Rethinking Technology Transfer Policy toward China

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Executive Summary

China’s commercial and technology practices create strategic risk. China will not change them unless pressed. The Western response is inchoate and technology denial measures (such as export controls) are inadequate to protect the West or make China change. The greatest leverage will come from a collective approach to deny China the ability to export the products of illicitly acquired technology, accompanied by a collective, coordinated, and sustained diplomatic effort to compel China to become a responsible participant in global markets.

Rethinking Technology Policy for China

Technology is increasingly important as an element in international relations and a key determinant of national power. The ability to create, acquire, and use technology to build economic and military strength is similar to how industrialization reshaped trade, diplomacy, and war in the 1890s. This makes technology an arena for international competition, particularly with China, and this competition is forcing the United States and its allies (the “West”) to reconsider their technology relationships with China.

This restructuring comes after 40 years of building a symbiotic technology relationship with China. Western investment, trade, and education, combined with China’s immense human capital, espionage, and supportive economic policies made China the second-largest economy in the world. If China had been willing to follow international norms for state relations (which it may not regard as legitimate) and commercial practice, it may well have become the largest economy, but its authoritarian governance, disregard for human rights, and predatory trade behavior raise unavoidable foreign policy concerns.

Managing technology transfer to China is a central strategic consideration for Western countries. The long-term problem is how to rebuild the technology and trade relationship with China to make it fair and trustworthy. The near-term problem is to identify concrete steps for China to take to repair relations, and when it chooses not to take them, find ways to increase accountability for its misbehavior.

This paper lays out recommendations that build on existing precedents. The first is to deny China the benefits of illicit activities rather than attempting to deny access to technology. The second is to extend the notion of buying from trustworthy suppliers that was developed for the 5G debate to other technologies besides 5G. The third is to create mechanisms to hold China accountable when necessary. These policies will be more sustainable and more effective in the complex, commercially interconnected technology relationship that exists today.

China was not held to account when it opened to the West, given its poverty and because of the economic opportunities it offered. But what were acceptable costs of doing business with China in the twentieth century are no longer tolerable. Redefining how the West interacts with China is a problem that requires a coordinated and comprehensive diplomatic response. A coherent policy would have four elements:

  1. An explicit and consistent message to China’s leaders and to the international community on how China must change, and persistent iteration of this message by allies as part of a coordinated diplomatic effort
  2. Measurable reductions in illicit or predatory behavior that allow countries to assess progress (or the lack thereof) by China
  3. Further efforts to accelerate Western innovation, which in some instances will require continued interaction with Chinese firms and researchers[1]
  4. Policy and regulation in Western countries that allow continued interaction with China, subject to measures that restrict China’s ability to exploit Western markets and resources and that create incentives for China to change in ways that will ultimately allow it to participate responsibly in the global economy

So far, however, the Western response to China on technology competition has been incomplete. Implementing a coordinated and comprehensive approach will take time, and any effort should begin by demonstrating to China that unacceptable behavior will incur costs.

Assumptions about China

A discussion of the technology relationship with China should begin with four assumptions. First, China will remain a competitor for the foreseeable future and will ignore international norms for commerce, espionage, and sovereignty when it finds them inconvenient. China is not going to end its efforts to reshape the global order (by which it means a world ordered by the Chinese Communist Party). China’s nonmarket policies and predatory commercial practices distort the global economy and create strategic risk to Western nations.

Second, the West cannot “decouple” from China, nor can China decouple from the West. The global economy is too interconnected for Cold War-style bifurcation. Decoupling is not achievable, even though China itself wants to decouple. While China remains reliant on Western technology, markets, and finance, significant dependencies have developed between Western companies and Chinese suppliers and markets.

Third, China will make progress in developing technology irrespective of Western constraints. At best, the West can slow this progress. Some of China’s progress will be the result of espionage and intellectual property (IP) theft by China, to which the West needs to respond more forcefully, but it also reflects China’s significant investments in technology and science. A reliance on export chokepoints offers limited prospects for success in a contest that will last years, if not decades.

Finally, global distrust in China, its intentions, and its technology, will continue to grow, although this distrust is not yet sufficient in many countries to counter Chinese influence and incentives. China as a supplier is more dangerous than China as a customer. Distrust does not ensure support for Western policies, but it will frustrate China’s efforts to build a Sino-centric world order.

