/The Sino-American Race for Technology Leadership (via Qpute.com)
The Sino-American Race for Technology Leadership

The Sino-American Race for Technology Leadership (via Qpute.com)


Alarming and outrageous, certainly. The reaction in Washington to reports that China trawls America’s open innovation ecosystem pocketing prized technologies got that much right. AI and quantum computing, to name just two of them, could change the balance of global power.

One would have expected Congress and President Donald Trump to mount a strategic response. Instead, they opted for export and foreign investment control laws with broad and vague reach, expanding powers that the administration was already using to block China’s access to U.S. industry. Media reports piled up describing how regulation, actual and anticipated, was diverting capital and talent over to the competition, including China. This approach was counterproductive to American innovation leadership. It also failed to address the reality that acquisition of U.S. technology is not the only challenge from China or even, arguably, the most important.

 

 

General Secretary Xi Jinping is leveraging state resources and extending the state’s reach into the economy in pursuit of industrial plans hymning the battle for technology supremacy. Xi has reversed the trend of market liberalization in this strategic sector to win. That is the central challenge. There is reason to believe that this approach will ultimately fail, but accommodating China’s state-guided capitalism no longer makes sense. Admittedly, formulating a strategy is a difficult balancing act. Half of the Chinese economy is open and competitive, a lucrative market where foreign firms want to do business. Likewise, a large American corporate footprint abroad serves the U.S. national interest. U.S. influence over China is also waning as rivalry dominates the relationship.

In identifying economic competitiveness, innovation, and democratic principles as core pillars of national security, the Trump team was on the right track. However, the administration offered no coherent strategy. It is time to reflect on what happened in order to chart a better path. This should start with sound analytical judgments about China, employing regulation and other pressures but emphasizing bilateral and multilateral initiatives when confronting China’s non-market behavior. Above all, this new approach should ensure that America continues to host the world’s most attractive innovation ecosystem, the best guarantee of winning the technology race. 

Disrupting the Disruptors: Regulatory Uncertainty Hits Silicon Valley

Against a backdrop of troubling changes in China, the Trump administration joined forces with Congress to disrupt Silicon Valley in order to halt China’s acquisition of U.S. technology. For decades, Washington fostered an open, largely unregulated innovation ecosystem defined by minimal, simple, and predictable regulation, unrestricted venture capital, and transnational research and development. Growing unease that China was “stealing” its way up the technology ladder at America’s expense prompted a radical shift. Washington chose to force U.S. technology startups and venture firms to avoid China or seek permission for who they could sell to and collaborate with, as well as who could buy, invest in, and work for them.

In August 2018, Congress gave the Commerce Department unprecedented preemptive powers to regulate, on an ongoing basis, the export of emerging and foundational technologies that could have military and intelligence uses, as well as the sharing of sensitive knowledge with foreign employees. The problem is that there is no established metric to predict the future use of emerging technology, and research is rapid, iterative, and collaborative, involving scientists from many countries. This leaves the fate of industry and innovation in the hands of government officials removed from both. While the U.S. government has not yet controlled any emerging technologies under the 2018 rule, it used other rules and processes in 2020 to control some. The constraint on research appears to not apply in these cases. Nonetheless, visa restrictions on scientists from China that Trump separately imposed are a close cousin. The reliance on authorities other than the 2018 rule to control emerging technology is hard to explain. Potentially, the process may be slow or multilateral partners may be resistant to acting outside of existing multilateral export control regimes. Regardless, Washington has introduced regulatory unpredictability into the technology industry and set a legal precedent for putting regulation ahead of innovation.

Congress did not stop there. Legislators also erected a barrier to foreign venture capital investment and linked it to the new export control policy. This measure risks slowing the process by which venture capitalists drive U.S. startups to grow into formidable global competitors. Any emerging or foundational technology that the Commerce Department controls for export triggers a national security review by the Committee on Foreign Investment in the United States (CFIUS) — which takes 45 days to several months. The committee has been adept at walking the line between keeping U.S. markets open to foreign investment and safeguarding U.S. technology in the case of “controlling” foreign investments in critical technologies. But legislators broadened the committee’s powers to review minority, or “non-controlling,” stakes in U.S. firms involved with “critical technologies,” “critical infrastructure,” or “sensitive personal data.” They left these key terms undefined, giving the government maximum discretion to interpret the regulations, adding to market uncertainty. What’s more, the committee’s power to unwind a completed transaction applies. Trump used it in a few cases involving acquisitions by Chinese nationals.

