Adam Segal on U.S.-China Competition

Adam Segal is the Ira A. Lipman chair in emerging technologies and national security and director of the Digital and Cyberspace Policy Program at the Council on Foreign Relations (CFR). An expert on security issues, technology development, and Chinese domestic and foreign policy, Segal was the project director for the CFR-sponsored Independent Task Force report Defending an Open, Global, Secure, and Resilient Internet. His book The Hacked World Order: How Nations Fight, Trade, Maneuver, and Manipulate in the Digital Age(PublicAffairs, 2016) describes the increasingly contentious geopolitics of cyberspace. His work has appeared in the Financial Times, The Economist, Foreign Policy, The Wall Street Journal, and Foreign Affairs, among others. He currently writes for the blog, “Net Politics.”

Before coming to CFR, Segal was an arms control analyst for the China Project at the Union of Concerned Scientists. There, he wrote about missile defense, nuclear weapons, and Asian security issues. He has been a visiting scholar at the Hoover Institution at Stanford University, the Massachusetts Institute of Technology's Center for International Studies, the Shanghai Academy of Social Sciences, and Tsinghua University in Beijing. He has taught at Vassar College and Columbia University. Segal is the author of Advantage: How American Innovation Can Overcome the Asian Challenge (W.W. Norton, 2011) and Digital Dragon: High-Technology Enterprises in China (Cornell University Press, 2003), as well as several articles and book chapters on Chinese technology policy.

Segal has a BA and PhD in government from Cornell University, and an MA in international relations from the Fletcher School of Law and Diplomacy, Tufts University.

Why are China and the US coming into conflict over technology development. How do Chinese advancements in high-technology threaten US economic and security interests?

It's being driven by security and technology concerns on both sides. Beijing has long wanted to decrease its dependence on the West and on the U.S. in particular for critical technologies, and it is afraid that that dependence on foreign suppliers creates vulnerabilities, especially in cybersecurity. Washington now feels basically the same way. It is worried about the cybersecurity threats from China – and so relying on Huawei or ZTE for providing telecom infrastructure seems to increase the vulnerabilities – and it is worried about China competing as it moves up the value chain in high-technology sectors.

Chinese practices such as state-sponsored hacking and intellectual property theft from U.S. corporations have heightened tensions over technology. How extensive are these practices and what are their costs to the U.S.? What measures is the U.S. taking to combat them?

IT theft has been happening for decades, and in some sectors it has been extremely extensive. For example, Microsoft was making less in China than it was anywhere else in the world, even though Microsoft was being widely used there. Cyber-espionage and cyber-enabled theft began in the mid-2000s and then peaked and came to a temporary halt in 2015. That was when President Xi Jinping and President Barack Obama reached an agreement which said that neither side would support or tolerate cyber-enabled theft of intellectual property. We don't really have an idea of how big it was. There was an IP commission that came out of the National Bureau of Asian Research that estimated the annual loss to the U.S. economy from the theft of intellectual property to be more than $300 billion, with 50 to 80 percent of that being stolen by China, but these numbers are a little soft. The Chinese seemed to have reached that agreement in 2015 in part because the U.S. used naming and shaming by calling out the Chinese for the hacking and publicly attributing the attacks to Chinese hackers. They indicted five hackers from the People's Liberation Army and seemed to be threatening to sanction either high-level government officials or state-owned enterprises. That seemed to have gotten China’s attention. But the hacking now seems to have returned.  Just two weeks ago, former Attorney General Jeff Sessions announced what they're calling the “China Initiative,” which is an attempt to better coordinate against intellectual property theft.

So there was sort of a lull in this activity after this agreement was signed, but it has since returned?

That's right. Although the weird thing about the lull is there was a report by the cybersecurity company FireEye stating that the lull predated the agreement, so it seems to be driven more by internal factors. We know that the PLA was undergoing a reorganization, and they were bringing the cyber-forces together under what they call the “Strategic Support Forces,” so what seems to have happened is that the lull was planned already and the Chinese took political advantage of it. Now the reorganization is done, and a lot of the espionage seems to have moved out of the PLA, which wasn't particularly good at it, and is now being conducted more effectively by the Ministry of State Security. So while the numbers of attacks might be smaller, the impact still seems to be going up.