If these assumptions are correct, they point to the need to seek to change China’s behavior while defending against predatory practices that include mercantilist policies that favor Chinese companies, unacceptable state-backed lending practices, illicit subsides, and industrial espionage. Against these practices, technology transfer restrictions such as export controls are insufficient unless embedded in a comprehensive diplomatic program to set expectations for China and to penalize depredation until China can be persuaded to change.

The categories of irresponsible behavior for which China needs to be held accountable are its illicit support for Chinese companies, the obstacles it has imposed on foreign companies operating in China, and its rampant practice of commercial espionage. There are numerous examples in all three categories of behavior, often used in combination, over the last 20 years. Changing these behaviors requires a significant change to Chinese economic policy that will be difficult to attain, but without change, technology and trade with China will continue to harm Western interests.

The acquisition of technology using illicit or coercive techniques, such as requiring joint ventures or the forced transfer of IP, has been part of doing business in China since the early 1980s. Foreign direct investment and joint ventures—which are often coerced—are a leading source of technology transfers. China also takes advantage of Western patent systems, where patents are published, to gain access to technologies. China similarly uses investments in Western countries to gain access to technology. The many techniques used for the illicit acquisition of technology are indicative of China’s larger disregard for international norms and law.

Huawei is the best-known case among many. By supporting Huawei financially and through espionage, the Chinese government has built powerful global company, gained access to telecommunications infrastructure in ways that have provided intelligence benefits, while driving Western competitors from this strategic market, what China would call a “win-win.” Even if Huawei did not engage in illicit activities to gain commercial advantage, it would still be untrustworthy given China’s disregard for international conventions. Other examples where a blend of government subsidies, espionage, and the theft of IP have been used include rail cars, aircraft, fiber-optic cable, house paint, high-speed trains, and semiconductors.

Other examples can be obtained from victims and intelligence sources the world over. Australian officials reported that there were more than 200 attempts to hack the networks of an Australian mining firm during contract renegotiations with China. These attempts only stopped after the Australian company’s internal material had been extracted. The United Kingdom’s Security Service has warned that Chinese intelligence officers have approached UK businesspeople at trade fairs and exhibitions offering cameras and memory sticks, the latter of which contain malware that provides China with remote access to users’ computers. In a competition over telecommunications infrastructure, a European supplier found its bid undercut by a Chinese company offering a significant discount. Chinese investors will appear at companies of interest and offer funding in exchange for access. CSIS has published lists that detail many more examples.

China Has Not (Yet) Peaked

Some argue that China has “peaked” and will pose less of a threat in the future, and that this should allow for a return to the status quo ante when Western businesses were not as constrained. This is wishful thinking. China is unlikely to end its efforts to replace the international order with one more to its liking and which it can more easily control.

Nor can China easily give up the mercantilist practices it has relied on for decades to build its economy. Indeed, as China peaks, this will create even more pressure on the Chinese Communist Party (CCP) to expand illicit activities. There are indications that China’s leaders are increasingly uncertain about its inevitable rise to global primacy, but having gone up that ladder, Xi cannot easily climb down.

China’s export-driven economic model for growth relied on a surplus of labor combined with Western capital and technology, but this model has reached its limits. China has massive misallocation of capital, immense debt, and a stifling political culture that undercuts indigenous innovation. But in similar circumstances, the Soviet Union took 45 years to collapse, and Xi has carefully studied this to avoid a similar fate. China remains a competitor for global influence and is willing to spend and spy to achieve this.

“De-Risking” Requires Ending Tolerance of Chinese Behavior

An effort to balance strategic need against commercial pressures has led to calls for “de-risking,” a term derived from work on illicit financial activities, such as the efforts of the Financial Action Task Force. In this context, it means restricting or ending commercial relations with suspect entities to avoid risk. De-risking is a step in the right direction, since it opens the question of China’s trustworthiness as a supplier, but it needs to be embedded in a comprehensive diplomatic approach that manages China’s access to Western markets, capital, and IP.

The economics of post-1990 globalization drove a deep integration with China at a time when political risks seemed small and there was optimism about China’s future direction. From the start, the agreements, norms, and practices that shaped commerce among countries were less influential in a China that had been hermetically sealed for decades. How much to move in the direction of international practice was a subject of debate in China after its opening to the West, pitting “integrationists” against those who preferred a nationalist, Sino-centric policy as more fitting with China’s Leninist roots. That debate was resolved with the arrival of Xi Jinping.

