The more certain short-term impact is that US investors still interested in Chinese AI startups will need to do a lot more due diligence. The Treasury Department is not creating a new government committee like CFIUS to review every transaction submitted by investors, and instead is asking them to write their own work and report whether they think a Chinese AI company will be covered.
Under the new rules, even if the AI model of a Chinese startup is less than 1025-flops size threshold, a US investor can still be responsible for notifying the Treasury about his transaction and the homework he has done, as long as his pattern is at least 1023 failures (covering essentially all large-scale models under development today and in the future). In practice, this means that the US government is creating its own system to monitor the overall flow of money going from US investors to Chinese companies working on AI.
“To confirm that a transaction is outside scope would require significant due diligence by US investors,” said Robert A. Friedman, an international trade attorney at the law firm Holland & Knight. While the rules have been praised by local AI companies and their supporters, they will become a stumbling block for venture capitalists with international portfolios, he says.
An uncertain future
Outbound investment restrictions are due to come into effect on January 2, and in the meantime the Treasury has signaled that some minor changes are still on the way to further clarify the rules. Officials also said they were making efforts to coordinate with U.S. allies such as the G7 countries to introduce similar measures that would prevent Chinese AI companies from turning to venture capitalists in Europe, Canada or Japan for the types of investments , banned in the US.
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 have backed Trump are opposed to the kinds of regulations the Treasury Department has put in place, so they could potentially try to lobby the president to roll them back. Several major US companies, such as Tesla and Blackstone – both led by outspoken Trump-supporting billionaires – have significant investments in China and could see their businesses negatively affected by tighter restrictions.
The Biden administration’s technical policy toward China has been defined, at least in principle, by the idea of a “small yard, high fence,” or in other words, defining relatively narrow zones where the US government can impose very tight restrictions. The latest version of the outbound investment rules is an example of what this idea looks like in action. But under Trump, Chinese companies may see just how big the shipyard can really get.
