USChina high-tech rivalry: the innovation imperative and Great Power competition

Andrew Kennedy and Darren Lim

Image credit: The White House via Flickr

The rivalry between the United States and China is turning ugly. The past month has seen increased tensions in the South China Sea, and a tit-for-tat round of tariff increases sparked by President Donald Trump’s nationalist and deficit-reducing trade agenda. Yet more and more of the rancour between the United States and China stems from one area in particular: technology.

This is no accident. Technology is a vital contributing factor to both military superiority and economic prosperity, which makes innovation — the development of new products and industrial processes — a key determinant of the global balance of power. For decades the United States has been the world leader in innovation, but China is catching up, and Beijing’s methods are causing significant friction.

In March, the Office of the US Trade Representative released a report documenting means employed by China to accelerate its acquisition of sensitive technology. Within China, the government uses restrictions on foreign ownership, such as joint venture requirements and licensing rules, which effectively compel US companies to transfer technology and intellectual property to local firms. These regulatory tools form part of a broader strategy through which Beijing seeks to become a global leader in multiple high-tech industries. Abroad, the Chinese government has acquired technology by providing backing to a spending spree of acquisitions, but also, allegedly, by sponsoring cyber-intrusions to steal trade secrets. Fear of such actions are not confined to the United States — German Chancellor Angela Merkel has spoken of the ‘huge challenge’ Chinese acquisition poses to German industry.

In our recent article in International Affairs, we develop an analytical framework to illuminate this new dimension of great power rivalry. As a middle-income rising power, China faces what we term an ‘innovation imperative’ — the need to acquire and generate new technologies to overcome structural hurdles to economic development. How a rising power responds to this imperative in turn shapes its interactions with the dominant state — in this case the US. We argue that the rising power’s innovation activities can have distinct strategic effects that threaten the interests of the dominant state and thus generate Great Power competition. We call these effects “strategic externalities”, since they refer to impacts that are external to the individual actors (such as firms) engaging in the innovation activities. We identify two such effects in particular: security externalities and order externalities.

Security externalities capture the national security implications of economic activity. Such implications are particularly acute when commercial transactions involve dual-use technology, which can be employed by both civilian and military organizations. China’s pursuit of the innovation imperative is clearly generating negative security externalities for the United States. China’s attempts to acquire advanced semiconductor technology, for example, have generated security concerns in Washington, which reviews such investments through the Committee on Foreign Investment in the United States (CFIUS). Following CFIUS reviews, both Presidents Barack Obama and Trump rejected sensitive Chinese investments, and legislation currently before the US Congress would significantly expand the committee’s jurisdiction. The Trump administration is also taking action in other domains, in particular telecommunications, by imposing a seven year ban on US companies selling products to Chinese tech firm ZTE, as well as proposing broader limits on the use of Chinese technology domestically.

Order externalities arise because the character of the international system — its rules, practices and institutional arrangements — tends to reflect the interests of its most powerful members. The United States led in the construction of a rules-based order in the post-war period, and the maturing system of intellectual property (IP) protections in particular has allowed the US to benefit economically from its position as global technology leader. China (and other states) have generated negative order externalities for the United States through actions that undermine this order. For years, China’s weak enforcement of IP rules in particular has threatened the US-led Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), which aims to ensure minimum standards of IP protection worldwide. Under President George W. Bush, the United States responded to China by making IP protection a key element of its ‘responsible stakeholder’ concept and by prosecuting Chinese behaviour at the WTO.

More recently, China has generated order externalities for the United States through its alleged sponsorship of economically motivated cyber-espionage, which has undermined US efforts to extend IP protection in cyberspace. The United States has responded by pressuring China through a variety of channels to curtail such activity. While the Obama administration had some success in this regard, it remains very much a live issue, as evidenced by allegations levelled by the Trump administration and the actions that have followed in their wake.

In short, the growing friction between the United States and China in the high-tech arena is much more than an outgrowth of President Trump’s economic gun-slinging. Instead, it is embedded in the structure of the relationship between the world’s dominant state and its most prominent rising power. This is not to suggest that matters will simply go downhill from here. China may calculate that it has more to lose than it stands to gain by alienating the United States and adjust its approach accordingly. China’s interests may also evolve over time as more and more firms within China demand stronger protection for intellectual property. Nevertheless, Beijing’s initial response demonstrates that it is ready and willing to retaliate against US commercial interests while simultaneously looking to accelerate its own indigenous innovation efforts. The underlying rivalry, in technology as in other domains, will not disappear anytime soon.

Andrew Kennedy is Senior Lecturer at the Crawford School of Public Policy at Australian National University.

Darren Lim is Lecturer in International Relations at Australian National University.

Their recent article in International Affairs is titled ‘The innovation imperative: technology and US–China rivalry in the twenty-first century’.

Read the article online here.

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