Welcome to the New Phase of US-China Tech Competition
Welcome
to the New Phase of US-China Tech Competition
September 3, 2019
11:31 AM ET
The previous era entwined the two economies. This one is
splitting them apart.
It came without a breaking news alert or
presidential tweet, but the technological competition with China entered a new
phase last month. Several developments quietly heralded this shift:
Cross-border investments between the United States and China plunged to their
lowest levels since 2014, with the tech sector suffering the most precipitous
drop. U.S. chip giants Intel and AMD abruptly ended or declined to extend important
partnerships with Chinese entities. The Department of Commerce halved the number of licenses that
let U.S. companies assign Chinese nationals
to sensitive technology and engineering projects.
Even as Washington debates
the relative merits of decoupling technologically and economically with China,
policymakers need to consider that the point may be moot: Decoupling is already
in motion. Like the shift of tectonic plates, the move towards a new tech
alignment with China increases the potential for sudden, destabilizing
convulsions in the global economy and supply chains. To defend America’s
technology leadership, policymakers must upgrade their toolkit to ensure
that U.S. technology leadership can withstand
the aftershocks.
What’s Already Happened
The key driver of this shift
has not been the President’s tariffs, but a changing consensus among
rank-and-file policymakers about what constitutes national security. This
expansive new conception of national security is sensitive to a broad array of
potential threats, including to the economic livelihood of the United States,
the integrity of its citizens personal data, and the country’s
technological advantage.
In June, the U.S. Department of Commerce added five Chinese companies involved in
the Chinese government’s supercomputing program to the Entity List, which
prevents U.S. companies from doing business with
them. Not just another shot across the bow in the U.S.-China trade war, these
additions reflect the national security ramifications of selling advanced
commercial processors to companies linked to the Chinese military.
Unlike the President’s trade
war, support for this new, expansive definition of national security and
technology is largely bipartisan and likely here to stay. Throughout
Washington, concerns about Xi Jinping’s civil-military fusion drive and
renewed emphasis on acquiring dual-use technologies has opened the door for
more enforcement against Chinese entities seen as vectors for Beijing’s
high-tech push. Newfound worries over the protection of personal data, and how
it can be weaponized, have also driven Congress to last year designate personally identifiable information as
a national security concern.
Washington has also become
increasingly concerned about Beijing’s efforts to vault Chinese companies past
their U.S. competitors via technology transfer,
both formal and informal. Last summer, Congress voted overwhelmingly to
overhaul the Committee on Foreign Investment in the United States, or CFIUS, which screens business deals for national security
concerns, and the export control regime, which limits the sale of sensitive
technologies abroad.
Over the past year, CFIUS has forced two companies to divest from their
Chinese funders due to concerns over personally identifiable information. In
addition, the justification behind adding the five Chinese companies to the
Entity List was the possible military end use of the products it was exporting,
or dual-use technologies. The use of these economic tools to close off China’s
technological upgrade avenues in the United States is clearly working—since
these reforms have passed, Chinese investment into the United States has
dropped by almost 90 percent.
What We Can Expect
from China
This shift has not gone
unnoticed in Beijing. Since China entered the World Trade Organization in 2001,
it has largely relied on economic entanglement with the United States to acquire new technologies and develop its
high-tech sectors. Even before the most recent trade spat, officials had
already begun recalibrating China’s tech strategy to emphasize indigenous
innovation over foreign acquisitions.
The blacklisting of Huawei
this past spring has accelerated this shift, turning the
need to focus on indigenous innovation capacity from a long-term objective to
an urgent priority. Beijing has doubled down on ‘self-reliance,’ which means
utilizing China’s sprawling network of state and military research institutes
to develop domestic replacements to critical components. This state-led push
will further blur the line between what
constitutes a private and a public company in China. It also likely means
settling for some suboptimal domestic alternatives or finding ways to “design
out” foreign inputs where possible.
Critically, turning inward
through “self-reliance” does not mean Beijing will shy away from accelerating
technology transfer from abroad when possible. Even as key avenues for
technological upgrade close off, some avenues will remain open.
