Fear Not Technological Disengagement and Competition with China


Fear Not Technological Disengagement and Competition with China

Despite the anticipated signing of a U.S.-Chinese first phase trade deal, the agreement will do little to resolve the clash of fundamentally different Chinese and American views on the shape and direction of the global order. Most national security officials in Washington realize this but the current long-term U.S. approach to China still falls short. Washington lacks defined peacetime competitive strategies that use latent national power to shape China’s strategic behavior. Such strategies will need to build on U.S. competitive advantages, one of the most important being America’s technological innovation ecosystem.

Conventional wisdom holds that China will surpass the United States in the long term due to its economic momentum and increasingly innovative economy. But this wisdom underestimates America’s unique structural advantages in innovation that will enable the United States to lead China across a range of strategic and emerging technologies. The United States and its allies therefore should not fear selective technological disengagement, in which U.S.-centric and Chinese-centric systems for research and development, production, and use of certain technologies are increasingly separated. Rather, Washington should see technology as a legitimate and favorable domain of competition.

 

 

Traditional U.S. approaches to maintaining a technological advantage have been standalone and defensive, without an explicit overarching strategy. Such efforts include withholding access to U.S. technology and knowhow through export controls and investment security reviews. Recently, many have also called for policies that reinvigorate the U.S. science and technology innovation ecosystem. Defending and improving U.S. innovation is critical, but Washington is in a long-term competition with a dynamic competitor in which relative technological balances matter. Instead of simply focusing on improving and defending American innovation, Washington ought not underestimate its ability to shape Chinese technological developments.

A new approach toward China should include a coherent and enforceable long-term technology cost-imposition strategy. This strategy incorporates both defensive and proactive approaches to restrict, shape, and strain China’s development of defense goods, dual-use items, and other strategic and emerging technologies that underwrite long-term U.S. economic competitiveness. Using primarily targeted measures, Washington can limit China’s military strength, preserve U.S. commercial and military technological superiority, and pressure Beijing to abide by international laws and norms. Although implementing such a strategy will have adverse economic effects for both sides, the negative consequences for the United States will be measured in years, while the more severe repercussions for China will last decades. The long-term result will be a China that is constrained and influenced by U.S. technological superiority and that, ideally, chooses accommodation rather than confrontation with Washington.

China’s Structural Shortcomings in Innovation

Arguments that China cannot innovate are simply unfounded, but every system suffers from certain pathologies. Although China’s economy is climbing the innovation ladder — which ranges from simple copying to pathbreaking innovation — the Chinese Communist Party stubbornly subscribes to a techno-nationalist state-led development model that produces uneven technological development and undermines long-term innovation. Chinese leaders have long argued for technological self-reliance, yet China still depends on Western technology across various industries and possesses structural weaknesses in technological innovation. This is particularly true for strategic technologies, the advanced technologies that underlie a state’s military power and drive economic growth. China’s continuing struggle to strengthen itself after decades of legal and illegal efforts to absorb Western technology reveals the central weaknesses of Beijing’s technology policy and China’s system of innovation.

National development plans, policies, and directives, including Made in China 2025, directly and indirectly distort distribution of public and private capital and resources, producing overinvestment and inefficiency. Firms — particularly startups and small enterprises — outside of areas deemed strategically important are crowded out in securing financing from state-owned banks and even private funds. Besides central directives, other problems persist. National and local party officials interfere with various economic interactions for self-interested reasons, producing inefficient outcomes. China’s private capital cautiously focuses on development of commercially ready technologies rather than on basic and applied research that could produce groundbreaking innovation. Intellectual property enforcement, despite recent improvements, remains weak, discouraging investment in long-term research and development. Finally, China’s closed political system may stifle the innovative thinking necessary for transformative discovery. When and where China does produce major innovations in technologically complex fields, it often succeeds only in creating islands of excellence.

This does not mean that China cannot innovate and achieve rapid technological advances. In the 1960s and 1970s, China’s leadership steadfastly pursued “Two Bombs, One Satellite,” the term for the development of a nuclear bomb, a hydrogen bomb, a satellite, and their related missile delivery systems. That China accomplished these feats largely through independent effort, even accounting for the Soviet Union’s substantial initial support in the 1950s, is remarkable. But these achievements in strategic weapons occurred through a unique process. China’s traditionally siloed, top-down research ecosystem was temporarily supplanted by a system in which top-down leadership attention and resources were combined with uncharacteristically flat, entrepreneurial, and risk-taking research organizations and scientists. Yet the opportunity costs were high, as China’s conventional weapons programs and civilian economic industries were neglected, requiring decades to recover.

