The inexorable movement toward a divided global economy

Imagine a barbell. That is, in my mind, the future shape of the global economy. Two separate spheres, one the economies of the West and the other those centered on China, connected by a tube of undefined thickness.

I (along with a lot of other people) once thought the connecting cylinder would be thick, nearly as big as the two orbs it linked, allowing virtually all goods and services to pass from one side to the other. Only trade in sensitive high-end technologies would be restricted. Increasingly, though, connections between the halves of the global economy are dwindling and the tube is narrowing.

Traditionally, global economic exchange resembled two largely overlapping spheres, with only a small space of forbidden interactions, the result of export controls that banned trade that could improve military capability.

In recent years, the two spheres have separated still more as the number of restricted items increased. Today, debate focuses on semiconductors and the technologies needed to create them, but they are just the first in what will be a series of measures to reduce trade in emerging technologies. The chief concern now is artificial intelligence, but scrutiny will soon shift to biotechnology, green tech, nano tech and advanced materials. In addition to trade, expect restrictions as well on investment flows (in and outbound) and academic and research exchanges.

Heightened concern about protecting critical infrastructure indicates that connecting tissue will narrow still more. Last week, U.S. President Joe Biden signed an executive order (EO) that authorized spending more than $20 billion to strengthen cybersecurity at American ports. “Every day malicious cyber actors attempt to gain unauthorized access to the Marine Transportation System’s control systems and networks,” explained the White House as it announced the measures.

The EO was prompted by a 2021 intelligence assessment that found that China could shut down port traffic or gather intelligence on goods and equipment shipped through those facilities. Last March, The Wall Street Journal reported that the U.S. Department of Defense worries that Chinese-made cranes, in particular those manufactured by Shanghai Zhenhua Port Machinery Company (ZPMC), could serve as “Trojan Horses” to disrupt or surveil traffic, especially at military ports.

Those warnings were reiterated last week when the Maritime Administration of the U.S. Department of Transportation issued a worldwide threat advisory that “seeks to alert maritime stakeholders of potential vulnerabilities to maritime port equipment, networks, operating systems, software and infrastructure.” It honed in on the LOGINK integrated logistics platform (which I mentioned in a column in September), radiation scanners and automated ship-to-shore cranes.

The EO is intended to “bolster the security of the nation’s ports” and “strengthen maritime cybersecurity, fortify our supply chains and strengthen the U.S. industrial base.” The primary means by which it will do that is the production of more port cranes at home.

China makes about 80% of the cranes used in U.S. ports; 70-80% of the large, container cranes used in ports worldwide are manufactured by ZPMC. Security specialists worry that those cranes provide remote access and control, which is great for operational optimization and repair, but also, said U.S. Rear Adm. Jay Vann, commander at Coast Guard Cyber Command, “potentially leave PRC manufacturing cranes vulnerable to exploitation.” Counterintelligence experts have referred to cranes as “the next Huawei” — a reminder that decoupling practically began with efforts to separate national telecommunications grids by cutting off trade in those products.

South Korea is taking the warnings seriously. Just under half of the 876 port cranes in that country have been built by ZPMC and some are found in facilities where U.S. military supplies are handled. The Seoul government has said that it will inspect all Chinese cranes and that it intends to increase the number of domestically built machines in operation.

The Chinese government calls the spying charge “overly paranoid” and an attempt to “mislead the U.S. public.” Those denials are backed up by the American Association of Port Authorities, which calls the accusations “sensationalized claims” and said that there is no evidence of the cranes being used in a harmful way.

My point is not to highlight the evergreen topic of cybersecurity. Rather, it is to demonstrate how concern about cybersecurity is shrinking connections between the two spheres of economic activity. Potential vulnerabilities in port infrastructure are being used to rationalize a domestic crane manufacturing renaissance. (The prime candidate for which in the U.S. is PACECO Corp., a U.S.-based subsidiary of Mitsui E&S Co.) Similarly, the need to ensure supplies of semiconductors is spurring billions of dollars of subsidies to build those plants in Japan, the U.S. and elsewhere.

In a deeply wired society, all internet connections are potential vulnerabilities. I used to think it didn’t matter if a refrigerator, fax machine or animated toy was made in China. But even inoffensive, picayune internet-connected devices can cause trouble. As the saying goes, “if it’s smart, it’s vulnerable.”

More than 16 billion devices are estimated to be connected to the internet of things (IoT). In 2016, James Clapper, then director of national intelligence, told Congress that these devices “can threaten data privacy, data integrity or continuity of services. Intelligence services might use the IoT for identification, surveillance, monitoring, location tracking and targeting or recruitment or to gain access to networks or user credentials.”

They transmit data that can be mined for insights into behavior. They can serve as bots or route attacks on targets. Imagine the trouble if every IoT device — and there are typically dozens in every house — was activated simultaneously; do that across a wide enough range and electric grids could be disrupted.

In a recent report, Charles Parton, the former British diplomat who spent a career studying China, details how three Chinese companies have over 50% of the international market for cellular IoT modules. These modules are the gateway for data transfer for those devices, “a single point of entry and exit for vital flows for the monitoring or control of systems” that are vitally important to national economies and societies.

Parton warns that China’s market position poses a national security threat (echoing Clapper); an economic prosperity threat (the data can give Chinese companies a competitive advantage by virtue of superior information about supply chains); a data privacy threat; and a values threat (by facilitating surveillance capabilities that erode individual freedom).

Again, my point is China’s domination of the market for these devices is yet another reason to shrink the connection between the two global economic spheres. Even low-tech products are becoming problematic.

Nor are we likely to stop here. While there is no national security threat to trade in textiles — unless one counts lost jobs among developed world clothing manufacturers — there are complaints about the use of forced labor to pick cotton. On this issue, an entirely different constituency is demanding greater scrutiny of trade.

As I wrap this up, the Washington Post reported that the Biden administration is expected to issue an EO as early as this week to prevent the bulk flow of Americans’ sensitive data, such as genetic information, to hostile foreign countries. Given the centrality of data to the digital economy, it is plain that this will exacerbate economic bifurcation. How can digital products pass from one sphere to the other when the stuff they run is supposed to be segregated?

Efforts to protect national economies from these threats require multinational solutions. Chains are only as strong as their weakest link: One country acting alone will be vulnerable through its partners and allies. That is why the U.S. demanded that countries that want Washington to share intelligence cut Huawei from their national communications grid. It’s why Japan and the Netherlands had to cooperate with the U.S. if restrictions on access to chip-making equipment are to be effective.

And to repeat a point that is often obscured: The West is not alone in pursuing this objective. China, too, prioritizes the reduction of dependencies on foreign sources for key products and sectors as it worries about its own vulnerabilities. "Made in China 2025" is one expression of this ambition.

The Financial Times concludes in an article published after the Washington Post piece cited above — just hours ago — that “China is accelerating efforts to construct an alternative trade architecture that is insulated from U.S. influence and centered upon the developing world.”

It’s also why the global economy is becoming increasingly bifurcated — and the connective tissue between the two spheres is becoming slimmer and thinner.