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Economy

Robert A. Manning: While Trump looks to the past, Xi wants to own the future

China's president is determined to dominate fields like AI

The contrast could not have been more striking. Just one day after the recent U.S.-China "Comprehensive Economic Dialogue," which focused on steel and aluminum overcapacity and chicken imports with few results, Beijing's State Council on July 20 unveiled a well-funded plan to make China the world leader in artificial intelligence by 2030.

This is a critical piece of China's effort to dominate advanced manufacturing in the emerging fourth industrial revolution. Along with AI, Beijing has identified robotics, semiconductors, biotech, 3-D printing, clean energy, new materials and "smart manufacturing" as sectors where China's unique brand of techno-nationalism will be applied. Beijing's "indigenous innovation" strategies, notably "Made in China 2025," seek via predatory industrial policies to create national champions through large-scale subsidies and exclusion of foreign competition.

Printed circuit boards, commonly imported to the U.S. from China, likely will be affected by Washington's new tariffs, an American semiconductor industry group says. Printed circuit boards, commonly imported to the U.S. from China, likely will be affected by Washington's new tariffs, an American semiconductor industry group says.    © Reuters

AI may be the single most important component of the world-changing technologies now emerging. Like the internet has been to the onset of the digital era, AI will likely be the key multipurpose platform for the knowledge economy and advanced manufacturing in the coming decades. Beijing seeks to do to these sectors what its state-centric policies have done to the global steel, wind and solar industries.

Yet there is little indication that any of the issues that define the 21st-century economy were seriously discussed at the U.S.-China economic meeting. The mindsets of President Donald Trump and many of his advisers seem stuck in the 1980s.

Budget cuts in research and development, which has been key to the U.S. maintaining its innovative edge, are one indicator that coal may be more of a focus than the technology revolution. One remarkable comment from U.S. Treasury Secretary Steven Mnuchin is illustrative. When asked in an interview if he worried that AI and robotics would displace human workers, he replied, "It's not even on our radar screen ... 50-100 years away. I'm not worried at all [about robots]."

Fortunately, there are signs of a learning curve. The Trump administration is considering trade remedies to Chinese intellectual property violations and forced technology transfers. But for now, looking to the future of the global economy, it is almost as if Americans are playing checkers and the Chinese are playing Go. No matter how much U.S. chicken or beef China imports, no matter how much it reduces steel and aluminum overcapacity, the decisive issue for the trajectory of U.S.-China economic relations will be emerging technologies -- the digital economy.

Trump's backward-looking "America first" trade policies pale in comparison to President Xi Jinping's forward-looking "China first" industrial policies.

One of the great ironies in Xi's much-heralded speech in January at the Davos World Economic Forum was that he portrayed China as the beacon of globalization and free trade. In the real world, Beijing's increasingly restrictive policies use various tactics to limit or bar foreign direct investment in strategic sectors -- such as its new, vaguely worded national security law, which could force tech companies to hand over their source codes.

WESTERN BACKLASH China appears to be for everyone else's open, globalized markets. Moreover, China often uses economic coercion for political goals: It once banned exports of rare-earth minerals to Japan, boycotted Lotte stores on its soil and banned Philippine fruit exports.

China's behavior has begun to set off alarm bells and generate a political backlash in both the U.S. and Europe. Though the outcome has yet to fully take shape, attitudes in the U.S. and EU have been steadily hardening. Last fall, Germany blocked a Chinese company's acquisition of chipmaker Aixtron, while in December, then-President Barack Obama blocked the acquisition of an Aixtron U.S. subsidiary.

Chinese companies are all over Silicon Valley, looking for tech startups to buy. In 2016, Chinese investments in the U.S. totaled $46.5 billion, and based on projections from the first quarter of 2017, they are likely to increase by more than 50% in 2017. Earlier this year, a still unpublished Pentagon report warned that China is "skirting U.S. oversight and gaining access to U.S. technology," including tech with military applications. "If we allow China access to these same technologies concurrently," the report said, "then not only may we lose our technological superiority, but we may even be facilitating China's technological superiority."

Such concern is prompting U.S. congressional efforts to tighten restrictions on FDI by expanding the interagency Committee on Foreign Investment in the United States, or CFIUS, which reviews foreign acquisitions. Sen. John Cornyn, a Republican from Texas, is drafting legislation that may expand the scope of CFIUS and block some investments in sensitive areas such as AI.

Similarly, European leaders, including Emmanuel Macron and Angela Merkel, have expressed concern about the lack of reciprocity in FDI from China. The European Commission is pursuing new rules for EU members to adopt stricter regulations on FDI, particularly from China. EU sources say that new regulations may be revealed in a "state of the European Union" speech in September. The new rules are expected to include legal criteria for halting some investments based on national security concerns, though this is still being debated in Brussels.

Beijing has been negotiating bilateral investment treaties with the U.S. and EU. In the talks, it reduced its "negative list" of excluded sectors, but not enough to conclude agreements with Obama nor with Europe. The discussions with Washington have been suspended under Trump.

Robust bilateral treaties would deepen China's economic ties with the U.S., EU and Japan. Thus, it is critical that members of the Organization for Economic Cooperation and Development pursue parallel policies aimed at achieving reciprocity with China. One can only hope that Trump's view of China fast-forwards from the 1990s to 2017. As Benjamin Franklin, one of America's founding fathers, advised, we must hang together, otherwise we will hang separately.

For the U.S., EU, Japan and other OECD economies, the key issue is reciprocity. If there is a coordinated approach to define reciprocity, the respective bilateral treaties could be an important source of leverage to gain equal access to Chinese markets in emerging technology sectors. This could also give China incentive to alter its state-centric policies and implement the market reforms it claims to support. The Group of 20 may also be a good venue to build consensus on acceptable competition and FDI policies.

Absent more concerted efforts led by the U.S., EU and Japan, it is difficult to envision how to level the playing field and temper China's predatory industrial policies. This question, far more than trade deficits, may be one of the most critical problems of global economic governance. The outcome is likely to shape the economy of the 21st century as the new technology transformation unfolds.

Robert A. Manning is a senior fellow of the Brent Scowcroft Center on International Security at the Atlantic Council and its Foresight, Strategy and Risks Initiative. He served as a senior counselor to the undersecretary of state for global affairs from 2001 to 2004, as a member of the U.S. Department of State Policy Planning Staff from 2004 to 2008, and on the National Intelligence Council Strategic Futures Group from 2008 to 2012.

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