This new regulatory landscape surfaced roughly around the time of Trump’s shock and awe campaign to block U.S. technology exports to major Chinese firms using the government’s existing powers. As this offensive was gathering steam, the administration began flexing its expanded new powers. In November 2018, the Commerce Department proposed 14 categories of emerging technologies for export control, a list so broad and sweeping that it covered entire sectors like AI and quantum computing, leaving it unclear which technologies are actually critical to control. Separately, the Treasury Department announced a “pilot program,” rendering the investment controls operational. The Justice Department followed with a “China Initiative” to crack down on economic espionage and, per media reports, the FBI began to warn venture firms to avoid involvement with China. Peter Navarro, a key White House advisor on trade and manufacturing, and an advocate of rearranging global supply chains to “decouple” the U.S. and Chinese economies, gave a talk around this time characterizing China as an economic threat.

Industry could ignore neither the regulations already in place nor the draconian list of proposed technologies that could come under export control. Businesses make decisions based on predictions about the future. It would not be until January 2020, over a year later, that an export control on emerging technology would be announced and provide a clue that the final list of controls might be narrower in scope than the administration’s initial list had suggested. By that time, however, the regulatory onslaught had escalated. Trump declared a national emergency over “threats” against U.S. technology and expanded the list of Chinese firms on the Commerce Department’s Entity List. He also threatened to force U.S. firms to leave China and subsequently widened bans on Chinese technology firms, while moving to expand the Foreign Direct Product Rule and use of the Defense Department’s Section 1237 List. The direction of U.S. policy was clear even if the specifics kept everyone guessing.

Washington’s actions disrupted an innovation ecosystem in which risk used to be concentrated in the business of innovation, not unpredictable regulation. Venture capitalists assume high levels of risk to finance technology startups with a 90 percent failure rate. No other institutional source of capital assumes that degree of risk. Venture firms do so because successful startups grow exponentially and make huge profits. They need export markets for that. U.S. startups beat the competition because they penetrate global markets early on in their growth. A new regulatory landscape could change that. In the hypercompetitive technology business, startups either achieve speed to market and exponential growth or they go bankrupt. Any strategy conceived in denial of these commercial realities disadvantages the United States in the technology race.

Economic Competitiveness and Innovation Take a Back Seat to Regulation

While it is important to constrain China’s access to U.S. technology, giving regulation the lead role imposes unwarranted costs on competitiveness and innovation. The most quantifiable impact of regulation and the anticipation of more to come has been the diversion of export revenue, scientific talent, and venture capital to U.S. competitors. As Chinese and other foreign firms weed out U.S. components from their supply chains, American firms are losing billions of dollars in revenue. This reduces their capacity to fund research and development. Take the U.S. semiconductor industry, hit by Trump’s blacklisting of Chinese firms. The industry spent about $40 billion on research and development in 2018, out of $220 billion in total revenue. It stands to lose $50 billion if supply-chain decoupling continues. Technology firms rely on large export revenues to amortize and recoup research and development costs. Significant reduction in, or loss of, revenue streams thus hurts innovation. The Defense Department was so concerned about its suppliers’ research and development budgets that it vetoed a proposal last year to tighten export controls.

The same is true for restrictions on participation in research and development. Scientists from China can go elsewhere, including back home to support the Chinese government’s “Thousand Talents Program,” not to mention to other research hubs like Canada’s Toronto-Waterloo Tech Corridor. Canada even has billboards in Silicon Valley inviting foreign talent north. That’s where the cost comes: when the talent accomplishes elsewhere what it might have achieved in America. Take the University of Florida chemistry professor who failed to disclose academic connections to China. He returned to China and created a COVID-19 test that gives results in 40 minutes. To be sure, economic espionage is a serious problem. Between 2011 and 2018, 90 percent of such cases involved China. But this should be tackled without unduly hindering scientific collaboration. America should prioritize scientists innovating at home, not in China.

