Innovation and China’s Global Emergence

edited by Erik Baark, Bert Hofman, and Jiwei Qian

ISBN: 978-981-325-148-9

published August 2021

Or read this open access web edition

Chapter 2

China and the US: Technology Conflict or Cooperation?

Gary H. Jefferson

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle”.

Sun Tzu, The Art of War, 5th Century bce

Introduction

During the first 35 years of China’s economic reform, the US and China maintained a largely harmonious and seemingly mutually beneficial cooperative economic relationship, including the exchange and utilisation of US-sourced technologies. Recently, particularly during the Trump Administration, this harmonious relationship has changed dramatically as the US has at one and the same time imposed tariffs on Chinese imports and taken steps to block both the access of China’s high-tech sector to American technology and access by the American market to Chinese technology.

The thesis of this chapter is that the technology relationship between two countries, one a technology leader, in this case the US, and the other a technology follower, China, with the potential to match or exceed the science and technology capabilities of the former, depends on the technological distance between the two countries. Specifically, the proposition is that the China-US policy relationship will likely, but not necessarily, follow a trajectory similar to that of the Kuznets “inverted U” curve. That is, when the US enjoys an undisputed lead, as it did with China during the last decades of the 20th century and when in the future the two countries have achieved relative technological parity, the incentives to avoid disengaging technologically and instead to jointly engage in a relatively open, cooperative technology relationship will be powerful. However, China’s transition from technological novice to partial catch-up to technological proximity or parity is deeply problematic for both countries for a variety of reasons. As an aggressive follower with the resources and determination to match or exceed the technological prowess of the US, China is increasingly perceived in the US as a threat to the established leadership and security of the country. At the same time, by virtue of the passage of time and practice, the US assumes that it is entitled to continued technological hegemony. Moreover, the established rules and practice that have distributed asymmetric advantages to the two sides are viewed by China as unfair and malleable and by the US as sacrosanct to the economic and technology lifeline of the country.

The prevailing analysis suggests two broadly possible strategies and outcomes. The first is the containment of China leading to a fragmentation, or uncoupling, of the world’s innovation and technnological systems sustained by two separate operating systems. From the perspective of this chapter, whether or not the US achieves some degree of containment, it is very unlikely to obstruct China’s rise to achieve economic and technological parity or superiority. The second policy option involves transitioning towards a more cooperative system in which China more closely adheres to the global “rules of the game”, while the US accepts the role of shared technological leadership. In order to compensate for the growing US scale disadvantage and the problem of unilateral credibility, the success of this approach depends fundamentally on the ability of the US to engage effectively with other Organisation for Economic Cooperation and Development (OECD) countries to create and present a united front to China. While the exchange of certain security-related technologies may be limited, when virtual technological parity has been achieved, such that disruptive behaviour by one country can be effectively matched by the other side, the breach of known standards is likely to result in mutually-assured disruption.

The following section surveys China’s transition from technological backwardness to becoming a major technology actor on the global scene. Section 3 describes the advent of China’s rise and the emergence of policy conflict, including the decisive role of China’s official report, Made in China 2025. Section 4 describes the US policy response and perceptions regarding the nature of the threat. Section 5 formulates a theoretical perspective in which the technology distance between a rising technology power and an incumbent power creates conflict; we map this perspective into distance-conflict space. The section then seeks to lay out two general policy scenarios as they relate to our theoretical perspective. Section 6 attempts to identify the key assumptions underlying each of the contending policy scenarios with implications for their respective feasibility. Section 7 offers conclusions and related issues for discussion.

From Imitation to Innovation

During the 25 years following China’s reform initiative in 1979, virtually every major American manufacturer established a footprint in China. As a result, supply chains proliferated, labour costs fell, profits rose and shareholders benefitted; corporate America enjoyed access to rapidly growing Chinese and overseas markets; and the American consumer enjoyed substantial cost savings. On the Chinese side, technology and capital flowed to joint ventures and Chinese-owned companies; employment surged, with tens of millions of workers migrating to higher-paying jobs and with falling poverty; exports surged, and a fast-growing middle-class prospered.

During these years, is was widely known and accepted that China aggressively imitated foreign technologies, engaging in a variety of manoeuvres to acquire certain technological capabilities of foreign-invested companies. The officially mandated principle of these policies—Technology in Exchange for Markets (jishu huan shichang)—required that as a condition of foreign investment, or sometimes of the renewal of a registration, foreign companies would share certain technologies with a Chinese counterpart. In many instances, such exchanges were undertaken through joint research initiatives involving both Chinese and foreign nationals, thus enabling the transfer of new R&D capabilities as well as specific technologies. According to Jiang et al. (2019a), these collaborative research projects, notably those granted United States Patent and Trademark Office (USPTO) approvals, resulted in patent quality outcomes that were at once significantly above the patent quality achieved by Chinese-engineered patents, but also significantly lower in quality than patents from domestic US research collaboration. At least until recently, much of this technology transfer transpired well inside the international technology frontier.