China’s huge and cheap labor force was a magnet for Western companies. Industries relying on less-skilled labor such as textiles, migrated to China. China has benefited from access to the West, and the West has benefited from the income derived from China and access to China’s workforce. China as supplier and market for the West was a reciprocal relationship, but with each side following different rules.

The 40 years since Deng Xiaoping opened China to the West have seen the rise of globally interdependent and interconnected innovation and supply chains, with China being “the world’s factory,” as well as a source of talent, and a massive market. Chinese companies have been interwoven into Western supply chains, and Western companies are deeply attracted to China as a supplier and as a market despite China’s efforts to displace them. Careful scrutiny of this relationship is long overdue, but mutual interdependence complicates efforts to change it.

Letting China into the World Trade Organization (WTO) without holding it accountable for not observing its commitments was a strategic blunder. China uses illicit subsidies to support its own firms, coercive restrictions on Western companies doing business in China, and private and governmental commercial espionage to build its companies and provide them with competitive advantage in global markets. While counterarguments may suggest that many countries engage in such practices, China’s illicit behavior occurs at an unprecedented scale.

In the last few years, Western countries have assembled a collection of measures, including restrictions on Chinese investments, limits on Chinese technology in infrastructure, and export controls. Export controls have been central to this, but do not fully address China’s exploitable technology behaviors. The Wassenaar Arrangement, the centerpiece of multilateral controls on industrial goods, is 27 years old. It is hobbled because Russia is a member. Technological change also challenges the scope of Wassenaar’s controls. Wassenaar lacks the strategic underpinnings that led to its creation. It was a response to the end of the Cold War and was designed for that context. More importantly, it does not address a key problem with China: IP theft. While it is not in the Western interest to dismantle Wassenaar, it needs to be supplemented by measures that go beyond export controls.

The problem is to reduce China’s role in important supply networks and restrict its ability to profit from purloined technology. China is not going away as either a market or a supplier. Global supply chains will not bifurcate. China remains attractive as a market for Western business interests. This creates an undercurrent of dissent from current Western restrictions on technology transfer and investment and a case can be made that overly extensive controls damage the West as well as China. Some in the European and U.S. business communities are increasingly vocal on the need to dial back restrictions on China. These restrictions may not be politically sustainable in a global economy where China has an irreplaceable role as supplier and market.

It is well past time to hold China accountable to international norms for commercial relations among states, including its contravention of its WTO commitments and its espionage and IP theft (incidents of Chinese espionage far outnumber those by any other country). Since one of the reasons for China’s growth have been its willingness to ignore norms, changing this behavior will not be an easy task. An intermediate goal of limiting the damage from China’s misbehavior is within the grasp of leading economies. The best policies will manage China’s access to protect Western economies while creating incentives for China to change. Goals to shrink China’s role in global supply chains and to constrain its predatory commercial behavior are achievable. In this contest, Western countries have an advantage if they use access to their markets as a coercive diplomatic tool in the way China now uses it.

New policies need to prevent China from competing on the basis of illicitly acquired technology. Useful precedents can be drawn from the development of regimes such as the Financial Action Task Force and the Missile Technology Control Regime, which began as an initiative in the G7 (the Wassenaar Arrangement itself grew out of G7 talks on dual-use goods). Both provide models for collective action among a group of like-minded nations to address a major international problem. The goal is to articulate norms for responsible technology relations among states and define penalties when they are not observed.

Technology Transfer and Export Controls

There are multiple avenues for technology transfer, including investment, education, espionage, and scientific cooperation. These create risks that fall outside of Wassenaar or the WTO. These are the most potent avenues for technology transfer, and there is a great need to develop new policies. To date, the Western response has been too limited, with an over-reliance on denying activities in ways that China can circumvent and that do not work to make China a responsible participant in international affairs.

Espionage is difficult to address, as international law treats spying as a kind of sovereign privilege. Likewise, remedies created for spying on a much smaller scale than China’s actions, are inadequate. Estimates of the long-term cost of commercial and technological espionage run into the billions of dollars, and China has now added the theft of massive quantities of personally identifiable information, political coercion, and influence operations to its espionage activities. Current law and policy are inadequate to address Chinese espionage.

