Hello and welcome back to Eye on A.I.
The biggest development in A.I. news from this past week is one we’ve been waiting for. President Joe Biden signed a long-awaited executive order aimed at restricting U.S.-based investments in Chinese companies operating in sensitive technology areas, including A.I.
The executive order specifically targets advanced computer chips, microelectronics, quantum information technologies, and certain artificial intelligence systems. The current proposal would require U.S. investors to notify the U.S. Treasury Department of certain transactions and prohibits others altogether. The restrictions will not apply retroactively to investments that have already been made, and there will be some carve-outs for intellectual property licensing, contracts to buy raw materials, and university-to-university research collaborations.
Regarding A.I. specifically, the order proposes a ban on investments into the development of software using A.I. systems designed for military, government intelligence, or mass surveillance. The U.S. Department of the Treasury Office of Public Affairs said in its fact sheet about the order that it welcomes public feedback on the A.I. category in particular during the 45-day comment period, including on the definitions surrounding A.I. technologies and their potential implications on scope.
In the order, Biden describes how China eliminates the barriers between commercial and defense sectors “for the purposes of achieving military dominance.” He cites numerous national security concerns, including “the development of more sophisticated weapons systems, breaking of cryptographic codes, and other applications that could provide these countries with military advantages.” The order refers to “countries of concern” throughout, but China is the only country cited.
Beijing was quick to condemn the order, with the Ministry of Foreign Affairs accusing the U.S. of “overstretching the concept of security and politicizing business engagement,” and the Ministry of Commerce saying it “reserves the right to take measures.”
In a rare show of bipartisanship, U.S. lawmakers from both the Democratic and Republican parties are applauding the order as a solid step while pledging to go further.
The move to ban investments on certain A.I. systems in particular creates tough challenges for the administration and poses questions that the tech industry at large is currently grappling with. Unlike chips, A.I. is not so easily defined—especially at this moment when A.I. is advancing quickly, being used in a wide variety of new ways, and is proving to be more multifunctional than ever before. And for many people and entities developing A.I., all-purpose artificial general intelligence (AGI) that could act outside the bounds of what it was taught, is the very goal. Indeed, according to the Wall Street Journal's sources, the Biden administration officials who crafted the order struggled to distinguish the boundaries between purely commercial A.I. and A.I. that could be used for military means.
There are no easy answers to many of these questions. In the meantime, we can expect the decoupling of the U.S. and China tech industries to continue.
U.S. investors have participated in nearly $200 billion in deals in China over the last six years, and venture capital investments in particular have been focused in the very technology areas targeted by the order, according to Pitchbook.
But already, the rising tension between the countries has been having a measurable impact on business. The House Select Committee on the Chinese Communist Party recently sent letters to four U.S. venture capital firms expressing “serious concern” about their investments in Chinese tech startups.
Many venture capitalists describe proactively pulling back from doing deals in China, seeing such deals as risky. In 2022, Chinese companies saw a sharp decline in investments from U.S. private equity and venture capital. The number of deals dropped by 40% from the previous year, and the aggregate value of U.S. investments in China declined by roughly 76% year over year from $28.92 billion to just $7.02 billion, according to S&P Global Market Intelligence data.
“I don’t know anyone that’s doing early-stage China investing from the U.S.,” Steve Sarracino, founder of Activant Capital, told CNBC, citing hedge funds as the only exception.
And with that, here’s the rest of this week’s A.I. news.
Sage Lazzaro
sagelazzaro.com
