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The Obama Administration’s bold agenda to establish these rules across Europe and the Asia-Pacific did not yield lasting success, with the failure of the Transatlantic Trade and Investment Partnership (TTIP) negotiations and the Trump Administration’s withdrawal from the Trans-Pacific Partnership (TPP). Nonetheless, the key elements of US digital trade policy enjoy bipartisan policy support, providing a promising basis for the next Democratic administration to re-engage with Europe, our biggest digital trading partner.

Part 1 of this issue brief explains why international rules are needed to protect and facilitate digital trade. Part 2 describes the turbulent past decade in transatlantic trade relations and the growing importance of US digital trade with Europe. Part 3 explains why the US government and the European Union (EU), during TTIP negotiations, were unable to agree on a digital trade chapter, including a key provision guaranteeing the free flow of data. Finally, Part 4 suggests how two parallel sets of trade negotiations beginning early this year — between the EU and the United Kingdom (UK) and between the United States and the UK — may help a future US Administration end the transatlantic stand-off over digital trade.

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China’s technology transfer programs are broad, deeply rooted, and calculated to support the country’s development of artificial intelligence. These practices have been in use for decades and provide China early insight and access to foreign technical innovations. While cyber theft and industrial espionage may or may not be employed, we judge that the main practices enabling AI-related transfers are not illegal. This inspires optimism on one level, but many—possibly most— of these transfers are unmonitored and unknown outside China. China’s reputation as a copycat is overstated and the formulation itself is simplistic. China is building indigenous S&T capacity and can innovate on its own terms, while taking account of global trends to move to new stages of novel development.

Just as important, creativity is multi-faceted and implemented by different cultures in different ways. The belief that liberal democracies, and the United States especially, are endowed with a creative advantage is not well supported by evidence. We have low confidence that any combination of persuasion or disincentives will cause China to abandon its idiosyncratic transfer practices. Its current reliance on external models to supplement indigenous research is effective, and the alternative (liberalization) is too risky for China. China’s legal and extralegal technology transfers are likely to continue. The U.S. government should invest in ways to manage the situation that are consistent with our values and legitimate security concerns.

We propose five policy options to calibrate the problem and address a few of the United States’ own liabilities that magnify the problem’s effects. They are:

• Expand U.S. government (USG) data collection and analysis;
• Define general standards for evaluating transfers;
• Educate the world on U.S. concerns and expectations;
• Promote immigration of AI skilled persons;
• Expand America’s S&T base.

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Many nations are racing to achieve a global innovation advantage in artificial intelligence (AI) because they understand that AI is a foundational technology that can boost competitiveness, increase productivity, protect national security, and help solve societal challenges. This report compares China, the European Union, and the United States in terms of their relative standing in the AI economy by examining six categories of metrics—talent, research, development, adoption, data, and hardware.

It finds that despite China’s bold AI initiative, the United States still leads in absolute terms. China comes in second, and the European Union lags further behind. This order could change in coming years as China appears to be making more rapid progress than either the United States or the European Union. Nonetheless, when controlling for the size of the labor force in the three regions, the current U.S. lead becomes even larger, while China drops to third place, behind the European Union. This report also offers a range of policy recommendations to help each nation or region improve its AI capabilities.

Download the report.

Introduction

The United States reaped tremendous economic benefits from the last wave of digital innovation, becoming home to some of the world’s most successful tech companies, such as Amazon, Apple, Facebook, Google, Intel, and Microsoft. Meanwhile, many parts of the world, including the European Union, paid an economic price staying on the sidelines. Recognizing that missing the next wave of innovation—in this case, AI—would be similarly problematic, many nations are taking action to ensure they play a large role in the next digital transformation of the global economy.

China, the European Union, and the United States are now emerging as the main competitors for global leadership in AI. Indeed, China, which achieved success in the Internet economy in part by shutting out U.S. firms, has clearly stated its ambition of achieving dominance in AI—both to increase its competitiveness in industries that have traditionally been vital to the U.S. and EU economies, and to expand its military power.^[1] Moreover, the EU’s coordinated plan on AI states that its “ambition is for Europe to become the world-leading region for developing and deploying cutting-edge, ethical and secure AI.”^[2] The outcome of this race to become the global leader in AI will affect the trio’s future economic output and competitiveness, as well as military superiority.