The West urgently needs to develop new tools to slow Chinese espionage. Traditional remedies against espionage have limited applicability in this situation. Twentieth-century precedents, such as the U.S.-UK campaign to eject dozens of Soviet technology collectors (from the KGB’s “Line X”), are suggestive but have been undercut by the success of cyber espionage. Expelling case officers, arresting agents, recalling ambassadors, or even closing consulates are insufficient against China because of the scale of its espionage efforts and its exuberant use of hacking. Counterintelligence efforts struggle to keep up with the volume of espionage, especially cyber espionage. Simply urging better cyber defenses will not be enough since most defenses can be circumvented by a persistent and well-resourced opponent. The best response to espionage is to deny China the fruits of its success as part of a collaborative program of work among allies.

A greater challenge lies in limiting Chinese access to research. Limiting this avenue of technology transfer could create difficulties, since China will accuse such efforts of being racially motivated and Western research institutions and companies that benefit from Chinese participation will suffer and complain. Collaborative research has been immensely useful to both sides and will be increasingly important as China’s contributions to science increase. China, of course, denies allegations of misbehavior, asserts equivalent behavior by the West, and claims that objections are driven by Western envy or racism.

The problem with collaboration is that China obtains technology through joint research, builds indigenous capacity, and then engages in illicit practices to dominate a market. Ideally, Chinese companies and researchers could continue to collaborate without the risk of IP theft. As long as China can profit from stolen technology, this risk is too great (arguments from some companies that they are aware of the risk and can manage it should be greeted skeptically given China’s successes). In general, however, and based on experience that dates back to the Reagan administration, the policy first laid out in NSDD-189 is still justified for unclassified fundamental research. Fundamental research should not be subject to export restrictions, as the benefits to the United States and its allies outweigh the risk of Chinese participation and if there are espionage concerns, this calls for an expanded counterintelligence effort.

The Limits of Export Controls

The final category for action is export controls, which have been reenergized by competition with China. That export controls are a tool of foreign policy has been obscured in the over-militarized discussion of how technologies may improve China’s military capabilities. China’s size and spending means it will improve militarily regardless of Western action. China’s announced policy of “military-civil fusion” further complicates any effort to manage technology transfer. The central foreign policy problem is not slowing China’s military growth, but countering and changing its behavior.

Export controls are built on the edifice of the Cold War. The political factors that underpinned these controls no longer exist. The global economy was markedly different during the Cold War, creating an environment that enabled control. There was a clear bifurcation between opponents, with little trade or travel between them. Income, research, and industry were concentrated in a handful of advanced Western economies. None of this exists today, and some NATO members may be tempted to return to closer relations with China when the war in Ukraine ends.

While export controls on weapons of mass destruction and munitions remain useful, export controls on many dual-use goods, particularly commodity goods such as semiconductors, have less utility. China, while it has extensive problems, is not the economically moribund USSR. The Western and Chinese technology sectors are deeply interconnected, creating an interdependence that technology transfer polices cannot manage. If a technology is strategically important, an opponent with an advanced economy will not simply give up. Export controls need to be buttressed by a larger response to achieve foreign policy goals in technology relations with China.

Export controls on industrial, dual-use goods can be counterproductive because other countries respond by creating substitutes or finding replacement technologies. The result is to undercut Western technology leadership. Huawei’s announcement that it will use Chinese-made 5G chips for its phones illustrates this. Even though these chips are not equal in performance or price, they are good enough to circumvent export controls. A few other examples show the damage export controls can create:

