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President Donald Trump’s “America First Investment Policy” executive order signaled that he will continue the hardline approach he took toward China on national security in his first administration, and which President Joseph R. Biden Jr. intensified during his. The order, signed on February 21, is aimed at making it easier for US allies to invest in America but harder for China and the US to invest in each other.
The order’s measures to attract investment into the US include a promise to expedite environmental review for projects larger than $1 billion and a useful focus on fast-tracking investment from yet unspecified “allied and partner sources.” Meanwhile, proposed investments from a list of “foreign adversaries,” especially China, into the US, as well as from the US into China, will receive greater scrutiny. Interestingly, despite the Trump administration’s recent emphasis on opportunities to partner with Russia, it is also listed as an adversary.
Beijing reportedly had hoped to offer large-scale Chinese investments in the US as part of potential negotiations with the Trump administration over trade and other issues. But the president’s call to restrict investments from China in US technology, critical infrastructure, and energy could complicate one avenue to a deal. The order’s impact on China and its military modernization, however, will likely be minimal.
The directive mostly calls for reviews and rule changes that will require details to be finalized before they take effect, and it is unclear when this could happen, but almost all its goals can be achieved without congressional action. The changes fit into three categories: inbound investment security, outbound investment restrictions, and ensuring Chinese firms with access to US capital markets live up to US standards.
Inbound investment security
First, the president ordered changes in the US government’s security reviews of proposed foreign investments in the US to restrict more investment from China while loosening regulatory burdens on investment from allies “in proportion to their verifiable distance and independence” from China. This could be a good thing. Driven by concerns about China, the number of US security reviews by the Committee on Foreign Investment in the United States (CFIUS)[1] on inbound investment to the US more than doubled from 136 in 2016, when Trump was elected the first time, to 326 in 2023, under the Biden administration. But most of the burden fell on allied countries like the UK, Japan, and Canada that invest far more in the US than China. Only 14 percent of reviews during Trump’s first term were of Chinese investments, as most Chinese investors avoided proposing transactions in sensitive sectors, knowing CFIUS would force them to abandon them. The only options available to most Chinese investors are passive investments like buying stocks or US Treasury bonds on the open market—and CFIUS has no jurisdiction over such deals.
Under Trump’s order, the US will simply ban more Chinese investments rather than examining whether each one could be approved with complicated “mitigation agreements,” such as ongoing monitoring of the firm post-acquisition to ensure only Americans can access certain sensitive data. The order says the resources saved from formulating and implementing mitigation agreements will be directed at “facilitating investments from key partner countries,” but the order will also add to CFIUS’s workload with an expanded set of technologies that will trigger more onerous security reviews.
The government will create a welcome “fast-track” process for reviewing proposed investments from allied countries and companies. The existing program designed to exempt some of them from some reviews has failed because it is too restricted. Out of concern that allied countries could become backdoors for Chinese shell companies, too few countries were included, and few companies in those countries meet the strict requirements—and the exemptions are too limited to be worth pursuing in most cases. However, the order does not detail what “appropriate security provisions” will be required or how investors will have to ensure they “avoid partnering” with China.
Under the order, Trump calls for considering legislative changes to allow the government to regulate greenfield investment. This would be a major change, since currently the government only has authority to review acquisitions of US firms or real estate near sensitive areas, as well as investments that give nonpublic information or governance rights like board seats.[2] Nothing in the law today could stop a Chinese firm from starting a subsidiary in the US that hires Americans to research advanced artificial intelligence–a feature increasingly seen as a loophole in the current review system. Such legislation would require careful drafting to avoid, for example forbidding Chinese students in the US from starting businesses or Chinese people from buying US property where they live.
The executive order also commits the Treasury to exploring the enhancement of CFIUS powers to restrict access to US “talent and operations,” especially in artificial intelligence (AI), but what this means is unclear. One way the government may try to implement this is through expanded export controls under the Department of Commerce’s jurisdiction. The “deemed export” regime allows Commerce to restrict transfer of export-controlled technology to foreign nationals of certain countries, even if they are in the US, but this has not been applied to controls on advanced microchips. Doing so would be disruptive and likely harmful to US AI capabilities. A significant portion (38 percent in 2022) of top AI talent in the US are people from China, including a large share of the team that build Elon Musk’s latest xAI Grok 3 AI model, so restrictions on Chinese nationals’ ability to work on AI in the US would both create a compliance nightmare and lead more Chinese talent to stay in China and work on AI breakthroughs there.
