This is the seventieth part in the series The China Chronicles.
Read all the articles here.
Circa 2018 will be remembered as the maiden year of the great Sino-American trade war. As President, Trump is finally possessed of the tools to tackle what he believes is responsible for the loss of millions of American jobs: unfair trade — especially with Beijing. Cut a little deeper though, and the real implications of Trump’s trade war are apparent — a high stakes battle for the future of innovation between the world’s two superpowers.
A more granular study of the Trump administration’s trade strategy
reveals that it targets many industries that are critical to the “Made in China 2025” (MC 2025) initiative — China’s attempt at dominating the entire spectrum of future technologies such as AI and robotics. Regardless of what the future brings for the Trump administration, it is clear that there is broad bipartisan consensus in Washington that China’s high technology ambition requires a reality check.
It is unsurprising that this shift in Sino-American relations should coincide with broader technological change. As our economies become more information intensive with the onset of the fourth industrial revolution (4IR), states intuitively understand that pulling ahead of the curve in breakthrough technologies will translate into economic, military and consequently, geopolitical power.
Regardless of what the future brings for the Trump administration, it is clear that there is broad bipartisan consensus in Washington that China’s high technology ambition requires a reality check.
This is, however, new territory for China, and the headwinds it faces should not be underestimated. Since 2002, Chinese leaders have proceeded under the assumption that they operated in a period of “strategic opportunity” — where a benign security environment coupled with Beijing’s entry into the WTO would facilitate its development. This assumption was
reiterated by President Xi earlier in March, during his address to the 13th National Party Congress.
Yet he must surely know that this is no longer true. If the US National Security Strategy, which labelled China as a “revisionist power,” dealt an opening blow to this presumption, Mike Pence’s
speech earlier in October signaled a clear departure from America’s approach to China. Acknowledging that much of the US’ China policy was framed when the US was still “heady with optimism” after the collapse of the Soviet Union, Pence hailed the Trump administration’s “actions to re-set America’s economic and strategic relationship with China, to finally put America First.”
“America First” versus the “China Dream”
This generational shift in American policy will have three critical consequences for the Middle Kingdom and its ambitions for leadership in the fourth industrial revolution.
First
, China can no longer rely on the United States as its primary supplier of innovation. Over the years, Beijing has essentially exploited the open nature of America’s society — benefiting from foreign investment, unhampered access to American universities and knowledge, forced technology transfers from American firms and wide scale industrial espionage. Since 2006, this
Chinese policy was known as known as IDAR (“introducing, digesting, absorbing, and re-innovating”).
It is still unclear if it was ever China’s intention for this virtuous transfer to end so abruptly. While the announcement of the MC 2025 initiative in 2015 did suggest that China was confident in its ability to innovate indigenously, the Communist Party certainly did not anticipate a Trump presidency.
Under Trump, Washington has doubled down on its scrutiny of Chinese investments in American high tech industries by
strengthening regulatory and oversight institutions; ratcheting up domestic enforcement against China’s theft of intellectual property;
reinstating visa controls against Chinese nationals in certain sensitive sectors; and even going so far as to
consider nationalising its 5G network. Washington’s new China policy is also being
replicated, albeit to a lesser extent, in states such as Australia, German, France, the UK and Japan, who are all re-examining their tech relationship with Beijing.
While the announcement of the MC 2025 initiative in 2015 did suggest that China was confident in its ability to innovate indigenously, the Communist Party certainly did not anticipate a Trump presidency.
Seen in this light, the Communist Party’s
dikat ordering state media to underplay the MC 2025 initiative strongly suggests its leaders are worried. And they have cause to be. A 2015, McKinsey
report notes that China’s contribution to global innovation has largely been its ability to scale technologies; while its market share of breakthrough technologies is significantly smaller. In a way, the MC 2025 itself acknowledges this reality: One of China’s primary method for achieving indigenisation of “core technologies” was to
double down on its investments and acquisitions in critical high-tech sectors currently controlled by the United States and Europe.
This now seems unlikely. Towards the end of October, the US Department of Commerce
banned American firms from selling technologies to a key Chinese semiconductor company on grounds of IP theft, national security and economic competitiveness. Even though company was one amongst many chose by President Xi to wean Chinese reliance off American technology, the move is expected to cripple it, highlighting the
vulnerable position of China’s high technology ecosystem.
Second, China will have to contest for dominance over the supply chains of the 4IR. China could become the hub of dense transcontinental trading networks because western firms outsourced their supply chains
en masse, a process that allowed Beijing to gain technical know-how, intellectual property, corporate experience, brand value and new technologies. In other words, China’s climb up the value chain to become a geopolitical superpower was, in many ways, underwritten by the trade rules of its competitors today.