  • In the 1980s, a Japanese firm sold machine tools that let the Soviet Union build quieter submarines. The United States imposed tight controls on its machine toolmakers, and a few years later, most U.S. toolmakers, unable to export, had exited the business, leaving the United States dependent on foreign suppliers (including China).
  • In the 1980s, the United States allowed China to launch U.S. satellites. China learned from this how to improve their space launch capabilities. The United States responded by blocking not only exports of U.S. satellites, but also their components, imposing onerous licensing conditions on European satellite makers. In response, the Europeans created their own component makers to replace U.S. parts. U.S. companies permanently lost market share, and some smaller U.S. suppliers exited the satellite business. China accelerated its space efforts and now launches more satellites than the United States.
  • Until 1999, the United States restricted software encryption exports. The effect was that U.S. software makers were being displaced by foreign companies in the emerging internet market until export controls were removed.
  • In the early 2000s, the United States tried to restrict Chinese access to high-performance computer chips (CPUs). The Department of Commerce even talked of keeping China “two generations behind.” In many cases, older chips can be substituted for the most modern ones. China’s access to high performance computing was not blocked and one result was to inspire China to try harder to build its own chip industry.
  • U.S. efforts to restrict access to drone technology led other countries to develop entire industries (Turkey’s Bayraktar is an example). Some analysts also include expanded controls on advanced night-vision devices on this list.

If the intent of export controls on China is to “choke their military technology,” they are unlikely to succeed. Cold War strategy accepted that the Soviets would always have a quantitative advantage and that NATO should restrict access to the technologies that provided its qualitative advantage. Cold War export controls struggled to maintain a marginal advantage over a numerically superior opponent. Export controls will not change the military balance between the United States and China, which is determined by force size, force capability, doctrine, and strategy.

Thinking that there is a technology that guarantees military advantage, such as artificial intelligence (AI), is a misunderstanding of how technology affects warfare. Technology provides advantage when it is rooted in effective doctrine and strategy. Other factors shape outcomes, such as range, lethality, speed, strategy, tactics, and, of course, political will. A single technology is unlikely to change outcomes in favor of China or the United States.

Export controls are a relic. Export controls on industrial goods—“dual-use” controls—are often counterproductive, because other countries create replacement technologies while U.S. tech leadership is undercut, something that is easier to do in the interconnected twenty-first century. The result can be a reduction, often permanent, in U.S. companies’ market share of the controlled technology. Slowing China’s progress is a good goal, but only if done in a way that avoids simultaneously choking Western industry and incentivizing opponents at the same time. 

There are export controls that make sense. Prohibitions on arms sales to China by the United States and its allies reman crucial. Export controls on proliferation-related technologies, while not effective against China (which is doing quite well in missiles and weapons of mass destruction without U.S. help), are important for slowing Iran and North Korea. Given the possibility of military confrontation, unfettered technology transfer to military end uses or end users in China would be foolhardy. But export on controls on most dual-use goods, particularly commodity items like chips, harm the United States. 

Reorienting Technology Relations with China

Continued trade with China (either directly or indirectly) will remain a fact of life, but the West can no longer afford to accept China’s behavior as the cost of doing business in a giant market. After 40 years, this approach has destroyed some Western industries and still harms others. An effective policy begins by asking what the foreign policy goal is for relations with China, and what the tools are to achieve it. Since China will, barring unforeseen turmoil, remain one of the largest economies in the world, and since global interconnection is unavoidable, the goal should be to deny China the benefits of its irresponsible behavior and ultimately to persuade it to change and become a responsible participant in the global economy.

Given technology’s heightened importance in international relations, an effective policy would address all avenues for technology transfer in a coordinated fashion among Western allies and in the context of a larger diplomatic effort to manage and change Chinese behavior. Unlike the Cold war bifurcation, China will remain an important part of the global economy. Similarly, China remains dependent on Western technology, research, and markets (despite its blustery claims to the contrary). Western leverage over China principally derives from changing the terms of China’s access to Western markets and technology.

Western countries will need sustained and coordinated engagement based on common policies to deny China the benefits of its irresponsible behavior and to persuade it to change and become a responsible participant in the global economy. To give weight to this effort, diplomacy should be accompanied by measures that selectively deny China access to technology and to markets. Change will require restrictions on access and penalties for irresponsible behavior. The alternative is continued economic erosion.

Given technology’s heightened importance in international relations, an effective policy would address all avenues for technology transfer in a coordinated fashion among Western allies and in the context of a larger diplomatic effort to manage and change Chinese behavior.

The Need for Better Public Metrics

Agreement with an antagonistic opponent where verification cannot be measured in concrete terms is useless. Concrete verifiable measures would involve observable change and measurable commitments. The number of cyber espionage incidents or arrests of Chinese spies is quantifiable. Illicit subsidies, if they can be discussed, are also quantifiable. Western companies will report (perhaps privately) coercive or harmful actions taken against them in China. Other harmful activities such as IP theft and its use to develop competing products can at times be more difficult to identify, but this could be a task for intelligence agencies or company reporting.

