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Over 10 years, Xi Jinping has methodically amassed power. Beginning with an unprecedented consolidation of military support, Xi then launched his ‘Tigers and Flies’ campaign, sidelining his political rivals along with officials accused of corruption. Over many years he patiently laid the groundwork to elevate Xi Jinping Thought to match the official stature of Mao Zedong Thought, and edge out Deng Xiaoping Thought, in the CCP’s ideological pantheon. He then overturned international commitments regarding Hong Kong, and brought that free-wheeling and Westernized city to heel with the introduction of a new security law. At the last 19th Party Congress in 2017, Xi tossed aside Deng’s “hide-and-abide” (韜光養晦、有所作為) approach to international relations and gave a triumphalist speech, announcing that China had not only arrived on the world stage but that it deserved central position on that stage. With the outbreak of the Covid-19 epidemic, Xi used sharp-elbow tactics to block scientific investigation into its origins in China and ordered sweeping zero-Covid lockdowns to highlight his government’s ability to take more effective action than was possible for democratic governments in the US and the West. The Winter Olympics were meant to be Xi’s star-turn to demonstrate — more to the Chinese people than to international audiences (many of whom undertook diplomatic boycotts of the Games because of oppression of Uyghurs in Xinjiang and other issues) — that he was a flawless and unrivalled champion. He even went so far as to claim that the authoritarian system he presided over represented a superior form of democracy to Western liberal democracy.
Along this path to unrivalled power in China, Xi first jettisoned the system of collective rule by the Standing Committee of the Politburo which Deng had put in place to guard against recurrence of unbridled rule by any one individual, epitomized by the last years of Mao’s rule. Longer term, Xi’s aim in amassing power has been to discard the limit of a president to two five-year terms, another safeguard Deng put in place and which he himself observed.
The announcement of leadership for the next five-year term will happen at the CCP’s 20th Party Congress in Beijing this autumn. At that meeting, Xi is widely expected to be named for a precedent-shattering third term. This will mark a historic high-point for Xi. His systematic consolidation of power has been designed, in part, to create an air of inevitability about this outcome. While his selection is still overwhelmingly likely, a number of significant fissures have appeared in recent weeks which crack this façade of total control.
ZERO-COVID
While undoubtedly successful in limiting the number of infections, hospitalizations, and deaths in the first two years of the pandemic, Xi’s Zero-Covid policy has created a raft of problems for China more recently, most notably during the highly-transmissible omicron phase. While incidences of infection, hospitalization and death have been dropping worldwide, they have been surging in China, with the number of confirmed cases more than quadrupling from mid-February to mid-March of this year. Elderly citizens are especially at risk due to their low rates of vaccination and hospitals have already become overwhelmed, due in part to the low number of hospital beds on a per capita basis in China. While it can be argued that the Zero-Covid policy ‘bought time’ for the development of vaccines, Xi’s championing of the locally developed Sinovac vaccine and his refusal to permit the use of more clinically-effective vaccines developed in the West, has blunted that advantage somewhat since the Sinovac vaccine is notably less effective against the omicron variant. The Zero-Covid policy has also meant that there is practically zero immunity in the Chinese population as a result of exposure to the virus as it becomes endemic worldwide. If SARS-COV-2 can be compared to a flame, China’s population is like a vast field of tinder. Finally, the economic and social costs have become glaringly apparent with the lockdown of an entire province, Jilin, in the northeast and the of Shenzhen and Dongguan – China’s two largest manufacturing hubs for information and communications technology (ICT) — in the south.
While Xi will, with considerable justification, continue to claim credit for his “triumph” over the coronavirus, China is by no means out of the pandemic woods and the setbacks of the last month make his strident claims ring more hollow, both internationally and domestically.
REAL ESTATE
In September last year, Chinese real-estate development firms began to feel the severe discomfort of a massive hang-over following years of real-estate speculation partying. The problems were most evident in real-estate giant Evergrande but soon spread to a host of other significant players in the field such as Fantasia, Modern Land, China Property Group and Xinyuan Real Estate Group. At the institutional level, the problems hitting the $5 trillion sector were the result of a unique PRC nexus of aggressive real estate development, lax banking, and local government incentive structures. More simply, the problems resulted from “unrestrained borrowing, expansion as an end-in-itself, and corruption.”
While the PRC Government claimed this week that the real-estate free-fall has been “stabilized,” pricing data from real estate developers across the country continue to show sharp deterioration. Also this week, Evergrande announced a further delay in sharing its plan for restructuring and for paying back bonds and other financial obligations. The government has strong reason to put on a brave face while throwing up a curtain of opacity around the problem. Property-related industries account for more than 30% of China’s economic output. Continued problems in the sector could drag China’s growth below the optimistic, post-pandemic official target of 5% growth, a minimum level which must be maintained in the years ahead for China to escape the ‘middle income trap.’ More immediately, it risks alienating an important swath of the urban public, 80% of whose household wealth is tied up in real estate and who see their property values plummeting. (A particularly aggrieved segment of this population are buyers who have paid up front to the developers, as is common in China, for a property not yet built and for which construction has halted indefinitely while values continue to slide).
While Xi has voiced loud promises to not let the bottom fall out of this sector and to support homeowners currently caught in the fallout, there is little evidence on the ground of these promises translating into reality. Meanwhile, the situation risks alienating the public and sowing dissent among officials.
‘COMMON PROSPERITY’
As measured by the Gini coefficient, China ranked fourth in the world in 2022 for greatest wealth disparity and inequality (after South Africa, Namibia and Sri Lanka). While Deng Xiaoping had announced famously in the late 1980s that “to get rich is glorious” and to “let some get rich first,” the extreme degree of inequality persisting in China four decades later is a source of growing social and political concern. The heady days of 10% growth have long ago disappeared and Chinese who thought they would be boarding on a later rail-car in the national train of prosperity now worry that the train may have departed, stranding them on the platform.
To counter this source of social unease, Xi unveiled with great fanfare in 2021 a policy of ‘Common Prosperity.” Writ large, this policy was meant to cement Xi’s place — side-by-side with Mao and with Deng slightly in the background – in China’s pantheon of modern heroes. In this telling, Mao was the one who roused China to throw off its ‘Sick Man of Asia’ bondage to foreign imperialists and to stand up. Deng contrived a transitional stage of capitalist-style wealth-creation for enough Chinese that China could attain wealth and power (富权). It was left to Xi to complete this project of national rejuvenation, by reinstituting a Marxist “Common Prosperity’ for all Chinese and returning China to the center of the world stage.
