Trade and Security

Geoeconomics: the Chinese Strategy of Technological Advancement and Cybersecurity

By Anthea Roberts, Henrique Choer Moraes, Victor Ferguson
Monday, December 3, 2018, 12:27 PM

This is the third post in a series. Read the first two parts of the series here and here.

Various factors portend a movement toward a new Geoeconomic World Order characterized by a relative convergence of economics and security and increasing use of “economic instruments to promote and defend national interests, and to produce beneficial geopolitical results.” In this context, much has been written about China’s use of its Belt and Road Initiative as an economic policy instrument with clear strategic implications, and possibly intent. In this post, we consider other elements of China’s geoeconomic strategy that relate to its pursuit of advanced technologies, its approach to cybersecurity and its efforts to localize data in support of what could be called “national security with Chinese characteristics.”

China takes a sweeping approach to national security. In Article 2 of its 2015 National Security Law, China defined national security to mean “the relative absence of international or domestic threats to the state’s power to govern, sovereignty, unity and territorial integrity, the welfare of the people, sustainable economic and social development, and other major national interests, and the ability to ensure a continued state of security.” This formulation is intended to be comprehensive (Article 3), including “political security” and “economic security.” As President Xi Jinping has made clear, China’s overall national security outlook emphasizes the importance of political, economic, territorial, social and cyber security.

As a key element of its economic and national security strategy, China has taken numerous steps to become more technologically advanced when it comes to innovating and manufacturing critical technology, including by seeking self-sufficiency where possible. This move is intended to help secure China’s economic progress and close the gap in military advantage between the U.S. and China. China’s ambitions and approaches to fulfilling these have elicited anxieties in the United States that have led to a tech/trade war over the development of critical technologies, such as artificial intelligence (AI), with battlegrounds emerging in areas such as the regulation of global data flows and multilateral internet governance. Our aim is to describe these dynamics, rather than to assess them normatively or legally.

The Innovation Imperative

Technological innovation plays a key role in power transitions on the geopolitical stage. The United States is a world leader in technological innovation, which it has used to fuel both its economic advantage and military predominance. As a rising great power, China faces an “innovation imperative”: it needs to acquire and develop technologies in order to continue its ascent up the global value chain, overcome the middle-income trap—that is, the risk of reduced economic growth as wages rise and capital investments face increasingly diminishing returns—and arm itself against an America with better military resources. It has sought to close this technological gap through a combination of making, transacting and taking.

  • Making consists of supporting domestic firms to develop indigenous innovative and manufacturing capacity so that China can be more self-reliant when it comes to developing and producing new technologies. A clear example of this is the Made in China 2025 industrial policy, which seeks to spur Chinese innovation and technological advancement in key areas, including robotics, AI and quantum computing, to “meet the demands of economic and social development and national security.”
  • Transacting involves concluding commercial transactions with foreign entities that result in the transfer of key technology. This can involve Chinese companies buying or investing in foreign technology companies. It can also take the form of requiring foreign companies that want to invest in China to work with domestic firms or transfer some of their intellectual property in return for access to the Chinese market.
  • Taking means acquiring existing technology from foreign states and companies without paying for it. This can occur through legal means, such as collecting open-source material like published scientific papers or having Chinese students study at overseas universities. Or it can occur through non-legal means, such as stealing intellectual property from foreign governments and competitors.

The trade war between China and the United States is, in many ways, a technology war, because it reflects a struggle for which state will achieve technological mastery. As the dominant technological power, the United States has decried China’s strategies for closing the technological gap, arguing that they involve “aggressive acts, policies, and practices that fall outside of global norms and rules.” Some U.S. complaints hinge on China’s alleged violation of existing trade and investment disciplines, as reflected in the United States’s filing a World Trade Organization (WTO) complaint in March 2018. Other U.S. concerns relate to practices that may not technically fall afoul of current rules, but which the U.S. views as unfair, unreasonable and unduly burdensome on U.S. commerce.  

By contrast, as the upcoming technological challenger, China views U.S. actions as illegitimate efforts to contain China’s rise and maintain American hegemony. It complains that the United States is adopting a “Cold War mindset” and has “brazenly preached unilateralism, protectionism and economic hegemony, [made] false accusations against many countries” and “intimidate[ed] other countries through economic measures.” China highlights the “notable results” it has attained in the protection of intellectual property rights. It also asserts its right to adopt policies that are conducive to development and hints at a certain hypocrisy of developed countries, which have resorted to similar measures in the past when they were seeking to develop but now expect to hold developing states to developed state standards (sometimes described as “kicking away the ladder” to development).