In the four years following China’s accession to the World Trade Organisation in December 2001, Chinese exports doubled as a share of GDP. In 2004, the volume of China’s high-tech exports surpassed that of the US and nine years later rose to four times the volume of US high-tech exports (Naughton 2018: 363ff). While exports were classified as “high tech”, spanning computers, smartphones and various types of equipment, in fact many of the exports consisted largely of assembled imported components. Moreover, within China, the vast majority of these exports were manufactured and exported by foreign-invested firms. For example, laptops assembled by Taiwanese firms in China came to account for 90 per cent of the world’s laptop production (Naughton 2018: 376). This surge in high tech exports led to two interrelated pathways.

The first concerned China’s technology policy. In 2006, this heavy dependence on foreign technology, foreign-owned companies, exports with foreign brands and foreign-controlled supply chains motivated a deep rethinking of China’s science and technology development strategy. This reassessment of China’s technological relationship with the rest of the world culminated in the Medium and Long-Term Plan (MLP) (2006–20). With a view towards reducing China’s reliance on the near monopoly of foreign invested firms controlling the technology, manufacture and sale of “high-tech” exports, the MLP set forth “the guiding principles for our S&T undertakings over the next 15 years”. These included an emphasis on “indigenous innovation, leapfrogging in priority fields, enabling development, and leading the future” (The State Council 2006: 9). Among the “frontier technologies” emphasised in the plan were biotechnology, information technology, advanced materials technology, advanced manufacturing technology, advanced energy technology, marine technology, laser technology and aerospace technology, which considerably overlapped with the OECD definition of “high-tech” and “medium high-tech” industries.[1]

After 2001, the growing reliance on foreign-invested firms for the technology content of the export surge led to discomfort and determination to achieve greater technological autonomy. However, the second implication of the surge in high tech exports after this date was a substantial widening of China’s export base, including the technologies incorporated in its growing range of high-tech exports. Notwithstanding the troubling condition of deepening reliance on foreign-owned technology and foreign invested firms, the FIE-domestic collaborations were critical for enabling the Chinese research enterprise to transition primarily from imitation to increasing degrees of innovation and from the lower rungs of the technology ladder to the mid- and upper-level. During the first decade of the 21st century, China began to achieve a substantial degree of technology catch-up in a number of fields. As documented by McKinsey & Co in their report, The China Effect on Global Innovation (2015), when measured by exports as a share of home industry
output, and with the exception of railroad equipment, China’s performance was relatively weak in the broad categories of science and engineering-based industries. The strength of the export sector was concentrated in customer-focused and efficiency-driven industries, including wind and solar-powered equipment, household appliances, generic pharmaceuticals and electronic equipment. Within a decade of joining the WTO, China had begun to make substantial progress in its move up the global technology ladder.

China’s Rise: Made in China 2025

A decade after the presentation of the MLP, Prime Minister Li Keqiang in 2015 launched Made in China 2025 (MIC 2025), which set forth explicit and ambitious goals for modernising China’s industrial capabilities. The report both represented and precipitated a transformative understanding of China’s S&T capabilities. Focusing on intelligent manufacturing to secure China’s position as a global powerhouse, the 10-year comprehensive strategy conveyed China’s ambition to move up the value-added chain, repositioning itself from a low-cost manufacturer to a direct competitor with technologically advanced OECD economies, including South Korea, Japan and Germany—and the US (Institute for Security & Development Policy 2018). Drafted by the Ministry of Industry and Information Technology (MIIT) with extensive input from 150 experts from the China Academy of Engineering, MIC 2025 lays out a set of wide-ranging goals, strategies and policies for achieving its ambitions. In contrast with the more uncoordinated approach of the US, Made in China 2025 resembles Germany and Japan’s systematic approach to government planning and policy.

Clear goals of MIC 2025 are to make Chinese companies more competitive across the board, to localise production of components and final products and to have Chinese firms move up the value-added chain in production and innovation networks so as to achieve greater international brand recognition. In addition, the plan calls for Chinese firms to ramp up their efforts to invest abroad by becoming more familiar with overseas cultures and markets, while strengthening investment and risk management.

Underlying the enormous indigenous endowment of an evolving supply of STEM-trained labour, an enormous and fast-growing consumer market and unequaled collaboration with a range of technology-driven foreign invested firms, China’s S&T policy was becoming increasingly focused and ambitious. If the MLP represented the take-off stage for China’s S&T, the Made in China 2025 industrial policy report represented a kind of coming of age, with respect to China’s ambition and confidence, resulting in a certain disregard for the impact of its aggressive intentions on the sensibilities of the heretofore-leading technology powers, especially the US. By flagging its ambitions and seemingly defying the established hegemony, MIC2025 provoked widespread public and official response, particularly within the US.

