The U.S.-China Trade War Is a Competition for Technological Leadership

The United States has significantly ratcheted up its trade war with China in recent weeks by firing two new shots. First, President Trump signed an executive order that is expected to restrict Chinese telecommunications companies Huawei and ZTE Corp. from selling their equipment and services in the United States. Second, the Department of Commerce put Huawei on an export control blacklist that forbids U.S. individuals and businesses from selling goods to these companies without a license from the U.S. government. Such a license can be denied “if the sale or transfer would harm U.S. national security or foreign policy interests.”

In a new paper, we argue that these geoeconomic moves reflect increasing U.S.-China technological competition, which has the potential to radically reshape global tech supply chains and international economic governance. By “geoeconomic,” we mean the “use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results.” Although the U.S.-China trade war receives a lot of attention, it masks a more significant “tech war” over innovation in the 21st century. The United States is currently the world leader in technological innovation, which it has used to fuel both its economic advantage and its military predominance. It is now facing a technological challenger in the form of China, which is leading the U.S. to undertake shielding, stifling and spurring measures to protect its innovative edge.

Some U.S. commentators portray heightened tensions between China and the United States as a new Cold War in which the two economic superpowers may seek to “decouple” their economies in general in order to limit interdependence across trade, investment and finance. However, the emergence of U.S.-China strategic rivalry is more likely to result in the two great powers seeking to develop what Thomas Wright has called “spheres of independence” in certain key areas, like information communications technology (ICT). Although the future can never be certain, it seems as though the two rivals are headed toward a form of competitive and cooperative “managed interdependence” rather than complete isolation or total integration.

China’s Innovation Imperative: Making, Transacting and Taking

In recent decades, China has taken enormous strides forward, lifting vast numbers of people out of poverty by becoming the world’s manufacturing hub. As a rising great power, China faces an “innovation imperative:” It needs to acquire and develop new technologies to enjoy long-term growth, continue its ascent up the global value chain and arm itself against a dominant strategic competitor with more advanced military capabilities. China has sought to close this technological gap through a combination of what Andrew Kennedy and Darren Lim describe as making, transacting and taking:

• Making consists of supporting domestic firms in developing indigenous innovative and manufacturing capacity so that China can be more self-reliant when it comes to creating and producing new technologies. For example, the Made in China 2025 industrial policy seeks to spur Chinese innovation and technological advancement in key emerging technology sectors.
• Transacting involves concluding commercial transactions with foreign entities that result in the transfer of key technology. This goal can be achieved by Chinese companies buying or investing in foreign technology companies, or by the government requiring foreign companies that want to invest in China to work with domestic firms or transfer some of their intellectual property in return for market access.
• Taking means acquiring existing technology from foreign states and companies without paying for it. This objective can be realized through legal means, such as collecting open-source material like published scientific papers or sending Chinese students to study abroad, or through illegal means, such as stealing intellectual property from foreign governments and competitors.

U.S. Technological Supremacy: Shielding, Stifling and Spurring

Until recently, the United States was fairly dismissive when it came to Chinese innovation capacity, viewing China as a “copycat nation” that could only steal or “rip off” technological innovations. Yet China has made significant investments in research and development in recent years, and Chinese companies have made impressive strides forward across a range of areas, including ICT and artificial intelligence (AI). As China seeks to move itself forward, the United States now faces an imperative to maintain its “technological supremacy.” It accordingly has an interest in defending its existing technological dominance, hobbling the technological ambitions of its upcoming rival China and doubling down on its own technological advancement to ensure it retains its edge going forward.

It is difficult to develop a coherent strategy about how to protect America’s technological supremacy. One of the chief problems is that views differ over whether openness in trading, investment, and research and development with an economic and strategic competitor represents a security risk (because of the possibility of knowledge and material transfers) or a security gain (because it bolsters thriving technology industries that are then best placed to retain their innovative edge). For example, Hugo Meijer’s work on U.S. export controls contrasts the views of “Control Hawks,” who believe that exporting sensitive technologies to competitors is a security risk, with those of “Run Faster” advocates, who argue that strict export controls may actually damage U.S. security by undermining the competitiveness of the commercial industrial base upon which the Pentagon relies for advanced defense technology.

