The Coming Tech Battle With China

The Coming Tech Battle With China

Arriving in Beijing last month, I knew I would not be able to connect to Google, Facebook or Uber. As strange as it was to go without these staples of online life in the West, it was even stranger to find that local Chinese didn’t seem to feel deprived at all. They search through Baidu, get their social media fix on WeChat, hail rides on Didi, curate news through sites like Toutiao. And while they know Beijing is watching, they accept this surveillance as normal.

The Chinese government has carved out an alternative internet universe with its own brands, rules and culture, in which privacy doesn’t exist. But its real ambition is to break out of this parallel universe and dominate not just the internet but the technology industry worldwide. To contain Beijing, the United States and its allies are fighting back with a campaign of technoprotectionism, opening a perilous new front in the global trade battles.

President Trump is the unlikely leader of the fight against Chinese tech dominance. Widely seen as a champion of rust belt industries, he recently slapped heavy tariffs on all the leading aluminum and steel exporters, drawing fierce protests not only from China but also from American allies like Germany and Canada. But steel is a side show compared with the emerging tech battle with China.

Technology will decide which country emerges as the world’s dominant economic power in the long run. While about 20 percent of per-capita gross domestic product growth is driven by labor and capital, the remaining 80 percent is determined by how rapidly an economy is developing and applying new technology to increase production. China’s ambition to catch up to Western living standards thus depends largely on how rapidly it can match or surpass Western technology.

Even allies miffed by Mr. Trump’s steel tariffs remained largely supportive when he imposed $50 billion in tariffs on China — and only China — in response to its predatory tech trade practices, then threatened another $200 billion if Beijing followed through on a promise to retaliate. This week, Mr. Trump endorsed intensified  review of Chinese investment in American technology and of American tech exports to China.

Mr. Trump is both accelerating and expanding trade battles that began before he took office. Following the global financial crisis of 2008, countries around the world began to restrict cross-border flows of trade, capital and migrants. Globalization’s champions predicted that borders would continue to fall in at least one area — digital tech and the internet — but China has shown that a determined government can build walls in the virtual sphere, too.

The president’s tough stand on trade with China may be more popular than he is. The overwhelming consensus in the West is that Beijing is catching up illegitimately, by forcing companies that invest in China to share their best technology, or dispatching hackers to steal it. Though borrowing from the leading tech power is a standard development strategy — think of 19th-century America copying British industrial technology and Japan’s great success replicating American technology — the scale and organization of China’s campaign makes the threat feel new.

Beijing has banned some foreign competitors like Google and Facebook outright, and regulated others so heavily that they have been compelled to sell themselves to Chinese rivals (Uber) or forced to consider pulling out of China (Amazon). In essence, China has created domestic internet monopolies that are generating enough cash in their vast local market to finance aggressive expansion abroad. I have been told, for example, that Toutiao already sells its novel content curating service to one in 10 Japanese.

Last year Beijing rebranded the manufacturing centers of the Pearl River delta as the “Greater Bay Area” and began urging the main cities there — Shenzhen, Guangzhou and Hong Kong — to cooperate to become China’s rival to Silicon Valley, which the Chinese would like to make the lesser Bay Area.

In Beijing, the buzz was about how “Created in China” is replacing “Made in China,” with some claiming that Shenzhen is now more innovative than Silicon Valley in key industries. Instead of just assembling simple goods from parts built elsewhere, China is now increasingly seen as a cutting-edge designer and developer of artificial intelligence, drones and other advanced technologies.

Among the world’s 20 largest internet companies by market capitalization, 11 are American and nine are Chinese, and the Chinese giants are proliferating fast, up from two just five years ago. Currently, they are limited largely to Chinese turf. Tencent and Alibaba get more than 90 percent of their traffic from within their home country, compared with roughly 10 percent for Google and Facebook, but they all have plans to expand.

The Trump administration has moved to restrict Chinese tech expansion in several ways. An executive branch committee that reviews investments for security threats recently blocked attempts by a Chinese company to buy MoneyGram, a money-transfer company. In another case, that same committee’s concerns about potential Chinese influence over global mobile networks helped scuttle Broadcom’s proposed takeover of the chip maker Qualcomm. When the Trump administration banned exports to a major Chinese smartphone manufacturer, ZTE, it forced the company to largely shut down for lack of access to key American technology.

Mr. Trump was willing to lift the ban on ZTE after the company paid a $1 billion fine and fired its top executives, but Congress was not. The Senate voted to reinstate the ban, which is likely to fuel trade battles to come. When I was in Beijing, many Chinese were talking about how the humiliation of ZTE was inspiring an official push to reduce China’s dependence on the United States for semiconductors, software and other critical tech imports.

The next salvo from the Trump administration is expected to focus on sensitive sectors like financial technology and artificial intelligence, and to impose new controls not only on American tech exports to China, but also on American investments in China. Many Western allies have already taken similar steps. Germany is tightening investment rules for Chinese companies and protesting the restrictions German companies face in China. Australia is reportedly considering banning Chinese firms from working on its 5G rollout because of national security concerns.

The European Union recently imposed new data protection rules written largely to give consumers more control of information now in the hands of corporate giants like Facebook, but also to guard against the spread of a China-like surveillance state. The European Union is also pondering a new digital single market, in part to give European companies a market in which they have a chance to grow as large as Chinese rivals.

Meanwhile, many countries are going the opposite way, copying elements of China’s external barriers and internal surveillance tools: Russia, Brazil and other countries are requiring foreign internet companies to put servers on those countries, where they are easier for the government to monitor and control. Qatar, Iran and the United Arab Emirates, among others, have banned foreign services like WhatsApp and Viber. These moves may be motivated by a desire to control political discussion more than trade, but nonetheless they invite retaliation.

This is how a digitally interconnected world could die by a thousand cuts, and technoprotectionism may get a further push during the next global downturn. From the United States to Europe and Japan, public debts are high and deficits are rising, which means these governments are poorly positioned to spend their way out of any slowdown. Central banks can’t help much, either, since interest rates are still very low, with little room or reason to drop further right now. In this environment, governments may see protectionism as the only lever they have left to pull.

For most of the postwar era, the consensus in support of free trade was so strong that governments rarely resorted to raising tariffs even when times were tough. The trade wars that broke out after 2008 have involved mainly nontariff or “stealth” trade barriers, including cheap state loans and subsidies for favored industries. But in the last two years, the rise of Mr. Trump and other antiglobal populists has given new currency to protectionism in all its forms, including technoprotectionism.

The global financial markets had largely ignored the brewing trade battles, until recently. As the tariff threats grow in scale, and the battleground shifts from rust belt industries to new technologies, the markets are growing more skittish. So far, stocks have been hit harder in China than in the United States, but there will be no winners. The latest surveys of American investors and manufacturers show that their biggest concern is the threat of a trade war.

The risks from deglobalization are growing. If the current skirmishes turn into a full-blown trade war, blame will fall heavily on the thousandth cut. But the real fault will lie with the 999 that came before.

By: Ruchir Sharma
Source: https://www.nytimes.com

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