The evidentiary threshold for China’s actions cannot be too legalistic or mirror too closely the cumbersome requirements used for dumping cases or the WTO. This would be self-defeating and reinforce China’s penchant for “lawfare.” Given the consistent pattern of behavior over decades, a different threshold needs to be applied. This could include decreased support for state-owned enterprises, fewer illicit obstacles to foreign companies operating in China (including coercive extraction of IP), and a decline in commercial espionage, which can be detected in many instances and quantified.

One useful step would be for governments to commission research on loss form espionage and IP theft. Some of the information is publicly available, but much resides in the records of intelligence agencies. Simply asserting that there is gigantic loss and that this creates strategy risk is not enough, and part of a diplomatic strategy will require developing a “bill of attainder” to win support.

Engaging with China

Western countries need sustained and coordinated engagement with China. The engagement should be regular, occur at all levels, and occur continuously rather than sporadically or as an appendage to other discussions. It should be based on common policies to deny China the benefits of its irresponsible behavior and ultimately persuade it to change and become a responsible participant in the global economy. 

A precedent could be drawn from the Western effort in the 1990s to persuade China not to sell missiles. This effort took several years of high-level engagement and a constant reiteration of the need for responsible states to observe the norms developed for such transfers in the Missile Technology Control Regime. The issue was raised with China officials at every level, on every occasion, and during every topic of engagement. A talking point on proliferation was appended to every senior official’s statement. Most importantly, it was not just one nation appearing to call for change, it was a collective and repeated action every time a Western leader engaged with China for several years. This is why a clear and repeated message on desired change is essential.

The drawback to this precedent is that this is no longer the China of the 1990s. Nor were missile sales as important to China as is illicit acquisition of technology and predatory trade. China has become more powerful and more ideological, making it less likely to respond to diplomacy. But the precedent of setting clear expectations for Chinese behavior and making these expectations a central part of every diplomatic engagement with Beijing by all allies (not just the United States) remains valuable. While this will take years to implement, China is more likely to respond if the West works collectively to avoid market distortions and ensure a level playing field globally.

A second precedent would be the 2021 adoption of UN norms for responsible state behavior in cyberspace. While the cyber norms themselves suffer from a lack of accountability, articulating expectations for responsible behavior lays the foundation for collective action and for making sustained engagement on a specific goal routine expectation. In the Group of Governmental Experts negotiations that defined the 2021 norms (led by an Australian chair), China was the lone holdout, a position it was unable to sustain despite efforts to find even one country to side with it. The final round of negotiation came the day before a visit by President Xi to the United States, and the threat of embarrassment ultimately secured China’s assent (albeit temporary) to limit its commercial espionage.

A dilemma for negotiation is China’s penchant for ignoring an agreement when it no longer serves its interests. Hong Kong’s “one country, two systems” is an example of this. The WTO is another. The 2015 agreement with the United States to end commercial espionage lasted only a few months before economic and political necessity led China to ignore it.

Any engagement with China should be approached with an understanding that success will be difficult to obtain. Authoritarian regimes that hold a grudge (and China believes it has been denied its rightful place at the center of the world stage), disrespect opponents, reject their values, engage in military buildups, and believe that the international order should be restructured, are not good candidates for quick agreement. It is always difficult to extract concessions from China, and now it is even more so. It is not even clear that China is willing to begin a serious negotiation process. In previous negotiations, China has recognized Western impatience and simply delayed in the hopes that an administration would come to power on the U.S. side that would make more concessions. Erratic engagement will lead China to conclude that the West is not serious. This is why engagement needs to be regular, occur at all levels, and become continuous rather than sporadic. This is the kind of pressure that can be difficult even for China to ignore.

Limiting China’s Ability to Exploit Western Markets

Engagement should be accompanied by economic pressure. There is no incentive for China to change if it continues to benefit without penalty. To give weight to a diplomatic effort, it should be accompanied by a collective response that denies China the benefits of market-distorting behavior.