Making China toxic is having the desired impact on U.S. venture firms. They are excluding Chinese nationals from their partnerships, restructuring investments, or abandoning them to avoid the regulatory dragnet. Chinese venture investment in the United States dropped by about $2 billion in 2019 from the previous year. Those dollars are being diverted to the competition, including back to China. The rules also set a precedent for screening foreign venture capital for political reasons, which, if mishandled, could chill foreign venture investment in America. What does this portend for innovation in the United States? With 25 innovation hubs worldwide, valued above $10 billion each, startups and investors have options. The Cambridge Science Park in the United Kingdom runs a biotechnology program with Tsinghua University with funding from China. In other words, allies are not following Washington’s lead. The top hubs in 2019 were Silicon Valley and New York City, followed by London and Beijing. What should also concern policymakers is that while the United States accounted for 95 percent of startup and venture capital activity globally in the mid-1990s, today it accounts for only half. China commands a quarter, and the rest is spread elsewhere.

China Under Xi: A State-Guided Economic Juggernaut

Washington’s radical shift in policy approaches to U.S. industry and counterproductive focus on regulation to win the technology race came in response to change in China. Since Xi assumed office in 2012, China is more ambitious, assertive, and authoritarian. He has put the country on a collision course with the United States and an international economic order based on relatively free markets and rules of fair trade. While the market prevails in non-strategic sectors of the economy, in strategic sectors (including technology, infrastructure, and energy) it generally does not. The 14th five-year plan, for instance, which covers 2021 to 2025, targets seven “front line” technology sectors for state support, including AI and quantum computing. Under Xi’s party-state capitalism, the state seeks to keep economic growth as high as before but plays a more intrusive role through the Chinese Communist Party. Three-quarters of non-state firms now have party cells embedded in their governance structures, potentially incentivizing them to deliver on the state’s industrial policies for the technology sector.

China’s industrial policies are problematic. First, they violate the terms of the World Trade Organization because domestic firms are treated preferentially. Second, they explicitly seek domination, sparking widespread anxiety. China aims to displace the United States as the world’s sole economic superpower and to become the dominant military power in the Asia-Pacific region, with a world-class military — all by 2049. Those are the ultimate goals of its industrial policies for the technology sector, three of which have garnered considerable international attention. Military-civil fusion is a strategy to link the defense and commercial parts of the economy to foster advances in military technology. Made in China 2025 has targets of 70 percent self-sufficiency in high-technology industries and global market domination. The forthcoming China Standards 2035 aims for “global power” status in setting technology standards. The ability to render competing product lines obsolete unless they adapt to the predominant standard is a form of market power that China seeks as a route to technological dominance. While these plans are all aspirational and may not succeed — certainly investment patterns bear little relationship to industrial policy mandates — they compel other states to assess the potential for adverse impacts to their welfare and interests.

More immediately worrisome is Xi’s goal of making state-owned enterprisesworld-class, globally competitive firms” to lead the country’s technology ascent, backed by forced technology transfer, subsidies, and other discriminatory policies. Xi is succeeding. Last year, 75 percent of the Chinese companies on Fortune’s Global 500 list were state-owned and, for the first time, more Chinese than U.S. companies made the list. State-owned enterprises put foreign private firms at a substantial competitive disadvantage because they are funded by the state and not accountable to shareholders for profits, so they can absorb losses to achieve national goals. Two decades after entering the World Trade Organization, China, the world’s second-largest economy since 2010, still pursues non-market policies that disadvantage everyone else. Foreign firms essentially compete with the Chinese state, not individual Chinese firms, in markets worldwide.

Chinese firms have also honed strengths in areas critical to success in the global technology industry. Leveraging a large domestic market with a growing middle class, they commercialize ideas fast and on a large scale, proving their business models at home, and they are skilled at consumer-focused innovation. Decades of experience in manufacturing has taught them how to cut costs while improving quality.