Without getting into either the ideological weeds (such as Xi’s ‘Dual Circulation’ strategy) or deep into the tangle of economic measures (e.g., restrictions on overseas listings by Chinese companies, user-data and other controls put on Chinese Big Tech firms, clampdown on student test-prep and video game commercial sectors, etc) which Xi embraced in 2021 to advance his Common Prosperity agenda, the general effect was felt quickly and keenly in the form of abrupt economic slowdown. In the first quarter of this year, the Common Prosperity program has been ‘walked back’ by numerous party officials who have emphasized that it represents a historic project more than an immediate project. Premier Li Keqiang, in his lengthy speech to 3,000 deputies at the opening of the National People’s Congress earlier in the month, mentioned Common Prosperity only one time. For educated Chinese — who have been skillfully parsing official pronouncements closely ever since the Cultural Revolution for clues about where the country is headed — this lack of visibility and endorsement for Xi Jinping’s signature program represents a remarkable degree of push-back for Xi by top-level leaders.
UKRAINE
Chris Buckley’s report in last Friday’s New York Times traces the contours of what is potentially the most damaging crack to appear in Xi’s carefully-crafted, monolithic façade of power and control. The article details the war of words that has erupted on the Chinese internet following the warning delivered by a respected scholar and politically-connected insider, Hu Wei, to the effect that China “risked becoming a pariah if it didn’t denounce Russia’s invasion of Ukraine.” As was covered in last week’s post and as continues to play out this week, Chinese officials have contorted themselves by claiming to be neutral and wanting peace while following Putin’s lead in not calling the ‘special military operation’ either a war or an invasion, in not objecting to Russia’s violation of Ukraine’s sovereignty and territorial integrity, and in amplifying Kremlin disinformation about U.S. bio-military labs in Ukraine.
As argued last week, this has the potential to grow into a strategic blunder for China with significant geopolitical fall-out. It may affect not only Xi’s ambitions to retake Taiwan – the last territorial piece in his China Rejuvenation plan – but to bear long term costs for China as a rising power in the Indo-Pacific region and for its standing in the world at large.
None of this is to suggest that Xi will not get his third term as President this fall. It is only to say that the carefully-cultivated blooms of infallibility and inevitability are now off the XJP rose.
Xi has been in power for less than half of Putin’s tenure (18 years as President and 4 years as the power behind the throne for Medvedev) but there are doubtless people in Zhongnanhai wondering to themselves, post-Putin’s invasion, whether Deng didn’t get it right with his moves to limit the untrammeled exercise of power by an individual leader.
Volume 2, Number 4 in Global TECHtonics: U.S./China Fault-line series
The weekend’s big development in the technology arena is Beijing’s eleventh-hour move to alter the timing and trajectory of the sale of TikTok’s U.S. operation.
We touched on the Trump Administration’s August moves against TikTok’s parent Bytedance in the U.S./China De-Coupling: 4 Levels of Risk post two weeks ago. On August 6th, President Trump signed two executive orders which started a 45-day time-clock involving two Chinese companies with hugely popular social media apps – ByteDance (owner of TikTok) and Tencent (owner of WeChat). According to those orders, U.S. citizens and businesses would be barred, once the 45-day period expired, from any transaction involving the company and/or its products. On August 14th, the Trump Administration modified the order as far as it affected TikTok by putting a new order in place, giving TikTok 90-days within which to complete the divestiture of its U.S. operation to an approved U.S. corporate buyer.
The widely-presumed reason for this change being made so shortly after the announcement of the original order is that U.S. potential buyers interested in acquiring the U.S. operations of TikTok had pitched their interest to the White House. It is not surprising that U.S. potential acquirers would be focused on TikTok and not WeChat. The number of TikTok users in the U.S. is estimated at 80 million in comparison with 19 million for WeChat. Its growth rate in global markets is far faster and, critically, its algorithms have nearly ubiquitous applicability whereas WeChat algorithms are more geared to Chinese user behavior and are so less replicable in other world markets.
Two groups of interested buyers have emerged publicly since the August 14th announcement:
- Microsoft/Walmart: As Instagram and other social networks edge into offering shopping features, Microsoft and Walmart are looking to establish themselves at the strategic center of this opportunity with one bold acquisition move. Put simply, Walmart would provide the e-commerce component for TikTok while Microsoft would manage the crucial cloud-computing infrastructure. The deal offers competitive advantages to both firms – Walmart would become better positioned to compete with Amazon and Microsoft would gain experience with an innovative and cutting-edge set of algorithms and data-sets.
- Oracle: According to analysis by the New York Times business reporter Mike Isaac, “Oracle could use TikTok’s data about social interactions to benefit its cloud, data and advertising businesses.” Also, like Microsoft and Walmart, Oracle is interested in the opportunity the deal would afford “to offer customers a hyper-personalized experience in both content and commerce.”
Going into the weekend, the expectation was high that Bytedance’s preferred acquisition partner would become known and that negotiations would shift to a new phase of negotiation with only that chosen partner.
So, what was the development over the weekend which changed the trajectory and pace of this deal? The Chinese government announced late in the day on Friday that any sale of Bytedance’s assets would be subject to a brand-new set of restrictions affecting artificial intelligence exports. As reported in still-developing coverage in the Wall Street Journal, “the new Chinese restrictions highlight the extent to which TikTok, a breakout social-media hit—especially with younger U.S. users—has been thrust into a geopolitical contest between the U.S. and China over the future of global technology.”
I’ll limit my commentary on this development to three main points – a historical observation, a key point having to do with the present-day competition in advanced technologies between the U.S. and China, and my personal handicapping of where this deal is likely to go in the weeks ahead.
Historical Antecedent: The U.S.-Japan Trade War
While observers sometimes invoke the U.S.-Japan Trade War as a template for understanding our current tensions with China, the contrasts between the two are probably more instructive than the similarities. A future post will return to the broad comparison. For our purposes here, I will single out one important point of contrast. The U.S.-Japan Trade war became incandescently hot as a political issue in the lead-up to the 1992 U.S. Presidential election. But while that was happening, commercial developments on the ground were already in motion to begin lowering the heat. The industry sector in which the grass-roots transformation took root and started having great effect was the automotive sector. The seed for that bottom-up transformation was the fact that, post-war, Japan had developed intellectual property in their domestic market that made them more competitive than the U.S. industry in a number of vital areas of automotive manufacturing (e.g., inventory management, quality control, customer-based innovation, etc). Led by Toyota, the Japanese and U.S. industries started reaching an accommodation even before politicians in the U.S. turned up the volume on their anti-Japan megaphones. Japan would license out its intellectual property and bring its production closer to its customers in the U.S. by building factories and supplier networks in the U.S. In return, American companies would gain access to know-how in areas where its competitiveness was lagging and also gained greater access to the restricted Japanese market. At a political level, investments in new state-of-the-art production facilities in the non-unionized south brought jobs into key congressional districts. Of equal importance, auto workers, their families and their communities started having the experience of working alongside Japanese managers on U.S. soil. In the process, real-world people-to-people experiences built on collaboration replaced the one-dimensional caricatures being amplified by politicians and the media.
