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China’s Technological Challenge

By Roderick Kefferpütz

15 September 2018

This article was originally published by Roderick Kefferpuetz on www.europecallingblog.com

In the past China used to be belittled as the workshop of the world that produces cheap, low quality products. Those days are over. We are witnessing a technological changing of the guard: the world’s workshop is becoming the world’s research centre. In the West, some are beginning to understand this in broader, historical terms. In the thousand years between 500 and 1500 AD, China’s technological superiority was apparent in most domains. Only with the Enlightenment was the West able to develop into an innovative force. Critical thinking and scientific advancement took hold throughout Europe, allowing the West to surpass China. But this era of technological supremacy is coming to an end. We are bearing witness to China’s technological return to the world stage. 

While Europe’s R&D spending was still on an equal footing with China in 2014, the Middle Kingdom has now overtaken us; China is now responsible for 20% of global spending on research. Huge amounts are invested in key technologies such as artificial intelligence. And unlike in Europe, the venture capital market is also booming. Start-ups are popping up like mushrooms, with one third of all ‘unicorns’ based in China.

China had a lot of technological catching up to do. In the attempt, Western ideas and innovations were cloned, bought, and even pirated. Products were copied, and technology was bought via company takeovers. China’s annual foreign direct investment has increased almost tenfold since 2006. Chinese investors have bought themselves into numerous companies, from robot manufacturer Kuka and Deutsche Bank to Daimler. 

In this context, China concentrated particularly on next generation technologies. China knows it can’t compete with traditional German car manufacturers in the market for internal combustion engines. Instead its focus is on battery cells and electromobility, an important future market that has been neglected in Europe, in a strategy known as ‘leapfrogging’: major developmental leaps allow certain technological stages to be skipped entirely. China is then able to take the lead itself.

From playing technological catch-up to overtaking, the People's Republic is playing offense. By 2035, China wants to become the world's most important force for innovation, and the ‘Made in China 2025’ strategy sets the course for this. This poses a challenge to the rest of the world. China wants to be an international leader in ten key sectors – from biomedicine and robotics to artificial intelligence and alternative car technologies. And this isn’t just about surpassing the West. China wants technological self-sufficiency.  As stated by Chinese premier Xi Jinping, “In order to become an internet superpower, we need our own technology. And we have to master it completely”. As early as 2020, the share of domestic components in technologically important key sectors is mandated to be between 50% and 70% of the national market. This is technological protectionism, and an interesting juxtaposition with Xi Jinping's defence of free trade at the Davos World Economic Forum in 2017.

Technological leadership may also enable China to create new dependencies. The Belt and Road Initiative, Beijing's ambitious infrastructure initiative along the route to Europe, is now to be expanded to include a digital component. China wants to build up the digital infrastructure of other countries. Xi Jinping has called for the creation of a “community with a common future in cyberspace”. China wants its technologies and standards to be taken up in other countries, not only to strengthen the position of Chinese companies but also to create a situation of technological dependence and to ‘cordon-off’ these countries’ digital realms from other powers. China is already offering capacity buildings in cyber governance in numerous African states, and Tanzania has introduced cybersecurity laws and introduced internet controls that restrict digital content and blogging activities that are similar to those in force in China. Beijing is playing digital Wei Qi, the strategy board game better known as Go, in which it is important to encircle territory and control empty spaces. By doing so, it creates a digital sphere of influence. Digitalisation should not only secure China's autocratic system, it should also influence the systems of other states. In the meantime, the world is starting to feel the foreshocks of this technological change of guard. Trump's trade war is also an answer to this technological power shift: given that America's global relevance is also based on technological dominance, it is clearly in the interest of the US to impede or slow the pace of Chinese technological advancement. 

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The US government has detailed Chinese efforts to acquire foreign technology in numerous recently published reports. A report for the US Department of Defence, for instance, illustrates how Chinese venture capitalists are selectively investing in strategically-relevant American start-ups. Furthermore, the Department of Commerce undertook a ‘Section 301 Investigation’ on Chinese practices in technology transfer, which was the basis for President Trump's 25 per cent tariff on Chinese industrial technologies. Chinese academics working at American universities in technologically relevant fields such as robotics and artificial intelligence have also started to get their visas denied. In addition, the mandate of the Committee on Foreign Investment in the United States is being expanded to better contain Chinese investment. Finally, the US Senate voted against the sale of US high-tech goods to Chinese telecom giant ZTE, thus essentially forcing it into bankruptcy.