Those reacting with alarm might not have been so surprised had they been attentive to the achievements of China’s S&T programme over the previous 15 years. These include:

  • A surge in the growth of Chinese investment in research and development, having increased to around 2.3 per cent of GDP, a proportion comparable to that of the large OECD countries;
  • The ability to produce substantially more patent filings than any other country in the world.[2] That is, during the first two decades of the current century, China dramatically increased the sheer volume of production of intellectual property. The quality and management of that intellectual property warrant deeper attention.
  • The production, circa 2010, of more science and engineering PhDs than the US, a proportion that has grown steadily over the past decade (McKinsey & Company 2015).

Clearly, there are significant quality differences in the nature of R&D, with China’s R&D significantly more focused on development and less focused on basic research. Likewise, the average Chinese patent represents fewer claims and citations than counterpart US patents and the surge in investment in China’s higher education has likely compromised quality. Nonetheless, these proportions are shifting rapidly towards quality improvements in China’s favour.

However, product capabilities and their implications were the most unsettling for many American observers. Thomas Friedman, the New York Times correspondent, captured many of these in a 2019 op ed piece (Friedman 2019). According to Friedman, so long as China’s technological capabilities were limited to “T-shirts, tennis shoes, and toys”, China functioned more as a complement than as a competitor to the technology hegemony of the US. However, China has begun to make and sell to the rest of the world the same high-technology tools that the US and Europe sell, for example, smartphones, artificial intelligence systems, 5G infrastructure, electric cars and robots. Furthermore, as characterised by Friedman, certain of these products incorporate “deep technologies” that can become embedded in the US economy and social systems, thereby rendering many within the US sceptical and insecure about networking with Chinese technology within or accessible to these systems. As Friedman asserts, “the absence of trust and shared values” also matters.

In addition to the issues of cybersecurity and “shared values” raised by Friedman, the US Council on Foreign Relations opened its report, “Is ‘Made in China 2025’ a Threat to Global Trade?”, with the following (McBride and Chatzky 2019):

The Chinese government has launched “Made in China 2025”, a state-led industrial policy that seeks to make China dominant in global high-tech manufacturing. The program aims to use government subsidies, mobilise state-owned enterprises, and pursue intellectual property acquisition to catch up with—and then surpass—Western technological prowess in advanced industries…. For the United States and other major industrialized democracies…these tactics not only undermine Beijing’s stated adherence to international trade rules but also pose a security risk.

While some focused on issues of cybersecurity and the methods of China’s S&T programmatic initiatives, the Trump Administration was at once more inclusive and ambiguous, also stressing these cybersecurity and IPR issues, but seemingly equally alarmed by the prospect of China matching or eclipsing US technological capabilities. China’s dramatic advances along several product lines were particularly concerning for the Trump Administration. The most problemmatic included China’s advances in 5G, which have arguably surpassed those in the US, which, in turn relies on Ericsson, Nokia and other overseas sources for 5G components as alternatives to China’s Huawei, ZTG and other Chinese 5G suppliers. As Scott Kennedy (2019) recounted in his report, given that Made in China 2025 pushes China to become a leader not just in aerospace, but also in sectors like telecoms equipment and phones and 5G, AI, semiconductors, automobiles and medical products, “the goal is to comprehensively upgrade Chinese industry, making it more efficient and integrated so that it can occupy the highest parts of global production chains”. With respect to 5G, China has achieved that goal.

Andrew Kennedy and Darren Lim (2018) outline the principal means through which China has pursued its ambitious S&T goals. They summarise these as “making, transacting, and taking”. While many of the activities and policies have been adopted by rising economies, including Japan, South Korea, and the US during its eclipse of UK technological dominance, with the propagation of the WTO, the various intellectual property treaties,[3] and other treaties and international rules and guidelines, the Chinese strategy pushes boldly against international norms. Kennedy and Lim summarise these Chinese initiatives:

  • Making:The Made in China 2025 industrial policy seeks to use subsidies, regulation, and government acquisition to spur Chinese innovation and technological advancement in emerging technology sectors, including electric cars and other new energy vehicles, next-generation information technology (IT) and telecommunications, and advanced robotics and artificial intelligence.
  • Transacting: As well as outright commercial transactions with foreign entities that result in the transfer of key technology, the China approach to transacting continues to link the ability to do business in China to the precondition of technology transfer, “jishu huan shichang”.
  • Taking means acquiring existing technology from foreign states and companies without paying for it. This objective can be realised through legal means, such as collecting open-source material like published scientific papers or sending Chinese students to study abroad, or through illegal means, such as the cyber-theft of intellectual property from foreign governments and competitors.