The Chinese have studied this experience whereby Japan lessened the political tension of the U.S.-Japan Trade War while, simultaneously expanding access to the lucrative U.S. market and affluent U.S. consumers. For various reasons, they have not been as successful in applying the model. We’ll examine the broader set of reasons in a future post but, for present purposes, one salient reason is that China, generally speaking, has not developed the portfolio of intellectual property focused in high-value industries (like, for Japan, automotive and consumer electronics) and highly sought after by U.S. companies. Except, that is, until now as China emerges with competitiveness in advanced technology fields such as artificial intelligence, robotics, and autonomous vehicles.
Looking at Both Sides Now:
The U.S. innovation ecosystem represented by Silicon Valley is, and is likely to remain for the foreseeable future, peerless in many important respects – depth of talent and experience, access to capital, connectivity to leading universities, basic research capability and innovation mindedness. In three respects, however, emerging tech competitors in China enjoy advantages which U.S. firms can’t match. First, China has been for years the biggest and fastest growing market in the world and U.S. companies can’t afford to cede that base of users entirely to their Chinese competition to monopolize. However, the ability of U.S. firms to access those consumers is highly constrained by a whole raft of protections – many non-WTO compliant and others not yet covered by WTO ground-rules — by which the Chinese government limits foreign access to its home market and by which it supports its home-grown champion companies. Second, China may enjoy a tactical advantage through its laser-focus on market applications (as opposed to research and academically-based innovation). Third, AI firms in China definitely enjoy a leg-up in algorithm development because they have direct access to the world’s largest user-base for smart phones and are less constrained by privacy protections for those users. These latter two advantages for Chinese tech firms are persuasively presented by the former President of Google China, Kaifu Lee (a Taiwanese national whose computer science PhD thesis at Carnegie Mellon gave birth to the world’s first speaker-independent, continuous speech recognition system) in his book AI Superpowers: China, Silicon Valley and the New World Order. In Lee’s view, “the United States may have been a first mover in AI but that advantage will not last forever. The AI era will reward the quantity of solid AI engineers over the quality of elite researchers. Strength will come from an army of well-trained engineers and entrepreneurs, and China is training just such an army.”
So, stepping back, there is now for the first time since normalization of U.S.-China relations a strategically-important (emerging) industry where Chinese firms hold important competititve advantages over the U.S. Unlike democratic Japan, this high-stakes competition is associated with a Communist regime with all that that entails for public attitudes in the U.S. And there is little in the of way local ties-that-bind being built quickly and effectively on a people-to-people basis. Nothing that can match the stabilizing experience with Japan investment into the U.S. in the 1990s. Together, these three factors go a long way to illuminating the huge pressures that have been building up under the U.S./China technology faultline on both sides of the U.S. political aisle.
Where’s The TikTok Deal Likely to Go?
Despite the fact that practically nothing is known yet about the details of the PRC government restrictions announced on Friday, two things can be safely said. First, the fact that the PRC government is invoking national security as a basis for governing the commercial activities of its leading artificial intelligence firms is hardly surprising. The competition between the U.S. and China is, for reasons just examined, acute. The U.S. and other countries routinely monitor and manage international commercial activity for their technologically-advanced products and services, especially those that are ‘dual-use’ in both commercial and military applications. The second point is that the timing of the announcement tends to be viewed in the U.S. as so transparently tied to the on-going negotiation involving TikTok that it will be viewed more as a political beanball, than a fair pitch. This despite the fact, as pointed out by an astute comment (see below), that these new regulations had been proposed prior to Trump’s August 6th announcement and were in a public comment process.
The Chinese government action raises the prospect that key algorithms and other vital data – everything that makes TikTok tick — may be stripped out of the sale by its Chinese parent corporation as a new requirement of Chinese law. That result would fundamentally change the value proposition for both the Microsoft/Walmart and Oracle bidding teams. It’s like the difference in value between a top-of-the-line computer and that same computer with all its electronics removed. At the very least, the PRC government action will force all parties to slow the pace of their negotiations and delay the deal being sealed until there’s greater clarity about what will ultimately be allowed.
With Friday’s move, it’s likely that the Chinese government will be satisfied with slowing the deal and changing the trajectory of its fall-out for global technology competition. Scuppering the deal entirely would risk dramatically escalating the issue with Trump and his Administration. That would go against China’s temporary strategy of muted response to the Trump Administration’s recent, pre-election flurry of jabs. The idea in Zhongnanhai in the run-up to November 3rd is to give its wolf-warriors and nationalistic netizens enough to appease their appetites but not enough to risk fanning Washington-Beijing flames out of control.
So, with the clock ticking down to 64 days before the U.S. election and with 78 days before the Trump Executive Order 90-day deadline expires on November 12th, the endgame of this global chess match is now ruled by the time-clock.
TikTok, TikTok, TikTok …
Volume 2, Number 2 in Global TECHtonics: U.S./China Fault-line series
One of the most memorable moments from the two months of A-100 training I received upon entry into the U.S. Foreign Service was a leadership training film about the 1985 Bradford City Football (Soccer) Stadium fire. A small fire, sparked in a code-violation trash pile, was quickly whipped by winds into a fire engulfing substantial portions of the stadium. The raging fire trapped spectators, killing 56 and injuring at least 265.
Filmed on-site during the panic, the key point in this very graphic film involved the challenge of communications in a crisis. As described by Wikipedia, “In the mass panic …, fleeing crowds escaped on to the pitch but others at the back of the stand tried to break down locked exit doors to escape, and many were burnt to death at the turnstiles gates, which had also been locked after the match had begun.” The specific problem was that people at the front of the mass of people trying to flee from the gates quickly recognized that those gates were locked but, in the panic, could not communicate the problem back to the people pressing forward from behind. Had clear communication been possible, everyone could have found an alternative exit. As it was, scores of people ended up pinned against the gates and perished.
The lesson for the U.S.-China technology upheaval currently underway is straightforward: the implications of the upheaval appear different to different parties, depending upon their position in the field of action, and there is danger of differing reactions and poor communications compounding the danger and likewise leading to tragedy.
The goal of this post is to set out in very general terms the different industry groups affected by the Trump Administration’s efforts to date to “decouple” the U.S. and Chinese tech spheres – denying various sub-sectors of the Chinese tech industry access to the U.S. market, incentivizing U.S. firms to bring their production from China back to the U.S., and also encouraging allied governments to reinforce both approaches. There are four major technology sub-sectors that, to date, have been affected by these policy moves. In addition to providing simple, thumbnail descriptions of each of these four sub-sectors and how they have been affected by the Trump Administration policy approach, we will also rank them in terms of national security risk and look at the potential for a seismic reaction being triggered.
