Regulatory policy is about to play a central role in the U.S. policy agenda, from governing green technology to addressing national security concerns about supply chains and wading through the looming challenges of digital currencies. But regulators may not be ready for the spotlight, especially when it comes to China, where the fine print will now be big politics. Adjusting technocratic policy processes to this new reality while protecting objectivity and transparent application of U.S. standards will be a key challenge for the Biden administration.

As high-profile national security priorities bleed increasingly into economics, finance, and regulation, the federal government will need a more coordinated, efficient approach to catch up to its own aspirations. Here’s a timely example: the U.S. government’s varied and confusing lines of authority surrounding the potential de-listing of Chinese firms from the U.S. Securities and Exchange Commission (SEC) stock exchanges, either on procedural or national security grounds—or both. The regulatory journey paves a path from the Treasury and the SEC, to the White House, the Commerce Department, the Defense Department, and Congress.

In the waning days of the last administration, an interesting game of footsie took place between the Treasury Department, the SEC, and the New York Stock Exchange—would Chinese firms that did not uphold U.S. auditing standards be delisted? The answer was yes, then no, then yes. As was typical of Trump-era decisionmaking, a high-level political truce is announced—or leaked—before the tough work of making a viable policy had been accomplished.  

President Joe Biden’s new team has now placed a hold on the policy to work out its intricacies, a task for the new SEC Chairman and the Public Company Accounting Oversight Board, the markets watchdog that has taken center stage in the dispute.  

America cannot, however, simply blame Trump’s chaos for the jumbled policy, as rhetorically handy as that may seem. The delisting question is an example of how U.S. regulation can be piecemeal, conflicting, or just downright confusing. And this becomes increasingly worrying when regulations that have the force of law suddenly play a role in the national security debate, as auditing has with China.  

Chinese firms do not comply with US standards. They have easy access to U.S. shareholders in the world’s deepest capital markets without adhering to the rules of accountability and transparency others are required to observe. Advocates for de-listing argue that this is an overdue procedural move and not a matter of national security, but as tensions mount across the U.S.-China economic relationship, the time to draw this distinction may be in the rearview mirror. Delisting risks retaliation from Beijing and boosting the appeal of Chinese exchanges for investors looking to purchase shares in a rapidly growing economic powerhouse.

Plus, the Defense Department is involved. Across the Potomac, the Pentagon takes a different view on stock market participation. In compliance with the National Defense Authorization Act of 1999, the Pentagon releases the names of Chinese firms it has determined are linked to the People’s Liberation Army (PLA) and its military-civilian fusion strategy. This list is unclassified—there is likely more to it than can be shared publicly. If asked to recommend firms for a potential delisting on national security grounds, as some in defense circles have advocated, then the Pentagon would start here. 

Expanding on the initial delisting question, Trump signed an executive order in November barring Americans from investing in all Chinese companies on the Pentagon’s list, due to come into effect in late 2021. Biden’s team placed a hold on this as well, through May, while several firms impacted are having interim success challenging the order in U.S. courts.

But what will the Pentagon recommend when the issue comes up for review? The number of PLA-linked firms in China listed in U.S. markets may prove too narrow because it does not address firms linked to China’s oppression of Uighurs and other Muslim citizens in Xinjiang, to territorial disputes in the South China Sea, or repression in Hong Kong. This isn’t surprising for a recurring congressional reporting requirement over two decades old. In late February, the NYSE announced that it would begin delisting one firm listed by the Defense Department, the China National Offshore Oil Company. Was this to comply with the executive order and the Pentagon list, or the initial auditing issue? Both?

Meanwhile, the Commerce Department has seen expansion of its export control authority over the past several years. Its Entity List covers anything from telecommunications to semiconductors to aerospace technology. Some Chinese firms are blacklisted, some are subject to licensing restrictions. Biden’s team will face difficult decisions on how to refine this authority and balance its use with maintaining our own competitiveness.  

Last but certainly not least, comes congressional legislation. Trump signed the Holding Foreign Companies Accountable Act in December, which mandates de-listings based on auditing standards. But it won’t stop there. Senator Marco Rubio introduced legislation in October, calling for the delisting of all Chinese firms identified either by the Defense Department or Commerce Department and to bar U.S. investment, retirement, and insurance firms from purchasing shares. The economic analysis behind this proposal remains unclear, and the bill introduces a similar kind of brinksmanship the Hill has played with the Executive Branch over sanctions (Russia ones, in particular) and their economic impact. 

In the end, the only agency that gets some reprieve from ambiguity is the Treasury’s authority to sanction. If a foreign firm is sanctioned under U.S. law for its activities (as in, subject to a full asset freeze and prohibition from transacting with US persons), then it can’t go anywhere near New York. Period. But fully sanctioning a Chinese company listed in U.S. exchanges or some identified by the Pentagon would signal a major escalation in U.S.-China tensions and could incur sizeable economic and financial costs.  

Biden’s team won’t be able to tread water sorting out Trump’s policy legacy. Policymakers will table options for the delisting of Chinese firms from New York exchanges—and more broadly, limits on investing in China or otherwise working with Chinese firms. But which regulations and lists would they use? Whose standard applies? U.S. agencies and regulators need to deepen their understanding of how financial markets function in the world of national security and devise a strategy to centralize authorities that span half the government. Right now the United States remains tangled up in its own capabilities and doesn’t seem quite ready to play the game. Without taking to time to generate clearer alignment of authorities, the US government risks politicizing independent procedural decisions, muddling agendas and messaging among Departments and Agencies, and sending mixed messages to Beijing, where the government will judge how and when to respond.  

Julia Friedlander is C. Boyden Gray Senior Fellow at the Atlantic Council’s GeoEconomics Center. She has served as a senior advisor at the U.S. Treasury Department and as Director for European Affairs at the National Security Council, 2017–19. 

Image: Reuters