Arguably, these are the methods that many developing economies, the four Asian Miracle economies, (notably South Korea, Taiwan, Hong Kong, and Singapore), and Germany and Japan employed to achieve their industrial rise. This claim invites two rejoinders. The first is that the methods used by these other economies were not as extensive during their own industrial transitions. If for no other reason, China is likely to utilise the range of technology-augmenting measures due to the scale of its economy and population that both enable it to leverage concessions from foreign enterprises and also create the opportunities for greatly decentralised measures by lower-level provincial and municipal governments and state-owned enterprises beyond the purview of the central government. The second rejoinder is that with the WTO, TRIPS and other IP-related treaties (see “Treaties-Intellectual Property”), the rules of the game have substantially evolved, with more enforcement provisions from those which applied in the earlier 20th century, when many of these provisions were being established. While China’s economy has evolved in an era of far greater global vitality with respect to trade and technology transfer, the protections afforded to the owners and originators of these goods and services, largely sited in OECD countries, have become more detailed and rigorously managed.

As well as the US, EU leaders have long complained about both Chinese subsidies that distort the global economy, and restricted market access for European firms and the lack of protection for their intellectual property. Like the US, the EU has filed complaints against China at the WTO and imposed anti-dumping measures on many products.

The US Council on Foreign Relations reported that Chinese officials, wary of international blowback and realising that some of the language in MIC2025 raised alarms, have increasingly framed the plan as aspirational and unofficial. They have begun to reduce their allusions to it as Western leaders have voiced concerns. In the opening session of the 2019 National People’s Congress, Premier Li Keqiang did not mention China 2025 at all; it was the first time he left the programme out of his annual report to the congress since it was first introduced. On 16 August 2020, the New York Times headlined an article, “With Trump on the Attack, China Softens Its Tone in Hopes of Truce”. (Hernández 2020). The article suggested that in order to substantially mitigate the conflict, China would need to offer “concrete proposals”. Given that President Trump might have believed that his toughening stance towards China was an important selling point of his 2020 reelection campaign, any mutual softening and negotiation were highly unlikely until 2021.

The US Response: Nature of the Threat?

A 2019 US Congressional Research Service study (Congressional Research Service 2019) outlines the key issues aggravating China-US economic relations. While this study and subsequent events underscore the critical role of the trade deficit, by far the largest US bilateral trade imbalance, and forms of tariff retaliation undertaken by the Trump administration, we focus here on issues addressed by the CRS that are most relevant for the present and future US-China technology relationship:

  • Intellectual Property Rights (IPR) and Cybertheft. US firms cite the lack of effective IPR protection as one of the biggest impediments to conducting business in China. The report notes that “A May 2013 study by the Commission on the Theft of American Intellectual Property estimated that China accounted for up to 80% (or $240 billion) of U.S. annual economic losses from global IPR theft”. In November 2018, FBI Director Christopher Wray asserted, “No country presents a broader, more severe threat to our ideas, our innovation, and our economic security than China”.[4]
  • Industrial Policies. The report notes: “Major Chinese government practices of concern to US stakeholders include subsidies, tax breaks and lowcost loans given to Chinese firms; foreign trade and investment barriers; discriminatory intellectual property (IP) and technology policies; and technology transfer mandates”. Recently issued economic plans, including the Made in China 2025 plan, “appear to indicate a sharply expanded government role in the economy”.
  • Foreign Direct Investment (FDI). Chinese FDI flows to the United States, the report notes, were “facing enhanced scrutiny by the Trump Administration, which contends that the Chinese government seeks to obtain US cutting-edge technologies and IP in order to further its industrial policy goals”. The enactment of the Foreign Investment Risk Review Modernization Act of 2018 upgrades the ability of the Committee on Foreign Investment in the United States (CFIUS) to expand the types of in-coming investment subject to review, including certain non-controlling investments in “critical technology”. In April 2018, US intelligence agencies said that Chinese recruitment of foreign scientists, its theft of US intellectual property and its targeted acquisitions of US firms constituted an “unprecedented threat” to the US industrial base (Capaccio 2018).
  • Advanced Technology Issues. The report notes that “the Trump Administration has raised national security concerns over global supply chains of advanced technology products, such as information, communications and telecommunications (ICT) equipment”, where China is a major global producer and supplier. China is the largest foreign supplier of ICT equipment to the United States. Citing a “national emergency”, President Trump, on 15 May 2019, issued an executive order 13873, stating that “US purchases of ICT goods and services from ‘foreign adversaries’ posed a national security risk to the United States” and authorised “the Federal government to ban certain ICT transactions deemed to pose an ‘undue risk’”. On the same day, the US Commerce Department announced that it would add Chinese telecommunications firm Huawei and 68 of its non-US affiliates to the Department’s Bureau of Industry and Security Entity List, which would require an export license for the sale or transfer of US technology to such entities.