While Beijing protects its technology industry at home, it is opening markets abroad using more sophisticated economic statecraft. A new development plan repackages the Belt and Road Initiative as a platform for “international policy coordination” on economic and financial integration, as well as trade and technology standards, carrying hints of the Digital Silk Road. The plan portrays China as a responsible global power with goals that align with the interests of the Global South and the U.N. 2030 Agenda for Sustainable Development. This strategy, like Beijing’s push to conclude the Regional Comprehensive Economic Partnership in Asia and a comprehensive investment agreement with the European Union, embed China in blocs that hedge against Washington forming coalitions threatening its rise. China is also expanding its presence in Europe in tangible ways through an extensive network of rail, air, and shipping links that convey people and products back and forth every day, deepening ties at a more basic level.

Internal Obstacles Threatening China’s Economic Rise

Trump framed this highly complex, multifaceted challenge in narrow, tactical terms: how to stop China’s crime and shopping spree for American technology. He also made it a zero-sum contest, and Beijing responded in kind. A “tit-for-tat” pattern ensued during 2020. This carried costs for both sides. The economic relationship is the U.S.-Chinese relationship. It is characterized by a thick web of overlapping economic, commercial, and financial ties. As this economic anchor loses weight, there is not much left to help both sides to overcome their vast differences, and the ability to fix or manage problems gets harder.

Furthermore, the absence of a broad, coherent approach also allows others to shape the relationship and the technology race. U.S. and foreign firms, per a Brookings Institution survey, expect continued Sino-American tensions to bifurcate the global technology landscape, yet they plan to compete in both markets “regardless of the extra cost and complexity.” Both are too lucrative to be ignored. Industry will not shun China, but rather accommodate it for business survival. Efforts to restrict satellite exports in the 1990s similarly backfired when U.S. manufacturers relocated abroad. It is like stumbling backward into policy.

The starting point for developing a comprehensive strategy is the Trump administration’s expansive definition of national security, which included economic competitiveness, innovation, and democratic principles — cited under the rubric “the American way of life” in the 2017 National Security Strategy but reduced to “American values” in the speech Trump gave unveiling it. President Joe Biden’s Interim National Security Strategy reinforces this enhanced concept of national security. It is the required basis of any approach that seeks to place economic concerns front and center and keep bilateral relations sufficiently stable to improve chances of policy success. Otherwise, as Jacques deLisle argues, “when nations … see their national security at stake through competition in technology sectors, those concerns tend to dwarf economic objectives, and to push in the direction of less cooperation and greater conflict.” Trump equated economic security with national security to justify his focus on constraint-based policies as the primary tool to defend America’s innovation ecosystem, which he even rebranded as the “National Security Industrial Base.” But it is also the right foundation for a multidimensional approach. This would be rooted in clear-eyed assessments of China’s economic prospects and the potential to influence its choices. Notably, broad-based economic reform is essential to achieve the Chinese leadership’s goal of advanced-economy levels of prosperity throughout the country.

The problem for Beijing is that the old drivers of economic growth are fading, as a 2019 World Bank collaboration with China’s State Council warned, including the “demographic dividend” of a large labor force that is now rapidly aging. Without broad-based market reform, the country will not use capital and labor efficiently enough to drive future productivity growth, and thus higher wages. That is critical. The leadership’s goal since the 11th and 12th five-year plans, covering 2006 to 2015, has been to shift the economy away from export-led economic growth to a more sustainable pattern of growth driven by Chinese consumers. Today, domestic consumption accounts for about 56 percent of gross domestic product, versus 73 percent for developed economies. A vibrant private sector is essential to wage growth and thus to raising domestic consumption’s contribution to economic expansion. That is why Xi’s shift to non-market management of strategic sectors and implementation of party-state capitalism provokes concern that private sector dynamism will evaporate. Private Chinese firms worry that state-owned enterprises, which Beijing encourages to take stakes in their companies (and vice versa), or party cadres could gain control of corporate boards and undermine market-based decision-making. Private firms account for 80 percent of urban employment, per the Rhodium Group. Unless they “feel confident that they have a place in the Communist Party’s vision of the future,” growing household incomes, and thus growing the economy, will be a challenge.

