Opinion | Beyond China, Asia will bear the brunt as US builds walls around tech capital
Outbound investment rules introduced last year are expanding and hardening into law, chilling US investment across Asia’s tech ecosystems
SCMP
These rules are gaining teeth, giving rise to a compliance architecture that conditions US foreign direct investment on national security priorities. As firms begin to operationalise these rules, capital is likely to pull further away from China’s technology ecosystem. The most significant consequences, however, will not be borne by China alone: they will fall on Asian economies whose technology supply chains are deeply integrated with China across critical sectors.
Under the US Department of Treasury’s programme, outbound investment rules apply when an American person or company makes an investment that gives them a meaningful stake in certain sensitive technology activities that “enable the military, surveillance or cyber-enabled capabilities of a country of concern” – namely, China.
The programme imposes compliance costs on prohibited transactions. The Treasury estimates that on an annual average, about 60 US investors per year across 106 transactions are directly affected, with compliance costs of around US$4-9 million. It acknowledges these burdens but maintains the national security benefits will outweigh compliance costs. On that point, it is right.
But while the Treasury’s estimate captures the compliance costs associated with transactions that fall clearly within the scope of the rule, it does not capture the broader economic effects of the compliance regime. Those are harder to measure but more consequential, arising from the uncertainty and burden involved in determining whether a transaction is notifiable, prohibited or permissible at all.
The Treasury’s rule operates through ex ante compliance obligations. Accordingly, investors are required to conduct an inquiry into the foreign counterparty, the implicated technology and its downstream usage, placing the burden on companies to assess national security exposure before a transaction is executed.
In practice, these obligations are likely to have a chilling effect on US-China deal-making. Deciding whether a transaction falls within the scope of notifiable or prohibited activity can be costly, time-consuming and indeterminate – especially involving jurisdictions like China, where corporate transparency is limited.
But US outbound investment screening is not just regulating bilateral capital flows. It is also projecting domestic economic security policy into globally integrated technology ecosystems. As semiconductors, AI and quantum technologies are developed across transnational supply chains, outbound controls are structurally positioned to generate third country spillovers.
For example, Business Roundtable warned that uncertainty during the diligence process could lead US financial institutions to avoid providing services not only to China-linked firms, but also to companies in third countries involved in advanced technology development.
Other experts have likewise suggested foreign companies with US parents may be forced to impose new compliance controls across their foreign affiliates, thereby pulling third country firms into the ambit of outbound screening and influencing activity beyond strict US-China investment channels.
These third-country dynamics are particularly likely to play out in Asia, where advanced technology supply and production chains are closely tied to China’s. Integration is markedly pronounced in semiconductors.
Similar patterns are evident in Southeast Asia. Malaysia exported over US$12 billion in integrated circuits to China in 2024, among its top destinations for semiconductor-related goods. Malaysia has emerged as the region’s primary data centre hub, attracting significant Chinese investment after Beijing’s 2021 directive encouraging companies to expand overseas digital infrastructure.
Congress has also laid the groundwork for its expansion, directing the Treasury to update the regime through formal rule-making by early next year. Lawmakers also broadened the list of covered technologies to include high-performance computing and supercomputing, and hypersonic systems.
Such controls are unlikely to remain unique to the US. The European Union is exploring establishing an outbound investment screening framework, and US officials are considering how to encourage trade partners to adopt similar economic security tools. The impact on Asian economies will be amplified if outbound controls begin to diffuse across allied economies.
The first year of US outbound investment screening marked the construction and codification of a new economic security tool but the years ahead will determine whether it becomes a central feature of the global investment landscape and shapes investment activity. Asia’s technology ecosystems will sit at the centre of that evolution.