The Chinese threat to the liberal economic order and the US-European convergence

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A Chinese manufactured 5G robot at the 2017 MWC in Barcelona

US-European cooperation on economic issues is at a low ebb. Efforts to rekindle interest in mutually advantageous policies such the Transatlantic Trade and Investment Partnership (TTIP) are not likely to succeed for the time being. Under the prevailing circumstances, transatlantic disillusion­ment has settled in. A better approach than letting mutual acrimony languish would be to focus on a joint challenge: how to meet the resolute Chinese challenge to the industrial economies of the West.

Xi Jinping’s growing consolidation of power is giving ever more momentum to the ambitious Chinese plan to gain dominance over high-tech industries. This is nothing short of a head-on assault, given that these industries to date have been the main source of strength in the US and European economies. Even a brief look at the Chinese government’s “Made in China 2025” program reveals the full scope of China’s effort. The explicit goal is not just to move up the ladder of industrial technology leadership, but to dominate it eventually.

The goals set are as ambitious as they are mercantilist: Chinese companies are to control 70% or more of domestic consumption in ten key industries by the year 2025. The target list constitutes a particularly direct threat to the economic pillars of both European and American industry. It includes the aerospace, semiconductor, auto and robotics sectors, to name just the most visible. One area of special concern is telecommunications technology. It is not only a major industry in itself, but will increasingly be a driver of the entire industrial economy in the years to come.

It is clear that fifth generation (5G) wireless systems are a crucial enabling technology of the future. They are needed for a multitude of purposes beginning with the building of the Internet of Things and the transition to autonomous vehicles. They also play a role in accommodating the transmission of massive amounts of data for analysis and artificial intelligence applications, as well as meeting the growing demand for mobile videos and video gaming. To underscore 5G’s centrality, any serious effort to improve cybersecurity and ensure the integrity of major systems like the electric grid depends on this type of technology. Furthermore, modern wireless systems will need a huge increase in the transmission speed and bandwidth of their telecommunication infra­structures.

Building that infrastructure will involve hundreds of billions of dollars of investment on a global scale. Whoever captures major parts of the market will be in a strong position to compete in new areas like the Internet of Things.

For national security and cybersecurity purposes, it is important for the United States and its allies to be able to rely on the safety of this infrastructure. China has imposed strict controls on data transfers and access to cloud computing and non-Chinese websites. This provides a huge economic advantage to indigenous firms like Alibaba, Baidu and Tencent. But that is clearly not the game plan the Chinese have in mind. Their ambition, upon which they are acting with great determination, is to control access to all sorts of data collection.

Inside their own country, China already monitors the daily life of its citizens. The new 5G standard has the potential to extend this capability on an international scale. After all, whoever sets the standards for the new technology will have the upper hand in extending surveillance and data mining on an unprecedented scale. China’s leadership, no longer content with being a “technology taker” as during the previous rounds of IT development, intends to lead in this race. To that end, it is working on introducing a new technology, called digital object architecture.

If core 5G standards are adopted in the Chinese model, equipment manufacturers will have to license them on Chinese terms. The dangers to privacy and security of communications would be heightened in this scenario. Chinese firms would also have the upper hand in equipment markets. Forever seeking a competitive advantage, China deliberately uses its huge market size to convince outside firms to use its standards. This effort also goes well beyond the 5G field.

The fourth generation (4G) of mobile networks was crucial in the development of new apps and related services such as Uber and AirB&B. Telecom expert Roger Entner goes so far as to argue, “The dominance that Google and Apple have over the mobile ecosphere could not be possible without America’s 4G dominance.” 5G will be equally important to the Internet of Things and artificial intelligence apps and the emerging autonomous vehicles industry.

The standard setting issue aside, through its “Made in China 2025” program, China also pours huge amounts of money into the research and development of all types of software and hardware needed for 5G. This includes subsidizing both the research and the building of new production facilities and related equipment. For instance, for advanced semiconductors, China has earmarked around $160 billion alone to support the next generation of semiconductor technology and $180 billion for 5G infrastructure buildout.

We also cannot close our eyes to the fact that the Chinese government encourages state-owned and state-guided companies in China to acquire or invest in the companies and technologies in the industrialized world that are leaders in all phases of the software and hardware needed for 5G. The Chinese government also often subsidizes these acquisitions in opaque ways.

It is well known that this makes it difficult for foreign firms to operate in China and forces those who do so to share their technology. As the world’s largest consumer of semiconductors and memory chips, China has gained considerable influence in this sector. Part of its “knowledge bank” is due to Chinese firms regularly trying to violate patents and other intellectual property rights. If the US and Europe are to protect their own industrial future, they should urgently take note of the fact that many of these tactics are banned in the rules of the World Trade Organization (WTO).

With its impact on the nascent Internet of Things, as well as its parallel efforts to dominate the electric vehicle industry, Chinese efforts in 5G, in particular, are a major challenge to the European and Japanese automotive and semiconductor firms. To maintain technology leadership, European and US industrial firms, as long-time global technology leaders, must therefore take six specific, concerted policy initiatives.

First, they must redouble their efforts to protect patents around the world, including the need to limit the reach of antitrust authorities over patent licensing. Second, they must work on improving conditions for private firms to benefit from basic and applied research in technology and software. Third, they must cooperate in the WTO to use existing rules or craft new ones as needed to discipline Chinese subsidization, dumping, forced technology transfer and unfair trade practices especially for state owned enterprises. Fourth, they must be vigilant in maintaining the private sector-led model for standard setting in the telecommunications field. Fifth, they should work cooperatively to develop rules on foreign investment that are responsive to the state-directed and subsidized policies now employed by China. And finally, sixth, the national security teams from NATO allies and Japan should cooperatively address the questions of cybersecurity related to the development and implementation of 5G systems.

The hope is that collaboration to meet this challenge will result in Europe and the United States, in particular, gaining new confidence in the value not only of working together, but in finding ways to improve the existing liberal economic architecture. The present protectionist and centrifugal forces will only be reinforced if the Western allies fail to address Chinese economic ambitions without blinders and with determination.

* A version of this article was also published on The Globalist.

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