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Overall, the United States currently leads in AI, with China rapidly catching bodog casino up, and the European Union behind both. The United States leads in four of the six categories of metrics this report examines (talent, research, development, and hardware), China leads in two (adoption and data), and the European Union leads in none—although it is closely behind the United States in talent. Out of 100 total available points in this report’s scoring methodology, the United States leads with 44.2 points, followed by China with 32.3 and the European Union with 23.5.

The United States leads for several reasons. First, it has the most AI start-ups, with its AI start-up ecosystem having received the most private equity and venture capital funding.^[3] Second, it leads in the development of both traditional semiconductors and the computer chips that power AI systems.^[4] Third, while it produces fewer AI scholarly papers than the EU or China, it produces the highest-quality papers on average.^[5] Finally, while the United States has less overall AI talent than the European Union, its talent is more elite.^[6]

China is ahead of the European Union in AI and appears to be quickly reducing the gap between itself and the United States. It has more access to data than the European Union and the United States, which is important because many of today’s AI systems use large datasets to train their models accurately. In venture capital and private equity funding, Chinese AI start-ups received more funding than U.S. start-ups in 2017, but not in 2016 or 2018.^[7] China, however, is clearly behind both the United States and the European Union in high-quality AI talent. Several European Union member states, including Italy, had more AI researchers ranked in the top 10 percent internationally than China as of 2017.^[8] Nonetheless, China has made clear progress relative to the United States in most metrics, and significantly outpaces the European Union in funding and AI adoption.

The European Union has the talent to compete with the United States and China. Indeed, it has more AI researchers than its peers, and typically produces the most research as well.^[9] However, there is a disconnect between the amount of AI talent in the EU and its commercial AI adoption and funding. For example, AI start-ups in the United States and China both received more venture capital and private equity funding in 2017 alone than EU AI start-ups received in the three years covering 2016 through 2018.^[10] The European Union’s laggard position reduces its ability to not only enjoy the economic and social benefits of AI, but also influence global AI governance, which is a goal of the European Commission.^[11]

To read the full report, please click here. 

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The EU’s ‘Europe–Asia Connectivity Strategy’, adopted in October 2018,1 should help the EU and its member states on their way, but falls short of providing the necessary strategic guidance in the digital field. Essentially a value proposition for sustainable, comprehensive and rules-based connectivity, the strategy largely focuses on the field of transport. This focus may have seemed natural considering the boom in Chinese investments and loans for infrastructure development in Europe recent years, but today, as the fourth industrial revolution2 sparks a more conflictual international environment, European stakeholders are left ill-equipped to deal with growing challenges in the field of digital connectivity.

[To read the original brief, click here.]

Copyright © 2019 Netherlands Institute of International Relations Clingendael. All rights reserved. 

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This Policy Brief presents a statistical portrait of US MNCs’ global innovation system and the technological, organizational, and labor market factors that have changed the system in the last two decades, as discussed in our previous research. The evidence points to an international division of R&D labor akin to the well-documented global value chains in goods production, in which particular R&D activities are located in regions where innovation in those domains appears most efficient. As is usually the case when the benefits of specialization and gains from trade can be realized, this transformed system brings broad-based opportunities by increasing the innovative capacity of US companies. In the context of the productivity slowdown in the advanced industrial world, these benefits should be welcomed, as they appear to offer a plausible pathway to increase productivity growth.

Several challenges could limit these benefits from the globalization of R&D, however. The global rise of economic nationalism poses a potential risk to progress in this area, particularly if the United States retreats from international trade policy leadership, for example. The aggressive use of tariffs under the Trump administration is already signaling to companies that the US government no longer supports the internationalization of commercial activities. It may take years to measure the impact on global R&D activity with any precision, but it is not difficult to imagine current rhetoric resulting in a decrease in overseas R&D activity by US MNCs or, potentially worse, decreasing integration and collaboration between US MNCs’ domestic R&D labs and their foreign affiliates.

