China and Technology: Tortoise and Hare Again

csis.org /analysis/china-and-technology-tortoise-and-hare-again/

August 2, 2017

Reports that the Trump administration will confront China over unfair trade practices is good news, but this is only
half a solution. It generally doesn’t help when you are losing a race to complain that your competitors are running
too fast. To stay in the lead, you have to pick up the pace.

China does not play by the rules, and it has gotten away with it for too long. Compare the treatment of U.S.
companies in China to Chinese companies in the United States. China’s excuse that it is a developing country and
should be allowed to tilt the playing field is nonsensical for the world’s second-largest economy. The word that
Chinese companies fear is reciprocity—that they should be treated in the United States the way American
companies are treated in China. When Alibaba built a data center in Seattle, it was not forced to do this as a junior
partner in a joint venture, nor to provide source code as is the case for U.S. companies in China.

The goals of Chinese policy are easily summarized: they wish to extract technologies from Western companies; use
subsidies and nontariff barriers to competition to build national champions; and then create a protected domestic
market for these champions to give them an advantage as they venture out in the world. Huawei is the best example
of a globally dominant company built along these lines, but there are others. Lu Wei, the former head of China’s
Cyberspace Administration, once said that if China had not blocked Google, there would be no Baidu.

One reason that China has gotten away with this for so long is that U.S. companies have been ambivalent about
pushing back. They fear retribution from China—a reasonable concern—and do not believe the United States will
take action to support them against such retribution. China is a huge market that companies are reluctant to risk.
The Trump administration will need to ignore handwringing from trade groups if it is to move ahead, but simply
pushing back on China will not be enough.

China is pulling ahead because it has a strategy to build a high-tech economy and is willing to spend heavily and
consistently over years. China announced more than a decade ago that it would build its own commercial airliner. At
first, the quality of Chinese aircraft was abysmal. Every year this improved (in part though the technology exchange
found in joint ventures with Western aircraft companies). Now the Chinese have an aircraft, and we should not be
surprised if there is pressure from Beijing on Chinese airlines to buy it. We do not always want to take Chinese
pronouncements of technological success at face value, but China commits to programs and spending for decades,
while our spending is often limited to fits, starts, and cuts.

How is it that the richest country in the world is routinely outspent by China in supporting new technology? China
has allocated billions of dollars for investment in research and acquisitions in semiconductors, 5G telephony,
artificial intelligence, and super computers—part of a long list of advanced technologies that are key to future
economic growth. The United States grudgingly allocates millions for the same efforts. Being outspend a thousand
to one is no way to win, and heroic entrepreneurs and the market are not going to save us from underinvestment.

Intellectual property (IP) theft is yesterday’s issue. Yes, the Chinese licitly and illicitly acquired American IP from the
start of the opening of their market, and it reached a fever pitch through cyber espionage between 2000 and 2016
(more a reflection of our inattention and lax defenses than of Chinese skill). But, in part because of past technology
transfer and in part because of heavy, sustained government investment in science and research, China has
developed its own innovative capabilities. This is a good thing, but what is not good is the policy of using unfair
practices to give Chinese companies an edge in marketing their innovations. Creating new IP in the United States is
more important than keeping IP from China.

Innovation is the buzzword du jour. It means creating new products and services, either by improving existing
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products or by taking advantage of scientific breakthroughs. Some ask if the United States is losing its innovative
edge, which is a strange question for a country where it is too expensive for most people to go to college and where
funding for research is being trimmed. Companies spend heavily on developing new products, but very little on
developing new ideas, setting a boundary for innovation that limits the U.S. economy’s ability to create.

If we use traditional metrics—such as the number of patents issued, published research, the percent of national
income spent on basic research, the number of graduates with science degrees—the U.S. trendlines are flat or in
decline, showing a nation that is coasting on the science investments of the Cold War. More complex measures
would look at income growth and productivity. For “mature” economies, innovation is the best path for growth, as
people find better ways to use existing resources to produce goods and services. There are many reasons why
productivity growth in the United States is stagnant, but underinvestment in research is certainly one of them.

There are other self-imposed drags on American innovation, including convoluted tax policy and the world’s most
expensive health care system. This sounds Trumpian, but even an institution as “establishment” as the International
Monetary Fund has similar recommendations for the United States: tax reform, less regulation, increased
infrastructure spending, deficit reduction, educational improvements, and improved trade agreements. These are, as
we know, politically difficult issues, but a decision to match China in investment for science and technology should
not face the same obstacles.

A U.S. effort to get China to follow global norms on technology, trade, and investment is long overdue, but it will not
work without a strategy on how to move ahead in technology. The United States has innate advantages, with the
strongest scientific base in the world, leading technology companies, and an innovative culture that others find
difficult to match. Strengthening and revitalizing the partnership among companies, universities, and government
can reignite U.S. technological innovation, but it will require a willingness to invest seriously in growth. America lives
in a post-innovation environment of its own making. Changing this does not require more words, more calls for
partnership, or more unfunded strategies. Change requires spending.

James Andrew Lewis is a senior vice president at the Center for Strategic and International Studies in Washington,
D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt
institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary.
CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed
in this publication should be understood to be solely those of the author(s).

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