While the CRS study helps to provide a quasi-objective assessment of the sources of conflict, it does not represent the range of measures available to the US government to counter many of these concerns. The principal legal avenue through which prior Administrations and the Trump Administration have devised and justified economic and trade actions against other countries is Section 301 of the 1974 Trade Act. Section 301 sets out three categories of acts, policies or practices of a foreign country that are potentially actionable: (i) trade agreement violations; (ii) acts, policies or practices that are unjustifiable (defined as those that are inconsistent with US international legal rights) and that burden or restrict US Commerce; and (iii) acts, policies or practices that are unreasonable or discriminatory and that burden or restrict US commerce.

Furthermore according to the CRS: “Prior to the Trump Administration… the United States has used Section 301 authorities primarily to build cases and pursue dispute settlement at the WTO…. However, President Trump has been more willing to act unilaterally under these authorities to promote what the Administration considers to be ‘free’, ‘fair’ and ‘reciprocal’ trade…pointing to alleged weaknesses in WTO dispute settlement procedures and the inadequacy or nonexistence of WTO rules…”.

On 14 August 2017, President Trump issued a memorandum directing the Office of the United States Trade Representative (USTR) to determine if China’s policies on IPR protection and forced technology requirements “may be harming American intellectual property rights, innovation, or technology development”, and thus warranted a Section 301 investigation. Following the investigation, on 22 March 2018, President Trump signed a Memorandum on the Actions by the United States Related to the Section 301 Investigation. It listed four IPR-related policies that justified US action, including China’s forced technology transfer requirements, cyber-theft of US trade secrets, discriminatory licensing requirements and attempts to acquire US technology to advance its industrial policies (such as the Made in China 2025 initiative). These investigations, findings and similar memoranda have established the rationale and legal basis for the number of tariff and techology restrictions that were proposed and enacted in the following years.

A Theoretical Perspective

At this point, a theoretical perspective may be helpful for anticipating the possible outcomes of the rising China-US technology conflict. This perspective is founded on a key proposition, that the current conflict needs to be viewed within a larger context of a longer evolution of China-US relations. As such, according to this proposition, the current situation is at the coincidence of three stages, one of which is past, the second is now evolving; the third can only be speculative. The stages are:

  • Stage I: 1980–2010: Based on a clear set of comparative and mutual benefits, China and the US enjoyed a generally harmonious open and cooperative technology exchange with market access.
  • Stage II: 2010 to the indefinite near future: As China achieved substantial economic and technological catchup with the US, thereby challenging the US in sensitive areas, the comparative advantage is transitioning into competitive conflict, and concomitant US efforts of containment.
  • Stage III: China and the US achieve virtual technological parity. The two countries, facilitated by the role of other OECD economies, acknowledge the mutual benefit of a more open science and technology system than the fragmentation and rule-breaking during Stage II. Outside of certain fields of defence and cybersecurity, key innovations beome readily accessible and commercially exchanged. In the areas of both defence and cybersecurity, China and the US have achieved the stabilising condition of mutually assured disruption.

Figure 2.1 shows an inverted “U” curve, which generally follows the shape of the trajectory proposed by Simon Kuznets in which income inequality within countries tends to be relatively limited when countries are low income and largely agrarian in nature. As economies evolve with industrialisation and deeper economic integration with other nations, and attracting new technologies and investment to certain areas, new development results in poverty reduction, but also in rising income inequality. Measures of inequality, namely the Gini coefficient, rise. Finally, as economies transition to the more uniformly high-income, product, labour and capital markets become more mature and efficient, while governments spend more widely for health, education, old-age support and various forms of insurance. A growing middle-class emerges, resulting in falling inequality and declining measures of poverty. This characterisation of the pattern of rising, then declining, income inequality resulting in the inverted “U” curve shown in Figure 2.1 has also been extensively applied to the tendency for the environmental degradation of individual countries to rise and fall. Following industrialisation and the proliferation of chemical use in agriculture and industry, and as living standards rise, demands for clean air and clean water, combined with a shift from heavy industry to the services sector and with greater environmental regulations result in a decline in environmental degradation, thereby tracing out a pattern of change similar to that of income inequality and economic development, that is, that of an inverted “U” curve.

Figure 2.1: Kuznets “Inverted U” Curve: Technology Policy Conflict vs. Technology Distance

In this chapter, Kuznets’ metaphor of the inverted “U” curve is borrowed to underscore the evolution of bilateral conflicts as the technological distance between the two countries evolves. Initially, when a clear division of labour exists between a technology-rich, high-income country and a technology-backward low-income country with low-cost labour and a large, growing consumer market, the comparative advantage is deep and compelling. As the low-income country benefits from technology spillover and technology upgrading, facilitated by foreign investment, scale and the diversity of its expanding economy, the original comparative advantage erodes, becoming replaced by expectations by the rising country of parity, resulting in fear within the heretofore hegemonic country of burdensome competition, and of possibly being overtaken in key industries. The original comparative advantage transforms to intensifying competition; conflict emerges.

