China, a state-led economy, is making full use of structural and policy advantages over market-based economies, like the United States.
As a political system under Communist Party rule, China can set and implement long-term strategic goals. In the US, by contrast, political power is separated into three branches of government, which function within a framework of checks and balances. Private corporations, operating in decentralized markets, are narrowly focused on short-term, company-specific goals, such as optimizing quarterly profits and boosting stock market valuations.
Unless there is an urgent sense of national crisis—as happened in 1957 when the Soviet Union launched Sputnik, the first Earth satellite, triggering a national campaign to boost R&D—the US government places its faith in the efficiency of the market mechanism. It believes that the marketplace yields superior outcomes to the national goals set by the State.
Although that faith was justified in America’s Cold War with the Soviet Union, it remains to be seen whether the decentralized market model will outperform the State-centric system in the post-Cold War rivalry between the US and China.
China’s economy is far more dynamic, flexible, and productive than the rigid economic system of the Soviet Union.
The Communist Party Congress has laid out bold plans to make China become the world’s leading power by 2050. President Xi Jinping understands that if China is to displace the US as the world’s superpower, China must advance to the forefront of transformative technology.
What, specifically, are these transformative technologies? AI (artificial intelligence), machine learning, big data analytics, microprocessors and semiconductor technology, cloud computing platforms, driverless cars, robotics, IoT (internet-of-things), mobile devices, pharmaceuticals, stem cell and gene-based R&D.
Of these, AI is the key—the seminal, enabling technology. It is the application of AI algorithms that allow advanced computers to collect, analyze, and store huge volumes of data. Data is the basic ingredient for AI development across all sectors of the global economy: retail, financial services, health care, transportation, entertainment, hospitality, energy, and infrastructure.
Knowing this, the Chinese State has targeted AI as the wedge technology in which to invest huge financial and human resources over the next 10 to 15 years. By focusing and investing substantially more resources than other countries, China expects to emerge as the world’s AI leader by the year 2030.
Population and Data
The sheer mass of domestic data is another structural advantage that China is harnessing. China is the world’s second largest economy and the world’s most populous country, with 1.4 billion people—more than four times America’s 326 million.
There are more than 721 million Chinese internet users, compared to 287 million Americans. The largest crowd of internet users thus reside in China. Ninety-five percent of the 721 million Chinese rely on mobile devices.
By using smartphones for ordinary transactions, China is moving rapidly towards becoming a cashless society. Mobile websites, Alipay and WeChat, account for nearly $5 trillion in financial transactions.
From the standpoint of aggregate numbers, therefore, China can draw upon a deep reservoir of empirical data. And data gathering and analysis, as pointed out already, is the central thoroughfare for the long journey to global leadership in digital technology.
A third advantage that the Chinese State has created—based on government policy (not on systemic factors)—is asymmetric access to trade and investments, namely, easy access to overseas markets for Chinese companies but stringently restricted access to China’s own market for American corporations. Call this market divide the 21st century version of “The Great Wall of China.”
If any of America’s five tech titans—Alphabet (Google), Amazon, Apple, Facebook, and Microsoft—try to establish a presence inside “The Great Wall of China,” the Chinese State requires that they transfer key proprietary technology, build manufacturing, R&D or Cloud storage centers inside China, and agree to joint ventures or partnerships with local Chinese companies. Over time, such transfers of proprietary technology enable local Chinese companies to catch up and eventually to push out American companies. This policy approach can be described as a “One-Way Street.”
Why do leading American corporations, like Apple and Qualcomm, accept patently unfair trade and investment practices? Because the lure of China’s enormous domestic market is simply irresistible: specifically, the purchasing power of 1.4 billion Chinese consumers who are the beneficiaries of rising disposable incomes.
What’s at work here, once again, is China’s pursuit of strategic, long-term goals and corporate America’s quest for short-term revenues and profits. Take the cash now. Don’t be paralyzed by future uncertainties. Call this trade-off a risky and potentially costly “Faustian Bargain.”
Chinese Investments and Acquisitions
While restricting foreign entry into its domestic market, China is taking full advantage of its access to open overseas markets. In 2016, Chinese entities invested an estimated $200-250 billion in new technology start-ups and established hi-tech companies.
Half of that amount was invested in the United States, representing anywhere from 7-10% of all venture deals done in the US in 2016. The technologies that China has targeted cover the spectrum from semiconductors to AI, machine learning, robots, and cloud computing. All are essential technologies for achieving global leadership.
The Chinese have spent roughly $150 billion to acquire American semiconductor companies, including both early stage start-ups and established firms. US venture funds, seeking the highest rates of return, are reluctant to invest in hardware start-ups, given the steep costs of capital investments and the high risks.
Too often, the only investment money available to American semiconductor start-ups is Chinese money. And China usually brings the semiconductor technology—as well as R&D and manufacturing know-how—back inside the Great Wall of China.
America’s Ecosystem of Innovation
The semiconductor industry is an indispensable fixture in America’s ecosystem of innovation. If semiconductors fall under Chinese sway, America’s ecosystem of innovation—its most precious national asset—could be seriously impaired, if not permanently damaged. This would deal a devastating blow to America’s base of economic and military power, because America’s military weaponry have become increasingly dependent on technological breakthroughs in commercial R&D.
Industrial Espionage and Cybertheft
China’s restrictions on access to its domestic market fall into the category of coercive trade practices, but such practices are not, strictly speaking, illegal.
Where China crosses the border into the dark underworld of illegality is its ruthless campaign of cyber-theft, industrial espionage, patent infringement, piracy, and counterfeiting. Whereas Russia engages in cyber-hacking in order to destabilize democratic societies, China is focused on cyber-hacking aimed at stealing advanced technology.
The Commission on the Theft of American Intellectual Property, an independent organization, has estimated that cyber-theft by foreign countries—primarily China—amounts to $225 to $600 billion per year.
The lower-end estimate of $225 billion is more than 1% of America’s GDP. The higher end of $600 billion is roughly 3% of America’s GDP. That’s a staggering sum. America’s defense budget, the world’s biggest, is 3.5% of GDP.
Clear and Present Danger
China’s strategic goal of becoming the global leader in digital technology by 2030 poses a clear and present danger to the economy and national security of America, as well as those of its global allies, particularly Western Europe and Japan.
China’s global strategy of technological domination is far more threatening than the Soviet Union’s launch of the Sputnik satellite in 1957. What is urgently needed today and over the next several decades is a strong, sustained, and coordinated response by the United States and its allies. In the face of China’s strategic challenge to the West, is Japan prepared to collaborate comprehensively with the United States?
Daniel I. Okimoto, professor emeritus at Stanford University, is also co-chairman of Silicon Valley Japan Platform.