Tech Crisis with China

Chinese tech companies have fallen under the hammer of the Trump administration. Huawei, ZTE, Alibaba, Tencent, Baidu, Hikvision, and others all face sanctions and other measures intended to keep them out of the U.S. market and damage their global standing. These U.S. actions extend the growing restriction on tech transfer to China and might create a “tech rupture” between the two countries, but this was inevitable.

Q1: Why is the United States doing this?

A1: The United States is taking action against an aggressive and unconventional challenge from China. China’s leaders want to replace the international order set up after 1945 with one that is China-centric and led by China. According to the FBI and government agencies in Europe, Australia, and Japan, China is engaged in a massive espionage campaign against the United States and other Western countries to steal technology and give Chinese companies an economic advantage; it has started a global influence campaign to persuade the world of China’s technological prowess and inevitable rise; and it is home to the world’s largest domestic surveillance system, which relies on information technologies and apps to monitor Chinese citizens. China may be trying to extend this domestic surveillance system globally. These three activities all pose national security risks to the United States and friendly countries.

China has made very few concessions in the “trade war,” and U.S. companies face considerable obstacles to doing business in China. Facebook, for example, is not allowed to compete in China. The Chinese government dislikes the idea of reciprocity in the treatment of foreign firms and, until recently, has been able to get away with unequal treatment. U.S. firms have been willing to put up with this because of the pull of China’s vast market, but the overall effect has been to damage the American economy and those of Europe and Japan. Many companies argue that the financial benefits of doing business in China still outweigh the risks, but the Trump administration has taken a sledgehammer to this idea when it comes to Chinese tech companies. In China, if the government asks for help with spying or propaganda, Chinese companies are obligated to cooperate and have no appeal or recourse. This legal requirement is a cause of concern for the United States and makes it suspicious of any Chinese tech.

Q2: What is the effect of recent actions?

A2: The recent actions are bold and showy but have mixed effect. The biggest damage is probably to Chinese tech companies’ “brand,” since the United States has now publicly painted them as untrustworthy. Huawei and ZTE have been banned from the U.S. market, and a few other countries have taken similar steps. Chinese company ByteDance is being pressed to sell its subsidiary TikTok, which has a huge presence in the United States. Social network WeChat has a much smaller presence and is used mainly by Chinese resident in the United States; the effect on the company will be small, especially as the administration seems to have excepted Tencent’s investment in the U.S. video game industry. Banning TikTok and WeChat from app stores will hurt China, but Apple will also be hurt if it cannot sell WeChat from its App Store. This may only accelerate China’s effort to eliminate Apple from its domestic tech market.

Clean Network, an initiative announced by Secretary of State Pompeo this week, does not (yet) have the force of law. Some of its measures, such as calling on U.S. companies to avoid Chinese cloud service providers or undersea cable companies, make sense. These are well-known avenues for spying. Others, such as the confusing ban on apps, only show the administration is still wrestling with how to deal with the new digital economy and are symbolic more of American displeasure than actual restrictions. It is an effort to keep TikTok from simply moving offshore and continuing to service the U.S. market. It presents an interesting regulatory problem—how do national rules catch a foreign-sourced, globally available app? The administration’s solution, banning the user agreement that is part of any download, could be challenged in court and companies might be able to find a workaround. Other initiatives, such as the “Blue Dot Network,” which grew out of a G20 effort calling for the use of safe, certified technologies have more international support.

The economic effects are mixed. Chinese companies are not leaders in cloud service market and being cut out of the U.S. market, the world’s biggest, does real harm. Huawei and ZTE are struggling, but Chinese government subsidies will keep at least Huawei in business until it can recover. TikTok is a global company, and while the United States was its most valuable market, it will continue to be profitable (as long as more countries don’t follow India and ban it entirely). Measures to restrict Chinese access to U.S. financial markets will do immediate harm but will lead to a further dilution of American dominance of global finance as Chinese companies move to list and trade outside the United States. 

Q3: Can China retaliate?

A3: The Chinese government is very sensitive to perceived slights and will need to take some action in response. Its options are more limited than many will admit. It will look to punish U.S. companies, but it will avoid punishing those upon which it is still dependent (like the semiconductor industry). Its previous restrictions limit its options—U.S. social media companies don’t operate in China, and China still depends on U.S. chips and software. And repeated efforts by the Chinese government to force Chinese companies and government agencies to buy only Chinese software (in complete contradiction to China’s World Trade Organization commitments) have failed because its business software is still not world class. It will look for those areas of trade with the United States where it can ban without harming China’s interests, such as agriculture, consumer goods, and entertainment. It will accelerate its investments and espionage to make China technological independent.

Q4: How will the rest of the world react?

A4: The general statement heard in other countries is a desire to avoid being caught in the middle of the clash of two giants. Security partners will impose some complementary measures. A few countries will take advantage of the opening created by U.S. actions to expand sales in China. Distrust of China is growing globally—actions in Hong Kong, the domestic surveillance system, and other Chinese actions have raised suspicions in many countries, and many governments are increasingly concerned about China’s predatory economic and trade policies. This does not immediately translate into support for U.S. actions—with a few exceptions (such as 5G), the administration has done a bad job of bringing allies and others along to share its views and take action, and a certain erraticism in implementation can be off-putting. The United States has had the opportunity to build shared opposition to China’s aggressive behavior, but it has not taken it. Most countries will try and stay out of the way, look for business opportunities while reducing supply chain dependence on China, and be a little more suspicious of Chinese tech. Much will depend on how far the United States pushes a new economic and tech bifurcation, and how much it works to bring other countries along to share its views and actions.

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

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

© 2020 by the Center for Strategic and International Studies. All rights reserved.  

James Andrew Lewis
Senior Vice President; Pritzker Chair; and Director, Strategic Technologies Program