A simple way of assessing national security risk and gauging the related potential for a Bradford Stadium-type chain of events is to think in terms of crisis management. Crisis management experts generally identify four distinct stages as a true crisis develops. The following is drawn from the Crisis Prevention Institute’s Crisis Development Model:
- Anxiety
Anxiety prompts changes in behavior and looking at things differently. It’s a time to listen and observe, not dictate what should happen next.
- Defensive Behavior
Defensive behavior can be a natural escalation of anxiety; it’s the point where actors in crisis begins to lose rationality.
- Risk Behavior
Risk behavior is displayed as actors enter crisis and reach the point of propensity to harm themselves or others.
- Tension Crisis
Every crisis reaches a point of meltdown or tension reduction. Crisis behaviors, as they escalate, expend a tremendous amount of energy.
So here we go …
Level One
Among the earliest Trump Administration actions targeting technology products from China involved the use of tariffs. While the various rounds of tariff actions are too technical and convoluted to get into here, a few broad generalizations can be made. First, the tariff actions put into effect were more targeted to electronic components than to finished electronic consumer products. For instance, componentry for modems, routers and televisions were subject to two rounds of steep tariff increases and microelectronic chips were assessed a hefty 25% tariff while consumer products such as cellphones, laptops and video games, despite a series of threats by Trump to impose tariffs in the summer and fall of 2019, have still not been hit with any tariffs to date. The President’s advisors apparently convinced him, as the Christmas season approached, that voters would not take kindly to sudden price increases for these products. Second, there is little evidence to suggest that these tariffs inflicted enough pain on Chinese technology manufacturers and exporters to induce them to substantially change their behavior or to protest loudly to their government for relief. Tariff increases can be absorbed at any link in the supply chain stretching from the manufacturer and its supplier network (in China) to the importer, distributor and retail outlet (in the U.S.) or, alternatively, can end up simply be passed on to the consumer (in the U.S.). Preliminary analysis indicates that the U.S. side of the supply chain in technology products has likely absorbed as much pain from these rounds of tariff actions as the Chinese side has been forced to absorb. Third, tariffs are the quintessential sledgehammer used to crack open a peanut. Even if they actually hit the peanut, it tends not to yield anything worth the effort and can cause considerable damage to the surroundings.
At the same time that the Trump Admistration was rolling out waves of tariffs to target imported goods from China, they were also tightening and expanding limits on investment into the U.S. by Chinese technology companies – as well as certain other types of companies – on the grounds that they represent a risk to U.S. national security. The mechanism for achieving this was through expansion of the review powers of the Committee for Foreign Investment in the United States (CFIUS), an inter-agency body comprising nine cabinet-level departments and chaired by the U.S. Secretary of the Treasury.
As with the tariff actions, the heightened scrutiny of potential Chinese investments into the U.S. by CFIUS served primarily to send a political signal to the Chinese side that the commercial and economic climate was getting chillier for Chinese companies in the U.S. Chinese companies looked for work-arounds, adjusted their business plans, and in some cases looked to other world markets to take up the slack. These two sets of actions caused some tremors but did not cause the ground to fundamentally shift under U.S.-China relations. This represented, broadly speaking, the Anxiety Phase of the building crisis.
Level Two
The first indication of a second, potentially more consequential level of tension occurred in the spring of 2018, as President Trump was repeatedly threatening to levy tariffs on China but before the imposition of the first round of tariffs in July of that year. That second front involved Shenzhen-headquartered ZTE, one of China’s largest makers of smartphones and telecommunications equipment. In March, two ZTE affiliates agreed to a civil and criminal penalty of $1.19 billion for having illegally shipped telecommunications equipment to Iran and North Korea. Two months later, after it was found out that ZTE had failed to reprimand and had, in fact, paid bonuses to the executives involved in those illegal shipments, a seven-year ban on the export of U.S. components to supply ZTE’s manufacturing facilities in China was instituted. This ban was widely viewed as a likely ‘death sentence.’ The manufacture of ZTE smartphones would not be possible without access to U.S.-made microelectronic hardware and Android operating system software. Moreover, the fact that ZTE had been designated as a risk to U.S. national security hung like a sword of Damocles over the country’s future. But, almost immediately, the sentence was lifted without clear explanation. On May 13th, President Trump tweeted “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done.” One week later, the U.S. Commerce Department eased the restrictions and on June 7th a deal was reached whereby the Chinese company agreed to complete a $400 million escrow payment in return for the complete lifting of the seven-year export ban.
The whole sequence of events was somewhat baffling except for what it indicated about President Trump’s penchant for injecting himself personally into company-specific matters and for taking public and dramatic steps to build his rapport with President Xi. There is widespread speculation that Trump hoped, through this off-again on-again courtship of Xi, that he would get a trade deal which would allow for the lifting of the whole raft of “Level One” tariffs and give him a major trade deal to tout in the run-up to the 2020 elections.
It was not to be. U.S. and Chinese trade negotiators continued to slog through their negotiations inconclusively and an apparently frustrated Trump and the U.S. national security apparatus soon turned their attention to an even larger target than ZTE–Huawei, China’s national champion in that industry space. Founded in 1987 by Ren Zhengfei, a former army officer, and also headquartered in Shenzhen, Huawei employs 200,000 and manufactures telecommunications equipment, particularly equipment used in the infrastructural backbone of the new 5G standard for telecom, and consumer electronics, particularly smartphones. As was the case with ZTE, the Trump Administration voiced a specific legal concern and general national security concern in launching its campaign against Huawei. The legal matter concerned charges that Huawei too had created elaborate corporate structures to evade the U.S.-led “maximum pressure” sanctions regime against Iran. Specifically and most visibly, that legal issue crystallized around the detention in Canada of Ren’s daughter and Huawei CFO, Meng Wanzhou in early December 2018. The charges, unveiled publicly by the U.S. Justice Department in late January 2019, alleged a decade-long attempt by Huawei and Meng to steal trade secrets, to obstruct a criminal investigation and to evade economic sanctions on Iran. Canada was asked to extradite Meng to the U.S. to face trial on these charges.
The broader national security issue behind the campaign against Huawei centered on the charge that the Chinese government would be able to get access to the torrent of data coursing through next generation 5G telecom networks. To the extent that Huawei-supplied network components are built into the backbone of those networks, Huawei could gain access to the data. And, the thinking goes, that since Huawei is a China-based, PRC-supported champion company, Huawei would have no ability – protestations by the founder and company spokespeople to the contrary – to resist Chinese government requests for access to that data.
The two characteristics of the still on-going U.S. government-led campaign against Huawei which sharply distinguish it from the earlier actions against ZTE are its long duration and its expansion to the international field. Each one of these two characteristics presents complexity which defies easy summarization. Future posts will examine the international dimension of this campaign which has brought the Trump Administration some hard-won headway but also a sometimes stunning level of push-back and public repudiation from traditional allies.