China’s dramatic trade- and investment-driven economic growth since the 1980s has overshadowed its setbacks in research, development, and production of strategic technologies, such as semiconductors and aircraft. In an attempt to catch up to Western semiconductor technology, China has applied decades of effort, through central planning, education, investment, forced technology transfer, subsidies, espionage, and other means. Yet China remains overwhelmingly dependent on imports of semiconductors and semiconductor production equipment for economically essential products, from advanced manufacturing equipment to mobile phones. This critical enduring vulnerability was laid bare last year when the U.S. Commerce Department dealt a near-death blow to Chinese telecommunications company ZTE by initially restricting U.S. technology exports.

Similarly, China has long aspired to develop jet aircraft to compete with Western manufacturers. Chinese aerospace company Comac has spent years developing the ARJ21 regional jet and the C919 narrow-body jet, but repeated delays and safety and efficiency concerns prevent them from gaining acceptance internationally. Moreover, both the ARJ21 and C919 are indigenously built only on the surface — the airframes are made in China, but the engines and nearly all the advanced avionics vital to aircraft operation are imported from abroad.

Some foreign observers characterize China as a major innovator, particularly in the digital economy. Chinese technology companies led the development of innovative, integrated apps, such as Tencent’s WeChat, which contains features ranging from messaging to mobile payments to gaming. Yet succeeding at innovation in mobile technologies is generally easier than innovating in the more complex and fundamentally valuable fields of science and engineering, which are the foundation of most strategic technologies and in which China still faces daunting challenges. Despite movement toward greater decentralization and risk taking, continued ideological emphasis on top-down development contributes to China’s difficulty in replicating its earlier strategic weapons program model. And China’s successes in innovating in science and engineering underscore its continued dependence on foreign technology. Achievements in areas such as wind turbines, high-speed rail, solar panels, and communications (e.g. Huawei) mainly result from strong government demand and technology transfer from abroad, both legal and illegal.

Enduring Relative U.S. Advantages in Technology and Innovation

China’s self-imposed predicament is made even more challenging because it faces a dynamic competitor with long-term advantages in technological innovation. The United States has the world’s best universities and research and development institutes, which is why, despite a recent modest decline, over one million international students — one-third of whom hail from China — annually pursue studies in America. This education system breeds a highly talented and productive workforce capable of generating innovation and commercializing its potential. The United States remains a global leader in public and private investment in basic and applied research and development. The U.S. model of public-private research collaboration incubates innovative ideas that the market would otherwise ignore. The financial system allocates private capital efficiently across business types. Most importantly, the United States possesses a higher technological baseline that, if adequately defended through cyber, regulatory, legal, and law enforcement measures, will provide U.S. firms an edge in producing efficient and marketable products.

Critiques of U.S. technology policy often include stark comparisons with China’s centralized plans and lament insufficient U.S. federal government planning. Many of these commentators do recommend valuable proposals and Washington must ensure America’s continued technological superiority, including through consistent federal research and development funding increases, new education and immigration policy measures to provide the necessary supply of science and technology researchers, and investments in infrastructure and training in nascent technological fields. But comparisons between the United States and China regarding innovation cannot focus solely on national policy plans, as the decentralized yet entrepreneurial U.S. innovation ecosystem is far preferable to China’s overly centralized and distorted one.

Seize the Advantage: A U.S. Technology Cost-Imposition Strategy Against China

The upshot of the relative structural differences in innovation is that the United States is positioned to continue being the world’s leading innovator across a broad range of strategic and emerging technologies for at least the next 15 to 20 years, if not longer. This leadership is a form of leverage that can be exercised by U.S. policymakers. Due to both U.S. technological achievements and uneven innovation within China, Chinese companies will need to continue integrating U.S. technology and knowhow into their products, both to remain competitive in international markets and to offer technologically advanced products to domestic civilian and military customers to support China’s modernization goals.

Defensive and proactive measures that disrupt China’s absorption of advanced U.S. technology and knowhow would strain the embedded structural limitations, inefficiencies, and high opportunity costs within China’s innovation ecosystem, forcing it to undertake, sometimes vainly, development of a broader and more complex range of technologies than it is capable of effectively addressing. By imposing such costs on Beijing, Washington can preserve America’s commercial and military relative technological edge, limit China’s military capabilities, and pressure China to refrain from destabilizing actions abroad.

