U.S. policies are tightening for innovation investment and China

The economies, the wellbeing, and the stories of the U.S. and China have become so intertwined and so interdependent that individuals not following global political-military-ideological studies might be excused for getting lost in the narrative, let alone following such a complex plot. There won’t be a simplifying explanation offered here, but there are a few new twists in the storyline SSTI wanted to share that may relate to the innovation investment, product development, and exit strategies for some parties within the TBED community. 

For instance, the CHIPS and Science Act tightens research security by requiring U.S. institutions to report gifts of $50,000 or more from a foreign government, whereas the previous reporting limit was $250,000. Tighter scrutiny and reporting may discourage even innocuous international research partnerships from continuing or being developed in the future.

Additionally, on August 9, Biden issued an executive order that limits investments in companies in China, specifically restricted are investments in technologies affecting military, intelligence, surveillance, and cyber security. The executive order allows investment in companies that do research and development in non-military areas, but some ambiguity will remain on which technologies are included.

And most recently, the renewal of the U.S.-China Science and Technology Agreement (STA) got a tepid reception from the Biden administration. On August 24, Biden renewed the agreement for only six months, when it was up for a five-year renewal. The U.S. is expected to negotiate changes to the agreement before it is signed early next year.

The debate about restrictions

The restrictions laid out in the executive order, which will take effect next year, protect against U.S. investors invertedly helping the Chinese military to develop technologies to harm the U.S. military. Public comment just closed on a related advance notice of proposed rulemaking (ANPRM) published in the Federal Register. The ANPRM mentions that when U.S. companies invest in Chinese companies, they aren't just supplying capital. They also provide "enhanced standing and prominence, managerial assistance, access to investment and talent networks, market access, and enhanced access to additional financing." If a company has a close relationship with the Chinese military, as many do, this type of assistance amounts to giving direct assistance to the Chinese military.

The opinions on how much the U.S. should restrict investments in Chinese companies vary among federal agencies. As reported in the Washington Post, the Treasury Department advocated a narrow approach to the restrictions. In contrast, the Pentagon advocated for a broader mandate that would have restricted investments in electric vehicles and biotechnology companies.

Some members of Congress argue that the administration needs to take a stronger stance against technology transfer between the U.S. and China. In a letter sent to Secretary of State Anthony Blinken in June that argued against renewing STA, some U.S. House of Representatives Committee on China members said that "research partnerships organized under STA could have developed technologies that would later be used against the United States." The letter mentioned the 2023 Chinese balloon incident and collaboration on “sensitive agricultural technologies … such as developing techniques for analyzing satellite and drone imagery for irrigation management” as examples of technology transfer that harmed the U.S.

In contrast, as reported in this Wall Street Journal article, many scientists warn that heavily restricting research collaborations with Chinese scientists by significantly limiting or eliminating the STA would cripple U.S. scientific advances, particularly in biotechnology, clean energy, and telecommunications. The article describes some positives of U.S.-China collaboration that would no longer be possible with heavy-handed restrictions. For example, a clean-energy partnership “generated more than 300 peer-reviewed publications, 26 patent applications, and 15 product launches, and boosted U.S.-China climate cooperation that helped lay the groundwork for the Paris Agreement.” This program ended in 2020, and similar programs would not have been possible if research collaborations had been more significantly restricted in the current STA.

Implications for global economy

Restrictions on U.S.-Chinese collaborations could harm the Chinese economy. Secretary of the Treasury Janet Yellen said during a Press Conference in Beijing on July 8 that “we know that a decoupling of the world’s two largest economies would be disastrous for both countries and destabilizing for the world.” (A Washington Post article noted that Chinese officials were "openly skeptical" of the U.S., saying "de-risking" for national security is a "diplomatic euphemism.")

Numerous Western sources state there are signs that the Chinese economy may flounder, with or without U.S. investment restrictions. China's population is in decline, which may significantly impact whether China's GDP will overtake that of the U.S. Projections from the United Nations indicate that the size of the Chinese population will continue to fall and could drop below 1 billion before the end of the century.

In an opinion piece in the Financial Times, Ruchir Sharma, chair of Rockefeller International, points to population decline as evidence that China's GDP is more likely to grow 2.5% yearly instead of 5%, Chinese President Xi Jinping's goal. “At this rate (2.5%),” says Sharma, "China would not overtake America as the world's largest economy until 2060, if ever." Furthermore, Sharma says that if China maintains a 2.5% growth rate, it would be the first sizeable middle-income country to do so while also experiencing a "precipitous" working-age population decline.

Sharma also mentions the extent of China’s debt in proportion to its GDP as a factor contributing to a lower GDP. The percentage of debt compared to GDP now stands at 275%, whereas before the 2008 economic crisis, it was 150%. A third factor in the precarious state of the Chinese economy, Sharma says, is the collapse of capital efficiency. "China now has to invest $8 to generate $1 of GDP growth, twice the level a decade ago, and the worst of any major economy."

Whatever the final restrictions, the U.S. administration believes innovation will likely remain a vital part of the U.S. and Chinese economies. Yellen remarked at the Beijing press conference, “We believe it is possible to achieve an economic relationship that is mutually beneficial in the long term—one that supports growth and innovation on both sides.”