Generalising, Graham Allison (2017) characterises this condition as Thucydides’s Trap, based on the Greek historian’s account of the Peloponnesian War. According to Thucydides: “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable”. As Allison explains, “The past 500 years have seen 16 cases in which a rising power threatened to displace a ruling one. Twelve of these ended in war”.

Modern analysts generally do not expect the evolving conflict between China and the US to result in bloodshed. While some observers contend that the conflict may be “existential”, with technology as a metaphor for the wider military, economic, political and cultural supremacy that may be at stake, the “instruments of war” are likely to be limited to a collection of economic and technological skirmishes, focused more on the disengagement of competing resources than a fight to the finish.

Again, this formulation is highly speculative; however, it is intended to bring some order to the discussion that has a wide range of starting points, suppositions and possible outcomes. In Figure 2.1, the axis of “technology catchup” may serve as a useful baseline for understanding a key nature of the conflict, as the Trump Administration attempted to freeze or expand the technology distance between the US and China, while China’s leadership and S&T establishment aggressively seek to narrow the technology distance, as for example by staking out space on the global technology frontier.

Given the formulation of the technology-conflict Kuznets curve shown in Figure 2.1, it may be assumed that the analysis will identify that segment of the curve representing the current state of the China-US struggle. It matters if the struggle lies to the left or right of the peak, or if the struggle is, in fact, peaking at this moment. The research by Jiang et al. (2019a and 2019b) suggests that China’s overall technology remains substantially distanced from that of the US, though our analysis is limited largely to China’s overall relative technology position, using patent data that extend only to 2017, likely some years behind China’s advancing capabilites. A brief summary of key findings includes:

  • While China’s domestic patent office processes far more patents than any other country’s, in terms of patent approvals and total citations in international patent offices, and while China has matched France and the UK, it continues to lag behind Germany and South Korea and is far behind Japan and the US;
  • China shows large variation in patent quality. In key areas, such as telecommunications, semiconductors and optics, China’s average USPTO patent quality, in terms of claims and citations lags significantly behind the US and other (but not all) major OECD economies.
  • China’s USPTO patent production is dramatically concentrated in just three cities—Beijing, Shanghai and Shenzhen—representing two-thirds of the patent grants originating with less than five per cent of the country’s population.[5] This result shows both the challenge for China to diversify its centres of innovation, and the immense potential China enjoys for expanding the scale of its high-end innovative capabilites.

Notwithstanding these findings, within discrete technology categories and at the firm level, elements of Chinese S&T are in break-out mode at or near the global frontier, including 5G equipment and networking, electric vehicles, defence and cybersecurity. At the same time, investments in AI, aerospace, including commercial aircraft, and biomedical research are rapidly advancing. The MIC2025 emphasis on “comprehensive” competitive engagement with the advanced OECD economies suggests rapid movement along the “technology distance” axis. As such, the alarm engendered by China’s S&T push may be as much, and perhaps more, a result of the speed of China’s technological advance, as of alarm occassioned by the actual extent of the current closure of the technology gap.

Possibility and Feasibility

While there are many possible paths involving initiative and consequences, which meet with different degrees of feasibility, arguably they can be condensed into two. Meijer (2016), for example, distills the possibilities into the “Control Hawks” group which believes that exporting technologies to competitors is a security risk, and the “Run Faster” advocates who believe that exports are essential for keeping technology industries competitive and able to innovate.

In this section, we simply distinguish the approaches as the “containment strategy” and the “cooperation strategy”.

Containment: The containment assumption is based on several key assumptions. All assume a unilateral approach, similar to that initiated by the
Trump Administration. These assumptions include:

  • That the US has the methods that it can deploy sucessfully to deny US technology and markets to Chinese suppliers;
  • That other countries cannot and will not substitute the US in supplying either technologies or markets that enable China to outpace the development and use of the key technologies and markets that are particularly concerning to the US.
  • Assuming that many of the individual initiatives that constitute the containment policy succeed, China will not have the resources in the longer run to achieve the technological and economic capabilities to match and overtake the US; in the longer term, that is, the containment policy fails.
  • That the US can manage the overall situation, so that it will not get “out of hand”, entailing the serious loss of US markets, prestige or armed conflict overseas resulting in the loss of American life.

These appear to be the most general assumptions underlying the US administration’s “public” policy. For the most part, thus far the policy has been ad hoc and piecemeal without an open, thoughtful discussion of this largely unilateral containment strategy. Part of the problem is that, at the time of the writing of this chapter, the US was in the midst of an electoral contest culminating in November 2020. As a result, and even with the transition to the Biden administration in 2021, it is difficult to distinguish most near-term motivations. Is, for example, the “China threat” an election issue simply, or a well-conceived sustainable, public policy option for the US?