China has other structural problems, including a huge debt burden, that pose systemic risks and are primary reasons why Xi continues to push for greater market discipline in state-owned enterprises, which have high levels of indebtedness, and financial sector reform more broadly. In a report released in January 2021, the International Monetary Fund warned of potential financial stability risks, including in the housing market. A property market correction, as the Rhodium Group has noted, “could drain wealth from middle-class consumers,” impacting domestic consumption and thus economic growth.

Inherent in these realities are openings to pressure China to reverse its non-market behavior. It is important to get one thing straight at the outset, however: China returning to a path of broad-based economic reform does not equate with the country becoming more democratic. The Chinese Communist Party’s political ideology is Leninist. The party’s legitimacy derives in part from its ability to select leaders who the country sees as “competent,” as Rana Mitter and Elsbeth Johnson argue, but more crucially from these “competent leaders” delivering economic growth, jobs, and better living standards.

How to deliver these outcomes is subject to debate. While the party monopolizes power, it is not a monolithic group. Its 90 million members do not share the same policy preferences. Neither do the provinces and local governments. Xi is attempting to reduce their ability to push back or simply ignore him by recentralizing power, which he has done with great success. But what is submerged beneath Xi’s power grab and purges of prominent party officials? For that matter, what has motivated his pronounced shift from discriminatory policies to a horrific campaign of ethnic cleansing against the Uyghurs that has largely been abetted by a silent world community? Is there a body of opinion within the leadership collective that regards Xi’s doctrinal shift as damaging to China’s future as a great power? We do not know. Factionalism has been an integral part of leadership politics since 1949, as Alice Miller writes, but how the customary jockeying plays out under Xi is not clear. The leadership collectively may be quite uncertain about the direction that Xi is taking, and a strategic U.S. response could figure in their calculations.

Xi himself is a paradox of contradictory impulses about market-oriented reform. He was a proponent of reform during his first six years in office, unveiling what was hailed in 2013 as China’s boldest set of economic reforms in decades — policies he even played a key role in authoring. As late as 2017, the 19th Party Congress declared that markets would be the decisive factor in the allocation of resources. The leadership failed at managing the reform process and, faced with a series of crises, Xi reversed course. He made an assessment of the situation and adjusted accordingly. It is worth testing whether some combination of negotiation, dialogue, multilateralism, pressure, and reshoring might again modify China’s approach. Multilateralism, for example, skillfully pursued, would engage the leadership’s fears about the formation of anti-Beijing blocs that could hinder the country’s global ascent.

The Core of a Comprehensive U.S. Strategy

U.S. strategy for the technology race should start with sound analytical assessments of China’s economy, its structural weaknesses and strengths, the prospects for success of its non-market behavior in this sector, whether private enterprise will get crowded out by state-owned firms, and whether industrial policies are achieving stated goals. Policymakers should examine how to strengthen U.S. competitiveness and innovation, including through constraint-based measures that sharpen America’s technological edge instead of unintentionally blunting it. Washington should also look at global trends in the industry and evaluate the implications of a bifurcated landscape for U.S. interests writ large, including the potential responses of other states, from partners to adversaries, and ways to shape them. These analyses would form the basis for building a strategy of influence and pressure and of strengthening America’s capacity to out-compete and out-innovate China. How can Washington achieve this?

Industry and Domestic Policy

U.S. companies are at the front lines of the technology race. They ought to be proactive in helping Washington to achieve regulatory predictability and stability — and do no harm. An ongoing industry-government dialogue, for instance, would help policymakers understand Sino-American economic interdependence not as an abstract concept, but as something that they grasp well enough to quantify the costs of their actions on the U.S. economy. It would ensure that they recognize the impact of using industrial-age controls on digital-age technology before a federal register notice on proposed regulation is even published. Policymakers also require a clear understanding of the requirements of speed, scale, equity finance, and export markets for the rapid growth that makes technology startups unique, and nothing like small businesses. An ongoing dialogue would better position industry to ensure that any constraints that the government adopts are multilateral and do not discriminate against small, inexperienced startups. U.S. firms would also identify those policies essential to their competitiveness and ability to innovate, like the need for more science, technology, engineering, and math graduates and increased immigration to the United States.