Moving on to President Trump's trade war, much of his public rhetoric surrounding that focuses on trade deficits with China, but when his administration actually put out its initial round of punitive tariffs against China, it justified them on the grounds of security and those intellectual property violations, not on the grounds of trade deficits. What role does technology competition have in this trade war?

It's an interesting question, because as you said the president seems to be overly focused on or obsessed with trade deficits, which most economists don't really think are all that important. The business community itself was more worried about Chinese technology policies, like forced technology transfer or blocking of certain markets from U.S. companies. The tariffs now are pretty wide and a lot of them have been on technology products, but you can begin to see a strategy come into focus. What the administration seems to really want to accomplish in the end is to force U.S. companies to move their supply chains out of China. Both the tariffs would do that and the security concerns would also do that, but that would be incredibly expensive, and it would be very disruptive to trade. It seems pretty clear that even if US companies did that, they wouldn't bring the jobs back to the United States. They would relocate them to Vietnam, Malaysia, or other countries with low-cost manufacturing sectors, and that seems to be what is happening. There was a survey done last month with U.S. companies in southern China, 70 percent of them said they were thinking about either leaving China or reducing their investments there, and only 1 percent said they were considering reinvesting in the United States.

What would those tariff policies mean for companies trying to sell in China? Obviously, it's a huge and growing consumer market, and U.S. tech companies want to sell their products there. I've read one argument that this could actually lead to them having more of their operations in China, because then they wouldn't be importing their products and could avoid the trade barriers. Is that a legitimate concern?

Yes, one way to get around the trade barriers would be to shift more of your production inside of China. So there's some concern about that. The tech companies are probably more concerned about the other tools that China has, like anti-monopoly or anti-competitive investigations, their cybersecurity law which could make companies turn over equipment for review, and data localization requirements which make companies store data inside China. China has a lot of administrative tools to make business difficult. Supply chains are so complicated that the tariffs that are levied on China or the U.S. often will hurt the other side, and certainly hurt consumers.

A particular point of concern for the U.S. government is China's “Made in China 2025” initiative, which is aiming to increase Chinese domestic production in high technology and to make China a global tech leader. How is China pursuing those goals, and what are the chances of their success given the relatively poor record of Chinese industrial policy?

The Chinese have stopped talking about Made in China 2025, in part because the Trump Administration was paying so much attention to it.  They basically told their press to stop talking about it, although many of its policies are still in place. The Made In China 2025 initiative covers a whole range of things. Some have to do with internet-enabled manufacturing, or “Internet of Things” devices, with a major focus on semiconductors and a set of other policies. They're clearly more successful with batteries, solar panels, and electrical vehicles – all areas where the Chinese became competitive very quickly because of government subsidies and industrial policies. But in some of the most cutting-edge sectors, in particular semiconductors, they've had basically three decades of failure. The hope is that this time will be different. But mainly, it's subsidies, lots of research money, and then a broad national plan that gives a signal to localities and provinces to invest their own money in these technologies that Beijing has decided are important.

How is the Trump Administration, through policy, trying to thwart or slow down this initiative, and are those policies effective or likely to be effective?

Mainly it's been the tariffs, and then explicitly saying to the Chinese that they have to stop support for Made in China 2025. Also there has been a reform of the Committee on Foreign Investment in the United States, which broadened the types of technology and the types of investments that will come under review by the committee. So those are the main tools so far. The Chinese may stop talking about Made in China 2025, and they may call it a different policy, but the desire to reduce dependence and become more autonomous in technology, and to create indigenous innovative capabilities is a long-standing one in Chinese history, and certainly with the Communist Party.  In the last couple of weeks, President Xi made another speech that called on Chinese scientists to double-down on self-reliance and stressed the idea that China should take advantage of the trade conflict to really push these types of policies.

If you make it harder for the Chinese to access imported technology, you might slow down their development in the short-term, but in the long run, this could backfire and create a greater impetus for them to become self-reliant faster, couldn't it?

That's right. You basically hammer home their dependence on U.S. producers, and not only does that dependence become much clearer, but also you undermine their trust that market forces will allow them to gain access to those products, because you've interjected politics into it.

In the past, you have advocated for the U.S. to take a more assertive approach in combating Chinese cyber practices and confronting China's digital ambitions. Do you believe that the Trump Administration is doing either of these things effectively?

