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From Defense One

                                                    The previous era entwined the two economies. This one is splitting them apart.                                            


It came without a breaking news alert or presidential tweet, but the technological competition with China entered a new phase last month. Several developments quietly heralded this shift: Cross-border investments between the United States and China plunged to their lowest levels since 2014, with the tech sector suffering the most precipitous drop. U.S. chip giants Intel and AMD abruptly ended or declined to extend important partnerships with Chinese entities. The Department of Commerce halved the number of licenses that let U.S. companies assign Chinese nationals to sensitive technology and engineering projects.

Even as Washington debates the relative merits of decoupling technologically and economically with China, policymakers need to consider that the point may be moot: Decoupling is already in motion. Like the shift of tectonic plates, the move towards a new tech alignment with China increases the potential for sudden, destabilizing convulsions in the global economy and supply chains. To defend America’s technology leadership, policymakers must upgrade their toolkit to ensure that U.S. technology leadership can withstand the aftershocks.

What’s Already Happened

The key driver of this shift has not been the President’s tariffs, but a changing consensus among rank-and-file policymakers about what constitutes national security. This expansive new conception of national security is sensitive to a broad array of potential threats, including to the economic livelihood of the United States, the integrity of its citizens personal data, and the country’s technological advantage.

In June, the U.S. Department of Commerce added five Chinese companies involved in the Chinese government’s supercomputing program to the Entity List, which prevents U.S. companies from doing business with them. Not just another shot across the bow in the U.S.-China trade war, these additions reflect the national security ramifications of selling advanced commercial processors to companies linked to the Chinese military. 

Unlike the President’s trade war, support for this new, expansive definition of national security and technology is largely bipartisan and likely here to stay. Throughout Washington, concerns about Xi Jinping’s civil-military fusion drive and renewed emphasis on acquiring dual-use technologies has opened the door for more enforcement against Chinese entities seen as vectors for Beijing’s high-tech push. Newfound worries over the protection of personal data, and how it can be weaponized, have also driven Congress to last year designate personally identifiable information as a national security concern.

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Washington has also become increasingly concerned about Beijing’s efforts to vault Chinese companies past their U.S. competitors via technology transfer, both formal and informal. Last summer, Congress voted overwhelmingly to overhaul the Committee on Foreign Investment in the United States, or CFIUS, which screens business deals for national security concerns, and the export control regime, which limits the sale of sensitive technologies abroad.

Over the past year, CFIUS has forced two companies to divest from their Chinese funders due to concerns over personally identifiable information. In addition, the justification behind adding the five Chinese companies to the Entity List was the possible military end use of the products it was exporting, or dual-use technologies. The use of these economic tools to close off China’s technological upgrade avenues in the United States is clearly working—since these reforms have passed, Chinese investment into the United States has dropped by almost 90 percent.

What We Can Expect from China

This shift has not gone unnoticed in Beijing. Since China entered the World Trade Organization in 2001, it has largely relied on economic entanglement with the United States to acquire new technologies and develop its high-tech sectors. Even before the most recent trade spat, officials had already begun recalibrating China’s tech strategy to emphasize indigenous innovation over foreign acquisitions. 

The blacklisting of Huawei this past spring has accelerated this shift, turning the need to focus on indigenous innovation capacity from a long-term objective to an urgent priority. Beijing has doubled down on ‘self-reliance,’ which means utilizing China’s sprawling network of state and military research institutes to develop domestic replacements to critical components. This state-led push will further blur the line between what constitutes a private and a public company in China. It also likely means settling for some suboptimal domestic alternatives or finding ways to “design out” foreign inputs where possible.

Critically, turning inward through “self-reliance” does not mean Beijing will shy away from accelerating technology transfer from abroad when possible. Even as key avenues for technological upgrade close off, some avenues will remain open.