Cooperation: As with the containment strategy, the strategy of establishing a comparatively open, cooperative technology system with China is based on a deep set of assumptions. Most of these are contrary to those underlying the containment strategy. They include:

  • The US is unable to achieve its objective with respect to China unilaterally; China’s economy is too large; its population and core S&T capabilities, combined with the central roles of science and techology in its educational and political/cultural systems, make it impossible to “contain” China in any meaningful sense. Goodman and Ratner (2018) argue that attempts to cut off technology will simply speed China’s determination and domestic capacity to develop and diversify critical technologies.
  • Many aspects of technology are essentially public goods making them highly accessible to Chinese researchers. Such conditions include the requirement, embedded in US and international patent law, that patent applications contain sufficient information for the invention to be replicated, while not being used for commercial purposes, as well as reverse engineering and outright theft, as needed.
  • Efforts to motivate China to better conform with international law and norms regarding its economic and technological relations with the rest of the world cannot be achieved by the US unilaterally, at least not through negative incentives. Goodman and Ratner (2018) further explain that while many countries share Trump’s desire to combat Chinese hi-tech mercantilism, Trump divided allies rather than unifying them to confront China.
  • Such unilateral initiatives will ultimately serve to isolate the US as both China and the rest of the world either view both China and the US as unworthy of their support or single out the US as simply being unwilling to share its hegemonic position with China or any other country.
  • The US is likely to diminish or exhaust itself in a battle with China. Any success is likely to be transitory, resulting in a Pyrrhic victory.

A central difference between the containment strategy and the cooperation strategy may be the time horizon over which the respective strategies are intended to be implemented and sustainable. The cooperation strategy appears to be more focused on a longer time-horizon than that of the containment advocates, with respect to its sustainability as well as the time required for its implemenation. The central assumption of the advocates of cooperation is that even if the objectives of the containment advocates and the cooperation advocates are identical with respect to China, the objectives cannot be obtained unilaterally. An alliance, such as the G7, the largest of the high-income OECD economies, is required. Arguably, the alliance is not addressing issues of sheer scale, which over time is likely to tilt to the disadvantage of the US; the alliance approach is critical for two additional reasons. Both have to do with perceptions.

The first is that unilateral initiatives by the US, which has evolved as the world’s economic and technology hegemon over the past century, have been and will continue to be viewed by China’s leadership, its intelligensia and general population as attempts by the world’s bully to suppress China’s rise. The critical issue is not China, but the weakness and insecurity of the US. The second reason is basically that much of the rest of the world will also view the problem in these terms. Section 301 of the 1974 Trade Law is ambiguous. Not only does it have force for violations of international or US law, in addition, as shown in President Trump’s memorandum to the US Trade Representative, Section 301 provides a window for punitive action against countries with which the US incurs a trade deficit or with which trade or investment has resulted in the diversion of American jobs.[6] Seemingly, simply as a result of the deficits and job loss resulting from commercial relations with the US, any US trading partner can fall within the crosshairs of Section 301; this is particularly so when the US finds itself engaged in “strategic competition” with a rising power.

Together, if China strongly adheres to this view, and the rest of the world follows, the legitimacy of the US effort is seriously eroded, resulting in its isolation. The second, more central vulnerability of the unilateral approach is that it will divert attention from what should be the focus of consternation, namely, China’s persistence in not adhering to agreements regarding trade, foreign investment and intellectual property rights, and the legitimate concern regarding the misuse of cyber techniques to compromise the security of various countries and their citizens.

In any event, these two strategy alternatives do not necessarily dictate the shape of the trajectory shown in Figure 2.1. If the emphasis is on punishing China, through either the containment or the cooperation strategy (in which success is limited to cooperation with OECD allies to change China’s behaviour), and with China remaining unresponsive, the trajectory could transition from B to C in Figure 2.1, not B to D. The analysis above suggests that given the circumstances of comparable scale and the limitations of single-country advocacy, the second approach is likely to be more feasible, while imposing fewer costs in terms of American resources and reputation. However, to the extent that the cooperation scenario is successful, its success is more likely to rely less on decoupling and the preservation of the singlar role of US economic and technological dominance. Its focus, feasibility and success would more likely result in greater clarity regarding the global “rules of the game” and China’s compliance with those rules. The cooperation scenario has more upside potential than the containment strategy.

For the US, the potential benefits of the cooperation strategy are considerable. These include:

  • The ability to play a leading role in renegotiating, reaffirming and reinforcing a set of international rules and treaties that effectively engage China;
  • Having access to a critical R&D endowment shortage, that of skilled labour supplied by Chinese researchers, many of whom would be trained in US universities.
  • Access to advanced Chinese technology, for example the 1,000 mile electric vehicle battery, and markets for US innovations, for example a cure for Alzheimer’s.
  • More openness and transparency for Chinese technology, making it feasible to achieve a state of mutual assured disruption, the reciprocal ability to use remote techniques to disrupt communication, technology and energy systems, thereby limiting the likelhood of hostile disruptive measures.

If these potential benefits once recognised by the US do materialise between China and the US, and across the international system with Chinese-US support, then the predictions of the Kuznets “Inverted U” curve at D, corresponding with 100 per cent or virtual catch up, are more likely to materialise.