Regulation

The goal of regulation is to force private companies to make non-commercial decisions regarding technology transfer to advance the national interest in constraining China’s access to critical technologies. It is important to mitigate any adverse impacts on competitiveness and innovation. The National Security Commission on Artificial Intelligence has useful ideas for a tailored approach to reduce the burden of regulation and regulatory uncertainty. Others have proposed strictly targeting firms with ties to the Chinese military, and blocking the country’s attempts to recreate global supply chains at home by limiting its supply choices — policies that would need to be multilateral to be effective. Regulatory models that rely on soft law, such as consensus best practices, should also be considered. A hybrid might work for non-controlling foreign investment in U.S. startups, for instance. There is genuine concern that commercially important or controlled technologies might leak from scientists or executives in U.S. firms over to minority Chinese government shareholders. But a CFIUS review takes 45 days to several months, and there is no evidence that venture firms leak technology in this way because limited partners play limited operational and management roles. Given that speed to market is critical to success, “safe harbor” clauses explicitly denying limited partners such roles could allow for a fast-track review. This is an important issue. The British Venture Capital Association has urged the U.K. government, as it considers similar legislation, to avoid the mistakes of the CFIUS regime. The association has proposed criteria and timelines for mandatory filing, for instance, to reduce the impact on competitiveness and innovation, concerns that critics of the U.K. legislation also cite.

Reshoring

Pandemic-induced shortages make the best case for reshoring, including because shareholders and rating agencies are now more likely to judge corporate performance on supply resiliency. Biden has ordered a review of supply chain vulnerabilities, including in the semiconductor industry. In January 2021, Congress passed legislation incentivizing the reshoring of semiconductor manufacturing. Integrated circuits are the building blocks of emerging tech. The United States depends on Taiwan for the most sophisticated chips. If manufacturing is reshored, including by the Taiwan Semiconductor Manufacturing Company building U.S. facilities, Washington should be prepared to handle any impact on cross-strait and U.S.-Chinese relations, or semiconductor manufacturing could become the single point of failure in both.

Multilateral and Alliance Engagement and Pressure

The World Trade Organization is in desperate shape, but expending the effort to rebuild the dispute settlement process, especially, and put the organization back on the map would give Washington a key tool for dealing with China. There is a compelling case for using the trade body to address non-market policies and practices. Yeling Tan documents how the Chinese leadership used the country’s entry into the organization 20 years ago to change the balance of power among competing forces in the country. If reform-minded leaders in Beijing need outside pressure, then a revitalized World Trade Organization is critical to U.S. strategy. The United States could then resume work with Japan and the European Union to address non-market economies and develop new rules on digital trade, industrial subsidies, forced technology transfer, and state-owned enterprises, all of which are problems for the global economy. Ad hoc multilateral coalitions could also be used to address specific Chinese policies and practices. The National Security Commission on Artificial Intelligence recommends building technology alliances with partners in Europe and Asia on data sharing, setting rules and norms, and even research. This would be a pointed multilateral response to China’s pooling of national resources to meet its goals.

Bilateral Trade Negotiations and Pressure

The question is what costs to impose if negotiations fail. Trump’s tariffs produced a “Phase 1” trade deal high on purchasing commitments and low on structural change. Washington should consider tariffs, sanctions, and regulation in consultation with industry and should choose penalties that can be easily lifted so that they do not become a permanent fixture to address other problems — much like country-specific sanctions regimes become self-perpetuating to address ever-growing lists of U.S. concerns. Retaining other constructive sources of pressure would help push negotiating processes with China, including the continued expansion of law enforcement efforts against economic espionage, but under altered procedures so as not to scare off foreign talent. The National Security Commission on Artificial Intelligence has a few recommendations, including amending the Foreign Agent Registration Act to require any recruiter for a foreign talent program to register as a foreign agent, and a special review of visas for advanced degree students and researchers to address potential problems before they arrive in America. Tightened auditing requirements for listing on U.S. stock exchanges and the CFIUS process to deny foreign firms controlling stakes in sensitive areas are also useful policies and sources of pressure.