The existing mechanism for managing unfair trade practices is within the WTO. The WTO is an unwieldy instrument at best, and like the Wassenaar Arrangement, it is hampered by the participation of rivals (China in the WTO, Russia in Wassenaar). At the time the decisions to admit Russia or China into these were made, it made sense as part of an effort to incorporate the two communist powers into the global order. That time has passed. While the effort to reduce the tariffs that motivated the WTO and its predecessor has been largely successful, it has not done as well in dealing with anticompetitive practices. The WTO itself recognizes the need for reform. A legalistic approach in the WTO to counter China will be counterproductive. This is an organized course of action by China that has lasted for decades, not a single case. Western countries should return to the intent and spirit rather than the letter of the WTO agreement.

One possible vehicle for this is the WTO’s national security exception, Article XXI. There are three circumstances when the exception may be applied. One of these is that it recognizes that WTO commitments “do not prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests,” including “such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment.” Another exception is that WTO commitments do not prevent any contracting party from taking any action in pursuance of its obligations under the UN Charter for the maintenance of international peace and security. While some in the trade community may object to this broad interpretation of the exception’s scope, its use in the WTO is a justifiable response to China’s actions and the failure to confront China in the past.

Article XXI would justify limitations on Chinese technology imports, so that China does not benefit from IP theft, predatory trade practices, or gain strategic advantage though its efforts to dominate markets. It could be used to address challenges posed by China’s non-market economy, which distort the global economy. China should not be allowed to freely participate in Western markets when it ignores their rules. Changing this will require imposing consequences for irresponsible behavior.

An immediate objection is that evidence of China’s actions may be anecdotal or incomplete. But the national security exception allows broad latitude in its application. It is ironic, of course, that China could choose to invoke the dispute resolution procedures of an organization whose rules it has ignored, but for the West, WTO membership does not include a commitment to economic suicide. Countering China will be a test for the WTO and a useful indicator of the body’s future utility.

Steady diplomatic pressure accompanied by skillful use of existing trade authorities (such as Section 301 of the U.S. Trade Act of 1974, used to address concerns about IP theft; forced technology transfers; and other unfair Chinese practices) can limit damage from China’s behavior. Unless there are observable changes, the United States and its partners will need to hold China accountable for its trade commitments and begin to treat Chinese companies the way China treats Western firms.

China’s recent development of a commercial airliner is an example of how market access restrictions can be applied. Before 2000, China’s Soviet-supplied factories made shoddy aircraft. When China opened its market, it made coproduction part of the requirement for access and for sales to the China air market. Coproduction taught Chinese companies essential production know-how. China will be tempted to use subsidies, pressure on domestic airlines, and barriers to foreign companies to give their manufacturer an edge in China and in the global market, as it has done for other technologies, and the only effective answer is to restrict exports. China will likely retaliate in some way, but this is the cost of confrontation. Rather than deciding on inaction to avoid retaliation or a trade war, the strategic interest of Western countries is to hold China to account. 

A Diplomatic Solution

Western countries will need sustained and coordinated engagement based on common policies to deny China the benefits of its irresponsible behavior and to persuade it to change and become a responsible participant in the global economy. To give weight to this effort, diplomacy should be accompanied by measures that selectively deny China access to technology and to markets. The alternative is continued economic erosion.

China’s dependence on the West for technology and markets means China needs the West as much as or more than the West needs it. This dependence provides leverage for what promises to be a long contest. The only real leverage on China is to deny it the benefits of irresponsible behavior and, ultimately, to persuade it to change and become a responsible participant in the global economy. This is best achieved with sustained and coordinated engagement based on “policies designed to restore a level playing field and bring about fair competition . . . in concert with like-minded countries [where] we will need the huge market of like-minded countries together to ‘evolve’ simultaneously.”

This strategy will not always fit well with the institutions and rules developed in the twentieth century, but many have noted that the nature of international conflict has changed. China has identified and exploited soft spots and loopholes and is unlikely to stop. To compete, the West needs to do the same when it comes to blocking illicit or predatory activities. The goal is not to stop China from growing but to change its behavior. A revised policy should counter nonmarket policies and practices rather than rely on technology denial by restricting cooperation and market access (as China does).

Redefining how the West interacts with China is a diplomatic problem and requires a coordinated and comprehensive diplomatic response. So far, however, the Western response to China on technology competition has been somewhat incoherent. A more coherent policy has several elements: a clearly articulated message, constant iteration, desired outcomes that are clear to China, and measures to reduce damage to Western economies and provide security from China’s irresponsible behavior. A new approach should use, but not rely on, existing institutions such as the WTO and Wassenaar; it should expand collective agreement on both countermeasures and ways to improve competitive strength.

