A more certain short-term impact is that US investors remain interested Chinese AI startups will need to do a lot more due diligence. The Treasury Department is not creating a recent government committee like CFIUS to review every deal submitted by investors, but instead is asking them to do their homework and report whether they think a Chinese artificial intelligence company will be covered.
Under the recent regulations, even if the Chinese startup’s AI model is less than 1025-flop size threshold, a US investor may still be required to notify the Treasury Department of his trade and do his homework as long as his model is at least 1023 flaps (essentially covering all large-scale models currently and in the future). In effect, this means that the US government is creating its own system to monitor the overall flow of money flowing from American investors to Chinese companies working on artificial intelligence.
“To confirm that a deal is out of scope, it will require extensive due diligence by U.S. investors,” says Robert A. Friedman, an international trade attorney at the law firm Holland & Knight. While domestic AI companies and their supporters celebrate these principles, they will become a stumbling block for venture capitalists with an international portfolio, he says.
Uncertain future
Restrictions on outbound investments are scheduled to come into effect on January 2, with the Treasury Department in the meantime he signaled that some minor changes are still being made to further clarify the rules. Officials also said are making efforts to coordinate with U.S. allies such as G7 countries to enact similar measures that would prevent Chinese AI companies from approaching VCs in Europe, Canada or Japan for investments prohibited in the U.S.
The biggest uncertainty right now, as with most parts of the US federal government, is how a second Trump presidency might change things. Danzman notes that many in the venture capital community who supported Trump are opposed to the regulations put in place by the Treasury Department, so they could potentially try to lobby the president to roll them back. Several enormous U.S. companies such as Tesla and Blackstone – headed by outspoken pro-Trump billionaires – have made significant investments in China and may be negatively impacted by tighter restrictions on their operations.
Other WIRED experts told WIRED expected that the recent Republican administration, which includes some China hawks like Rubio, would expand the scope of the regulations. “We may see a new executive order. Or, given a unified Republican government, perhaps expansion would come through legislative action,” Kilcrease says. That could mean more funding going to 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 ”small yard, high fence,” or in other words, designating relatively narrow areas where the U.S. government can impose very stringent restrictions. The latest version of the outbound investing rules is an example of what this idea looks like in practice. But under Trump, Chinese companies may finally see how substantial the shipyard can be.