The U.S. mindset has primarily focused on defending against Chinese absorption of advanced U.S. technology and knowhow with military applications. Newly strengthened traditional measures, such as investment security reviews and the export control system, are already imposing costs on China. Recently, the U.S. government has been implementing and strengthening new measures, such as prohibiting government procurement of telecommunications equipment from Huawei and ZTE and forbidding certain government personnel from joining Chinese talent recruitment programs. But these efforts are not enough.

U.S. policymakers possess broad justification on national security and criminal grounds to pressure China on technology issues. An ever-expanding number of technologies, especially in information and communications technology, have military and civilian applications. Moreover, China has spent decades integrating military and civilian economic efforts to strengthen its defense industrial base. Some measures, such as investment security reviews, should focus solely on these national security-related concerns in order to promote foreign direct investment in the United States and to generate support among allies for similar policies. But other cost imposing measures should directly target China’s malicious attempts to undermine America’s commercial technological advantages.

Strengthened defensive measures would include, first, expanding export controls to restrict China’s access to emerging and foundational technologies, for which the Commerce Department should soon be issuing new guidelines. Second, for nascent technologies where specific security guidelines are impractical, an interagency review process led by the Department of Commerce could evaluate security concerns of these exports on a case-by-case basis. Third, law enforcement and intelligence agencies should fund the creation of a publicly accessible database of Chinese military and defense industry-related affiliations, including publicly known incidences of technology theft. Chinese-speaking analysts could create this database through unclassified sources, circumventing classification concerns. This database would improve screening of foreign researchers by government and non-government organizations, aid U.S. exporters in identifying concerning end users, support U.S. government information sharing efforts with universities and businesses, and slow the operations of offending actors by forcing them to more carefully conceal their identities and methods.

Targeted proactive measures should obstruct and punish Chinese actors involved in intellectual property theft. First, the Treasury Department could use its existing authority to sanction perpetrators of cyber-enabled theft of intellectual property, a years-old power it has declined to use against Chinese actors. Second, a new federal interagency process could be created to review cases of theft of all types and impose costs against offending companies, either through economic sanctions or limiting access to U.S. technology through placement on the Commerce Department’s entity list. Third, foreign perpetrators of cyber intellectual property theft against U.S. firms could be punished through computer network attacks by the U.S. government. Finally, creative proactive methods could sow confusion within offending organizations. For example, during the Cold War, the U.S. government reportedly sabotaged the Soviet Union’s illegal attempts to acquire U.S. technology by providing flawed products, which compelled the Soviets to expend additional time and resources conducting and validating operations. Overall, although economic warfare is currently undesirable, implementing measured cost-imposing actions now may establish a legal, institutional, and bureaucratic foundation for more extreme measures targeting economic production and the Party’s legitimacy, if necessary in crisis or conflict.

Additional research is needed to identify and evaluate other cost-imposing measures and historical technological competitions offer guidance. During the Industrial Revolution, to protect its textile industry, Britain outlawed the export of textile manufacturing technologies and even the emigration of manufacturers and artisans, only to discover that implementing these policies was impossible. Britain’s efforts were also misguided, as it focused on banning exports of textile manufacturing equipment rather than banning export of the more valuable machines used to produce textile manufacturing equipment. More recently, America’s early Cold War experience warns that obsessiveness over the ideological purity of scientists may backfire, depriving the United States of talented researchers and restricting the freedom required for innovative research. Such experiences illustrate that preventing technological diffusion is problematic, and indicate that the U.S. government should ensure its restrictions are administratively practicable and enforceable, target the technologies of greatest enduring value, and refrain from undermining the vital openness and dynamism of the U.S. scientific community.

A Good Strategy Isn’t Free

Since the U.S. economy is not dependent on Chinese technology — with some exceptions — China has few viable long-term measures to counter a technology cost-imposition strategy. Beijing would likely continue with existing legal and illegal practices to acquire U.S. technology, knowhow, and talent, and increase harassment of U.S. firms and businessmen. An instinctive Chinese reaction to accelerate relatively inefficient top-down plans may be counterproductive. In nascent fields, such as artificial intelligence, decentralized efforts are likely superior to centralized ones due to continued uncertainty over the specific research paths that will ultimately bear fruit. Encouraging these innate self-defeating tendencies is at the heart of competitive strategy.