Expanded outbound investment regime to cut US investment in China
The order’s potentially most ambitious expansion of government authority would be regarding investment from the US to China. The first Trump administration created what is now the Non–Specially Designated National (SDN) Chinese Military-Industrial Complex (CMIC) list of firms that US investors are not allowed to invest in.[3] The Treasury Department under the Biden administration issued a set of rules last October restricting US investment in any Chinese firm involved in advanced semiconductors, quantum computing, and AI for military or surveillance purposes. So outbound restrictions are not new.
The government will also consider adding to the list of sectors that are off-limits. The additions could include biotechnology, aerospace, and advanced manufacturing, and other areas flagged as having potential links with China’s military. The Treasury program initiated under Biden already restricts US greenfield investments and corporate expansions in China, but it exempts investments in publicly-listed companies and thus allows US investors to buy shares in those firms. The order, however, directs the government to consider restricting investment in listed companies as well, which could force US investors like pension funds to reduce their investments in China.
The order requires the government to review whether to suspend the 1984 US–People's Republic of China Income Tax Convention, which would increase the risk of investment into China being double-taxed and create significant uncertainty designed to further discourage investment into China in all sectors.
Revisiting the terms of Chinese firms listed in the US
The directive calls for a review of one of the most successful recent compromises between the US and China, a deal that allows US regulators to audit China's audits to ensure Chinese firms listed on US stock exchanges are complying with US law. China stonewalled the US for years until Congress passed the Holding Foreign Companies Accountable Act (HFCAA) in 2020, giving China an ultimatum—Chinese firms would be delisted from US exchanges if the US could not supervise their audits. Concerned that audits could reveal state secrets, Beijing first delisted some state firms deemed too sensitive to be part of the compromise, then signed an agreement with the US in late 2022 and began complying.
The deal worked. The first round of inspections found that Chinese audits reviewed were not up to US standards but also noted that the issues were “consistent with the types and number of findings the PCAOB [Public Company Account Oversight Board] has encountered in other first-time inspections around the world.” Supervision has since extended to auditors of 99 percent of the total market capitalization of Chinese-listed firms in the US. US authorities have promised to call China out if it “obstruct[s] the PCAOB’s access,“ but this has not happened.
Finally, the order directs the Treasury and other agencies to review an arcane, risky legal structure that has underpinned Chinese firms listing in the US, the variable interest entity or VIE. China has long restricted foreign ownership in Chinese technology companies, but it also wanted to receive foreign investment—indeed, my book finds that Alibaba and Tencent would not be the behemoths they are today without it. Firms worked around Beijing's restrictions through VIEs, often in the Cayman Islands.[4] The problem is, the scheme has always been of unclear legality in China, meaning in the event of a dispute like fraud, Chinese courts have nullified the ownership workaround as unenforceable.
The VIE issue came to a head in June 2021 when Didi, China’s version of Uber, hoped to do an initial public offering in the US but was blocked because it apparently did not have proper regulatory approval. China has issued clearer regulations that indicate Chinese regulators still find VIEs acceptable, reducing uncertainty. While they merit a look by US authorities, the US should carefully consider the disruption and losses that could result for US investors if existing Chinese VIEs were forced to delist due to US policy.
Conclusion
Trump’s executive order is an important signal that further financial decoupling between the United States and China is coming, and nothing in the order suggests its provisions could be rolled back in the event of a deal on trade and other issues. They suggest that the Trump administration may focus negotiations more narrowly on purchases of US goods and tariffs while continuing to tighten national security restrictions on investment to and from China. These measures, however, are not likely to have much impact on China or its military modernization, as CFIUS has already made it a major challenge to buy US companies and China is not short of capital for firms in its military industrial complex.
Notes
1. CFIUS is an interagency body chaired by the Treasury Department. It has the power to review, force modifications, and even recommend that the president block certain foreign investments if they could harm national security.
2. See this piece for more detail on CFIUS jurisdiction on noncontrolling investments.
3. The SDN list, differentiated from this list, is the financial sanctions list that effectively bars any person or firm on the list from dealing with any globally active bank, a far more powerful tool, so far used sparingly against China for good reason.
4. In a VIE, foreigners can buy into the offshore entity, not directly into a Chinese firm, and then the actual owners of the Chinese firm promise to manage the company in China as if it were owned by the Caymanian company.
Data Disclosure
This publication does not include a replication package.
