While US trade policy may in part be driven by domestic-political considerations, the broader, strategic goals of US foreign economic policy have begun to emerge more clearly. US policies are aimed at both slowing down China’s economic rise and preventing it from becoming a global leader in the key technologies of the future. The economic rents attaching to technological leadership may or may not offset some of the incontrovertible welfare losses stemming from present US trade and investment policies. Economic welfare is not Washington’s primary objective, however. Losses to US welfare are considered an acceptable price to pay in the quest to maintain global technological leadership in view of intensifying US-China security competition (Jaeger 2019). As Stephen Krasner put it a long time ago: high politics beats low politics. National security beats economic welfare. The US is increasingly concerned about relative rather than absolute gains (or losses) as far as its bilateral economic relationship with China is concerned. This is unlikely to change as long as China's rise continues and it continues to act more assertively on the world stage.
Technological ‘dis-integration’ (or decoupling) will be very difficult to avoid. Washington’s ‘weaponization of interdependence’ (including technology) will lead Beijing to seek to reduce its dependence on the US by accelerating – to the extent possible – domestic innovation and technological upgrading (e.g. semi-conductors) and by diversifying its technology supply chains. Beijing will be doubling down on the very state-supported innovation policies that Washington finds unacceptable. The US will seek to limit China’s access to advanced technology as well as the means to innovate and produce advanced technology through targeted investment restrictions, tighter US export controls and the more forceful application of extra-territorial legislation (e.g. Huawei). It will also increase the diplomatic pressure on other countries not to adopt Chinese technologies (e.g. Huawei 5G) and not to supply China with advanced technology (e.g. Taiwanese semi-conductors). This is bound to lead to the emergence of a more segmented international technology regime and will affect trade, investment, finance, data flows, even the flow of students and researchers.
Economically, technological leadership often involves significant economic rents, but more importantly it may give countries a decisive technological-military advantage (e.g. US nuclear supremacy following WWII). Concerns about the revolutionary, transformative impact of AI, biotechnology, robotics and quantum computing have emerged as the main driver underpinning US policy towards China. These technologies are now seen as ‘dual use’ and Washington is intent on preventing China from acquiring them first. A bi- or even tri-furcated international technology regime is set to emerge. This is a battle – at least in the eyes of the US administration – for the commanding heights of the 21st century economy, as VP Pence put it (Hudson Institute 2018).
Both Washington and Beijing are increasingly seeing their relationship as a zero-sum game in the technological and military realm. Perception is reality. But is this an intellectually and historically defensible perspective? The rise and fall of great powers and the security competition it typically engenders is a fairly well-established historical fact (Thucydides; Gilpin 1981; Kennedy 1987; Allison 2017) with only few exceptions (Shake 2017). But is the concern about technological breakthroughs and military advantage equally well-justified? Technological breakthroughs have given economies and states an important comparative advantage on occasion; but it is also true that peer competitors have typically managed to acquire advanced technologies pretty quickly, if not through trade, investment or licensing, then through reverse-engineering or outright theft (e.g. US nuclear technology). Successful commercialisation is a different matter, but the successful integration of new technology into existing military capabilities, while not without challenges, is generally achieved pretty quickly. The time it takes to establish parity is certainly of concern to military planners and political leaders, but historically technological lead-economies and states have rarely managed to maintain an unchallenged leadership position for long – at least not relative to their closest competitor and especially not if the peer competitor decided to put substantial resources behind the quest for technological parity (e.g. Soviet and Chinese nuclear and missile technology). Such an observation is unlikely to put strategists and military planners much at ease, however. The fact remains that Washington is concerned about China establishing a leadership position in key future technologies, especially in areas of important military application.