Conclusions and Discussion

This chapter begins with a reference to Sun Tzu’s dictum: “If you know the enemy and know yourself, you need not fear the result of a hundred battles”. We enlist this dictum in support of a somewhat optimistic perspective on the eventual resolution of the current China-US tensions. Fundamentally, we view this conflict as resulting from the accumulation of destabilising change in the relative economic and technological stature of the world’s two largest economies. Reminiscent of the outlines of Thucydides’s Trap, the economic and technological rise of one economy is challenging to the established hegemony of an established economic power.

From a policy perspective, the principal reason for not wanting to quarantine or decouple from Chinese technology is that it is unlikely that the containment strategy will work; moreover, it creates numerous risks for the US while not promising compensating benefits. The containment strategy is likely to fail even more in the medium term and still more in the long run. In terms of sheer economic scale and technology capability, it is very likely that time is on China’s side. The US should use this limited interval to move from its hardball containment strategy, thereby legitimising the approach for China as it acquires more leverage; this may be the last opportunity for the US to take a leadership role in forging an OECD or G7 consensus that effectively engages China in a global consensus regarding the management of technology in the global economy.

Looking forward, US policy is unlikely to substantially affect China’s long-run economic and technological advance. Efforts to block the transfer of technologies, thus voiding the trend towards specialisation and comparative advantage, are most likely to motivate China to undertake a more determined, comprehensive and aggressive technology development strategy. It is highly likely that the best way to limit troubling outcomes, including destructive technologies such as nuclear arms, cyber-attacks and rogue gene editing, is through international engagement and collaboration. The most likely way to encourage this condition is through technology cooperation and competition. Clearly, in order to achieve technology cooperation, shown at the far right side of the Kuznets Curve, China has to change. A key precondition for such change is likely to be the country acquiring the indigenous appetite and need for IPR protection. In The Spies Who Launched American’s Industrial Revolution, Klein (2019) documents the acquisition of the means through which, as Doron S. Ben-Atar notes, “the United States emerged as the world’s industrial leader by illicitly appropriating mechanical and scientific innovations from Europe” (Ben-Atar 2004: xxi). This appropriation created the platform for its indigenous innovation capabilities that evenually allowed it to emerge as the world’s foremost advocate for intellectual property rights and guarantees. China is advancing along this track. Nonetheless, China needs to advance its ability to demonstrate to the world and its own population its understanding that S&T leadership entails a commitment to the open exchange of ideas, people and technologies.

A key change for the US is to renew its commitment to behaving like the world’s S&T leader by investing in basic R&D for next generation technologies and opening its doors to aspiring and successful scientists, engineers and entrepreneurs. A race is on for various countries to emerge as the leader in next generation technologies including 5G, medical and health care innovations, measures to mitigate global warming, space exploration and other fields. The US must renew its commitment to science and its innovative applications. In doing so, in the process of cooperating and competing with the rest of the world, China included, the US can hopefully restore its confidence that it can compete successfully in a global economy with an open exchange of ideas, people and technologies.

Acknowledgements

The author appreciates the contribution to the formulation of this chapter of the lively discussion at the International Conference on Innovation and China’s Global Emergence, organised by the East Asian Institute, National University of Singapore, 25–26 July 2019, as well as to colleagues at the Institute who have assisted with revisions.

Notes

[1] The OECD classifications, in some cases different from those used in the MLP, are High-technology industries: aircraft and spacecraft, pharmaceuticals, office, accounting and computing machinery; radio, TV and communications equipment; medical, precision and optical instruments. Medium-high-technology industries include: electrical machinery and apparatus, motor vehicles, trailers and semi-trailers, chemicals excluding pharmaceuticals, railroad equipment and transport equipment, machinery and equipment. (See OECD Directorate for Science, Technology and Industry 2011.)

[2] See the WIPO “country statistical profiles” for China and the US at the World Intellectual Property Organisation website, https://www.wipo.int/portal/en/.

[3] For a representative sampling, please see “Treaties--Intellectual Property” on the Tarlton Law Library, Jamail Center for Legal Research website.

[4] The Report of the US Trade Representative (OUSTR 2018: 8, Table 1.1) includes a list of China IPR commitments: “China’s Bilateral Commitments Relating to Technology Transfer, 2010–2016 Agreements”.

[5] According to Jiang et al. (2019b), China’s concentration is significantly higher than the US’ for which the comparably scaled proportion of the population accounts for 21 per cent of US patent production.

[6] See, for example, the Executive Office of the US President 14 August 2017 memorandum which reads: “China has implemented laws, policies, and practices and has taken actions related to intellectual property, innovation, and technology that may encourage or require the transfer of American technology and intellectual property to enterprises in China or that may otherwise negatively affect American economic interests. These laws, policies, practices, and actions may inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation”.

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