For now, the point is simply that the initial evanescent campaign against ZTE and now the sustained campaign against Huawei can together be thought to represent the second level of effort, and risk, in forcing U.S.-China tech decoupling. Representing a natural escalation of the anxiety provoked by the various tariff rounds, these two sets of actions – and, particularly, the Huawei campaign — reveal factors of irrationality coming into play. On the Chinese side, the issue is a personal affront to Xi Jinping. It is also catnip for the millions of Chinese “netizens” who use nationalistic vitriol and memes to inflame public opinion which, in turn, further narrows the options available to Xi and his government policy makers. On the U.S. side, Trump Administration officials have tried to cajole other countries into raising their own costs and slowing their own transition to 5G by foregoing Huawei equipment without providing specific evidence of the claimed threats to help countries justify taking these steps. Domestically, the Administration has failed to provide a clear rationale and consistent messaging so that the public can assess the risks. Instead, the Administration has framed the issue in terms that are highly personalized to Trump and in a tone that is more macho than rational. It has become, in effect, a bullet point in Trump’s “I’m tougher on China than Sleepy Joe will ever be” reelection strategy.
The factor which has perhaps kept these actions from destabilizing U.S.-China relations even more is that the U.S. doesn’t have its own horse in the 5G sweepstakes. The two major competitors to Huawei are Ericsson (Sweden) and Nokia (Finland). The fact that European allies have been so reluctant to sign on to the U.S. campaign against Huawei, even though two major EU companies stand to gain competitively, underlines just how weak the national security case which Trump officials put forward has been. Over recent months, as the campaign has made some headway following an initial and embarrassing series of stalls out of the gate, Samsung (Sourth Korea) has also emerged as a potential provider of 5G telecom infrastructure components.
Level Three
A third, but more nascent, level of conflict is now beginning to take shape around social media networks and search engine companies. The players at center-stage of this now emerging drama are the tech giants: Apple, Google, Facebook, Amazon and Microsoft in the U.S. and Baidu, Alibaba, and Tencent (the so-called ‘BAT’ trio) and Bytedance in China. For U.S. readers not familiar with the commercial landscape in China, Baidu, the weakest of the trio, makes money, somewhat like Netflix, principally through advertising and content subscription services built around its Baidu search engine. Alibaba, the strongest of the trio, operates a vast Amazon-like selling site for both business (B2B) and consumer (B2C) end-users. Leveraging extraordinary global reach and profitability with this base of operations in e-commerce sales and delivery, the Alibaba family of companies is increasingly branching into business areas as diverse as cloud computing, media and entertainment, microfinance and tourism. Tencent is the owner of WeChat, a multi-purpose messaging, social media and mobile payment app which has achieved far greater penetration in the Chinese market – and has become more of an indispensable feature in the lives of its users — than any comparable app has achieved in the U.S. Bytedance is the owner of the massively popular TikTok app.
The market access picture for U.S. firms in China has been markedly less open than that traditionally enjoyed by the above Chinese firms in the U.S. Put simply, there has not been reciprocity and the U.S. Big Five Tech Giants have long faced restrictions limiting their ability to do business in China. This is a direct reflection of the Chinese government’s sensitivity, verging on paranoia, about its citizenry’s ability to access sources of information beyond the government’s control. (The three pillars of control for the Chinese Communist Party (CCP) have been, even before assuming control of the nation in 1949, the so-called Three P’s – the Party, the PLA (People’s Liberation Army) and Propaganda). Of the five U.S. companies, Apple’s iPhone and Microsoft’s personal computers and LinkedIn business networking service have enjoyed relatively freer access to the Chinese market, though that access is nonetheless significantly constrained. Microsoft, which has had a presence in China since 1992, has fared the best. Its operating system controls more than a third of the market in China and through its research center in China (its second largest in the world), Microsoft works closely with major Chinese companies on innovative product development. Apple has enjoyed some access for its iPhones, however, the iPhone’s penetration has been limited in China by its high price-point and positioning as an aspirational brand undercut in price by Huawei and Xiaomi. The other three companies have been largely shut out of the market: Google by its refusal to accede to demands, explicit and implied, to make search results and other data available to the Chinese government; Facebook has flatly failed to get government permission to operate in the Chinese market despite years of personal lobbying by Mark Zukerberg (which included Zuckerberg learning Mandarin, recommending Xi Jinping’s book to his employees and even asking Xi Jinping to suggest a name in Chinese for his baby); and Amazon, which faced stiff price competition from Alibaba and JD.com, decided in early 2019 to shut down its uphill effort to build an e-commerce marketplace business in China.
While fierce competition is an undoubted factor in explaining some of this picture of limited presence by the U.S. tech giants in China, government policy is the paramount issue. As previously mentioned, an overriding element of the government’s restrictive policy has to do with control over information. An additional element has to do with the government’s drive – also seen in the aerospace and financial sectors – to give homegrown companies a protected space to grow domestically in order to develop into global competitors and foreign exchange earners. That this is inconsistent with commitments which China made upon entry into the WTO in December 2001 is a cause of concern for the global community. That it creates an unequal playing field for U.S. firms in China is a common concern shared by both political parties in the U.S. and needs to be addressed. That there is evidence of Chinese firms using their penetration of the U.S. market to conduct unauthorized data collection from U.S. citizens is even a greater matter of concern, one that demands strong and strategic counter-measures.
On this last point, it is an established and publicized fact that WeChat has been used to collect data from the devices of U.S. citizens on U.S. soil without the individual’s or the U.S. Government knowledge and, of course , without any legal authorization. Any and all information on a compromised device is at risk in these instances. The pattern of known instances of compromise suggests strongly that there has been a directed campaign by the PRC at work rather than a series of random or accidental intrusions by Tencent. Substantially more information on this vulnerability is known within U.S. government circles than has been shared to date through public sources.
It is this type of vulnerability which is the behind the Trump Administration’s announcement on August 6th of this year of signed Presidential orders to ban commercial transactions with WeChat’s parent company, Tencent, and with Bytedance, Tiktok’s parent. The fact that 60% of users of the TikTok platform are under the age of 24 make it seem, at first blush, to be an unlikely target for PRC government-directed surveillance. But closer inspection shows that risks are not negligible. There is the established precedent from WeChat. There is the vast user base – 85 million in the U.S and 1 billion worldwide. Also, as any expert will tell you, surveillance and espionage seek to exploit any vulnerability and one’s children can be a significant vulnerability. Finally, younger people are disproportionately represented in the workforce of some of the most innovative and cutting-edge industries.
