Faculty of law blogs / UNIVERSITY OF OXFORD

The Rule of Law in the US-China Tech War


Michael Callahan
Professor of the Practice of Law, Stanford Law School
Curtis J. Milhaupt
William F. Baxter-Visa International Professor of Law, Stanford Law School


Time to read

3 Minutes

US policy is increasingly being influenced by suspicion of links between Chinese companies and the Chinese party-state and military. These suspicions have been fueled by Xi Jinping’s economic strategy, focused on state-owned enterprises (SOEs), and his emphasis on loyalty to the Chinese Communist Party (CCP) in all aspects of Chinese society, including the corporate realm. 

Suspicion is playing out most prominently today in what has come to be known as the US-China Tech War. The battle lines of this conflict are now well drawn: 5G, AI, biotech, robotics, space technologies, and other advanced components of 21st century economic and military advantage. At the same time, the Internet’s promise of an autonomous, borderless means of communication is giving way to a ‘Splinternet’ comprised of competing democratic and authoritarian governance regimes. These forms of technological competition and decoupling between the US and China implicate enormously consequential policy issues spanning the realms of national security, data protection, and the innovative capacity of national economic systems. 

Competition over the technological future between the world’s two largest economies has produced a legal thicket of statutes, regulations, and executive orders in areas including foreign investment, data security and privacy, and access to the US capital markets. These regimes were created or bolstered due to legitimate concerns about the geo-economic impact of transactions that implicate control over advanced technology and data. Yet regulatory uncertainty engendered by these new legal regimes has greatly complicated many aspects of the prosaic but fundamental work of producing innovative companies and technologies—cross-border investment, mergers and acquisitions, and talent recruitment. 

In our paper, prepared for a volume on US responses to Chinese state capitalism edited by the Center for Strategic and International Studies, we approach the big policy issues in the US-China tech war from the ground up; we explore how regulatory uncertainty engendered by the legal regimes recently developed in both countries to operationalize technological decoupling has complicated cross-border deal-making and operations. We fear that ironically, the rule of law necessary to maintain continued vibrancy in US high-tech sectors is being compromised by some of the very actions ostensibly taken to protect these sectors from malign foreign influence.

We begin by highlighting recent research on Chinese corporate governance that underscores legitimate national security concerns relating to Chinese investments in the US, including most prominently policies to elevate and formalize the role of the Communist Party in Chinese corporate governance. Next, we examine recent legal developments in the technology/data and national security spheres of both countries and the regulatory uncertainties created by this environment. For example, China has made substantial progress on adopting a comprehensive cybersecurity and data security regime with wide-ranging implications for cross-border deal making and operations. In the US, the Trump Administration took several measures to address concerns over Chinese tech investments in the US and access to US data that have caused confusion or resulted in a dramatic decline in Chinese investment activity in Silicon Valley. These include: 

  1. expanding the scope and strengthening the review powers of the Committee on Foreign Investment in the United States (CFIUS); 
  2. seeking to deny US sources of funding or access to US capital markets to Chinese companies that allegedly promote the interests of the Chinese military and Communist Party or fail to submit to audit inspections; and 
  3. purporting to ‘ban’ two popular Chinese social media apps in the US (TikTok and WeChat) and attempting to compel divestment by TikTok’s Chinese parent. 

China’s strategic challenges to the US and the broader democratic world across a range of military and technological domains present legitimate national security concerns that must be met with a robust policy response. But the US must avoid entering a race to the bottom with China in creating an investment and technology landscape fraught with uncertainty and political risk. In the final section of the paper, we outline some realistically achievable steps that the US could take to address the challenges presented by Chinese state capitalism while reducing regulatory uncertainty for US investors and businesses. First, the US should seize the opportunity to lead in global data regulation and not allow a proliferation of individual US state regulations, and reactions to foreign regulation, to drive policy. Second, the CFIUS process, long criticized as a black box, could take lessons in transparency from other US agencies that review prospective corporate transactions and handle sensitive, proprietary information. Third, rather than a unilateral US approach to limiting Chinese access to the capital markets, coordinated action is needed by the world’s non-Chinese stock exchanges, regulators and globally active institutional investors to require Chinese publicly traded firms to adopt globally accepted standards of corporate governance and to mandate greater transparency about the role of the Chinese Communist Party in their high-level decision-making processes. 


Michael Callahan is Professor of the Practice of Law and executive director of the Arthur and Toni Rembe Rock Center for Corporate Governance, Stanford Law School.

Curtis J Milhaupt is the William F Baxter-Visa International Professor of Law, Stanford Law School.


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