A coordinated effort should begin with a comprehensive and public assessment of the scope, methods, and effect of Chinese espionage and IP theft. It should include a review of G7 national laws for the prosecution of espionage and IP theft and provide law enforcement agencies with the equivalent necessary legal tools. The G7 should agree on areas of greatest risk, including digital technologies, pharmaceuticals, aerospace, materials, and manufacturing. It should collaborate on improving IP protection mechanisms, including patent and copyright enforcement, trade secret protection, and licensing arrangements. It should also include efforts to increase supply chain diversification to reduce dependency on China and accelerate market trends to reduce investment in China. Given cyberspace’s central role in illicit Chinese activity, the G7 should develop and share best practices for cybersecurity, including threat detection, incident response, and information sharing. Furthermore, it should require businesses, research institutions, and government agencies to adopt strong cybersecurity practices. 

A more coherent policy has several elements: a clearly articulated message, constant iteration, desired outcomes that are clear to China, and measures to reduce damage to Western economies and provide security from China’s irresponsible behavior.

The G7 should expand dialogues with Chinese counterparts to address concerns related to espionage and IP theft and engage with China to encourage adherence to international norms and agreements. This diplomatic effort should be accompanied by G7 efforts to reform and strengthen institutions such as the WTO in light of China’s rise and confrontational policies. All of these efforts should be coordinated among G7 members and other important Western economies for dialogue and eventual negotiation.

Moving Ahead

Xi Jinping’s efforts to move China to the center of the world stage face many obstacles. One of them is that China is still dependent on the West for innovation and education, though this dependency declines every year. This means technology can be a choke point, and restricting access to technology can slow Xi’s effort. The United States, Japan, and others have increasingly tightened restrictions on technology exports, but bifurcation is neither possible nor in the Western interest. The West can mitigate and manage the risk of technology transfer and trade with China using regulation, negotiation, and countermeasures. The best approach is an incremental and flexible approach to protect Western economies. New restrictions on emerging technologies must map to innovation processes if they are to do more good than harm.

China’s policies rightly raise alarm in Western capitals and with Western companies. One result of this is a reversal of the integration of China into the global economy and a renewed interest in restricting technology transfers. G7 leaders have rightly concluded that “a growing China that plays by international rules would be of global interest,” but China will not change its behavior in the near term. Its leaders are committed to the pursuit of China’s dominance, and it has gotten away with ignoring its WTO commitments, employing illicit subsidies, and engaging in massive commercial espionage for decades. There are also no incentives for it to change (a key point to consider in developing a new strategy), and the current efforts do not create any incentives.

The assumption that guided this white paper is that China is not going away. Even after Xi’s departure, China will remain one of the great powers in a new multipolar and interconnected world. The question is how China and the world will interact and structure their relations. A return to the status quo ante that shaped relations for decades would still entail illicit practices. The issue for foreign policymakers is therefore to define a responsible China and use diplomatic and economic tools, including technology transfer constraints, to move China in that direction. This is not economic warfare, nor an effort to restrict China’s growth or maintain U.S. leadership. It is a reaction to the risks created by China’s behavior. Until that behavior changes, the West faces continued losses.

G7 nations have begun to take steps to reduce all avenues of technology transfer to China, including limiting Chinese investment in sensitive technologies, reducing Western investment in China, restricting scientific partnerships, expanding counterespionage efforts, and coordinating with like-minded states on export controls. These initial steps need to be expanded, accelerated, and organized into a comprehensive and coordinated campaign that can be sustained for years. The most important consideration is the need to maintain Western technological strength and economic growth. This is more important than restricting China’s access to technology. Given the need to restructure the technology relationship with China, the question for policymakers is which policies strengthen the Western capacity for innovation, since innovation is the cornerstone of future power.

James A. Lewis is a senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, D.C.  

This white paper was made possible by support from the Japan External Trade Organization.

[1] Such measures include support for research and development and industrial policy to supplement investment in strategic industries. These measures are not the subject of this paper.
James Andrew Lewis
Senior Vice President; Pritzker Chair; and Director, Strategic Technologies Program