In addition, some important developing countries are resisting effective protection of intellectual property rights and openness to foreign direct investment (FDI), preventing MNCs from taking full advantage of these nations’ potential as R&D sites. As the locus of R&D effort shifts from manufacturing to services and digitally traded services become a greater component of global consumption, global trade in services must be liberalized to achieve progress in innovation. The global effort to restrict (or tax) international data flows is another potential impediment. Because movement of skilled workers is a vital element of this system, rising opposition to immigration is another risk. Finally, growing US-China tensions pose a special challenge because of the important role these two economies play in the system. Certain public policies are needed to strengthen intellectual property rights, encourage labor mobility, and liberalize trade in services so that innovation can flourish to improve living standards and fuel economic progress.

[To read the original brief, click here.]

Copyright © 2019 Peterson Institute for International Economics. All rights reserved.

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It can be argued that geopolitical practice is increasingly changing from direct and indirect territorial competition over strategic resources into competition over direct or indirect control of the key functions of global connections, such as the maritime, air, space, and digital domains. bodog casino The focus here is on the newer type of functional competition over the digital domain and its social media platforms.

For resourceful state-level players, these new vulnerabilities offer lucrative, exploitable opportunities by: (1) Destabilizing: innovating new means of sowing and catalyzing societal divisions before, during and after democratic processes such as elections and referendums. (2) Scaling up: massively scaling up older practices such as espionage, as well as building multipurpose informer, influence, and corruptive networks.

In the first sense, social media can be utilized as a part of destabilizing campaigns, as the recent redacted version of the 2019 Mueller Report – presenting the findings of the official investigation into Russian meddling in the 2016 US elections – revealed. One aspect of the meddling operation was the use of the Russian quasi-governmental Internet Research Agency (IRA) across different social media platforms. According to the report, ‘by the end of the 2016 U.S. election, the IRA had the ability to reach millions of U.S. persons through their social media accounts. Multiple IRA-controlled Facebook groups and Instagram accounts had hundreds of thousands of U.S. participants. IRA-controlled Twitter accounts separately had tens of thousands of followers, including multiple U.S. political figures, who retweeted IRA-created content’. The digitalized geopolitical abuses of the platforms were also in evidence in European politics. Most of the discussions in this respect have focused on the 2017 French and German elections, and on the 2016 UK referendum on EU membership.

[To read the original column, click here.]

Copyright© 2019 Finnish Institute of International Affairs. All rights reserved. 

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While the Trump administration has caused a fair degree of uncertainty in Beijing about its ultimate strategic and economic objectives through an unconventional policy process, shifting personnel, and conflicting messages emanating from the President’s tweets, there is a widespread consensus among Chinese policy makers and analysts about the motivations of U.S. technology policy. Officials and academics are convinced that Washington is pursuing a strategy of containment, designed to slow China’s rise as a science and technology power, or, as Fudan University Professor Zhou Wen argues, “The United States’ real intention is to suppress the development of China’s high-tech industries.”[1]

To be sure, over the last several years both China and the United States have acted to reduce vulnerabilities created by the interconnectedness of their science and technology systems. President Xi Jinping has continued to implement the techno-nationalist policies introduced by his predecessors. The 2017 National Cybersecurity Law and Made in China 2025 as well as large investments in artificial intelligence, semiconductors, and quantum computing are the most recent efforts to free China from dependence on the West for critical technologies. Washington, anxious about China’s rising technological capabilities and its program of military-civil fusion, has limited Chinese investment in U.S. technology sectors, blocked Chinese telecommunications companies from doing business in the United States and other markets, and tightened controls on the sale of technologies.

The long-term effects of the decoupling of the U.S. and Chinese technology systems are uncertain. While both sides are likely to lose the efficiencies that came from the globalization of innovation, such decoupling may also energize American and Chinese policy makers to mobilize even greater resources for scientific competition. It is, however, too early to know whether the costs of eliminating the vulnerabilities created by interdependence outweigh the potential innovation gains of competition.