One channel that will be the hardest for the United States to close off will be talent. In 2017, the Trump administration used CFIUS to reject a bid to acquire Lattice Semiconductor, a U.S. company that produces programmable microchips. Nearly a year later, with the support of provincial officials in Guangdong, a Chinese startup founded by two former Lattice engineers began mass-producing programmable chips with similar sophistication. Attracting foreign talent with experience in high-tech industries abroad will be perhaps the most direct way to circumvent the U.S. firewall.

China will also increase cooperation with other advanced economies. After the United States heavily restricted the export of satellite technology in the 1990s, China turned to Europe to acquire critical technical know-how and intellectual property. Already, Huawei has already begun developing relationships with suppliers in Japan, South Korea, and Europe to offset the fallout from losing U.S. suppliers. Such relationships will only deepen. Few countries besides the United States have the political and economic wherewithal to refuse China’s overtures, especially if it means losing access to China’s enormous domestic market. 

Finally, Beijing will ramp up industrial espionage. Last year, the head of German intelligence noted how a sharp decline in Chinese cyber espionage followed an uptick in Chinese acquisitions of German companies. As if with the flip of a switch, China moved from stealing technology to buying it. But as legitimate avenues to acquiring technology close, Beijing will flip the switch back. China already has a well-developed infrastructure for illicit technology transfer via human and cyber-enabled means. After a brief hibernation in the wake of the 2015 U.S.-China cyber pact, Chinese cyberattacks on the U.S. government and businesses are again on the uptick. Policymakers can expect these efforts to become even more rampant and brazen, especially in sectors where CFIUS has restricted Chinese investment.

What the U.S. Can Do

As China accelerates its state-led technology drive, preserving the U.S. technological edge will require more than playing defense. Congress can take precautions to ensure U.S. innovation does not suffer during this time of transition, and specifically from the U.S.-China trade war. These could take the form of programs like the Defense Advanced Research Projects Agency’s Electronic Resurgence Initiative, which attempts to confront sector-wide bottlenecks and engage industry to foster breakthroughs. Such programs should be expanded and applied to other industries such as clean energy and next-generation telecommunications. 

While the U.S. government cannot stop Chinese researchers and engineers from taking their skills back to China, it can do a lot to ensure they feel welcomed in the United States. A good start would involve rolling back the Trump administration’s restrictions on H1B visas for skilled talent. The FBI and law enforcement can also do more to mollify the concerns of a Chinese-American community that fears racial profiling. The United States has long maintained its edge in science and technology by encouraging the best and brightest to adopt this country as their home. Losing that competitive edge during a geopolitical competition with China would be an unforced, and perhaps fatal, error. 

As tech companies are also disproportionately affected by the reforms to CFIUS and new export control regulations, the Treasury and Commerce Departments should consider adding special liaisons to those industries to explain new regulations, gather feedback, and build better working relationships. 

To prevent China from sidestepping export controls and turning to foreign companies to fill the gaps in its technology supply chains, the Trump administration should also work with allies and partners to create a multilateral regime. Commerce officials should begin by working with supplier economies, such as Taiwan, Japan, and South Korea, which have some of the most advanced technologies that China needs. Longer-term, Commerce should eventually try to also get all of the countries that have signed onto the Wassenar Agreement to also adopt similar policies around export controls. The Treasury Department should also send representatives to regions that develop critical high tech, like the European Union and Israel, to help create and implement CFIUS-like regimes.

Finally, as Beijing accelerates industrial espionage and cyberattacks to obtain U.S. technology, the U.S. government can help companies erect defenses. While private companies have adopted better standards for cybersecurity, the majority still remain woefully unequipped to withstand a cyberattack from China that targets core trade secrets. The Department of Homeland Security should conduct more outreach to companies that research and manufacture sensitive technologies to train and give technical assistance on how to better prepare for such an attack.

Decoupling is only the beginning, not the end, of the technological competition with China. The United States needs to realize that China will continue to find other avenues to ensure its technology drive proceeds apace. By identifying these additional pathways, and working with the private sector and multilateral partners, the United States will be able to maintain its technological edge.

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