The surest short-term impact is that US investors still interested in Chinese AI startups will have to do a lot more due diligence. The Treasury Department is not creating a new government commission like CFIUS that will review every transaction that investors submit, but instead is asking them to do their own homework and report whether they think a Chinese AI company would be covered.
Under the new rules, even if a Chinese startup's AI model is less than 1025-flop size threshold: A US investor may still have a responsibility to notify the Treasury Department of his transaction and the homework he has done, as long as the model is at least 1023 flops (which essentially include all large-scale models being developed today and in the future). Essentially, this means the US government is creating its own system to monitor the entire flow of money flowing from US investors to Chinese companies working on AI.
“Confirming that a transaction is out of scope will require significant due diligence from U.S. investors,” said Robert A. Friedman, international trade attorney at law firm Holland & Knight. While the rules will be celebrated by domestic AI companies and their backers, they will become a hurdle for venture capitalists with international portfolios, he says.
Uncertain future
The restrictions on outbound investments will come into effect on January 2, and in the meantime the Ministry of Finance has indicated that some further minor changes are on the way to further clarify the rules. Officials also said they are committed to coordinating with U.S. allies such as the G7 countries to introduce similar measures that would prevent Chinese AI companies from turning to venture capital firms in Europe, Canada or Japan for the kind of investments being made in the US is banned.
The biggest uncertainty now, as with most parts of the US federal government, is how a second Trump presidency might change things. Danzman notes that many members of the venture capital community who supported Trump are against the type of regulations introduced by the Treasury Department, and so may try to lobby the president to roll them back. Several major US companies, such as Tesla and Blackstone – both led by outspoken pro-Trump billionaires – have significant investments in China and could see their businesses negatively affected by tighter restrictions.
Other experts at WIRED expected that the new Republican administration, which is expected to include some China hawks like Rubio, will expand the scope of the rules. “It's possible we could see a new executive order. Or, given the unified Republican government, perhaps expansion would come through legislative action,” Kilcrease said. That could mean more measures targeting other types of Chinese startups, in sectors ranging from biotech to batteries.
The Biden administration's technology policy toward China has been defined, at least in principle, by the idea of a “small garden, high fence,” or in other words, the designation of relatively narrow areas where the U.S. government can impose very strict restrictions set. The latest version of the outward investment rules is an example of what that idea looks like in practice. But under Trump, Chinese companies could eventually see how big the yard can actually become.