In the short term, it is possible to identify an emerging Chinese strategy in reaction to U.S. pressure consisting of: doubling down on indigenous innovation and developing “core technologies”; protecting supply chains; diversifying access to foreign technology; making diplomatic efforts that stress the shared benefits of Chinese technology development; and continuing cyber-enabled theft of intellectual property.

U.S. Strategy

The Trump administration has placed Chinese technology policy front and center as a danger to U.S. economic and national security, and in response it has rolled out a fourfold policy response.[2] First, the United States levied tariffs on products benefiting from “Made in China 2025,” Beijing’s initiative to upgrade its manufacturing sector, placing a 25 percent tariff on 1,300 industrial technology, transport, and medical products.

Second, Congress has limited Chinese investment in U.S technology sectors, and the Commerce Department is revising the export control laws so as to block the flow of critical technologies to Chinese end-users. In August 2018, Congress passed the Foreign Investment Risk Review Modernization Act, enabling the Committee on Foreign Investment in the United States (CFIUS) to investigate additional investments, for instance minority positions or overseas joint ventures. The legislation also added new national security criteria to CFIUS decisions. The Trump administration has blocked the sale of the Lattice Semiconductor to a group that included a Chinese venture capital firm; barred Broadcom’s US$121 billion offer for Qualcomm; prevented Ant Financials acquisition of MoneyGram; and demanded that Beijing Kunlun Tech give up its control of Grindr, a gay dating app.

In addition, the 2018 Export Control Reform Act includes new controls on the export of “emerging and foundational technologies.” The Commerce Department, which is responsible for overseeing such restrictions, has published a list of technologies that might be controlled, including computer vision, speech recognition, and natural language understanding.[3]

Third, Trump officials have made it more difficult for Huawei and other Chinese telecom companies to do business in the United States. Congress has prohibited the Pentagon from buying network equipment from either Huawei or ZTE, and security concerns reportedly were behind AT&T’s and Verizon’s decisions not to distribute Huawei smartphones. The Federal Communications Commission has proposed making it more difficult for smaller carriers to use the Universal Service Fund to pay for future purchases of telecom equipment from Huawei and ZTE, and in April 2019 the FCC opposed China Mobile’s application to provide telecommunications services in the United States.[4]

In addition, U.S. officials have pressured Australia, Canada Japan, the European Union, and other allies and friends not to use Huawei for 5G infrastructure. Whereas Germany and the UK have suggested they can manage the risk of using Chinese suppliers, Secretary of State Mike Pompeo has threatened to stop sharing intelligence with allies, telling an interviewer, “If a country adopts this [Huawei equipment] and puts it in some of their critical information systems, we won’t be able to share information with them, we won’t be able to work alongside them.”[5] Others, such as Bahrain, Iceland, Saudi Arabia, Latin America, and the United Arab Emirates, have ignored Washington’s warnings and have recently signed deals to deploy Huawei’s 5G equipment.[6]

Fourth, the Department of Justice has pursued a number of high-level indictments against Chinese companies for theft of intellectual property. In November 2018, Trump officials charged Fujian Jinhua with the theft of DRAM—dynamic random-access memory technology— from Micron. The Commerce Department subsequently put Fujian Jinhua on a list of entities that cannot purchase components, software, and technology goods from U.S. firms. In January 2019, the Justice Department unsealed indictments claiming that Huawei stole technology from T-Mobile and that Huawei had a formal policy of awarding bonuses to employees who stole confidential information from competitors.[7]

The Trump administration has also responded to the return of Chinese hackers after the brief downturn in activities in the wake of a September 2015 agreement between President Xi and President Obama in which both sides pledged not to become involved in cyber-enabled theft of intellectual property for competitive advantage. In November 2017, the Justice Department indicted three Chinese nationals employed by the Chinese cybersecurity firm Boyusec, charging them with hacking into the computer systems of Moody’s Analytics, Siemens AG, and global positioning bodog casino system developer Trimble Inc. In November 2018, then Attorney General Jeff Sessions announced a China initiative to identify priority Chinese trade theft cases, pool FBI and Department of Justice resources to combat Chinese economic espionage and evaluate whether additional legislative and administrative authorities would be required to protect U.S. assets from foreign economic espionage. Finally, in December 2018 the United States, in coordination with Canada and the United Kingdom, indicted two Chinese citizens for hacking more than forty-five technology companies in at least one dozen U.S. states.[8]