These countries now know that Beijing’s efforts to achieve “70 percent self-sufficiency” in high tech industries would
devastate their own industrial export capabilities and market share. It is almost certain therefore, that China will no longer get a free pass. Once again, the US is setting the terms of this engagement. In October, news reports
revealed the United States introduced a new “non-market economy” clause into the USMCA (the reworked NAFTA), designed to limit America’s trade partners dependence on China. Senior officials, such as US Trade Secretary Wilbur Ross, are
suggesting that this was only the first amongst many such deals.
China’s climb up the value chain to become a geopolitical superpower was, in many ways, underwritten by the trade rules of its competitors today.
And with wariness over the MC 2025 growing in industrial powers like Japan, South Korea, Germany and the UK, it is only a matter of time until they start coordinating with Washington’s policy in some form or measure. Already, for example, the trade ministers of the US, the European Union and Japan issued a
joint statement in September pledging to “address non market-oriented policies and practices of third countries.” In fact, Germany’s top industry body recently
called for a complete overhaul of Berlin’s relationship with Beijing, recommending stronger oversight for Chinese investments and calling for a “diplomatic offensive” against its industrial policy.
While it is unlikely that many developing economies would acquiesce to America’s “poison pill” clause, given higher levels of interdependence with Beijing, it is clear that Washington is only beginning to explore options to box China out of supply chains in the 4IR.
Finally, Chinese technology companies will find competing in global markets over next generation technologies more difficult. Even today, experts continue to debate whether the American West Coast is more innovative than China’s East Coast. A significant condition for leadership in the fourth industrial revolution, however, will depend on how their respective businesses go global, and not just their capacity to innovate.
For now, China has the upper hand with its “
Digital Silk Road” (DSR); a multimillion dollar initiative to export China’s information technology infrastructure, digital platforms, and technical standards to build a “community of common destiny in cyberspace.” Like the Belt and Road Initiative (BRI), the DSR is making inroads in developing countries from South East Asia to Latin America. However, it is worth realising that there is now a growing backlash against China’s means of doing business through the BRI. In other words, developing countries, ranging from Myanmar to Sierra Leone, are wary of China’s unsustainable financing propositions and its strategic motivations.
A significant condition for leadership in the fourth industrial revolution, however, will depend on how their respective businesses go global, and not just their capacity to innovate.
There is every reason to believe that a similar fate awaits the DSR. As digital products increasingly
converge on the biological, informational and physical aspects of human society, there is only a limited measure of risk that societies around the world will be willing to tolerate. While most developing countries currently welcome China’s digital infrastructure push, given low costs and large scales, the Communist Party’s
pervasive influence in technology companies, coupled with its
policy of “civilian-military integration” raise questions about the long term sustainability of China’s tech companies global ambitions.
Consider, for example, that a multiyear investigation into China’s manufacturing practices by
Bloomberg concluded that “China’s intelligence community orchestrated pervasive infiltration of servers used to power everything from MRI machines to drones used by the CIA and US army.” Similarly, reports from earlier in January
suggested that China had bugged the African Union headquarters, whose information systems it had built and installed; Australian intelligence officials have recently
confirmed that Huawei likely assisted Beijing’s espionage efforts; Japan is
scrutinising investments from ZTE due to surveillance fears; and even the UK, which earlier welcomed investments from Huawei, recently released a report
warning of significant cybersecurity risk.
These challenges are going to exacerbate for Beijing as Washington and its partners begin to incorporate cultural values and ethics as part of competitive national strategies in the 4IR. Indeed, the technology “cold war” between the US and China will see both states exert their own standards, values, and rules for the global technology ecosystem. Consider for example, that the US is already
contemplating sanctions and export controls against Hikvision, the company responsible for building Beijing’s surveillance architecture in Xinjiang. With most Chinese tech companies involved in surveillance infrastructure in some way or another, it is only a matter of time before they find themselves under an American scanner.
A strained interdependence
Let there be no mistake, however, that Beijing now possesses formidable national capacity to lead the fourth industrial revolution — whether it is in terms of innovation, commercial strength, agenda setting legitimacy, or military power. President Xi’s rhetoric certainly does not appear concessional. In a recent
speech on information technology, he remained committed to the path of “self-reliance” in “core technologies,” reminding everyone that Beijing still considers technology an “important instrument of the state.” Ahead of the much anticipated G-20 meeting in Argentina, Xi
called on the US to “respect China’s choices.”
Since Xi Jinping’s elevation to General Secretary in 2012, China has doubled down on its “all of the government” approach to global power. In many ways, Beijing is aping the behaviour of its great power predecessors — selectively and unilaterally conforming to or dismissing global rules. For the first time since its opening up in the 1970’s however, the Middle Kingdom will now have to deal with an America that sees little value in giving it a free pass. Washington is in the midst of its own recalibration and will soon exert the full spectrum of its considerable national capabilities, network of partnerships and influence over international system to compete with China.
History offers little guidance to both the US and China. Never before have had two competing powers shared such a high level of commercial interdependence. As their strategic competition forces business and technology industries to “decouple,” however, it appears that China will have to go back to the drawing board.
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