The United States used to look dismissively at China’s innovation capacity, viewing China as a “copycat” nation. China has been making great technological strides recently, though the United States still clearly leads the way in terms of innovation. The United States is now responding to China’s technological advancement by, for instance, limiting exports of critical technologies to China and refusing to permit Chinese companies to invest in critical technologies in the United States. Some commentators have described such measures as attempts to “decouple” the two economies in order to counteract China’s “technonationalism.” Former U.S. Secretary of the Treasury Hank Paulson warns that, if this trend continues, “the integration of global innovation ecosystems [might] collapse as a result of mutual efforts by the United States and China to exclude one another.”

Certain U.S. actions are likely to reinforce China’s view that it needs to become more technologically self-sufficient. According to the Made in China 2025 plan, China aims to achieve 70 percent “self-sufficiency” in high-tech industries by 2025 and a “dominant” position in global markets by 2049. The brief U.S. ban on sales of semi-conductors to Chinese company ZTE, though quickly retracted by President Trump, reinforced China’s perception of its vulnerability in relying on foreign sources for critical technology. According to President Xi, technological self-reliance is essential to both economic and national security:

Self-reliance is the basis for the struggle of the Chinese nation to stand on its own footing in the world. Self-innovation is the only way for us to climb the world’s technological peaks…

Only by mastering the key core technologies in their own hands can we fundamentally guarantee national economic security, national defense security, and other security.

The ultimate lesson that China may learn from the ZTE experience and the current US trade war is that it needs to be more self-reliant when it comes to innovation and technology—a message that only serves to reinforce its Made in China 2025 strategy. More broadly, this will reinforce China’s belief in the need to de-center the United States in international economic governance—for instance, by establishing parallel international institutions and developing its own sphere of influence, or developing the capacity to challenge US agendas within existing frameworks such as the WTO—in order to reduce its vulnerability to asymmetrical US leverage over the international system.

The Battle over Artificial Intelligence

The fight to master AI has become a key battleground on which this tech/trade war is playing out. Given the potentially transformative effects of AI, Russian President Vladimir Putin famously declared in 2017 that “whoever masters it first will rule the world”—a recognition that leadership in this area will impact the strategic and economic balance of power. Both the United States and China are using geoeconomic policies to help secure their economic and strategic advantages in the battle to dominate artificial intelligence, including through U.S. efforts to secure free data flows and China’s decision to localize data.

As explained by leading internet and AI venture capitalist Kai Fu-Lee, the development of artificial intelligence involves two key stages: the “age of discovery” and the “age of implementation.” The United States has the lead in the age of discovery, which involves cutting-edge research to produce big breakthroughs, because it has the top universities and AI scientists in the world. The United States is now using or considering geoeconomic strategies to protect its advantage and reduce knowledge transfers, such as limiting the ability of Chinese nationals to work or study in STEM fields. It has also sought to develop free trade rules on electronic commerce, including the free flow of data, with an eye to gaining advantage for its highly successful IT companies.

What is often not appreciated is that China has the advantage in the age of implementation, which involves developing particular applications of the scientific breakthrough of deep learning on the basis of big data. China may have fewer of the world’s leading AI scientists, but it has a lot of very technically competent AI scientists. Moreover, China has an advantage that is unmatched by the United States: the quantity and quality of the big data to which it has access. Insofar as “data is the core” in the age of implementation, China has one up on the United States, and it is using geoeconomic strategies, like data localization, to make sure it retains it.

China holds a uniquely advantageous position in the generation of “big data” as an input for AI development. In terms of the quantity of data, as of 2017 and 2018, China boasted 802 million Internet users (58 percent of the Chinese population), 98 percent of whom are mobile users. In comparison, the United States had 286 million Internet users (88 percent of the US population) and the European Union had 460 million (90 percent of the EU population). To the extent that bigger is often considered to be better in AI development, China comes out on top. While the creation and use of “artificial” data might potentially render China’s quantitative advantage less significant at some point, it retains a clear advantage for now.

In terms of the quality of data, China is also particularly well placed for several reasons, including: the ubiquity within China of super-Apps like WeChat, which has been described as the “Swiss Army Knife” of apps because it provides users with a vast array of services through a single entry point; the exceptionally high use of mobile payments given that Chinese society largely skipped over credit cards in moving straight from cash to mobile payments; and the presence of many surveillance cameras coupled with limited privacy laws. China’s big data is thus much more extensive, integrated and available than data in the United States or Europe. Arguably, however, China’s big data advantage best enables it to develop artificial intelligence in relation to the Chinese market, not foreign markets.

China clearly recognizes the edge it possesses when it comes to big data. The 13th Five-Year Plan (2016-2020) declared big data to be a “fundamental strategic resource.” The State Council’s 2015 Action Plan for Promoting Big Data Development pledged to make full use of China’s “data scale advantage,” given that big data has become “a new opportunity to reshape the country’s competitive advantage.” The Council presents the existence of “massive data resources” as “China’s unique advantage in AI development.” Data is a strategic asset, like rare earths, and one that China might increasingly want to utilize and prevent being exported.

