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This blog post is the fourth in a series on U.S.-China technology competition. You can access the previous posts here:
As explored in previous blog posts, competition over the production and sale of advanced technologies like semiconductors and 5G networking equipment has increasingly become a matter of national security. Technology competition itself is nothing new. During the Cold War, the United States was engaged in a similar competition with the Soviet Union. However, in contrast with that period, today’s competition places a greater emphasis on attaining economic leadership as opposed to military strength.
Success in this new environment will depend more on our ability to leverage private sector innovation than on government planning. Even though technology competition has become a national security issue, this does not mean that our policy response can ignore market-economy rules and the principle of international trade. We should respect market-driven competition, while acknowledging where the weaknesses of a purely market-based approach may demand a modified approach to address security concerns. Importantly, this modification should be coordinated with allies.
Around the world, nations are reacting to intensifying technological competition with new plans to bolster their domestic capacity for innovation and production. The European Commission’s 2030 Digital Compass report laid out a series of steps to help Europe achieve digital sovereignty, including goals like having 20% of global semiconductor production occur in Europe by 2030. In the United States, an executive order issued by President Biden directed federal efforts towards securing critical supply chains in sectors like semiconductor manufacturing, battery production, and rare earth mining. In March 2021, President Biden proposed a $2.3 trillion infrastructure plan, which includes $50 billion for supporting semiconductor manufacturing and research. Meanwhile, China’s 14th 5-year-plan proposes sweeping new goals meant to help China achieve technological self-reliance. Chinese investment in R&D has increased rapidly over the last 20 years. In particular, its government R&D spending as a percent of GDP has been growing steadily, in contrast to the United States where public R&D spending has been falling continuously since 2009.
Behind all of these measures is a growing awareness of the importance of technological leadership for national security, and of the fact that innovation and production capacity for many strategic sectors is concentrated in a small number of nations. These concerns are important, but it is necessary to consider why these issues have arisen in the context of our current market-based global innovation ecosystem, and what that means as policymakers consider how they should respond.
The pitfalls of market-driven competition
In contrast to the Cold War era, innovation today is driven more by the needs and decisions of private enterprise than by government and the military establishment. This is because of the booming demand for commercial technologies, and the greater efficiency of private sector innovation in identifying and supporting new technological advancements. However, this shift creates challenges for national security that must be addressed by policymakers.
(1) The market does not prioritize national security and resilience
In a market-driven economy, private companies are narrowly focused on maximizing their profit. For example, in the area of semiconductors, growing capital expenditure requirements has driven consolidation in the sector to the point that each stage in the manufacturing process is now dominated by a small number of companies in only a few nations. This consolidation made good economic sense for the firms involved, but has created enormous risks for national security by making the global supply chain more prone to disruption. The most recent proof of this is the automobile semiconductor shortage this past winter, which led to multiple nations lobbying Taiwan to have chip manufacturer TSMC increase its production. When markets become oligopolistic, it can come at the expense of supply chain diversity and resilience. The trend of globalization is accelerating this process.
(2) Markets can be manipulated by states
All countries intervene in the market-driven economy to advance their geopolitical objectives. Some of these interventions are unobjectionable, like funding R&D to improve domestic innovation capacity or supporting education and training programs. A recent report by the Semiconductor Industry Association showed that U.S. incentives toward semiconductor manufacturer are relatively low compared with China, Taiwan and South Korea. These activities have effects on the market, but they are unobjectionable under current rules and norms surrounding international trade.
Of greater concern is the possibility that a country will covertly undertake illegal, unfair, or predatory practices like economic espionage, forced technology transfer, prohibited subsidies, or market restrictions that violate WTO obligations. These can unfairly distort the market, allowing states to protect their domestic actors by creating an unfair playing field. If countries use these practices to dominate some important technology area, they could threaten other countries' economic security.
Because of these issues, countries like the United States and its allies are vulnerable to the disruption of critical supply chains and to actors like China who are willing to manipulate the market to their own advantage. The question facing policymakers is how to address these risks without compromising the advantages of a global market economy.
Implementing market-based rules for secure technology competition
Market-based technology competition is vulnerable to disruption and exploitation, and as a result we are facing security risks. It is therefore necessary to modify our approach to the global innovation ecosystem as it pertains to advanced technologies critical for national security.
First, we should impose consequences on states who engage in illegal, unfair, or predatory trade practices. This can include forced technology transfer, unfair market restrictions, economic espionage, or contributions to human rights abuses. Against these countries, the United States and its allies should consider measures such as coordinated export-controls, technology transfer protections, and foreign direct investment restrictions. To do this, it is necessary to develop common norms and expectations around predatory trade practices.
Second, we should find ways to counteract the concentration of production capacity for critical technologies. Even though there is no malicious intent as in the case of market manipulation, there are unacceptable risks to allowing a monopoly or oligopoly to form in these sectors. To avoid this, allies should develop a common understanding around the importance of supply chain diversity and resilience, and commit resources towards shaping global supply chains to help reach this goal. From firms’ point of view, maximizing market power is an obvious goal. But the security risks are too great for states to allow this to happen. No single country should be allowed to gain a controlling stake over the supply chain for a critical technology.
Third, we should promote fair technology competition through open and transparent R&D investment. Since technology development is important to society, it is important for governments to continue supporting R&D, especially for basic research. Maintaining technology leadership is not possible without increased investments in R&D. But governments’ support for R&D should be for the benefit of society, not for the benefit of certain companies’ profit, as in the case of China’s support for Huawei and its semiconductor industry. We need more sophisticated measures to distinguish appropriate government support from corporate subsidies that distort global markets. This point must be made clear.
Forth, the United States and allies will have to take a collaborative approach to implementing these actions. A unilateral approach will not be effective at changing a target country’s behavior so long as that country can continue to do business with others. The first step of a collaborative approach will be sharing information and developing common understandings among like-minded countries. Already, there are several multinational organizations, such as WTO and OECD. These organizations are good to make high-level consensus about predatory trade practices. On the other hand, more practical information-sharing mechanisms will be needed for implementing the actions. So, the U.S. and allies have to make places, which do not have to be institutions but have to have functions to share information relevant to predatory trade actions.
In the future direction
Despite growing interest in supply chain decoupling, the effects of globalization are unlikely to be reversed in the near future. Technology will continue to grow increasingly important for national and economic security, and will continue to be produced primarily by the private sector as part of a global innovation ecosystem. This creates risks, but attempting to shift from a market-driven economy to a government-planned, techno-nationalist system will create even greater harms.
Moving forward, policymakers must focus their efforts on creating and enforcing rules for the global market to prevent predatory behavior and improve supply chain resilience. Accomplishing this will mean imposing strong consequences for states who break global market norms, working together with allies to establish secure and diverse supply chains for critical technologies and supporting open competition and investment in R&D. The United States has an opportunity to lead this work.
Akinori Kahata is a visiting researcher with the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, DC.
The Technology Policy Blog is produced by the Strategic Technologies Program at 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).