SinoTech: Google Plans Opening to China, and the NDAA Lets the ZTE Deal Off the Hook

The U.S.-China trade conflict has continued to escalate, as both sides appear determined not to flinch among rapidly rising tariff threats. On Aug. 7, the U.S. Trade Representative announced the list of Chinese imports that will be targeted in the next $16 billion tariff hike scheduled for Aug. 23; Chinese authorities immediately responded with an equivalent list of $16 billion in American imports. The Trump administration will now consider raising the stakes dramatically, with tariffs against $200 billion in Chinese imports. On July 30, President Trump instructed administration officials to consider raising the proposed tariff rate on those products from 10 percent, as originally outlined in June of this year, to 25 percent, which would match the tariffs imposed by the U.S. against $34 billion in Chinese tech imports last month, as well as the Chinese government’s matching tariffs. Those proposed $200 billion tariffs, initiated under Section 301 of the Trade Act of 1974, must first work their way through notice and comment procedures and are not expected to be implemented until at least September. Early reports indicated that administration officials would solicit industry feedback on both the 10 percent and 25 percent rates.

The Trump administration’s proposed 15 percent hike reportedly reflects growing frustration with the Chinese government’s unwillingness to amend its trade policies. On August 3, the Chinese Ministry of Commerce responded to the hike by proposing $60 billion in new tariffs against U.S. imports. Those tariffs, combined with the 25 percent tariffs that China has already imposed against $34 billion in American imports and the $16 billion tariffs lying in wait against further U.S. levies, would bring the total U.S. goods targeted to $110 billion, covering nearly all American exports to China. The Chinese government will thus have to find new mechanisms to retaliate; a statement by the Ministry of Commerce promised that China would “retaliate to defend national dignity and the people’s interests,” but the mechanisms of that retaliation were not immediately clear. The Chinese government has partially offset American tariffs by allowing the yuan to depreciate substantially in recent months, although the People’s Bank of China moved last Friday to stabilize the currency. Recent reports indicate that Chinese officials are considering new strategies to combat American escalation, and it is unclear whether the holdup by Chinese regulators that led to the demise of Qualcomm’s bid to purchase Dutch company NXP might be part of the “qualitative measures” Chinese leaders have threatened in retaliation for U.S. tariffs.

Google pushes toward Chinese market; Facebook maintains interest

Google is planning to launch a censored search engine for the Chinese market, according to documents obtained by The Intercept last Wednesday. The search engine, developed in a project code-named “Dragonfly” and disclosed only to a few hundred employees, would automatically detect and block websites prohibited by China’s national firewall.. Google previously provided censored search results from 2006, when it first entered the Chinese market, until 2010, when it decided to stop censoring results after suffering cyber attacks against the Gmail accounts of Chinese human rights activists. Chinese officials quickly blocked the uncensored results, and Google search has not been available in China since.

Google is also developing a news-aggregation app for the Chinese market that uses artificial intelligence to tailor personalized news feeds, the New York TImes reports. Both apps will be designed to meet the regulations of China’s censorship apparatus, though meetings between Google and Chinese administrators have suffered since the trade conflict crystalized earlier this year, leading some to speculate that Google’s stake in the Chinese market could become a bargaining chip in that conflict. According to Reuters, the search engine would be unlikely to win approval by the end of the year, though Chinese state-owned media suggested that the new products would be welcome if they complied with domestic law. Nevertheless, Google appears committed to reentering the Chinese market; the company is also in talks with major Chinese technology companies to bring its cloud services to China. Over the past year, the tech giant also has invested over half a billion dollars in Chinese e-commerce firm JD.com, introduced a Chinese version of its file management app, and established an AI research center in Beijing.

Project Dragonfly quickly sparked quiet resistance among some Google employees, drawing comparisons with Project Maven, the Google-Pentagon AI project that was terminated earlier this year due to internal opposition at the company. A bipartisan group of six senators submitted a letter to Google CEO Sundar Pichai, demanding to know how Google’s creation of a censored search engine would accord with the company’s ethical commitments. If Google does enter the Chinese market, it will face an uphill battle against entrenched Chinese search giant Baidu, whose CEO promised that Baidu would “win again” in a head-to-head contest. Baidu dominated the Chinese search landscape even when Google was active in the country.

Facebook has suffered its own setback in China, as its plan to open a new technology center in Hangzhou fell apart as quickly as it had emerged. The center first attracted attention in late July, when a posting on China’s National Enterprise Credit Information Publicity System indicated that the project had won regulatory approval. Facebook quickly announced that its Chinese subsidiary would receive an initial investment of $30 million and would serve as an “innovative hub … to support Chinese developers, innovators and start-ups,” similar to the hubs that Facebook had opened in Brazil, France, India and South Korea. Within 24 hours, however, the online posting had been scrubbed and the investment was off, reportedly after the Cyberspace Administration of China, the country's principal internet regulator, withdrew approval of the business license because it felt that the provincial government had acted without sufficient consultation.