High-Level Dialogue

U.S.-Chinese relations today are defined by rivalry. Episodes of tension and conflict will very likely continue to be the norm. New rules of the road are needed with clearly understood expectations and mechanisms to resolve differences peacefully. One option would be to resurrect a slimmed-down version of the Strategic and Economic Dialogue, which, in the past, suffered from an overemphasis on process rather than substance. This should be a substantive dialogue with limited participation, even one-on-one, and should be led by a presidential envoy, ideally from the private sector. Economic ties are the most developed, down to the people-to-people level, and remain the foundation of the bilateral relationship. This channel is, therefore, the most promising and reliable one for pragmatic, nuanced discussion.

High-level dialogue would help both sides to manage difficulties without compromising their ability to cooperate and collaborate on serious global problems like climate change, pandemic response, and nonproliferation. It would also give the world’s two largest economies the opportunity to discuss just how much emerging and foundational technologies will disrupt civilization as we know it. It might even be worthwhile to have a specific dialogue devoted to collectively imagining the future challenges that this disruption may bring, simply to improve each side’s understanding of the other’s approach.

A Race of Existential Importance

America and China are vying to lead the world in emerging and foundational technologies, the new crown jewels of geostrategic power. The Trump administration and Congress made blocking China’s acquisition of these critical technologies their primary focus. A policy response was long overdue, but Washington made two serious mistakes. First, policymakers relied on constraint-based measures as if they were silver bullets that only impose costs on the other side. They applied constraints and expanded the government’s restrictive powers while leaving unclear the scope of implementation, risking America’s innovation capacity and global competitiveness. Closing doors, erecting barriers, and inflicting costs have a role to play — but a supporting role, not one as the lead act.

Second, Washington failed to mount a strategic response to the world’s second-largest economy putting massive state resources behind policies and plans to win the most important race the United States has run since the Cold War. The logic is hard to fathom. China is not on an immutable trajectory. Market liberalization has not disappeared under Xi. It is a leadership priority in the financial sector consistent with the International Monetary Fund’s recent alert of financial stability risk. Even more compelling is the warning in a 2019 World Bank report, prepared in cooperation with China’s State Council, of serious structural obstacles to growth unless the government adopts broad-based liberalizing reforms.

Americans were poorly served. Washington never bothered to test the proposition that, confronted with bilateral and coordinated multilateral pushback, and given the need for market reform to preempt serious economic challenges ahead, Beijing could be pressured to change course. It is time to try.

Setting the right foundation is crucial. Sound analytical judgments about China’s policies, plans, and prospects, along with a new framework for the relationship, are the starting point. Neither wholesale confrontation nor wholesale engagement are adequate to address U.S. concerns, but the relationship should be stable for this approach to have any chance of success. The view that economic competitiveness, innovation, and democratic norms are core components of national security should drive the development of a comprehensive strategy into which discrete policies of pressure, negotiation, multilateralism, high-level dialogue, and domestic measures fit. Industry should work closely with the government to ensure this perspective underpins U.S. policy, and the government should recognize that industry is central to the United States winning the technology race and therefore should get a vote on how to run it.

Out-competing and out-innovating China requires that America remain the world’s most attractive innovation hub, enticing the best talent, drawing in the most venture capital, and generating the largest revenues to support U.S. leadership of technology’s newest frontiers. It means continuing to “move fast and break things.” The ethos that made America a technology superpower can keep it so. It also means injecting some strategic realism into U.S. policy. As former Secretary of Defense William Cohen put it, China’s actions have caused the United States to say, “we can’t do business the way we’ve been doing business,” but, “we still have to do business.”

 

 

Ferial Ara Saeed is CEO at Telegraph Strategies LLC, a risk management firm focusing on the analysis of political and economic trends. A former senior American diplomat with expertise on North Asia and the Middle East, she served as deputy U.S. coordinator for information and communications technology policy at the State Department, worked on the negotiating team for China’s accession to the World Trade Organization, and advised the under secretary of state for economic and business affairs on U.S. economic policy towards Asia.

Image: Xinhua (Photo by Wang Jilin)




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