On Feb. 4, the House of Representatives passed a bill aimed at increasing U.S. economic competitiveness with China. Dubbed the America COMPETES Act of 2022, the omnibus bill would devote nearly a quarter of a trillion dollars to subsidize domestic semiconductor manufacturing and research on artificial intelligence, quantum computing and other critical technologies. The House bill incorporates key elements of a bill that passed the Senate last year, which the New York Times has called the “most expansive industrial policy legislation in U.S. history.”
Biden has expressed strong support for seeing the bill enacted into law. In a statement released after passage of the House bill, Biden said that the vote was critical “for outcompeting China and the rest of the world in the 21st century.” The House bill is now expected to head into a conference committee, where Congress will reconcile the differences between the Senate and House bills before sending the legislation to the president for signature.
The House of Representatives had lagged behind the Senate in taking action on the bill. In June 2021, the Senate passed its own version of the legislation, the U.S. Innovation and Competition Act of 2021 (USICA), on a bipartisan 68-32 vote. The House tried to pass its version for months, but the effort stalled last year amid differences over key provisions. In an effort to break the logjam, Senate Majority Leader Chuck Schumer pushed to attach USICA to the National Defense Authorization Act, the annual must-pass defense appropriations law. Senate Republicans objected to the move, leading the House to draft a separate bill and proceed to a conference committee.
The bill was passed a few days after the Biden administration announced a series of policy changes to grant more visas for students and professionals working in science and technology. The move will expand the number of academic majors and professional fields that qualify as “STEM” to include emerging fields like data science. International students who majored in a STEM field are permitted to work in the U.S. for three years after graduation, compared to one year for those in non-STEM fields. President Biden had been criticized by academics for continuing President Trump’s policies barring Chinese grad students from studying in the United States. Though it is unclear how the new visa changes will affect Chinese grad students specifically, the measure is intended to boost American technological competitiveness by incentivizing highly skilled students from abroad to remain in the United States and contribute to the U.S. innovation ecosystem following their graduation.
The bill passed by 222-210, largely along party lines. Despite bipartisan agreement on the need to shore up technological competitiveness with China, Republicans have complained that Speaker Nancy Pelosi has moved forward on key provisions without Republican input. Republicans also expressed concern that proposed monitoring requirements for cryptocurrency transactions would harm the upstart industry, and that the $52 billion in subsidies for semiconductor chip research and manufacturing have not been adequately vetted.
FCC Shuts China Unicom Out of U.S. Market Over National Security Concerns
The Federal Communications Commission (FCC) announced on Jan. 27 that the American subsidiary of China Unicom, a state-owned Chinese telecom operator, can no longer operate in the United States. The agency’s four commissioners voted unanimously to revoke the license for China Unicom Americas, citing national security concerns—namely that the company could access or reroute American communications and engage in espionage. The FCC order requires China Unicom, one of China’s largest mobile service providers, to end domestic interstate and international telecommunications services in the United States within 60 days of the order’s publication.
The decision marks the American regulator’s latest move to safeguard the nation’s telecommunications infrastructure from espionage and comes amid persistent tensions between Washington and Beijing over a range of technology-related issues. Lawmakers and regulators have in recent years focused on the potential security threats posed by Chinese phone carriers, which serve a small number of customers in the United States. In 2019, the FCC voted to deny China Mobile’s application to provide telecommunications services in the U.S., and in October 2021, it revoked China Telecom’s authorization to operate in the U.S. over national security concerns.
China Unicom has been operating in the U.S. since 2002, when the FCC first granted the company permission to provide telecom services. However, the FCC began a review process more than two years ago after lawmakers wrote to the commission in 2019, urging that it review whether China Unicom and China Telecom should be allowed to continue operations in the U.S. given growing suspicions about their access to U.S. communications.
In April 2020, the FCC asked four Chinese telecom companies to defend their U.S. licenses and demonstrate that they are not subject to the influence and control of the Chinese government. And in October 2020, the FCC asked a committee of executive branch agencies collectively known as Team Telecom to probe the safety of allowing China Unicom to remain active in the U.S. The committee gave the FCC the green light to block China Unicom after identifying a “number of significant national security and law enforcement concerns” that could not be mitigated by measures short of shutting the company out of the U.S. market.