Technology Containment

Chinese analysts are clear about the goals and motivations of U.S. technology strategy. In short, they argue that Washington is pursuing policies designed to slow China’s rise as a science and technology power. Or, as Li Zheng of the China Institute of Contemporary International Relations, has put it, “The United States views technology as the ‘last barrier’ to constrain China’s challenge.” Li continues that U.S. actions have “risen to the strategic level,” seeking to “systematically and comprehensively curb the rapid rise of China’s technology industry.” Moreover, Zhou Xiaoming, a former Chinese diplomat, argues that the containment policies are here to stay: “The containment of the United States against China will be a normal state, and it will intensify. We must learn to adapt.”[9] These “containment” policies, according to most analysts, are not a response to Beijing’s industrial policies or theft of intellectual property, but rather they stem from a decline in U.S. power and prestige and a “panic” about China’s rise in technologies, such as 5G and artificial intelligence.[10]    

Analysts and policy makers have used the blockade of ZTE as clear evidence of Washington’s intentions and China’s vulnerabilities. In April 2018, the United States announced a seven-year ban on American firms from selling parts and software to ZTE after the company violated an agreement that was reached when it was caught illegally shipping U.S. goods to Iran.[11] Even though the ban was eventually overturned after the company paid a US$1 billion fine, the ban threatened ZTE’s survival and clearly demonstrated China’s dependence on U.S. technology, especially semiconductors.  

In a series of speeches after the ZTE ban, Xi Jinping highlighted China’s need for innovation and technological self-determination. In an April 20, 2018 speech on cyberspace and information technologies, Xi focused on indigenous innovation and for the first time described “core technologies” as “important instruments of the state” (核心技术是国之重器).  (Xi’s 2016 speech on cyberspace also stressed the centrality of “gaining breakthroughs in core technology as quickly as possible,” but it did not use the phrase “instrument of the state.”)[12]  

In May 2018, at a joint annual conference of the Chinese Academy of Sciences and the Chinese Academy of Engineering, Xi exhorted the gathered scientists and engineers to redouble their efforts, stating: “Self-determination and innovation is the unavoidable path … to climb to the world’s top as a leading player in technology.” [13] Xi returned to the same themes in July 2018, telling the Central Financial and Economic Affairs Committee that “China must improve innovation capabilities for key and core technologies and keep a firm hold on the initiative in the development of science and technology to offer a strong technological guarantee for China’s development.” [14]

In September, during a visit to Heilongjiang, President Xi argued that “rising unilateralism and trade protectionism” was pushing Chinese companies to adopt a “self-reliance” strategy, which, he said, was “not a bad thing.”[15] Days after the Commerce Department sanctioned Fujian Jinhua in November, Xi called for acceleration of the development of artificial intelligence, telling a Politburo study group that China must “control” the technology and make sure it is “securely kept in our own hands.”[16]

China’s Response

In the face of U.S. pressure, Beijing has adopted a five-part response. First, although China is likely to make some concessions at the margins of its industrial policy as part of any trade deal, it is equally expected that it will follow Xi’s repeated calls to double down on efforts to reduce dependence on the West for semiconductors and other critical technologies. In a March 2019 speech to the National People’s Congress (NPC), Li Keqiang made no reference to “Made in China 2025,” but he stated the government would promote advanced manufacturing in the same areas covered by Made in China 2025.[17] Similarly, the 2019 draft plan of the National Development and Reform Commission submitted  to the NPC states that it “will prioritize and strongly develop a number of clusters of strategic emerging industries in key fields such as next-generation IT, high-end equipment, biotechnology, and new materials.”[18]

