact, cautioning that it may further intensify tensions and stifle innovation and growth.

“The scope of restrictions is now expanding beyond the sale of technology IP or chips to include investments in the Chinese tech sector,” said Neil Shah, VP of research and partner at Counterpoint Research. “This move aims to stifle Chinese tech companies on both fronts — limiting financial and technology inflows. Unfortunately, this will make it difficult for Chinese companies to innovate quickly and will further intensify the geopolitical tech cold war.”

This also means that if China retaliates — while protecting its own manufacturing ecosystem — it could affect large and small tech companies that still rely on China as a key market.

In a related move earlier this month, a Chinese industry body called for a security review of Intel’s products, signaling heightened scrutiny of US tech firms operating in the country.

Reports indicate, however, that trade restrictions have had a limited effect on slowing Chinese chip manufacturing as China continues to stockpile chipmaking equipment. There are also loopholes in the restrictions that Chinese companies are able to take advantage of.  

Impact on enterprises

Restrictions could stifle collaboration and knowledge exchange between nations, potentially slowing innovation by reducing opportunities to work on advanced projects.

“Companies might also need to reassess their strategic priorities, which may lead to an unnecessary increase in innovation costs,” said Charlie Dai, VP and principal analyst at Forrester. “On the other hand, regulatory concerns will force enterprises outside the US to further prioritize localization strategies to achieve self-sufficiency in critical areas, potentially leading to increasingly isolated innovation ecosystems.”

The new rules may also require US enterprises to closely monitor both domestic and international regulatory shifts and establish agile compliance programs to adapt swiftly to evolving requirements.

“These constraints can also diminish R&D investments and have profound long-term economic effects, stifling advancement in pivotal sectors like semiconductors, quantum computing, and AI, ultimately hampering overall technological progress,” said Thomas George, president of Cybermedia Research.

Opportunity for emerging markets

For other emerging markets, however, the tightened US restrictions could present new opportunities by attracting redirected foreign investments from US firms.

“As trade tensions rise and new regulations emerge, US companies increasingly move away from Chinese manufacturing,” said George. “Instead, they want to collaborate with countries such as India, Mexico, and Vietnam. This shift is crucial as it enhances companies’ resilience and allows them to navigate new US export controls more effectively.”

Companies should reduce dependency on any single country by diversifying supply chains to mitigate risks associated with regulatory changes in specific regions, according to Dai.

“Engaging with research and advisory firms can help them better understand the potential impact of various regulatory changes, prepare contingency plans, and develop strategies to assess and mitigate risks,” Dai said.