What has been Europe’s response to this situation? For years it has stood on the sidelines, simply observing China’s efforts and confining itself to gaining more market access via a policy of economic ‘reciprocity’. The irony is that, for many European companies, Chinese market access tends to go hand in hand with technological disclosure. By accessing the short-term commercial opportunities of the vast Chinese market, foreign companies run the risk of being squeezed out of the global market by Chinese companies in the medium and long term. But the siren call of the Chinese market has been so seductive that it concealed the strategic intent that lay behind apparently straightforward commercial interests. European economic policy was driven by commercial factors, not sufficiently considering its foreign policy dimension – it was purely ‘economic policy’ as opposed to ‘economic statecraft’. China, on the other hand, understands the strategic leverage the sources of technological and economic power offer.

Europe is gradually undergoing a change of heart, however. In Germany, for instance, a high-level survey carried out by the Frankfurter Allgemeine Zeitungshowed that two thirds of those surveyed regard increasing economic dependence on China as ‘worrying’. This represents a noticeable change of tone. And at long last, action is being taken. The European Union is expected to introduce new EU rules on the screening of foreign direct investments. This should give EU countries more scope to ban acquisitions in technological and strategic areas, especially if the acquisition appears to be geo-strategically motivated. And to better protect European companies’ technologies and innovations, the EU Commission also launched legal proceedings in the WTO against China, arguing that Chinese legislation obliges European companies to transfer technology, thus infringing their intellectual property rights. 

In response, Beijing has criticised Europe’s “protectionist tendencies”, but in fact Europe is simply moving away from its earlier economic naivety – and these measures are a step in the the right direction. Furthermore, the EU should not let itself be intimidated. China is not (yet) all-powerful and remains technologically dependent. The Middle Kingdom now imports more semiconductors than oil. And Beijing's technological offensive also has its critics within China. A number of Chinese academics are critical of the current course, labelling it as ‘strategic adventurism’ and ‘strategic overstretching’ – a significant departure from the strategic modesty expressed in Deng Xiaoping’s famous ‘24-character’ guideline for Chinese foreign policy: taoguang yanghui (‘keep a low profile’).

Screening Chinese investments into strategically important industries and filing WTO complaints will not, however, prevent Europe from being left behind. Europe must also make progress technologically, an approach strongly supported by French president Emmanuel Macron: “Rather than bemoaning the fact that today’s digital champions are American, those of tomorrow Chinese, we must ensure that we are in a position to create European champions.” Importantly, he also ‘walks the talk’, pursuing an ambitious tech policy. The ‘Station F’ project, which he inaugurated in June 2017, is the world's largest centre for start-ups; he has called for the creation of a European agency for disruptive innovation; he has published an artificial intelligence strategy for France; and he meets regularly with the CEOs of the technology world. Germany, for one, has a lot to learn from France in this area.

If Europe fails to invest in the technologies and innovations of the future, if it no longer plays in the technological ‘premier league’, then what will be left for it? “Once we have been excluded, there is no second chance”, says Germany’s former Foreign Minister Joschka Fischer. It is also a question of Europe’s international image. China confidently represents the concept of authoritarian modernisation. Our liberal democracies and social market economies must prove that they can master transformation and modernisation quickly and successfully. Otherwise, other countries could follow China’s development path. 

What Europe, and above all Germany, increasingly need(s) is a strategic culture that understands economic and digital policy from a geopolitical point of view – that is, more economic statecraft. What is Europe’s answer to China’s Belt and Road Initiative? What type of foreign economic policy is Europe pursuing in its own neighbourhood? Brussels needs a comprehensive strategy for digital and economic foreign policy that promotes a digital neighbourhood in line with the open model of liberal democracy. Above all, the EU must shape international cyber governance. Beijing is not asleep at the wheel. China is actively involved in international standardisation bodies and has a clear strategy. It has published a white paper on AI standards, and has applied for the secretariat of the new standardisation committee on AI at the International Organization for Standardization (ISO). Furthermore, 20 Chinese standards on robotics are about to be adopted by ISO. Instead of leaving it to others, Europe must play an active role in shaping the international standardisation landscape for future technologies, especially when it relates to sensitive issues such as cybersecurity or ethics. What is needed, therefore, in addition to initiatives such as the European Connectivity Agenda with its focus on improving connectivity within the Western Balkans and between the region and the EU, is a strategy for the promotion of European industrial and digital standards, for example also in Africa.  

While China’s technological ascent cannot be prevented, we should not simply stand by and watch as it continues its technological expansion into other countries. Instead, Europe needs to give a self-confident response to Chinese ambitions.

Roderick Kefferpütz is a policy advisor in the strategy unit of the State Ministry of Baden-Württemberg, and a member of the editorial board of the Green European Journal. The text reflects his personal opinion. A German version of the article was published by the Zentrum Liberale Moderne (www.libmod.de).