At the same meeting, Chinese lawmakers passed a new foreign investment law that is intended to stop the forced transfer of technology from foreign companies. There are, however, serious questions about enforcement of the law, and there is, in any case, no evidence that Chinese policy makers have abandoned deeply held beliefs about the need for technological self-reliance.[19]  

China will continue to promote advances in semiconductors with huge investments in new fabs and technology. In 2018, China’s chip imports broke US$300 billion, rising from US$270 billion in the previous year.[20] Hu Weiwu, a Chinese Academy of Science scholar and the engineer behind the Loongson CPU, believes that the ZTE incident is a chance for the “domestic chip industry to turn a crisis into an opportunity.”[21] He suggested that the Chinese government should take advantage of this opportunity to promote the commercial application of domestic chips and build China’s own information and communication technology ecosystem. During the last several years, Beijing has mobilized US$100–US$150 billion in public and private funds to build an indigenous industry. Local governments have ramped up investment projects and the central government has designated a number of companies as national champions in manufacturing and chip design. China has the most fab projects in the world, with thirty new facilities or lines either in construction or in the planning stages.[22]

China will also pursue other avenues for computer and chip design, for example designating a quantum-computing “megaproject.” The government is reportedly investing US$1 billion to build the National Laboratory for Quantum Information Sciences in Hefei, and in 2017 Chinese companies filed twice as many patents for quantum computing as did American companies.[23]   

Chinese technology companies have signaled that they will follow the government’s lead. As Alibaba’s CEO Jack Ma said, “Big enterprises have an important responsibility. If we do not master the core technologies, we will be building roofs on other people’s walls and planting vegetables in other people’s yards.”[24] Baidu released its smart chip, Kunlun, in July; Huawei unveiled a 7nm microchip in August; and Alibaba launched its semiconductor division Pingtouge in September. This new business will develop artificial intelligence chips for cloud computing and Internet-connected devices. Huawei also announced that it has built its own operating systems for smartphones and laptops in case it is unable to use Google or Microsoft software in the case of another round of U.S. sanctions, and in April 2017 the company announced it will establish an Institute of Strategic Research and invest US$300 million each year for the next five to ten years to fund research in basic science and technology.[25]

Second, Chinese technology companies will make efforts to protect their supply chains from U.S. sanctions. After the arrest of CFO Meng Wanzhou for allegedly violating sanctions on Iran, Huawei’s leaders feared they would face a fate similar to that of ZTE. Huawei boosted purchases of capacitors, integrated circuits, flash memory and camera-related parts from Japanese suppliers, stockpiling components in case of a potential ban on U.S. sales.[26] Huawei reportedly asked Taiwan’s ASE Technology Holding and King Yuan Electronics, its top chip packaging and testing providers, to relocate most production to sites in mainland China. The company also spoke with Taiwan Semiconductor Manufacturing Co. about moving some chip production to Nanjing.[27]

Third, Chinese firms and investors are diversifying and looking for new technology-investment opportunities beyond U.S regulations. In 2016, China invested US$18.7 billion in 107 U.S. tech firms. In 2018, because of increased CFIUS scrutiny the total dropped to US$2.2 billion for eighty deals. As investment in the United States has fallen, there have been some notable technology acquisitions in Europe, such as Tencent’s US$8.6 billion purchase of Finnish gaming company Supercell and CSC Group’s multimillion-dollar investment in the London-based accelerator Founders Factory.[28] European governments are, however, updating or introducing foreign-investment screening regimes, and for the first time a Chinese acquisition was blocked bodog sportsbook review when the German government vetoed the takeover of a machine tool company.[29]

In addition, Chinese investors are looking at the Israeli technology sector, where Chinese investment has grown from US$274 million in 2016 to US$325 million in the third quarter of 2018.[30] Chinese funders supplied at least US$20 million in all seventeen financing rounds for Israeli start-ups during the first three quarters of 2018.[31] In response to these investments as well as Chinese investments in Israeli infrastructure, the Trump administration has reportedly told Israeli officials they must establish a CFIUS process for dual-use technologies and they also risk harming intelligence-sharing between the United States and Israel if the infrastructure projects move forward.[32]