The FCC communicated with China Unicom for months regarding its eligibility to continue operating in the U.S. and in March 2021 instituted proceedings to revoke the company’s Section 214 licenses, which allow foreign telecoms to interconnect with U.S. networks. FCC Chairwoman Jessica Rosenworcel said that the move was justified because “at each stage in the process, China Unicom Americas had an opportunity to respond. And at each stage, China Unicom Americas’ responses were incomplete, misleading, or incorrect.” According to the FCC, China Unicom is “subject to exploitation, influence and control by the Chinese government and is highly likely to be forced to comply with Chinese government requests without sufficient legal procedures subject to independent judicial oversight.”
In recent years, Congress has instructed the FCC to “rip and replace” network equipment that could potentially allow foreign telecom firms to monitor sensitive U.S. communications. In November 2021, President Biden signed into law the Secure Equipment Act, intended to block Chinese telecommunications companies deemed to pose national security threats—such as Huawei and ZTE—from obtaining new equipment licenses. The U.S. government added a dozen Chinese companies to a trade blacklist that same month, citing national security concerns.
China Unicom said in a statement in response to the FCC vote that it “has a good record of complying with relevant laws and regulations and providing services and solutions as a reliable partner of its customers in the past two decades.” It asserted that the FCC hadn’t given it “the required due process” and that it would “proactively protect the rights and interests of the company and its customers.” China’s foreign ministry denounced the decision as a “serious violation” of international economic and trade rules.
Nevertheless, the FCC appears to be in favor of imposing additional restrictions on China Unicom Americas such as adding the company to its list of entities ineligible to receive communications subsidies. The agency is also currently reviewing whether China-controlled Pacific Networks Corp. and its ComNet (USA) LLC unit pose similar risks to U.S. national security.
Meituan Expands Use of the Digital Yuan
Chinese food delivery and on-demand services giant Meituan has expanded the way that China’s digital yuan can be used on its platform to make purchases. Beginning on Jan. 26, more than 200 types of offline merchants, from restaurants and grocery stores to cinemas and hotels, can now accept payments in digital yuan—also known as e-CNY. Users can download the digital yuan, or e-CNY app, and link it to their Meituan app to pay for goods and services like movie tickets and taxi rides. Meituan also said it would give out discount vouchers to consumers who pay with e-CNY to incentivize adoption of the currency.
Meituan joins a host of other tech companies that have stepped in to help promote China’s digital yuan as the country’s central bank looks to increase the number of users. Social media and video gaming giant Tencent recently added e-CNY as a payment option to its electronic wallet service WeChat Pay, while online retailer JD.com has begun supporting e-CNY payments for purchases made on its platform.
The number of e-CNY users climbed to 261 million in December 2020 from 140 million just two months earlier, and only stands to increase now that the central bank launched its official e-CNY wallet app for public download in January. For the time being, the digital yuan can be used only in designated pilot cities. While China has yet to announce a formal timetable for the nationwide launch of e-CNY, authorities aim to showcase its use during the Winter Olympics, where foreign visitors will supposedly be able to use the digital yuan in event venues.
China’s trailblazing foray into the development of a central bank digital currency has inspired similar projects in some 87 countries around the world. The approaches taken by the U.S. and China are markedly different, with the former moving slowly in regulating digital currency for fear of upending the status quo while the latter recently banned cryptocurrencies outright, introducing instead a state-led version firmly under government control.
In the long term, some observers believe that the Chinese government will seek to use the e-CNY to strengthen the nation’s status as a top financial center, weaken the U.S. dollar’s dominant global position and expand access to valuable overseas data. At home, the trackable nature of the digital currency will allow the Chinese government to control financial flows and crack down on the disorderly expansion of capital. Though their broader geopolitical objectives may conflict, Beijing and Washington still share similar concerns regarding cryptocurrency’s disruptive nature, especially its ability to impact monetary policy and enable tax evasion, money laundering and terrorism financing.
China Issues New Draft Rules to Rein in “Deepfakes”
On Jan. 28, China’s top cyberspace watchdog, the Cyberspace Administration of China (CAC), issued draft rules for online content providers to regulate “deepfakes.” Deepfakes, a portmanteau of “deep learning” and “fake,” is a form of artificial intelligence used to fabricate photos and videos. Under the draft provisions, companies that use deep learning or virtual reality to alter online content—what the CAC calls “deep synthesis service providers”—will be expected to verify their customers’ identities. Additionally, the CAC will require providers to “respect social morality and ethics” and “adhere to the correct political direction.”