As far as technology, innovation and technology diffusion is concerned, there are several broader considerations that need to be mentioned in order to assess the broader implications of technological decoupling. First, there is the aggregate economic welfare argument. Technological advances typically raise economic productivity. Their diffusion is desirable. However, it is also important to ensure that those investing in research and development are rewarded for their risk-taking. Hence the existence of national and international intellectual property rights regimes. Otherwise desirable technological innovation may not take place at all. This issue is very much at the heart of US concerns about Chinese policies, including IPR protection and cyber-theft. Second, there is the national security argument, mentioned above. Technological breakthroughs, even if the technologies can ultimately be replicated, can confer a significant short-term advantage to a state in military terms. In extremis, a short-term technical advantage can translate into a strategic victory (or defeat). National security considerations militate against technology diffusion, but they obviously have an economic cost. Thirdly, there is the relative economic advantage argument. If one country makes a breakthrough, it may be able to establish an unassailable monopoly or lead position (‘winner-takes-all’). This may happen because the new technology is characterised by increasing returns to scale or because competitors find it difficult-to-impossible to replicate the technology. It may also lead to a broader enhancement of national economic competitiveness, though national competitiveness is a controversial concept (Krugman 1994). Related productivity are a real prospect, however. Historically, states or at least potential peer competitors have been able replicate new technology fairly quickly. States that are lagging technologically can also deny foreign companies to exploit their competitive advantages by shutting them out of the domestic market while national efforts to replicate the new technology have proven successful (e.g. US tech vs Chinese tech firms in the Chinese market). This is not meant to be a definite conclusion, rather food for thought for those who believe technological leadership is unassailable.
From a global economic point of view, technological dis-integration will be welfare-decreasing. As in trade, US technology policies may have been interpreted as seeking to create an improved international regime that not only generates a ‘fairer’ distribution of benefits (through IPR protection), but also global aggregate economic welfare gains. In reality, it is clear by now that the US has shifted towards a techno-nationalist stance due to what it considers – rightly or wrongly – the national competitiveness and national security implications of technological competition with China (second and third argument). If technology were all about generating greater aggregate economic welfare (non-zero-sum game), contentious issues could in principle be addressed by establishing a level-playing-field. At a minimum, this would require convergence towards a less state-interventionist, more market-based national economic and regulatory technology regime in China that guarantees IPR and prevents forced technology transfer. However, this is a distant prospect. Washington is quite simply lacking sufficient trust in Beijing and Beijing is not going to shift towards an open, market-based, level-playing-field type of regime as long as it remains confident that its present political economy is better suited to beat the US in the technology race. It will be even less inclined to shift away from government control against a backdrop of intensifying strategic competition. It is quite possible that China will at some point improve its IPR protection regime. But as long as it is catching up technologically and has little by way of indigenous technology worth protecting, the incentives are heavily stacked in favour of the status quo (Huang & Smith 2019; Lardy 2018). After all, it affords Chinese companies IPR protection in US and European courts, while US and European companies find it hard to have their rights enforced in China. It is also questionable whether any type of domestic reform would lead to less competition in the military-technological realm where espionage is, of course, unavoidable practice.
Assuming China does not fundamentally change its state-backed technology policies and domestic innovation regime, who is going to win the technological race? Some analysts predict a ‘second great divergence’ after the ‘great divergence’ following the Industrial Revolution. The present technological revolution, they say, will lead to a quantum leap in productivity, natural monopolies and large economic rents. It will also entrench the winner’s unassailable technological leadership position. Whether technology can or cannot successfully be replicated in a technical sense is difficult to predict. The argument most often cited is that China, for example, has access to significantly more data due to its demographic, significant use of digital technology, limited restriction on data privacy and supportive government policies. AI technology is highly reliant on large amounts of data. The establishment of AI supremacy will once and for all deny other competitors from challenging the lead innovator. Maybe. On the flipside, history has shown that states have proven quite adept at replicating, reverse-engineering or, if need be, stealing new technology. The burden of proof is on ‘supremacists’ arguing in favour of ‘divergence’.