Fourth, Chinese diplomatic efforts are likely to stress the global benefits of Chinese scientific and technological development and the threats to trade and security emanating from the United States. For example, during his 2019 Davos speech Wang Qishan called for countries to “work together to shape the global architecture in the age of the fourth industrial revolution with the vision to create a better future for all mankind.” He warned, however, that it is “imperative to respect national sovereignty and refrain from seeking technological hegemony, interfering in other countries’ domestic affairs, and conducting, shielding, or protecting technology-enabled activities that undermine other countries’ national security. We need to respect the independent choices of model technology management and of public policies made by countries, and their rights to participate as equals in the global technological governance system.”[33]  

Chinese diplomacy is also likely to echo the public relations campaign that Huawei has mounted in the face of U.S pressures, casting aspersions on those who question the security of Huawei’s products. In an op-ed piece in the Financial Times and in a speech at the Mobile World Congress in Barcelona, Guo Ping, chairman of Huawei, drew attention to U.S. intelligence capabilities. Explaining why Washington was trying to block the company, Guo argued that Huawei equipment was more difficult for the National Security Agency (NSA) to hack because the agency maintained cooperative relations with U.S. telecoms. Since Chinese firms were unlikely to cooperate if U.S. intelligence wanted “to modify routers or switches in order to eavesdrop,” Guo concluded, Huawei “hampers U.S. efforts to spy on whomever it wants.”[34]

The Foreign Ministry made a similar pivot with Australia’s new encryption bill, which requires tech companies to provide law enforcement and security agencies access to encrypted communications. Asked whether Australia was engaged in a double standard since it had banned Huawei from its 5G roll-out because it did not want companies in their networks that were beholden to another government, Foreign Ministry Spokesperson Lu Kang noted “Forcing companies to install ‘backdoors’ through legislation means protecting one’s own security and interests at the expense of other countries’ security and their people’s privacy.” Lu further claimed, “It is baffling how the country concerned could whip up ‘security threats’ posed by other countries or companies with trumped-up charges under the facade of cyber security, while they themselves are engaged in acts that endanger cyber security.[35]  

Fifth, Chinese hackers will continue their campaign of cyber-enabled theft of intellectual property. CrowdStrike, FireEye, PwC, Symantec, and other cybersecurity companies  reported new Chinese computer attacks on U.S. companies in 2017 and 2018. Rob Joyce, a senior official in the NSA and former White House cybersecurity coordinator, stated in November 2018 that “it’s clear that they [China] are well beyond the bounds today of the agreement that was forged between our countries.”[36]

Chinese hackers may have reinstated their cyber-enabled theft of intellectual property for two reasons.[37] First, Beijing may have never intended for the pause to be long term, but instead saw it as an opportunity to gain diplomatic advantage for a planned restructuring of its cyber forces that independently would create a temporary downturn in activity. The purpose of this reorganization, which involved the creation of the Strategic Support Forces and the shifting of espionage to more skilled hackers in the Ministry of State Security (MSS), was to allow the People’s Liberation Agency (PLA) to focus on warfighting and to reduce the chances that Chinese hackers would be called out by Washington. In effect, Beijing did not intend to give up hacking over the long term; it simply wanted to stop being caught so often.

Second, the return of hacking may be a reaction to increased pressure from Washington. If Chinese policy makers believe the United States has adopted a technology containment strategy, they are also likely to believe they have little to gain from honoring the 2015 agreement between Xi and Obama.

No matter the reason, and it may actually be some combination of the two, China possibly believes it can reach a stable equilibrium of espionage with the United States, in which the MSS deploys a level of tradecraft equivalent to the hacking conducted by the NS.. A high level of relatively “noisy” activity (for which they were likely to get caught and be called out on) is being replaced by a smaller number of more professional hacks who nevertheless provide China access to U.S. assets.[38]