Congress passes NDAA, abandoning attempt to block ZTE deal

The 2019 National Defense Authorization Act (NDAA) is headed to the White House after passing the Senate by an 87-10 vote last Wednesday. The law, though chock-full of China-focused provisions, will not block President Trump’s deal to save beleaguered Chinese telecom ZTE, as earlier Senate versions would have; China hawks were reportedly forced to sacrifice that provision in order to ensure more robust reform to the Committee on Foreign Investment in the United States (CFIUS). Under those reforms, CFIUS’s jurisdiction will expand to a broader range of non-controlling investment in American companies involved in developing and selling critical technologies, critical infrastructure, and personal data; CFIUS will be entitled to pursue investment reviews unilaterally; and the Commerce Department will be required to publish a biannual report on Chinese investment in the U.S. The U.S. export-control regime will expand to include identification and control of certain emerging technologies essential to national security. The NDAA also prohibits executive agencies from procuring telecommunications or video surveillance equipment from ZTE, Huawei, or other firms affiliated with the Chinese government, and authorizes the president to order “proportional action in foreign cyberspace” in response to cyberattacks believed to be launched by China, Russia, Iran or North Korea. The must-past bill will now head to President Trump, who is widely expected to sign it into law.

In other news:

• Huawei announced plans to swell its annual research-and-development budget to over $15 billion, after spending roughly $13.2 billion last year. That increased spending would place it on par on par with Alphabet, which invested $16.6 billion last year, and bring it closer to Amazon, whose $22.6 billion in research expenditures was the highest among American firms. Analysis indicates that Huawei surpassed Apple in global smartphone shipments in the second quarter, making it the world’s second-largest smartphone manufacturer after Samsung.
• At least five state-controlled or state-affiliated Chinese media outlets criticized Apple last week for failing to sufficiently censor content on its iMessage app. The coordinated campaign indicates that Apple is likely to come under increased regulatory scrutiny during the course of the trade war, and may be used as a bargaining chip, although no sanctions have yet been announced. An Apple spokeswoman stated that the company was working with Chinese regulators to find a fix.
• China’s third largest e-commerce company Pinduoduo debuted in Nasdaq to a rousing $30 billion valuation. Pinduoduo’s business model provides discounts to users who band together with other users to make purchases, but has long suffered criticism for tolerating and promoting fake goods and imitations. China’s market regulators initiated an investigation into reports of counterfeit good sold on Pinduoduo last Wednesday, following a trademark infringement lawsuit filed in New York federal court by U.S. diaper manufacturer Daddy’s Choice last month.
• The Commerce Department added eight Chinese companies and thirty-six of their subsidiaries to a list of Chinese firms subject to export controls. Those companies, which are predominantly state-owned firms operating in the aerospace or military technology industries, will now find it substantially more difficult to purchase certain military and dual-use goods from American suppliers.

Commentary & Analysis

Elsewhere on Lawfare, Stephanie Zable explains how the finalized version of the Foreign Investment Risk Review Modernization Act (FIRRMA) passed in the NDAA will affect the CFIUS review and export control processes; Shannon Togawa Mercer and Robert Williams argue that the Trump administration’s chaotic trade approach may be undermining its strategic position in its trade dispute with China; Herb Lin parses the National Counterintelligence and Security Center’s recent report on cyber-enabled theft of American intellectual property; and Bobby Chesney explains the provisions of the NDAA relevant to cyber operations, including authorization of “proportional” defense against cyberattacks launched by China or other likely aggressors. In last week’s Cyberlaw Podcast, Stewart Baker and crew discuss the breakdown of the Qualcomm-NXP deal (at 21:45). At Just Security, Sarah McKune and Ronald Deibert interpret Google’s “Dragonfly” project as recognition that China’s ‘cybersovereignty’ model is here to stay.

At Brookings, Cheng Li and Diana Liang outline three factors preventing China and the U.S. from negotiating a solution to the trade conflict, and Kevin C. Desouza, Chen Ye, and Xiaofeng Wang analyze attempts by Chinese local governments and academia to lead the domestic push into blockchain. At the Center for Strategic and International Studies, Samm Sacks and Manyi Kathy Li have published a new report on the Chinese government’s proliferation of cybersecurity standards, and the difficulties that those standards create for foreign firms operating in China. In the Diplomat, Yanfei Li outlines three factors key to China’s technological rise.

In Politico, Zach Dorfman reports on attempts by Chinese and Russian espionage to infiltrate Silicon Valley. In the New York Times Magazine, Brook Larmer examines the Chinese government’s finely-tuned responses to blunt American policies. In the Nikkei Asian Review, Minxin Pei summarizes Chinese domestic criticism of how President Xi has handled the trade conflict and overall U.S.-China relations. Ali Wyne analyzes the security implications of an escalating trade conflict in Foreign Affairs, and in Foreign Policy Elsa B. Kania contrasts the American and Chinese approaches to AI’s ethical quandaries. In Wired, Tom Simonite tallies up the challenges that Google might face in the Chinese market; Zen Soo, Sarah Dai, and Yingzhi Yang of the South China Morning post take a more optimistic view.