I will have occasion in the future to post on several aspects of this emerging arena of U.S.-China conflict. One topic involves the “geo-commercial” advantage which China enjoys with its population size, its unmatched number of smart-phone users, and its lax privacy laws, standards, and public expectations. As a result of these factors, Chinese companies are able to develop algorithms for new products and services more effectively and efficiently than their competitors. Bytedance’s TikTok is itself an example of this phenomenon. A second topic will be ‘balkanization’ of the Internet which will accelerate as the U.S. and China continue to de-couple and de-globalize their tech interests. A third topic will be the decisive role which India is likely to play in this contest as it balances its position as a massive market for cut-rate, Chinese-made smart-phones and as an important English-language strategic partner for Facebook and other U.S. social media and internet content and service providers.
For now, we can wrap this section with the observation that this emerging front in U.S.-China tech de-coupling involves a unique level of risk. It is so entwined in the lives of so many users and it touches on the core interest of so many behemoth companies in both the U.S. and China that it is markedly different from the risks found on the ZTE and Huawei front. While we are likely just in the early days of this new sphere of competition, it brings the U.S.-China relationship clearly into the third, risk behavior phase of the crisis development cycle. As this front continues to become a focal point, the public attitude and corporate bottom-line interests at stake are so core that entry into a mutually-destructive cycle of action and counter-action is almost foreordained unless both sides exercise great discernment and discipline.
Level Four
In last week’s post, Timing Matters, we touched on the issue of supply chains for semiconductors and advanced electronics. Because these products are the ‘brains’ behind entire emerging industries – artificial intelligence and robotics, autonomous vehicles, the commercialization of space, and others – this is where the United States’ and China’s economic competition is most fierce. Because these supply chains inextricably pass through Taiwan and Taiwan-headquartered industry leaders like TSMC – the economic risk is compounded by political risk.
The Assessing China ”Global TECHtonics: U.S./China Fault-line” series will delve much more deeply into this issue in the months ahead. Suffice it to say for now, that microelectronics and the global supply chains which help produce and distribute semiconductors and related products globally will be the fault-line which either ends up triggering a cataclysmic upheaval between the U.S. and China or, through inter-governmental negotiation, helps to settle the entire relationship on a new, more stable and sustainable basis.
There are a lot of things people don’t realize about Taiwan. I’ll mention three. First, it is the United States’ 11th largest trading partner worldwide, despite the island’s small population of just under 24 million. Second (and surprisingly given that China maintains iron-fisted control over its strategic industries), Taiwan “owned’ (both figuratively and in the sense of being the equity owner) most of the factories producing semiconductors, advanced information technologies and even some of the key communications equipment in China throughout the 1990s and, diminishingly but still decidedly, into the new millenium. (These Information and Communications Technologies make up the so-called ICT industry. Just think of Apple, Microsoft, Hewlett-Packard, AT&T and Verizon and all of their various competitors as comprising one vast and strategically vital sector). Third and still somewhat under-appreciated in the U.S. is the story of the growth of Taiwan’s vibrant democracy, which started taking root with reforms under Generalissimo Chiang Kai-shek’s son, Chiang Ching-kuo, in the mid-1980s and flowered under President Lee Teng-hui who was in power from 1988-2000 (and who passed away last month, on July 30th). The significance of this last point is that Taiwan’s experience has repudiated, with underlining, bolding and an exclamation mark, the self-serving claim voiced by generations of authoritarian-leaning leaders in Greater China and Asia – namely, that the Chinese (ethnic Han) people, heirs to a long tradition of imperial rule, are simply not suited to Western-style democracy.
Today’s post is a scene-setter for the “Global TECHtonics: U.S./China Faultline” series of technology-related posts which will be forthcoming on a weekly basis, usually on Mondays, starting next week. This scene-setter will draw mostly on my personal experience. It will also tug mostly on the economic and technological threads mentioned above and will only touch lightly on the political one. (In two weeks’ time, we’ll pick up the political thread more directly and weave it more visibly as the background to an examination of the current, very acute semiconductor supply chain tensions involving Taiwan, China and the United States in the run-up to the U.S. elections as well as what China’s recent imposition of a new security law in Hong Kong portends for Taiwan.)
Personally, I’ve had the good fortune to live in Taiwan for three separate periods in my life: for six months in early 1977 (trying to consolidate, in an entirely ad hoc and ultimately ineffective way, the Mandarin language I had studied for three years in college), for a full year in 1979-80 (finally succeeding at consolidating my Mandarin through the rigorous Stanford Inter-University Program for Chinese Language Studies at Taiwan National University in Taipei, the springboard I did succeed in identifying in 1977 as a way of achieving, on a deferred basis, my goal of nailing down the language ) and finally for three years 1999-2002 when I served as head of the Commercial Section of the American Institute in Taiwan (AIT operates as the de facto U.S. Embassy in Taiwan. Along with the AIT Washington Headquarters – the de facto counterpart to the U.S. Department of State for all things Taiwan – AIT was created in 1979 as part of the Taiwan Relations Act, whereby the U.S Congress spelled out the terms of continued U.S. involvement with Taiwan (the Republic of China) following President Carter’s decision earlier that year to de-recognize the Republic of China as “China” and to our recognize the Peoples Republic of China as “China” instead.
It was my three years of experience as the Senior Commercial Officer at A.I.T. which gave me a front-row seat – and sometimes got me inside the ring – of the complicated, three-way tag-team match involving the U.S., Taiwan and China in the global ICT arena. I’m going to give a few glimpses of what that entailed. Not that any of this reveals anything particular about me (except for revealing my questionable golfing skills). The experiences were all simply part and parcel of the position I was lucky enough to fill. My point in sharing these experiences is to set-up to the main point which this post is aiming for – a glimpse into how timing matters, particularly in Washington.
So, what did that three years at AIT make possible for me? For starters, I was able to forge close relationships with the trail-blazers of Taiwan’s global IT preeminence – Morris Chang, the founder and then Chairman of Taiwan Semiconductor Manufacturing Corporation (TSMC); Stan Shih, the founder and then Chairman of Acer Computer and later of the Acer Group (Stan and I were equally erratic on the golf course which made for a strong bonding experience); and, to a lesser extent with the more aloof Terry Gou, founder and Chairman of Hon Hai Precision Industries (better known by its tradename Foxconn, the electronics contract manufacturer which assembles iPhones throughout China). This level of diplomatic access is somewhat rarefied even for Ambassadors around the world but in Taiwan – like in Berlin, the post I served in prior to Taiwan – the U.S. was viewed as the guarantor of the country’s existence (for Taiwan as a current and on-going reality and for Berlin as a Cold War period reality) and important doors, even in the Presidential Office Building, were open for me.
Along the way, I was called on by American companies to help prepare for Y2K and then to clear up the debris of their local operations following the ‘Tech Wreck,’ the fallout of the sudden collapse of the dot.com bubble following its a valuation peak in March 2000. Months later, I was involved in the delicate minuet whereby China was welcomed into the World Trade Organization in December 2001, followed by Taiwan’s accession minutes later.