The Trump Administration does deserve praise for calling out the Chinese mercantilist policy, and they're right to highlight that the hacking has returned. It's too early to conclude anything about this China Initiative in the Department of Justice, but they have already indicted several hackers. There was a Ministry of State Security official who was in fact seized in Europe, and extradited to the U.S. The Trump administration has done a good job of highlighting the problem, and on trying to find some pressure points. The big weakness of the policy is the lack of coordination with our friends and allies. Germany has the same concerns about the theft of IP and the Chinese technology strategy. The Japanese have it as well, but because of Trump's obsession with deficits he's pursuing unnecessary tariffs on trade with those countries, instead of creating a united front on the more important issue. The policy would be a lot more effective if they weren't so busy picking fights with our friends.

Could you explain how those indictments work, given that the hackers are foreign nationals and often people working for the Chinese government? I assume they typically don't lead to any actual arrests or prosecutions, so what is their power?

That's right. Only if the person messes up, like in the case of this Ministry of State Security official. I don't know if he was lured or he just went on vacation to some country that has an extradition treaty with the United States, and local officials seized him and he was extradited. But that's exactly right, most of these people are never going to see the inside of a U.S. court if they're smart, if they just make sure they don't go to the wrong countries. The purpose is mainly to try to convince the Chinese that the U.S. in fact can attribute these attacks to them, and to create a deterrent value by doing public naming and shaming. The argument 10 years ago was that attribution is really hard, and you can't say very clearly who was behind the attacks. The Chinese repeat that, and the U.S. basically wanted to say “well no, actually we're pretty good at it, and we can tell you who's behind the attacks.” The argument that some people in the Department of Justice have made to me is that these hackers do want to travel, or young people who are studying cybersecurity do want to travel, so they see this and they think “do I ever want to go to Thailand or not? I'm not going to get involved in it.” I'm not particularly convinced of that argument, so right now I don't think it's doing a lot. It maybe sends a message to uppermost leadership that the U.S. has greater attribution skills, but it hasn't been all that effective in slowing the hacking down.

How would you compare and contrast the merits of the Obama administration's approach on this issue versus the Trump administration's approach?

The Trump Administration gave the Chinese a year to see if the upturn in hacking was a sign that the agreement had fallen apart, or if it was just some rogue elements or maybe just a violation of the spirit if not the letter of the law. Now they've decided that it really has broken down, and they're adopting a policy that's pretty similar to the Obama Administration’s. The big difference is that at the beginning of the Obama Administration, the White House believed that the two countries could work together on a whole range of issues – climate change and other kinds of transnational issues – so it was unwilling to make cyber a type of issue that could derail that agenda. By the end of the Obama Administration, there was a lot more skepticism because of the South China Sea and other issues. The Trump Administration made it very clear through Vice President Mike Pence's speech that they almost from the beginning saw the relationship with China as competitive, and so cyber is another one of these issues that they're willing to escalate because they see it as part of the competition over IP and security issues. So between the end of the Obama Administration and now there's not so much of a difference, but certainly from the beginning of the Obama Administration to now you can see a different outlook.

Some analysts warn of a “technology Iron Curtain” separating China from the U.S. in the future. How much should we worry about the division of the technology space into one sphere dominated by China and the other by the US?

To some extent we have that already. U.S. companies find it very hard going inside of China, and as we've seen for Huawei and ZTE, Chinese companies have it hard going into the U.S. A lot of it also is just language and culture, Chinese users are going to use WeChat and Alibaba, because that’s what they’re comfortable with, and U.S. users are going to use Facebook and Amazon. We already have some bifurcation, and that will continue. But there will be other poles; with Europe, the General Data Protection Regulation shapes technology markets. India is a huge market and it has its own ideas about how technology and data should be stored, used, and shared. So there will be these two main players, the U.S. and China, but there will be some other major poles, around India and Europe, and then there will be competition for a lot of other markets, like Brazil, Africa, or Indonesia. Users there at some point will have to choose. For most Americans and most Chinese it won’t make much of a difference, because we already exist in that bifurcated world.


Sam Fraser CMC '19Student Journalist

Файл:G.Tech Technology Factory Zhuhai China.jpg via Wikimedia Commons

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