Conclusion

There is also another possible direction that Beijing could take. Chinese leaders could embrace openness and an innovation strategy, a more bottom-up effort to create an environment supporting technological innovation rather than continuing down the road of market barriers and top-down, state-directed efforts to develop specific technologies. There is a long debate in Chinese technology policy about the best means to achieve the objectives of technological autonomy, and parts of the bureaucracy  believe that it is possible for China to raise its technological capabilities through more market-friendly policies. The 2006 Guidelines on the National Medium- and Long-term Program for Science and Technology Development, for example, introduced the idea of indigenous innovation (zizhu chuangxin) and eighteen science and engineering “megaprojects” also draw on the experience of Silicon Valley and introduce policies that deal with university-industry collaboration, venture capital, and small-start-ups. At least eight provisions either directly or indirectly focus on small and medium-sized technology businesses.[39]

There are hints of this thinking in some of the analysis of what is called the U.S. technology containment strategy. While analysts do not question the legitimacy of the ultimate goal of developing and controlling core technologies, they also introduce a range of reforms necessary to improve China’s innovation capabilities. These include reforming the education system, limiting the impact of political factors in funding and personnel evaluations, and recruiting foreign talent.

These voices were clearly in the minority even before the current U.S.-China technology war, and they are unlikely to gain significant policy traction during the technology war. Instead, the stark vulnerability in core technologies that has been exposed by U.S. actions will accelerate efforts to eliminate such dependencies. Beijing is likely to continue with heavy state support for R&D, especially for semiconductors, AI, and other frontier technologies; to coordinate with technology companies on the development of these same technologies; to diversify investment opportunities; and to direct a campaign on cyber-enabled industrial espionage.

Although Washington should maintain efforts to push back against Beijing’s market distorting policies and cyber theft, U.S. policy makers should work more closely with their counterparts in Europe and Asia to create a more multilateral effort. The European Commission’s March 2019 review of the EU’s relations with China, for example, criticizes Beijing for preserving “its domestic markets for its champions, shielding them from competition through selective market opening, licensing and other investment restrictions; [and] heavy subsidies to both state-owned and private sector companies.”[40] Such efforts may take some of the heat out of the tech war, making it less a U.S. containment strategy and more a broader conflict between China’s development model and the norms of the more open economies.

Both sides will incur costs from a technology cold war. Global challenges, such as addressing climate change and stopping pandemics, require collaboration, and all will benefit from breakthroughs in clean energy, carbon capture, and new vaccinations against influenza. Chinese and American policy makers will need to distinguish between competition over technologies with national security implications and more cooperative approaches to targeted technologies that could be the basis for a reconsidered U.S.-China science relationship. 

Adam Segal is the Ira A. Lipman chair in emerging technologies and national security and director of the Digital and Cyberspace Policy Program at the Council on Foreign Relations

CLM was launched in 2002 under the editorial leadership of Alice Miller at the Hoover Institution of Stanford University.  Upon Alice’s retirement in Bodog Poker September 2018, Minxin Pei of Claremont McKenna College assumed CLM’s editorship. CLM also moved from the Hoover Institution to an independent website, www.prcleader.org.

CLM is funded by a grant from the Smith Richardson Foundation.

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For nearly a year, a debate about Chinese telecommunications companies has raged in the West, started by the US decision to ban American firms from selling components and software to the Chinese telecommunications firm ZTE in April 2018. While this situation was ultimately resolved, it was followed shortly after by the arrest of Huawei’s Chief Financial Officer Meng Wanzhou, the daughter of the company’s founder, Ren Zhengfei. The Chinese Government’s swift response to her arrest – including the arrest of two Canadian former diplomats – seemed to indicate that the company, long-seen as a ‘national champion’, has the full political support of Beijing. Given the reputation China has as a source of cyber-espionage, the prospect of including Huawei in the building of the UK’s 5G network raises a number of questions about the company’s independence from Beijing, and potential risks inherent in including its hardware and software in the network.

In attempting to determine the risk posed by Huawei or ZTE (or any other Chinese corporation, for that matter) taking a large role in the UK’s digital infrastructure, it is clear that we are at an unusual crossing-point in the history of great power relations and in the history of technology. The People’s Republic of China has developed not only into an economic and military power but also into a cyber-power and now wishes to become a “high-tech” power. This introduces new dynamics into and exerts new pressures on the international system.

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