WASHINGTON – U.S.-European cooperation on economic issues is at a low ebb. Efforts to rekindle interest in mutually advantageous policies such as the revival of the Transatlantic Trade and Investment Partnership are not likely to succeed for the time being.
Under the prevailing circumstances, trans-Atlantic disillusionment has settled in. A better approach than letting mutual acrimony languish would be to focus on a joint challenge — how to meet the resolute Chinese challenge to the industrial economies of the West.
Chinese President Xi Jinping’s growing consolidation of power is giving ever more momentum to the ambitious Chinese plan to gain dominance of high-tech industries. This is nothing short of a head-on assault, given that these industries to date have been the main source of strength in the U.S. and European economies.
Made in China 2025
Even the briefest of looks at the Chinese government’s “Made in China 2025” program underscores the full scope of China’s effort. Make no mistake about it: The explicit goal is not just to move up the ladder of industrial technology leadership, but to eventually dominate it.
The goals are as ambitious as they are mercantilist: Chinese companies are to control 70 percent or more of domestic consumption in 10 key industries by 2025.
China’s list of the targeted industries constitutes a particularly direct threat to the economic pillars of both German and American industry. It includes aerospace, semiconductors, autos and robotics sectors, to name just the most visible.
One area of special concern is telecommunications technology. It is not just important as a major industry but, via the information technology space, will also increasingly be a driver of the entire industrial economy in coming years.
We are all aware that 5G is a crucial enabling technology of the future. It is needed for a multitude of purposes that only begins with building the “internet of things” and transitioning to autonomous vehicles.
5G also accommodates the transmission of massive amounts of data for analysis and artificial intelligence applications, as well as meeting the growing demand for mobile videos and video gaming.
To underscore 5G’s centrality even more, any serious effort to improve cybersecurity and ensure the integrity of major systems like the electric grid depends on 5G technology as well. So do modern wireless systems that will need a huge increase in the transmission speed and bandwidth of their telecommunications infrastructures.
A massive investment
Building out that infrastructure in and of itself will involve hundreds of billions of dollars of investment on a global scale. Whoever captures major parts of the market will be in a strong position to compete in new areas like the internet of things.
For national security and cybersecurity purposes, it is important for the United States and its allies to be able to rely on the safety of this infrastructure.
But that is clearly not the game plan the Chinese have in mind. Their ambition, upon which they are acting with great determination, is to control the access to all sorts of data collection.
Inside their own country, China already monitors the daily life of its citizens. The new 5G standard has the potential to extend this capability on an international scale.
After all, whoever sets the standards for the new 5G technology will have the upper hand globally in extending surveillance and data mining on an unprecedented new scale.
Digital object architecture
China’s leadership, no longer content with being a “technology taker” as during the previous rounds of IT development, intends for their country to lead in this race. To that end, it is working on introducing a new technology, called digital object architecture.
If core 5G standards are adopted on the Chinese model, equipment manufacturers will have to license them on Chinese terms. The dangers to privacy and security of communications are heightened in this scenario. Chinese firms will also have the upper hand in equipment markets.
Forever seeking competitive advantage, China deliberately uses its huge market size to convince outside firms to use those standards. This effort also goes well beyond “just” the 5G field.
4G was crucial to development of new apps and related services such as Uber and Airbnb. Telecom expert Roger Entner goes so far as to argue: “The dominance that Google and Apple have over the mobile ecosphere could not be possible without America’s 4G dominance.” 5G will be equally important to the internet of things and artificial intelligence apps.
The standard setting issue aside, through its “Made in China 2025” program, China also pours huge amounts of money into research and development of all types of software and hardware needed for 5G.
This includes subsidizing both research and building of new production facilities and related equipment. For instance, for advanced semiconductors China has targeted around $160 billion alone for supporting the next generation of semiconductor technology and $180 billion for 5G infrastructure build-out.
We also cannot close our eyes to the way in which the Chinese government encourages state-owned and state-guided companies. It wants them to acquire or invest in the companies and technologies in the industrialized world that are leaders in all phases of software and hardware needed for 5G.
The Chinese government often subsidizes these acquisitions in opaque ways. That it also makes it difficult for foreign firms to operate in China and forces those who do so to share their technology has long been known.
Intellectual property problem
As the world’s largest consumer of semiconductors and memory chips, China has collected considerable influence in this sector. Part of its “knowledge bank” is due to Chinese firms regularly trying to violate patents and other intellectual property.
If we want to protect our own industrial future, we should urgently take note of the fact that many of these tactics are banned in the rules of the World Trade Organization.
With its impact on the nascent internet of things, as well as its parallel efforts to dominate the electric vehicle industry, Chinese efforts on 5G are a particularly major challenge to the German and Japanese automotive and semiconductor firms.
To maintain technology leadership, European and U.S. industrial firms, as longtime global technology leaders, must therefore take six specific, concerted policy initiatives.
Six specific policy initiatives
First, they must redouble their efforts to protect patents around the world, including the need to limit the reach of antitrust authorities over patent licensing.
Second, they have to work on improving conditions for private firms to benefit from basic and applied research in technology and software.
Third, they have to cooperate in the WTO to use existing rules or craft new ones as needed to discipline Chinese subsidization, dumping, forced technology transfer and unfair trade practices of state-owned enterprises.
Fourth, they must be vigilant in maintaining the private sector-led model for standard setting in the telecommunications field.
Fifth, they should work cooperatively to develop rules on foreign investment responsive to the state-directed and subsidized policies now employed by China.
And finally, sixth, the national security teams from NATO allies and Japan should cooperatively address the questions to cybersecurity related to the development and implementation of 5G systems.
The value of working together
It is to be hoped that collaboration to meet this challenge will result in Europe and the U.S. in particular to gain new confidence in the value not only of working together, but also of finding ways to improve the existing liberal economic architecture.
The present protectionist and centrifugal forces will only be reinforced if the Western allies fail to address Chinese economic ambitions without blinders and with determination.
Thomas J. Duesterberg is a senior fellow at the Hudson Institute. He was executive director of the Manufacturing and Society in the 21st Century Program at the Aspen Institute.
IN FIVE EASY PIECES WITH TAKE 5