The US-China tech race is fueling a strategic contest over which country will set the standards and norms of digital governance. From 5G, AI, Internet of Things (IoT), Big Data, and robotics to aviation, agriculture, biotech, clean tech, and satellite navigation, technology innovation is accelerating global competition. However, this requires international cooperation, too. Geopolitically, the fundamental issue at hand is which system of governance – either democracy or autocracy – will prevail and how that will affect the future of work as US-China rivalry ramps up.
China’s increasingly aggressive approach in exerting international influence reflects Beijing’s perception of China’s ascendancy amid US anemia. The recent US-China diplomatic talk in Alaska – the first one for the Biden Administration – magnifies China’s rhetorical challenge to US global leadership. However, in reality, the sustainability of China’s ability to compete and innovate is not guaranteed. Despite Beijing’s self-reliance and dual circulation policy, China still is – and will remain – reliant on foreign technology, innovation, and capital, while it accelerates its efforts to acquire all three by any means – overt and covert – for the foreseeable future.
The United States recognizes the reality of China’s tech threat and the imperative to maintain a competitive edge. US legislation – including the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the Export Control Reform Act of 2018 (ECRA), and the Holding Foreign Companies Accountable Act of 2020 (HFCAA) – reflects Washington’s policy attempts at limiting China’s access to key technology and capital markets. FIRRMA requires heightened scrutiny of foreign investment in “critical US technologies”. ECRA authorizes the US Department of Commerce to implement export controls on “emerging and foundational technologies”. HFCAA requires certain issuers of securities to verify they are not owned or controlled by a foreign government. The Biden administration recently affirmed Executive Order 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies”, de-listed and de-indexed 31 firms trading in U.S. markets that are owned or controlled by the Chinese military. The cascading effect of this legislation has sped up China’s push to indigenize supply chains and globalize China-led technology standards.
US policy measures reinforce Washington’s whole-of-government, bipartisan approach and the need for a comprehensive industrial policy to countervail China’s competitive strategy. The 2019 “Made in China 2025 and the Future of American Industry” US Senate report delineated the multiple challenges at home and abroad that the US faces in the tech race with China. The COVID-19 pandemic has magnified the depth and breadth of US-China interdependence and exacerbated bilateral rivalry. As the stakes grow higher, effective risk mitigation strategies for public and private sector entities are paramount.
The “China Model”: Technology, Economics and Security
The nexus between technology, economics, and security is the foundation of the “China Model”. Beijing’s “Made in China 2025” and “China Standards 2035” frameworks reinforce the role of military-civil symbiosis in propelling China to become a manufacturing superpower and technology standard-setter across AI, Big Data, IoT, semiconductors, robotics, among others. The Chinese National People’s Congress unveiled the 14th Five Year Plan (2020-2025) in March of this year. The 14th FYP envisions investments and development of seven "frontier technologies": 1) New Generation Artificial Intelligence (AI); 2) Quantum Communications; 3) Integrated Circuits or Semiconductors; 4) Brain Science; 5) Genomics and Biotechnology; 6) Clinical Medicine and Health: and 7) Deep Space, Deep Earth, Deep Sea, and Polar Research.
These long-term plans and targets amplify the “China Model” according to the US State Department. The China Model operates on a symbiotic relationship between China’s civil and military systems in developing and deploying technology for both commercial and military purposes to advance China’s national security priorities. While China’s tech giants – Alibaba, Baidou, Tencent, etc. – contribute to its economic growth, the country’s state-owned enterprises (SOEs) and inefficient resource allocation still hamper systemic competitiveness and productivity. Ironically, SOEs will play an even larger role in market reforms, as announced at the recent National People’s Congress. In the absence of consequential, economic structural reforms, China’s “high-tech, low-productivity” paradigm will likely constrict long-term productivity.
Nicholas Lardy, expert on China’s economy at the Peterson Institute for International Economics in Washington, D.C., asserts in The State Strikes Back that China’s centralized control political system has led Beijing to invest in inefficient and unprofitable state-owned enterprises rather than in the private sector, where most growth is generated. The 'China Model’, therefore, appears to have a very dynamic private sector with a very bad, resource-consuming state sector that doesn't show much sign of improvement.
In pursuing a modern-day “Great Technology Leap Forward” with focus on technological innovation, Chinese state planners aim to increase productivity and competition. Artificial Intelligence (AI) will be the pivotal arena for China’s technology catch-up-and-overtake goal. China’s whole-of-nation approach marshals state-society structures to advance China’s quest for technological self-reliance. The US National Security Commission on Artificial Intelligence (2021) assesses the threat of China’s technology advancements and the necessity for the US to identify technology priorities to advance national competitiveness:
“China is pursuing a comprehensive technology leadership strategy. China’s strategic investments in key sectors through its Made in China 2025 initiative threaten U.S. technological prowess, economic prosperity, and national security. In addition to investments in AI, China is seeking to become a world leader in quantum, 5G, and biotech, among other areas, and sees its strategies to lead in AI and each of these other technologies as mutually reinforcing. It has made clear which technologies it views as key national priorities and is investing heavily in a wide range of sectors that it assesses are essential to overall technical leadership”.
Therefore, to compete against China, the United States must develop a unified list of the technologies that will underpin national competitiveness in the 21st century. Hence, the first-mover advantage of developing and deploying technologies like microelectronics, biotechnology, and quantum computing will make it difficult for the United States to catch up to China. The lack of such a list results in disparate funding and policy approaches to technology protection and promotion across the U.S. government. The absence of clear priorities also makes it more difficult to effectively marshal private-sector investment in key technologies. In critical sectors with strong network effects like telecommunications, a winner-take-all dynamic raises the stakes even further for rapidly developing a leading technology platform.
Policy and Industry Implications
In expanding China’s commercial, investment, and technological reach in gaining access to global talent and resources, Beijing systematically uses industrial espionage, intellectual property theft, and talent recruitment to elicit proprietary and critical information. Policymakers and corporate leaders should identify and mitigate the risks of Chinese state apparatus operations in American and European companies, universities, research institutions, media organizations, and non-governmental organizations. China’s asymmetric approach to gaining competitive advantage epitomises the global and local risk of the US-China tech race.