Along the way, I was honored to be the local host in Taiwan when then-Taipei Mayor (and later President of Taiwan) Ma Ying-jeou invited Bill Gates, Carly Fiorina and Michael Dell, along with scores of other U.S. IT industry leaders, to the World Congress on Information Technology (WCIT) in June 2000. And, again in 2006, I was asked to be the “WCIT Ambassador” responsible for organizing and bringing to Austin, TX for WCIT XV the official delegation from Taiwan, the second largest international delegation among the more than 2,000 official delegates at that event.
So, as China’s economy continued to grow by double-digits over these years and as China began to close the technology gap between Taiwan-owned ICT manufacturers operating in China and its own home-boosted technology companies, the stakes started rising for the developed economies and particularly for the U.S. The crux of the high-stakes gambit involved the global supply-chains linking U.S. brands and Taiwan OEMs (Original Equipment Manufacturers) producing the hardware for top U.S. brand-name companies, such as Foxconn’s manufacturing of Apple iPhones, previously mentioned here, or TSMC’s backstopping of production and supply of Intel’s chips. The questions in the early 2000s were many: did relocation of so many Taiwan-owned production facilities to the mainland, where labor costs were cheaper, pose risk to the integrity and sustainability of these vital supply chains? Would the increasing economic integration taking place between Taiwan and China tend to stabilize the political situation in East Asia or would it add a new dimension of instability? In the simplest formulation, could – and would — economics trump politics? Could global supply chains function as the cords to tie together the Asian region – historically fragmented and politically divided – into a more integrated polity more closely resembling stable Europe or could they get ripped out on the whim of a political leader?
With these questions in the headlines – at least in the business sections – of major newspapers and business periodicals, I was invited on three occasions to give expert testimony about these global ICT supply chain issues to a Congressional Commission, then called the China Economic Security Review Commission, during the 107th ,108th, and 109th Sessions of the U.S. Congress.
On a parallel track over this same period, I was able to get peer-reviewed articles giving my answers to these questions in several academic journals and books. In 2006, my article The Politics of Greater China’s Integration into the Global Info Tech Supply Chain was published in The Journal of Contemporary China (Vol. 13, No. 40) and in 2007 my paper Taiwan’s FTA Prospects from the Global IT Supply Chain Perspective was published in the book Economic Integration, Democratization and National Security in East Asia, edited by Peter C.Y. Chow (Edward Elgar Publishing).
If you’re reading this sentence, it means you’ve stayed patiently with me through a lengthy set-up for an ending tag-line which holds irony and hopefully some insight into how things work (sic) in Washington and what pot is close to boiling over at the moment on the world’s front burner. I’ll be able to wrap this up now. Just keep in mind the title of that last article – “Taiwan’s FTA Prospects …” which refers to the Taiwan’s prospects for finalizing a Free Trade Agreement (FTA) with the U.S. (The knot identified in that article was that a U.S.-Taiwan FTA would shore up for U.S. firms the strength and resilience of supply chains to the most advanced ICT products from Taiwan’s top tech firms but come at the risk of provoking a rageful reaction from China for throwing shade on its “One China” shibboleth.)
So what’s the finale to this set piece? In 2005, Ambassador Jim Lilley took it upon himself to introduce me to the American Enterprise Institute for a possible appointment as a fellow or scholar there. AEI trends a little to the right of my own political perspective but Jim Lilley was already established there as a Senior Fellow and, having gone through Tiananmen with him at the helm of the U.S. Mission, I had utmost respect for him and was flattered by his effort to get me on board. Also, my boarding school classmate, Nick Eberstadt, was well-established there as a demographic diviner of the harsh realities underlying North Korea’s inscrutable surface as was Arthur Waldron, another China expert I knew well from UPenn. Jim arranged for me to have a series of conversations with various experts during the course of the day and, in each conversation, we grappled with the various questions outlined above. At the end of the day, I was invited into the President’s office and was informed by senior management that, although they found the day-long discussion intellectually invigorating, they didn’t see my expertise as particularly relevant to government policy or to AEI’s mission. The essence of the message was that the free market would take care of all these questions and that government policymakers didn’t need to, and actually shouldn’t try, to think about them too much.
So that was 2005. Now in 2020, the jury is in and those questions are not only recognized as highly relevant to policy makers, they are at the incandescent center of U.S.-China relations. The global supply chain question is now at the beating heart of the Trump Administration’s moves to “decouple” the U.S. and Chinese technology universes. Just Tuesday, Apple was on the line with the White House along with a dozen other top U.S multinational companies, explaining the massive hit they project their iPhone sales in China will take if the President’s banning of WeChat takes effect.
Another example: Throughout the year, Taiwan Semiconductor Manufacturing Corporation (TSMC) has found itself ever-closer to a “impossible choice,” one forcing it to abandon its long-established strategy of serving both the U.S. (including Intel) and PRC (including Huawei) markets and instead to choose one at the expense of the other. Some military strategists fret that Xi Jinping, after having brought Hong Kong to heel with imposition of a new security law, will be tempted to take advantage of the pandemic and make its next move in the near-term on Taiwan. The rationale? Fulfillment of a “Chinese Dream” ambition for reunifying an imagined China from the past, of course, but for much more practical aims as well. Ninety-miles across the Strait of Taiwan, in the Hsinchu Science-based Technology Park (and other locations nearby) lies perhaps the world’s greatest single concentration of advanced microelectronic engineering talent and production facilities. This prowess has eluded China’s attempts, over decades, to home-grow. A quick power grab by China — while the world is distracted with COVID and the U.S. is internally riven by partisanship – may be highly unlikely but it is not at all inconceivable. We need to be anticipating, and guarding against, worst-case scenarios if we hope to effectively forestall them.
For me, the most satisfying single example of how my set of questions and provisional answers from fifteen years ago is finally getting serious traction in DC happened on Wednesday. Earlier in the week, President Tsai Ing-wen had hosted Health & Human Services Secretary Alex Azar on an official, multi-day visit to Taiwan for discussions about Taiwan’s exemplary response to the COVID-19 pandemic and the need for Taiwan to be allowed full participation, over Beijing’s objections, in the World Health Organization. The visit by Azar was the highest-level visit to Taiwan by a U.S. official, and the only Cabinet-level visit, since Taiwan’s de-recognition in 1979. Immediately after the “wheels-up” departure of Secretary Azar, President Tsai held a news conference in which she set out a single priority for U.S.-Taiwan relations in the upcoming year: to begin negotiations with the U.S. Government for a U.S.-Taiwan Free Trade Agreement (FTA) to strengthen trade flows and to safeguard supply chains.
Sweet.