Any strategy by the incumbent technological power will depend on the prevailing views as to the best balance to strike between being open and closed. In the past few decades, the Run Faster advocates have been predominant, leading to relative open policies on measures like welcoming foreign students and foreign workers, and permitting acquisitions by foreign buyers, including in STEM fields and the technology sector. However, as U.S. fears have been pricked by Chinese technological advances, the balance seems to be shifting closer toward the Control Hawk view. Wherever the balance is ultimately struck, we should expect that the incumbent power will seek to protect its lead through some combination of what we call shielding, stifling and spurring:

• Shielding consists of protecting domestic technological knowledge from taking and transacting by a competitor. Control Hawks would argue for clamping down on a wide range of activities by foreign competitors, whereas Run Faster advocates might suggest working out a narrower range of objectionable behaviors and policing those vigorously. In current U.S. practice, shielding includes prosecuting Chinese nationals and companies for industrial espionage; resisting “forced technology transfers”; restricting the scope for American universities to do collaborative research on “sensitive” technology with Chinese partners; and expanding the activities of the Committee on Foreign Investment in the United States (CFIUS) to permit the review and blocking of, inter alia, all nonpassive foreign investments in any company that deals with “critical technology” (including “emerging and foundational technologies”), “critical infrastructure” or “sensitive personal data of United States citizens that may be exploited in a manner that threatens national security.”
• Stifling involves taking actions to inhibit the strategic competitor’s capacity for making. U.S. practice in this regard includes imposing unilateral tariffs with a view, among other things, to pressuring China to moderate industrial policies that support high-technology industries; adopting new export controls on “emerging and foundational technologies” to prevent the transfer of next-generation technologies, such as quantum computing, robotics and artificial intelligence; banning the sale of components like semiconductors to Chinese companies like ZTE and Huawei; and seeking to prevent the purchase or adoption of Chinese technology like Huawei and 5G domestically and abroad. Although openly admitting to trying to stifle foreign competition may be problematic from an international trade and investment law perspective, this rationale is increasingly appearing in U.S. sources as an explanation for the economic policies that the United States is or should be adopting in order to counter China.
• Spurring means seeking to stimulate technological innovation by, for instance, increasing government research and development funding, adopting a more extensive industrial policy, attracting the best human talent from around the world and seeking to ensure for domestic companies a competitive advantage in markets abroad. The United States has worked hard to open foreign markets for its companies and has a strong history of attracting and retaining foreign talent, but its support for research funding and the strength and coherence of its industrial policy have waned over the years, leading to ongoing debates over whether such measures should be reinvigorated. Political scientists have identified “creative insecurity” as a key factor in spurring technological innovation, which occurs when a state’s perception of external security threats outweighs the drag of internal distributional fights between domestic stakeholders.

The new measures adopted by the United States this week represent forms of shielding (protecting the domestic U.S. market from sales by Huawei and ZTE within America) and stifling (attempting to undermine the growth and development of Chinese ICT companies operating around the world). Other actions, such as restricting knowledge transfers through limitations on Chinese STEM students and researchers studying and working in the United States, can have elements of both shielding (to prevent Chinese taking of existing technology) and stifling (to slow Chinese innovation through limiting human capacity). But it is important to note that many advocates still exist for a more open approach, particularly when it comes to welcoming foreign students and workers to attract the best global talent to the United States in order to fuel its innovative capacity.

Actions and Reactions: Toward Spheres of Independence

Some U.S. commentators argue that shielding, stifling and spurring measures are necessary so that the two economies can be “decoupled” and China’s “technonationalism” can be effectively countered. In response to such actions, Chinese President Xi Jinping has increasingly invoked the importance of zìlìgēngshēng, which means “self-reliance and sufficiency.” According to Xi: “Only by mastering crucial core technologies with our own hands can we … fundamentally safeguard our national economic security, national security, and security in other areas.” Thus, offensive and defensive actions by the technological incumbent might spur further offensive and defensive moves by the technological challenger, and both may increase levels of and desire for independence.

The U.S.-China economic and technological rivalry is likely to increase as data becomes a central battleground, given the unknown and potentially outsized economic benefits and security risks it possesses. For instance, CFIUS recently requested that Chinese firms divest from Grindr (a gay dating app) and PatientsLikeMe (a personal health app) over concerns about access to sensitive data. China has declared big data to be a “fundamental strategic resource” and has sought to protect this strategic asset by requiring the localization of data within the country, which fits within China’s broader policy of protecting its “cyberspace sovereignty.”

Economically, the Chinese government seeks to use data localization to give an advantage to Chinese companies over Western ones. Strategically, data localization helps ensure that Chinese data cannot be accessed by Western governments, a fear that became visceral for states like China and Russia after the Snowden revelations. Moreover, data localization can be both defensive (protecting against U.S. spying or interference) or offensive. In the latter case, localization can help secure China’s big data advantage, which in turn will give the country a head start in AI development with its potential to reap large economic and military advantages. And it can enable the Chinese government to access this data in accordance with its National Intelligence Law and Counter-Espionage Law, which require Chinese individuals and companies to comply with requests for information related to intelligence and counter-espionage work.

Conclusion

Across a variety of areas, from export controls to investment screening to data localization, these developments suggest that the United States and China are taking active steps to decrease the interdependence of their economies by moving toward greater spheres of independence in certain strategic sectors, such as ICT and military supply chains. The question is not one of interdependence versus independence; rather, it is one of what degree of interdependence and independence is desirable and possible, in which areas and subject to which precautions. These are important questions that countries and companies must consider in the months and years ahead.