One channel that will be the
hardest for the United States to close off will be talent. In 2017, the Trump
administration used CFIUS to reject a bid to
acquire Lattice Semiconductor, a U.S. company
that produces programmable microchips. Nearly a year later, with the support of
provincial officials in Guangdong, a Chinese startup founded by two former Lattice
engineers began mass-producing programmable chips with similar sophistication.
Attracting foreign talent with experience in high-tech industries abroad will
be perhaps the most direct way to circumvent the U.S. firewall.
China will also increase
cooperation with other advanced economies. After the United States heavily
restricted the export of satellite technology in the 1990s, China turned to Europe
to acquire critical technical know-how and intellectual property. Already,
Huawei has already begun developing relationships with suppliers in Japan,
South Korea, and Europe to offset the fallout from losing U.S. suppliers. Such relationships will only deepen. Few
countries besides the United States have the political and economic wherewithal
to refuse China’s overtures, especially if it means losing access to China’s
enormous domestic market.
Finally, Beijing will ramp up
industrial espionage. Last year, the head of German intelligence noted how a sharp decline in Chinese
cyber espionage followed an uptick in Chinese acquisitions of German companies.
As if with the flip of a switch, China moved from stealing technology to buying
it. But as legitimate avenues to acquiring technology close, Beijing will flip
the switch back. China already has a well-developed infrastructure for illicit
technology transfer via human and cyber-enabled means. After a brief
hibernation in the wake of the 2015 U.S.-China cyber pact, Chinese cyberattacks
on the U.S. government and businesses are again on the uptick. Policymakers can
expect these efforts to become even more rampant and brazen, especially in
sectors where CFIUS has restricted
Chinese investment.
What the U.S. Can Do
As China accelerates its
state-led technology drive, preserving the U.S. technological
edge will require more than playing defense. Congress can take precautions to
ensure U.S. innovation does not suffer during
this time of transition, and specifically from the U.S.-China trade war. These
could take the form of programs like the Defense Advanced Research Projects
Agency’s Electronic Resurgence Initiative, which
attempts to confront sector-wide bottlenecks and engage industry to foster
breakthroughs. Such programs should be expanded and applied to other industries
such as clean energy and next-generation telecommunications.
While the U.S. government cannot stop Chinese researchers and
engineers from taking their skills back to China, it can do a lot to ensure
they feel welcomed in the United States. A good start would involve rolling
back the Trump administration’s restrictions on H1B visas
for skilled talent. The FBI and law enforcement
can also do more to mollify the concerns
of a Chinese-American community that fears racial profiling. The United States
has long maintained its edge in science and technology by encouraging the best
and brightest to adopt this country as their home. Losing that competitive edge
during a geopolitical competition with China would be an unforced, and perhaps
fatal, error.
As tech companies are also
disproportionately affected by the reforms to CFIUS and
new export control regulations, the Treasury and Commerce Departments should
consider adding special liaisons to those industries to explain new
regulations, gather feedback, and build better
working relationships.
To prevent China from sidestepping export controls and
turning to foreign companies to fill the gaps in its technology supply chains,
the Trump administration should also work with allies and partners to create a
multilateral regime. Commerce officials should begin by working with supplier
economies, such as Taiwan, Japan, and South Korea, which have some of the most
advanced technologies that China needs. Longer-term, Commerce should eventually
try to also get all of the countries that have signed onto the Wassenar Agreement to also adopt
similar policies around export controls. The Treasury Department should also
send representatives to regions that develop critical high tech, like the
European Union and Israel, to help create and implement CFIUS-like regimes.
Finally, as Beijing
accelerates industrial espionage and cyberattacks to obtain U.S. technology, the U.S. government
can help companies erect defenses. While private companies have adopted better
standards for cybersecurity, the majority still remain woefully unequipped to
withstand a cyberattack from China that targets core trade secrets. The
Department of Homeland Security should conduct more outreach to companies that research
and manufacture sensitive technologies to train and give technical assistance
on how to better prepare for such an attack.
Decoupling is only the
beginning, not the end, of the technological competition with China. The United
States needs to realize that China will continue to find other avenues to
ensure its technology drive proceeds apace. By identifying these additional
pathways, and working with the private sector and multilateral partners, the
United States will be able to maintain its technological edge.
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