As the U.S. and China continue to face off daily over technology and other issues, I have been listening, as my dog Max and I walk each day, to the brilliant History of Rome podcast series by Mike Duncan (2007-12). One thing is clear from the endless wars which Rome undertook over the course of a millennium against the Latins, the Etruscans, the Samnians and the Carthaginians during the Republic; against each other during the Civil Wars; and against the Greeks, the Syrians, the Parthians and others during the early Empire (which is as far as I’ve gotten so far) – wars were started as often as a result of misreading – or cynically exploiting– an opponents’ real intentions as they were from any meeting of minds over the actual need for conflict. (Mind you – we’re talking here about the miscalculations that get conflicts started, not the logic which takes over once military actions have been initiated).
With that in mind, I am reminded of a March 2019 article by Katherine Epstein, a member of the Princeton Institute for Advanced Study. This article gives a clear overview of the attitudinal and behavioral parallels marking America’s 18th c. rise in a British-led world order and China’s emergence in the U.S.-led post-WWII global system. A common structural dynamic is at play in both instances.
To Understand China, Look to America’s History
In challenging Britain’s hegemony a century ago, U.S. tactics look similar to Beijing’s today.
By Katherine C. Epstein
March 19, 2019 7:15 p.m. ET
Wall Street Journal
There’s been a good deal of hand-wringing in the U.S. over efforts by the Chinese telecommunications giant Huawei to replace U.S. suppliers of advanced equipment and wire the world with its 5G network. Most analysis of China’s strategy turns on the conviction that the Chinese are trying to challenge U.S. commercial and geopolitical hegemony—they steal U.S. technology and then sell their plagiarized equipment at a lower price. Worse, they seek to build an alternative, China-led global telecom infrastructure, positioning Beijing to spy on the users and capture yet more U.S. commerce.
As a historian, I’m struck by the incompleteness of this analysis. Two crucial pieces are missing.
The first is any sense that the threat posed by Chinese control of a global telecom infrastructure might not be limited to espionage or (that other favorite metaphor) a “cyber Pearl Harbor.” The potential danger may be wider and deeper—and the World War I era shows why.
Before that war, like today, the global economy was highly integrated. This was the first era of globalization. Advanced industrial, urbanized societies depended on international trade, requiring uninterrupted access to the infrastructure that girded the global economic commons. Interruptions to that access had the potential to cause economic derangement, rapidly leading to social and political instability. In other words, control of the infrastructure conferred commercial advantage and it could also be weaponized.
A century ago, Britain acted on this insight. In addition to eavesdropping on enemy and neutral communications, the government acted to regulate the British firms that dominated the services necessary to conduct global trade: the global communications network, the financial-services industry (including commercial credit and marine insurance) and oceanic transportation. Britain used its control over the infrastructure of global trade not simply to spy on its enemy, nor to strike enemy military assets, but to mount a systematic assault on the whole of an enemy’s economy—in 21st-century parlance, a massive denial-of-service attack against enemy society.
Returning to the present, both the espionage model, which refers to targeted state spying, and the cyber-Pearl Harbor analogy, which refers to an essentially conventional military attack, fail to capture the systemic and social qualities of a certain type of attack. In this context, reflect on Russia’s efforts to interfere with U.S. elections. Partisanship aside, Moscow has managed, at relatively low cost, to reduce the confidence that Americans have in each other and the electoral process. It waged a successful psy-op, compromising not material resources but social confidence. Its campaign showed that foreign countries can manipulate information within global networks to sow distrust within American society.
What would a scaled-up version of this attack look like? What if it were carried out over a China-dominated information network?
The second missing piece is awareness that if China is trying to challenge (or escape) U.S. hegemony by stealing American technology and building an alternative global telecommunications infrastructure, this would be analogous to what the U.S. tried to do vis-à-vis Britain, then the global hegemon, and the other great powers in the World War I era. Americans tend to forget how powerful Britain was and how weak the U.S. remained before World War I.
In its drive for world status, America routinely pilfered foreign technology well into the 20th century, and it gained considerable strategic advantage from its theft. The 1912 Supreme Court case Crozier v. Krupp, which formally extended the power of eminent domain to intellectual property, concerned a German gun-carriage design the U.S. Army had plagiarized. That same year, a U.S. naval officer walked off with the plan for the British navy’s super-secret long-range torpedo. During World War I, Washington expropriated German chemical intellectual property held in the U.S., providing an enormous boon to America’s chemical industry.
In World War II, the U.S. received huge inflows of scientific and technological knowledge from Britain, then slapped secrecy restrictions on subsequent developments to prevent any flow back to Britain. Many more examples could be adduced. Historically, it might be said, Americans are an imitative people.
The U.S. came to appreciate the significance of controlling global economic infrastructure when Britain’s campaign of economic warfare against Germany in World War I caused huge collateral damage to the American economy. Companies like RCA worked hand-in-hand with the U.S. Navy to build a global telecommunications grid—perhaps similar to the way Huawei, run by a former Chinese army officer, may be working hand-in-hand with the Chinese army.
Wall Street cooperated with the U.S. government to develop a modern financial-services industry deliberately intended to help New York displace London as the world’s financial capital—perhaps similar to the way China has developed its own Swift payment-clearing system. Woodrow Wilson’s administration attempted to build an oceangoing merchant marine so the U.S. wouldn’t have to rely on Britain’s—perhaps similar to the way China is attempting to increase its control over the global oceangoing merchant marine.
In short, a century ago, the U.S. was the China of the age: an up-and-coming revisionist nation chafing against the established powers, importing and pirating what it could, free-riding on the security provided by the existing hegemon, and legitimizing its behavior with the pious conviction that it was on the right side of history. Could it be that the Chinese understand U.S. history better than Americans do?
It’s easy to be moralistic about China, but in the quest to find a sound U.S. strategy, we need less pearl-clutching and more imagination. Rising powers have compelling strategic incentives to control the sinews of global economic activity as well as to acquire foreign technology. Americans and their allies should ask themselves whether they would rather live in a world under U.S. or Chinese hegemony—and what they can do about it.
Ms. Epstein is a member of the Institute for Advanced Study in Princeton, N.J., an associate professor of history at Rutgers University-Camden, and a director of the Naval Historical Foundation.
So, what’s the point? As Yuval Noah Harari, author of Sapiens, would be quick to point out, the British themselves had established their naval-led Empire by upending Spain’s Armada, which had earlier navigated its way to world power status by stealing from the Portuguese the same “rudders” (mariner’s handbook of written sailing directions) which the Portuguese had stolen from the then-ascendant Arab empire.
Well, the point is that, as the U.S. and China edge ever-closer to an actual or pretextual spark of open conflict, we need to stay sharp-eyed. Given the incalculable costs which outright conflict between the U.S. and China would exact from both countries and the world, it is a political necessity and a moral imperative to keep an accurate picture of the structural situation in our field of vision. This is where Katherine Epstein’s article is useful. A picture with gray-tones is always more accurate and revealing than a simple black-and-white picture. Harder to argue in a sound-bite perhaps, but more consistent with the leadership we need.
______Assessing China / The TEA Collaborative______ 