Addressing the Threat From Securities Investments That Finance Certain Companies of the People's Republic of China

Overview

Executive Order 14032, issued by President Joseph R. Biden Jr. on June 3, 2021, responds to the perceived threat posed by securities investments in certain Chinese companies linked to defense and surveillance sectors. The order reinforces the U.S. government's stance against Chinese companies allegedly aiding military and intelligence operations through the PRC's Military-Civil Fusion strategy. It supersedes a previous order by the Trump administration and expands the scope of the national emergency to include companies involved in the surveillance technology sector, raising significant concerns about human rights abuses facilitated by such technologies.

The EO establishes a structured framework whereby U.S. individuals and entities are prohibited from purchasing or selling publicly traded securities of designated Chinese companies. These designations are made by the Secretary of the Treasury, in consultation with the Secretary of State, and potentially the Secretary of Defense. Specific deadlines are set for divesting from securities of companies listed in its annex, aiming to disrupt financial flows that could empower China's military-industrial complex and surveillance apparatus.

This directive underscores President Biden's commitment to addressing national emergencies related to overseas threats, particularly those posed by strategic competitors like China. It signifies an attempt to tighten regulatory measures around investments that could inadvertently bolster adversarial powers' military capabilities. By harmonizing foreign policy objectives with economic sanctions, Biden underscores the dual importance of national security and ethical considerations in diplomacy.

Legal and Policy Implications

Legally, Executive Order 14032 invokes authorities under the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act (NEA), which provide the executive branch with substantial latitude to regulate economic transactions. The order reinforces the executive's ability to impose restrictions on financial dealings with foreign entities deemed a threat unilaterally, bypassing the legislative process but operating strictly within existing statutes' scope.

This order suggests a shift towards a more comprehensive national security strategy that integrates economic tools to counteract external threats. It reflects an increased focus on the geopolitical implications of technology, particularly surveillance technologies associated with human rights violations, such as repression of ethnic minorities in China. This signals heightened vigilance within U.S. policy circles about the intersection of technology and civil liberties.

Moreover, EO 14032 necessitates close inter-agency collaboration, notably between the Department of the Treasury and the State and Defense Departments, to maintain an updated list of entities subject to sanctions. This coordination underscores the administration's commitment to an integrated approach in foreign policy, utilizing financial leverage as a component of broader diplomatic and defense strategies.

Who Benefits

The primary beneficiaries of EO 14032 are U.S. national security interests, and by extension, allies concerned about China's military and technological expansion. By restricting investment in certain Chinese companies, the order seeks to stymie potential adversaries' access to capital that could be redirected toward activities counterproductive to international security and stability.

Another beneficiary group includes human rights organizations and advocates. The explicit mention of surveillance technologies linked to repression aligns with efforts by rights groups to highlight and combat the proliferation of surveillance-driven abuses. By elevating this issue to a matter of national security, the executive order grants institutional backing to global human rights initiatives.

Additionally, U.S. and allied market companies not tied to these restrictions might indirectly benefit from reallocated investments. As portfolios divest from listed Chinese entities, capital redirection could bolster domestic firms, particularly those involved in defense, cybersecurity, and alternative surveillance systems that are less associated with human rights concerns.

The implementation of EO 14032 may also benefit intelligence and security analysts within governmental agencies. The focus on Military-Civil Fusion and surveillance technologies could streamline resources toward monitoring and mitigating sophisticated threats. This prioritization enhances the effectiveness and efficiency of intelligence operations targeting foreign technological developments.

Who Suffers

Chinese companies explicitly listed in the annex of EO 14032, or those subsequently determined to fall within its scope, face significant disadvantages. Being cut off from U.S. investment can reduce their access to capital, hinder their ability to compete internationally, and potentially degrade their operational capacities, especially in sectors intersecting military and commercial technologies.

U.S. investors, including institutional and retail investors with shares in blacklisted companies, may also suffer financial losses or incur divestment costs, particularly if forced to liquidate positions at inopportune times. The order imposes compliance burdens on financial institutions tasked with ensuring adherence to the rules, potentially increasing operational costs.

Furthermore, tech sectors reliant on Chinese components or partnerships might be affected by the EO's secondary consequences. Cross-border cooperation in tech innovation might encounter scrutiny or barriers, complicating supply chains and development projects that involve international collaboration.

Given the focus on surveillance technologies, companies within this sector might find the EO's implications extending beyond Chinese borders, amplifying caution in business operations domestically and abroad. This could lead to preemptive compliance measures altering product offerings or strategic directions to align with human rights and national security expectations.

Historical Context

Executive Order 14032 aligns with a historical trajectory of U.S. administrations utilizing financial and economic sanctions as instruments of foreign policy, rooted in broader strategies to limit militarization by rival states. The initial order that this EO builds upon was issued under President Trump, reflecting a bipartisan consensus toward addressing perceived Chinese militarization and technological threats.

Historically, the focus on China as a strategic competitor reflects long-standing concerns about technology transfer, intellectual property theft, and human rights issues. By continuing the policy direction set by previous administrations, President Biden underscores a continuity of purpose while potentially broadening the scope to encompass more comprehensive human rights considerations.

This order sits within a broader trend of executive actions underscoring technological dimensions of national security, highlighting the increasing recognition of technological warfare as a defining feature of modern geopolitical contests. It reflects an administration systematically integrating economic policy into security planning.

Biden's approach aligns with multilateral efforts to counteract China's global influence, signaling to allies that the U.S. remains committed to safeguarding democratic values, digital privacy, and ethical technology applications. This order contextualizes American leadership as operating within a coalition of like-minded nations confronting technological authoritarianism.

Potential Controversies or Challenges

The broad scope of EO 14032 may spark legal challenges, particularly from entities questioning the criteria for inclusion on the blacklist or asserting that the order exceeds executive authority. The vagueness associated with terms such as "operated in the defense and related materiel sector" could lead to disputes over legitimacy and proof of non-compliance.

Congressional pushback might emerge, especially from legislators advocating for engagement over isolation with China, out of concern for escalating tension and potential retaliatory actions impacting American businesses operating in China. Bipartisan debate over the best approach to U.S.-China relations could complicate broader legislative initiatives.

Enforcement concerns are likely, as ensuring compliance across diverse entities presents vast logistical challenges. Financial institutions must continually update compliance measures and monitoring systems to adhere to evolving designations, risking errors or oversights that could result in penalties.

Furthermore, the pressure on multinational corporations to align with EO 14032 regulations could impact global supply chains, leading to cautionary stances or altered innovation paths to remain compliant. This can create tension between maintaining market positions and navigating regulatory landscapes.

The EO may also face scrutiny regarding its actual impact on Chinese military capabilities versus its symbolic gestures. Skeptics might argue that while the order sends a strong message, its efficacy in concretely restraining Chinese arms advancement remains speculative. This dilemma highlights recurring challenges in sanction-based diplomacy.