China has sought to protect this strategic asset by requiring the localization of data within the country. Article 37 of China’s 2017 Cybersecurity Law prescribes that:

Critical information infrastructure operators that gather or produce personal information or important data during operations within the mainland territory of the People’s Republic of China, shall store it within mainland China.

This means that the categories of data covered by the Cybersecurity Law must be stored in China, rather than being permitted to flow across borders. If data is localized in China, it can be used by Chinese companies and potentially the Chinese government, including in AI research and intelligence operations. If data is permitted to flow across borders, it will often be stored with foreign cloud service providers, most of which are Western companies that operate servers in Western states.

Data localization has important economic and strategic objectives. Economically, the Chinese government seeks to use data localization to give an advantage to Chinese companies over Western ones. Strategically, it helps ensure that Chinese data cannot be accessed by Western governments, a fear that became visceral for states like China and Russia after the Snowden revelations. Indeed, the Chinese government has repeatedly explained the need to localize data in order to defensively protect against U.S. spying or other cyber interference, and this logic is reflected in Xi’s dictum that “there can be no national security without network security.” But data localization also reflects an offensive geoeconomic move by China in at least two ways:

  1. It secures China’s big data advantage, which will in turn provide the country with a head start in AI development that has the potential to reap large economic and military advantagesand
  2. It ensures that the Chinese government can access this data in accordance with its National Intelligence Law (Article 7) and Counter-Espionage Law (Article 22 and implementing regulations), which require Chinese individuals and companies to comply with requests for information related to intelligence and counter-espionage work.

China’s approach to data localization reflects part of a broader cybersecurity policy, enshrining the notion of “cyberspace sovereignty” in which the internet and other elements of digital life are subject to strict state control. This idea serves as the “organizing principle” for China’s broader vision for multilateral internet governance, which would permit distinct national cyber spheres with state-controlled content—contrasting sharply with the global and open internet championed by the United States, characterized by multi-stakeholder decision-making and light-touch state interference. Whereas China and likeminded states such as Russia have used the United Nations and other forums to promote a model in which states play the central role in regulating their domestic cyberspaces, the United States has long-advocated an “internet freedom” agenda anchored around principles of “commercial non-regulation” and “anti-censorship.”

These competing visions of internet governance have given rise to concerns about the possible emergence of a global “splinternet”—that is, the fragmentation of the internet into national or regional networks controlled by states. Domestically, China has taken great strides in balkanizing the internet, strengthening features like its Great Firewall to enable censorship. These efforts appear to be intended primarily as security measures aimed at protecting the political stability of the Chinese Communist Party. Yet they also have economic externalities, such as making the Chinese internet less attractive to and accessible for Western technology companies. This, in turn, has fostered the growth of domestic internet giants, which now have access to big data kept by China on the mainland. This serves both economic and strategic goals, such as the development of AI. In this way, cyber protection could be reframed as digital or cyber protectionism, with security and economic motives and effects intertwined and, at times, mutually reinforcing.

Military-Civilian Fusion

China’s geoeconomic approach not only fuses economic and security interests, but also relies on coordination between the Chinese state and market actors across multiple areas. One of the United States’s broader complaints about China is that its state-led capitalist approach—sometimes described as China, Inc.—undermines the existence of a level playing field between Chinese and U.S. firms. Within the science and technology sector, however, U.S. officials declare that China’s actions have “evolved into an even more ambitious, whole-of-nation, national-level strategy to ‘fuse’ the Chinese military and civilian industrial complexes, from top to bottom.”

Engaging in industrial policy and fusing public and private entities and interests is nothing new in China. But it has important security, as well as economic, consequences. For instance, at the 18th National Congress in 2012, Xi set forward the importance of the junmin ronghe (military-civilian fusion). Its objective is to accelerate the transfer of people and technologies between the military and civilian sectors. The Made in China 2025 plan thus repeatedly calls for military-civilian integration, such as by “[a]ccelerat[ing] the transformation and industrialization of national defense and promot[ing] two-way transfer between military and civilian technologies.” Recently, reports have also arisen of People’s Liberation Army members studying in Western universities in order to access scientific advances, a process known as “picking foreign flowers, making Chinese honey.”

When it comes to artificial intelligence, public-private collaboration and coordination is reportedly pervasive, and China has recruited big Chinese tech firms as part of the “AI national team.” Western commentators often portray the success of Chinese technology firms as the result of unfair practices, like theft of intellectual property and the provision of state subsidies. But, as Kai-Fu Lee notes, this also stems from China’s ability to endorse particular objectives and set the tone for private capital choices, as it has done in seeking to foster the development of artificial intelligence. China likewise leads the way in providing infrastructure to support these technological developments, such as building cities and highways with built-in sensors designed to facilitate the use of driverless cars. The Chinese government views its state capitalist model as a national strength that does not contradict international trade rules, which that it needs to secure against U.S. attempts to halt or reverse China’s rise. A key question for the future of international economic law is whether these different economic models will be able to coexist under the same legal framework.