The United States has been constructing a new dimension of its economic security policy: outbound investment rules. Since January last year, Washington has not only established its first outbound investment screening programme but codified it into law and explicitly provided for its expansion.
These rules are gaining teeth, giving rise to a compliance architecture that conditions US foreign direct investment on national security priorities. As firms begin to operationalise these rules, capital is likely to pull further away from China’s technology ecosystem. The most significant consequences, however, will not be borne by China alone: they will fall on Asian economies whose technology supply chains are deeply integrated with China across critical sectors.
Under the US Department of Treasury’s programme, outbound investment rules apply when an American person or company makes an investment that gives them a meaningful stake in certain sensitive technology activities that “enable the military, surveillance or cyber-enabled capabilities of a country of concern” – namely, China.
Technologies under scrutiny include semiconductors, quantum systems and artificial intelligence (AI). As competition with China has intensified, US policymakers are increasingly concerned that American capital and expertise may be helping the development of sensitive technologies abroad.
The programme imposes compliance costs on prohibited transactions. The Treasury estimates that on an annual average, about 60 US investors per year across 106 transactions are directly affected, with compliance costs of around US$4-9 million. It acknowledges these burdens but maintains the national security benefits will outweigh compliance costs. On that point, it is right.
But while the Treasury’s estimate captures the compliance costs associated with transactions that fall clearly within the scope of the rule, it does not capture the broader economic effects of the compliance regime. Those are harder to measure but more consequential, arising from the uncertainty and burden involved in determining whether a transaction is notifiable, prohibited or permissible at all.