The draft provisions expand on a previous CAC ruling issued in 2019 prohibiting the use of deepfakes to create “fake news.” CAC’s new rules would require companies to establish a user complaint system, and require platforms to suspend or remove apps that violate the provisions. The provisions also prohibit the creation of deepfakes without the permission of the person featured in the content, and require companies to register their algorithms in accordance with new provisions that will take effect March 1.
The new provisions may be motivated partially by government fears of deepfakes being used to spread social critique and anti-government opinions. The United States, the United Kingdom and Europe have all attempted to pass their own deepfake provisions to combat fake news, with limited success. As Jeremy Daum, senior fellow at Yale Law School’s Paul Tsai China Center, noted: “Combating fake news is an ongoing struggle everywhere, and China has been on it for a while …. That includes the fear of people spreading antigovernmental sentiment or criticism of policies.”
Under the new rules, companies will be fined between 10,000 to 100,000 yuan ($1,600 to $16,000) per infraction, and violators may be subject to criminal prosecution. Chinese citizens are invited to participate by contributing comments on the draft proposals by Feb. 28.
China Touts Technology and Attracts Censorship Concerns Ahead of Winter Olympics
The Winter Olympics, scheduled to be held in China from Feb. 4 to Feb. 20, is shaping up to be an opportunity for China to flaunt its status as a tech superpower on the world stage. Countries have long used the Olympics as an opportunity to showcase their country’s innovative capacity. For the 2020 Olympics, Japan built a “smart stadium” where spectators could do everything from measuring restroom traffic at the stadium to watching instant replays on their smartphones. China appears determined to upstage Japan by introducing even more high-tech amenities in the Olympic Village, including cocktail-mixing robots and 5G connectivity throughout the village.
China’s Olympic technology has attracted concerns from groups worried about censorship and surveillance. As part of the coronavirus rules, all foreign Olympians are required to install an app, MY2022, to provide health tracking and coronavirus test results. Researchers at Citizen Lab, a Canadian cybersecurity group, identified data transmission flaws in MY2022 that could allow hackers to gain access to sensitive user data and may potentially violate China’s own recently enacted data security laws.
Olympians have been given some exemptions from China’s usual censorship rules. Chinese officials have announced that athletes would be given cell phones that would circumvent blocks on Facebook, Google, Twitter and other ordinarily prohibited platforms. However, the Citizen Lab investigation uncovered a list of 2,422 political keywords hidden in MY2022 titled “illegalwords.txt.” The list included commonly censored terms referring to the Tiananmen Square Massacre, the Dalai Lama and Xi Jinping. Though Citizen Lab found that the list was not yet operationalized, their report raised concerns that China could “turn on censorship with the flip of a switch.”
Minxin Pei of Bloomberg argues that the costs of severing economic ties to the West are unsustainably high for China.
Aynne Kokas, professor at the University of Virginia, analyzes supply chain security, Chinese government data-gathering in the United States and improving U.S. competitiveness through trade.
Qin Gang, China’s ambassador to the United States, warns that the U.S. could face “military conflict” with China over the future status of Taiwan.
John Thornhill posits in Financial Times that the battle for semiconductors between China and the U.S. is the current era’s industrial Great Game.
Phelim Kine of Politico China Watcher unpacks how a possible Russia-Ukraine conflict may influence China’s intentions toward Taiwan.
Chinese researchers from Peking University’s Institute of International and Strategic Studies assert that China will suffer a greater loss than the United States from tech decoupling due to being isolated by an “alliance of tech democracies” and losing talent to the U.S.
FBI Director Christopher Wray addresses the threats posed by the Chinese government to U.S. national security in a speech at the Ronald Reagan Presidential Library and Museum.
Bryan Clark and Michael Doran of the Wall Street Journal caution that increased military and technological cooperation among China, Russia and Iran may threaten the U.S.-led global order.
Evelyn Cheng of CNBC discusses the implications of the crackdown on Chinese IPOs in the U.S. for investment in tech startups.
In Lawfare, Brady Worthington assesses the U.S. government’s efforts to combat forced labor in Xinjiang through sanctions on Chinese technology and surveillance companies.
In Politico, Bob Davis criticizes the Biden administration’s failure to articulate a coherent strategy for economic competition in Asia and to navigate the politics of trade with China at home and abroad.