Yellen Could Stop US Nativist Trajectory in Foreign Investment

President Joe Biden recently issued an order to restrict US investors from contributing to Chinese technological growth in areas that Secretary Janet Yellen’s Treasury Department will define. Is Yellen “The One” to bridge the economic relationship between China and the US?

In the 1999 classic “The Matrix,” Keanu Reeves’ character, Neo, is a singular force for salvation or “The One,” who fights against a forbidding environment that shackles humanity. Yellen will need some of Neo’s gifts to uphold global open investment policies in a political environment of bipartisan economic nationalism.

Biden’s order will make the US one of few countries with “outbound” investment restrictions, continuing a US government multi-year slide away from open investment policies that have benefitted America for decades.

The US is both the largest investor abroad and largest recipient of investment from other countries. This investment contributes to the US economy and national security, but the benefits often are long-term and widely dispersed, without well-defined political constituencies. The benefits frequently are outweighed by nativist political impulses, particularly when China concerns—many of them reasonable—are added to the mix.

But even if the impulse undergirding Biden’s order seems sensible—why allow US investors to help a competitor?—there are many practical problems beyond the erosion of open investment norms. Foremost among these practical problems is that the US is acting alone. Our allies appear unlikely to create similar limitations, so a predictable result of the restrictions is that US investors will be replaced by non-US investors.

The restrictions won’t become effective for months because implementing rules from the Treasury Department are needed to define relevant technology areas and other key provisions.

Fortunately, Treasury’s preliminary outline of the rules reflects Yellen’s status as a respected economist and, nearly synonymously, an open investment proponent. During a recent trip to China, Yellen forecast that the investment restrictions would be narrow, and she emphasized the importance of maintaining integration between the US and Chinese economies outside narrow areas where restrictions would apply.

In this regard, Yellen appears to be a nearly singular figure in official Washington. Spurred in large measure by concerns about competition from China, the Biden administration has implemented a dizzying array of export controls, economic sanctions, and inward investment restrictions limiting foreign investments in US companies.

The inward investment restrictions are particularly noteworthy because they’ve been implemented by a government committee that Yellen chairs. In fairness to our protagonist, the Trump administration injected this committee with the equivalent of powerful bureaucratic steroids, yielding aggressive implementation of restrictive rules.

Yellen arrived on the scene late and has been largely helpless to stop the growth and aggressive behavior of that committee, which now routinely deters investments in US companies, including investments from US allies in Europe and around the world.

But in ”The Matrix,” it took Neo some time to get his footing and to demonstrate that he was “The One.” Yellen now appears personally invested in ensuring that the outbound rules don’t follow a trajectory similar to inbound investment rules, a trajectory that would further dent the global order that so many previous administrations—from both political parties—worked to build.

Treasury’s preliminary outline accordingly indicates it intends to deliver on Yellen’s promise that the outbound restrictions will be “narrowly scoped.” For example, restrictions on investments in Chinese “artificial intelligence,” a potentially very broad category, apparently will contain critical “usage” parameters.

With these parameters, an investment would be prohibited only if the artificial intelligence were designed to be used “exclusively” or “primarily” for Chinese military, espionage, or surveillance purposes. Artificial intelligence used for a limited number of other purposes would be permitted but would trigger a notification requirement to the US government.

So relatively narrow limitations on investments will be implemented if Yellen, assisted by some of her savvy staff, can carry the moment.

After the Treasury’s outline became public, there were howls from Congress, with Senator Marco Rubio (R-Fla.) stating, “this narrowly tailored proposal is almost laughable.” If political criticism crescendos and Yellen cannot fight back, the outbound investment restrictions might become significantly broader, with the US sliding even further from the policies that have lifted this country and spread American influence.

At the end of “The Matrix,” Neo promises that he will show humanity a world where anything is possible. Yellen doesn’t need to go that far to uphold open investment principles. However, the forces of economic nationalism will make things tough on Yellen, and it remains to be seen whether she is, indeed, “The One.”

The views expressed are those of the author and not necessarily those of his law firm or its clients. This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Stephen Heifetz is a partner at Wilson Sonsini Goodrich & Rosati. He has served in administrations of both political parties as a national security and foreign investment review official.

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