Are US concerns about Chinese government support giving Chinese technological development a strategic advantage justified? Intuitively and historically, a sufficiently wealthy and advanced state should be able to successfully deal with what may be called a la Rumsfeld a technological known “unknown” (the technology already exists, you just need to figure out how to produce it yourself) by throwing sufficient resources at the problem (e.g. China, USSR and nuclear and missile technology, even poorly-resourced North Korea’s nuclear programme today). States often can and do often successfully design incentives to solve a pre-determined problem, especially in the military realm. But the incentives are typically not designed to find ‘new’ technologies (e.g. teflon, internet). This is probably where a market-based approach is superior, on average and in general, and where an organically evolved technological eco-system is more innovative than government-supported technology policies. It turns out that government subsidies and supportive government policies seem to have given China an edge when it comes to commercialisation and the application of certain new technologies (Lee 2018). The US, however, seems to retain the edge in terms of more advanced technological eco-systems, superior basic research and the number and quality more top-end researchers and research outfits (Financial Times 2019). This seems to favour the US in technology race, but it is difficult to make predictions with a reasonable degree of confidence. Once again, food for thought.
Technological leadership is primarily about military or economic advantage, including indirect advantages. It is about being able to set the international standards and building and perhaps controlling the global tech infrastructure as well as the technology used in other countries. Not only does this carry with it potential security implications (e.g. 5G), it may also help the technological leader lock in economic advantages. The US government, mainly through the vice president, says that Washington does not want to see the emergence of economic blocs and diverging standards, which would translate into lower efficiency. True, but form a security point of view, the country setting the standards and building the infrastructure on the back of its technological lead will tend to be more secure. After all, would the US accept Chinese standards and Chinese-built infrastructure in order to preserve a unified global technology regime? Hardly. In VP Pence’s own words, it is a fight over who will control the commanding heights of the 21st century economy. Beijing very likely shares the US vice-president’s view.
The Sino-US relationship will continue its secular shift from cooperation to competition and possibly (non-military) conflict (Jaeger 2019). Technological de-coupling will be difficult to avoid. The US wants to prevent China from acquiring advanced technology and becoming a technological leader, while China is eager to reduce its dependence on US technology and innovation. To the extent that the US weaponizes (asymmetric) interdependence, China will intensify its efforts to diversify to reduce its dependence. Weaponisation, especially against the backdrop of increased security competition, runs the risk of almost certain dis-integration (or bi-furcation) of the global technology regime. We have already seen a tightening of US export controls, US technology transfers and the US (inward) investment regime. US-China competition is also increasingly going to affect third countries in terms of trade, investment, capital and technology transfer, including Taiwanese semi-conductor producers, Vietnamese exports and FDI and financial openness.
Technological innovation will be a major area of competition between China and the US. US tech companies and entrepreneurs (Gates, Schmitt) oppose ‘dis-integration’/ de-coupling, but the increasing domestic political headwinds in the US make it unlikely that their view will be heeded. US Congress has been shifting towards a more adversarial stance vis-à-vis China for quite some time now. The White House, historically keen to bat off anti-China legislation, pursuing a more conflict-oriented China policy. US business is increasingly frustrated by increased competition from Chinese companies and market access and technology transfer and IPR problems in China is far less pro-China than it used to be and is in fact supportive of many of the economic objectives of US foreign policy, if not necessarily its means.
Trade, investment and the cross-border flow of people will be affected by increasing Sino-US techno-competition, including in third countries. Agreeing on a largely market-based, reciprocal and open regulatory regime that creates a level-playing field might appear to offer a way to avoid tech-competition. However, the lack of US trust in Chinese policies, the necessary changes to China’s political economy (and judicial system) this would require and the reluctance of China to embrace such large-scale change in light of increasing geo-strategic competition make such a possible solution highly unlikely. And even if such an agreement could be struck, it is not clear that it would prove a lasting solution as soon as either side begins to lose the technological race. Technology will therefore remain at the heart of US-China competition and it will affect a wide range of bilateral (and multilateral) economic, financial and investment policies for a long time to come.