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New Cold War: Americans to be Barred from Some Investments in China

One of the marks of a cold war is an all-out trade embargo between "belligerent" countries. After a quarter century of relatively open trade between China and the US through China's membership to the World Trade Organization (WTO), conditions are ripe for a reversal.

In 2017, the Trump Administration laid tariffs on hundreds of Chinese imports, with the big ticket item being steel. These tariffs have continued long after Trump lost the 2020 election. The Tax Foundation estimates that they have cost Americans 75 billion dollars, and a group of 6,000 companies recently demanded reimbursement from the government for the duties they've paid.

Restrictions on cross-border investment flows will follow restrictions on goods.

In February 2022, Financial Historian Russell Napier (Author of the Asia Financial Crisis) predicted that investment restrictions from the US to China would come as part of a new cold war. He will soon be proven right, but gradually.

On January 27th, Politico reported that the Biden Administration had been considering oversight on American investments in China "for months", according to House Foreign Affairs Committee Chair Michael McCaul. Oversight would mean limitations on US investment in these areas:

  • "Complete ban within high tech sector"

  • Artificial Intelligence

  • Quantum Computing

  • Cybersecurity

  • 5G

  • Semiconductors

On February 28, Politico reported that an executive order is expected between late March and early May, though the White House is indicating "softer" restrictions than previous plans:

  • Companies must notify federal authorities if investing in quantum, AI, and other sensitive sectors

  • Complete ban for semiconductors

Currently, US investors are prohibited from investing only in 59 companies directly affiliated with the Chinese military, as of August 2021. We predict that restrictions will start small, with the above priorities, and expand. Trade wars have a tendency to ratchet up, as each side responds to the other's restriction with more restrictions. An capital-flow war will follow the same patter.

President Biden has pledged the US military to defend Taiwan in the event that China invades not one, but three, times now. The US Navy continues exercises in waters claimed by China, while China has continued to fly fighter jets along the Taiwan Strait. Conditions are unlikely to improve.

What the White House has to contend with is China's ownership of US Debt, which stands at $860 billion as of December 2022. Contrary to popular belief, China has been a net seller of US Treasury Bonds since 2013.

Source: US Treasury Department Treasury International Capital Report.


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