On Wednesday, President Joe Biden signed an executive order restricting certain U.S. investments in China’s key technology sectors.

The move, largely focusing on semiconductors, microelectronics, quantum technology and specific AI systems, came amid escalating concerns about national security threats posed by advancements in the aforementioned sectors by nations including China.

While the order could potentially stoke the already tense U.S.-China economic relationship, an analyst at Raymond James suggested limited immediate backlash from China and highlighted the nuances of the directive.

Here's what investors need to know about Biden’s new tech embargo.

Strategic Denial: Ed Mills said the order aims to prevent U.S. capital and expertise from enhancing China’s military modernization. While it covers private equity, venture capital and other investment forms, most transactions will require government notification.

Some investments might be entirely prohibited, Mills said, though exceptions may be granted for public trading and intracompany transfers.

U.S. officials maintained the goal is to counter the most pressing national security threats without fully decoupling the interconnected economies of the U.S. and China.

Scope And Market Risk: Raymond James said the current order is initially limited in its scope and potential market risk. However, the foundation is set in a way that could see restrictions tightening if U.S.-China tensions intensify.

Tech Focus: The main sectors targeted are semiconductors and microelectronics, quantum information tech, and some AI systems. The order will require specific feedback on how to define and regulate software with AI components for certain national security-sensitive uses.

China's Response: The early stage and limited scope of the directive may lead to a subdued reaction from China’s policymakers, probably more in rhetoric than action, Mills said. However, if other countries adopt similar measures, China might retaliate against those nations.

The upcoming updates to U.S. export controls could spark more notable reactions from China.

Export Control Updates: Changes to the U.S.’s export controls are expected by the end of August, the analyst said. Updates may lead to more significant retaliatory action from China, which might include restrictions on exports of crucial minerals.

Regulatory Process: The Treasury introduced its regulations through an advanced notice of proposed rulemaking, indicating it’s still in the early stages. Feedback received during the 45-day comment window will shape the final regulations, with the final rules anticipated to start next year, with a possible emphasis on notification, Mills told investors.

Looking Ahead: Raymond James suggested that while the order could serve as the foundation for more stringent measures in the future, the immediate fallout might be contained.

Investors should watch out for potential reactions from both Congress and China in the coming months, as well as the release of updated export control regulations.

Here are a few ETFs with exposure to U.S. and China tech sectors that investors can watch.

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