The increased tempo of commercial partnerships between American and Chinese technology companies has begun to raise eyebrows in Washington. National security circles worry that such partnerships are degrading the American military’s technological superiority, because American technologies are being transferred to Chinese partners tied to the military. Such concerns are valid. However, from the perspective of American technology companies, these partnerships are nearly unavoidable.
China’s information and communication technology (ICT) market is massive, second only in size to the U.S. globally. Almost 95 percent of leading American companies agree that China is among their top five global priorities. However, many also agree that China’s business policy environment is deteriorating.
For the technology sector specifically, China’s blurred mix of national security concerns and protectionist commercial policies have led to an invigorated techno-nationalism over the last two years to the detriment of American competitors. While China’s heavy-handed methods to deal with perceived foreign government snooping pre-date Edward Snowden, the former U.S. government contractor certainly has served China’s interests well in justifying its restrictions on foreign technologies.
Of late, Chinese regulators have focused on imbuing technology policy with bureaucratic jargon like “secure and controllable technology” and “indigenous and controllable intellectual property” as euphemisms for requiring Chinese companies to replace foreign suppliers of hardware and software with local Chinese substitutes. In a country where many of the largest procurers of ICT services are state-owned, there is a propensity to abide by state mandates – both explicit and implicit.
This over-arching industrial strategy has been successful at clamping down on American company ICT market share. As a result, leading American technology firms such as Microsoft, Cisco, Intel, Dell, Qualcomm, and Hewlett-Packard have made the difficult decision to partner with Chinese competitors as a means to securing their shaky foothold. These partnerships often involve the creation of joint venture (JV) companies between the U.S. and Chinese parties. The U.S. partner is frequently limited to a minority ownership stake in the JV, potentially giving the Chinese partner ultimate decision making authority and control of company technologies. The partnership model, although imperfect, does once again allow American companies to supply Chinese companies with their products.
America’s national security today is closely linked with the economic success of its innovative companies. While U.S.-China technology partnerships may present challenges to American technological supremacy, they are only the result of China’s protectionist trade strategy. Scrutinizing these partnerships, while necessary, is scrutinizing the symptom, not the cause. In order to counter China’s security challenge, the U.S. must pursue measures that effectively put it in the driver’s seat and reduce the need for partnerships.
U.S. industry and government have engaged in significant advocacy and diplomacy in an effort to turn the tide, but the Chinese government remains steadfast. Despite the tensions China’s technology policies have caused, the frequency of U.S.-China government-to-government engagement is near an all-time high. While discussions to break down trade barriers are frequent, progress is gradual at best. Often, China’s negotiated commitments to not discriminate based on nationality are not matched by its actions. In the meantime, American companies must uphold their fiduciary responsibilities and answer to shareholders. This means selling their products in China however legally permissible.
From the Chinese perspective, the government’s decision to restrict competition has been a short-term boon for business. Chinese ICT companies like Inspur, Tsinghua Holdings, and Sugon, among others, have all been benefactors of China’s localization push. However, China’s efforts to isolate itself from foreign competition do more harm than good in the long run. Innovations in technology and security occur so quickly that China’s isolation risks missing out on important global developments. It is also risks becoming detached from deeply integrated global R&D networks and supply chains.
Divorcing oneself from global security developments will only hinder China’s ultimate goals for information security, leaving it more –not less— vulnerable. Even the CEO of Chinese telecom giant, Huawei, warned that creating a completely localized ICT environment in China would be akin to grade-schoolers competing against university students.
U.S. leadership must continue to highlight that China’s technology regulations are out of line with global best practices. American companies will have to continue engagement with the Chinese and U.S. governments through traditional channels in an effort to reduce investment and trade barriers in China. This is a slow process with incremental gains. As a result, we are likely to see more U.S.-China technology partnerships in the near-term.
Additionally, to encourage increased market access in China, American companies should encourage leadership to pursue high-standard trade deals that reward China’s competitors with the benefits of free trade. If China does not desire integration into the global system, it will be out-innovated and outcompeted in global markets. The U.S. Government should encourage increased integration through trade deals, which in turn should spur China’s own reform in hopes of future participation.
China should recognize that limiting competition stifles its long-term development prospects. Only through increased economic competition is China likely to react with meaningful reform.