Yet the measures above will still force America to endure some temporary costs and restructuring efforts. As argued previously in War on the Rocks, U.S. companies that export strategic technologies and knowledge to China will have to adjust both their Chinese market product offerings and their research, development, and manufacturing practices at China-based facilities to focus on less sensitive technologies. But U.S. businesses may eventually offset any losses in Chinese market sales through growth in alternative markets. Supply chains will diversify as U.S. and foreign companies shift production outside of China, with restructuring costs declining over time as economies of scale are reached. The chief U.S. vulnerability is whether Washington has the political will to endure this short-term pain.

Strengthening Coordination at Home and Abroad

Policymakers must work closely with U.S. corporations and allies for this strategy to succeed. Hearings and other informal communication mechanisms between the U.S. government and business are essential to limit diffusion of critical technology while still protecting the long-term health and revenue of firms. Given the growing complexity and impact of these policies, more formal mechanisms may need to be established to streamline, expand, and routinize this dialogue so that these policies can be managed and adjusted over time based on their effectiveness and business impact.

The United States should both pressure and entice partners and allies to prevent China from circumventing U.S. measures by obtaining strategic technologies and knowhow from other technologically advanced states. Many foreign companies produce strategic technologies similar to those of U.S. firms and, without coordinated action, these foreign firms stand to profit from new U.S. government technology controls. Moreover, some U.S. and foreign firms may feel pressure to concede precious intellectual property for short-term gain. Washington and other foreign capitals must improve information sharing, develop shared norms, and expand existing multilateral controls to limit this diffusion.

Policymakers could create a multilateral framework for punishing Chinese intellectual property theft, in which countries would jointly blacklist or sanction offending companies and individuals. In return for enlisting Washington’s muscle in combatting such theft, these partner countries could be asked to commit to specific policies or controls regarding related technology issues.

Washington should also expand preferential trade and investment policies for friendly countries that develop stringent technology controls. The Treasury Department’s proposal to allow certain countries to be excluded from U.S. investment security reviews if they enact similar investment security policies and coordinate with the United States is an excellent example.

For individual cases where the above efforts will not prevent China from acquiring foreign companies with advanced security-related technology or knowhow, the U.S. government should enact procedures to monitor pending transactions and facilitate competing investment funds to block Chinese acquisitions.

While U.S. allies and partners have expressed mixed responses to U.S. concerns over Chinese technology, these countries share a growing awareness of China as a rising security threat and appear increasingly willing to coordinate to preserve their economic and technological power.

The Ends and Limits of a Technology Cost-Imposition Strategy

This strategy’s long-term result is a China that is constrained and influenced by enduring U.S. technological leverage. This is the opposite of a more problematic China that has gained technological independence from the United States, the seemingly uncontested outcome that Beijing and Washington have been moving toward over several decades. Combined with policies to strengthen U.S. innovation, this approach extends the competitive time horizon and alters the perception that time is irrevocably on China’s side.

Western observers should resist the urge to preemptively crown China a technology superpower, but they should also avoid complacent thinking that China simply cannot innovate. Despite their distortions, top-down systems do produce innovation. China has achieved strategic technological surprise before and underestimating its potential could be disastrous. Chinese researchers look poised to make world-leading strides in concerning areas, such as hypersonic missiles and quantum communications. Acutely worrisome is that, even if the U.S. military can maintain a relative technological advantage, China’s military still poses an increasingly formidable threat to American interests and allies in the Indo-Pacific.

The degree to which technological disengagement is beneficial to U.S. national interests should be determined through defining American goals in the U.S.-Chinese relationship and assessing the strategic paths available to U.S. policymakers. A technology cost-imposition strategy should not constrain China’s development for its own sake. But technology is inherently linked to national security, and technology and innovation are fundamental American strengths. Technology is therefore a favorable domain to which policymakers in Washington can shift Sino-U.S. competition and incrementally apply pressure to Beijing within a broader long-term strategy of compelling China to recognize international laws and norms and abstain from destabilizing behavior.

 

 

Jack Bianchi is a senior analyst at the Center for Strategic and Budgetary Assessments, where he focuses on Asia strategy and U.S.-Chinese competition. Bianchi was previously a research analyst at Defense Group Inc. where he performed bilingual (Chinese and English) open source research and analysis for U.S. government clients on China’s defense-related science and technology development. Bianchi has working proficiency in Chinese and his prior experience also includes work at the Federal Bureau of Investigation and in the Office of Investment Security at the Department of the Treasury.

Image: PAS China




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