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NYC 19 Conference Report May 14 - 15 | #TechonomyNYC

The US-China Battle Over Tech

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  • Zachary Karabell and Stephen Roach. Photo credit: Rebecca Greenfield

Speaker

Zachary Karabell
Founder, The Progress Network

Stephen Roach
Economist & Senior Fellow, Yale University


Ten years ago, Karabell wrote “Superfusion: How China and America Became One Economy and Why the World’s Prosperity Depends on It.” Then five years ago, renowned economist Roach chimed in with “Unbalanced: The Codependency of America and China.” Now these two turn their attention to how these two codependent nations will manage their growing rivalry in tech.

The following transcript has been lightly edited and condensed for ease of reading.

 

David Kirkpatrick: Okay, so these next two guys are both experts in one of the key issues of the moment, which is US-China relations. And I just have to read the, just the titles of two of their books, and both of them have written multiple books. Zachary is a serial book writer, he’s written so many books I can’t even keep track of them. The most recent book is about the leading indicators, the numbers that govern modern economies, but he wrote a book called “Superfusion: How China and America Became one Economy and Why The World’s Prosperity Depends on it.”

Now, Stephen Roach who is a very eminent economist, with Morgan Stanley for many, many years, now he’s a senior fellow at Yale, he also was head of Morgan Stanley’s Asia work, he wrote a book called, “Unbalanced: The Codependency of China and America.” So codependent, or fused, they’re probably pretty closely related, but you guys can make the distinction. It’s a conversation, it’s really two experts just trying to help us figure out what’s happening with China and the US right now, so, Zachary.

Zachary Karabell: Thanks.

Kirkpatrick: Stephen. Thank you for being here, really appreciate having you.

Stephen Roach: Thank you, thank you.

Karabell: I have a little bit of a head cold, so if I sound like I have a little bit of a head cold, it’s because I have a little bit of a head cold.

So we’re going to have a conversation, as David mentioned, so if you hear me speaking and wondering why I’m not moderating, it’s because I’m not moderate. And if you’re wondering why Stephen’s not dominating the conversation, as he should be, that’s why. But I am going to steer the conversation a little bit. Stephen and I have known each other for a while.

So it’s interesting, the—codependent or constructively fused, which in many ways is like most marriages. The question of course now is where do we stand on all this. Are we at this final breaking point that a lot of people said has been long in the making and it was only a matter of when, not if? Recently a Harvard professor named Graham Allison wrote a book called “The Thucydides Trap” where he essentially looked back at the long legacy of countries that have risen in the face of established powers and said that these things almost inevitably end in cataclysmic war, and that that’s something we at least ought to be prepared for, or one version or variant thereof given just the structural realities, no matter how well this is managed between China and the US.

So I wonder, Steve, from your perspective, you know, is this—was this a flawed relationship from the start that was bound to end on the shoals and with dashed dreams and spilt tears and it only took whatever approximate, whether it was Trump or something else, it would have happened anyway and that’s where we are or is there something else going on?

Roach: Well, thanks Zach. I chose the—to frame this relationship from the construct of codependency, which I stole from the study of human psychology, human pathologies because it inherently is not a stable relationship, and I really hope for you that you are not in a codependent marriage.

[LAUGHTER]

Because—

Karabell: Can we not, can we not go there?

[LAUGHTER]

Roach: Well, you alluded to that, so I just wanted to bring that back onto the table.

Karabell: Yeah, I mean that’s totally—I kind of earned that one.

[LAUGHTER]

Roach: Codependency is when two partners become so reliant on one another as sustenance for their own sense of self that they lose sight of who they really are. Usually one partner, through—and I’m taking this a little further than I intended—but through therapy or whatever—

Karabell: It’s really—it’s getting a little close to home.

Roach: —decides to change. And that leaves the other partner, who is steeped in, you know, we’ll say his ways, okay, rather than her, but it could go either way—with a sense of feeling scorned and the scorned partner then lashes out, there’s a blame game, which leads to open conflict and, if untreated, a split.

So you know, economies are not people, but the US and China, despite the narrative—and it’s a bipartisan narrative in Washington—that it’s a one-way relationship, China depends on us, that’s bullshit. I mean, we depend on China for our third largest and most rapidly growing export market. They own about one and a quarter trillion in US treasuries, another 400 billion of Fanny and other government-sponsored debt, and we need low cost Chinese goods to make ends meat. So we need China and we liked keeping China in the box where it was delivering goods, buying treasuries and serving as our third largest and most rapidly growing exporter.

And China’s changing, just like the human counterpart to this, and we don’t like that, we’re uncomfortable with that. We’re not. We’re sort of stuck in the hubris of our superior growth model. And so, you know, we’re the scorned partner, we’ve lashed out and we’re using policies to sort of put China in the penalty box that don’t have a great history, and China certainly is responding to that. I think that the damage has been done, there’ll be a deal, it’ll be a superficial deal that will focus on the bilateral trade deficit for the US, which by the way we have 102 bilateral trade deficits if anybody wants to know. And so, but we won’t solve the big issues, which is sort of the topic of this session, the technology conflict, you know, intellectual property rights, forced technology transfer, cyber, state-sponsored industrial policies, we’re not going to solve those issues, despite how they’ll spin them in Washington. And so the conflict endures even after the coming deal.

Karabell: So I tend to be a little more cup half full, Stephen’s a little more like the human incarnation of Eeyore.

[LAUGHTER]

And I tend to view things more as there’s codependence and then there’s interdependence, right? And in interdependence there is some natural blurring of lines, there’s some natural blurring of, you know, where does one begin and the other end that is often purposely constructed or purposely done because each party believes that it’s longer term self-interest is most met by allowing, in the state sense, some erosions of sovereignty or some erosions of change, the evolution of international institutions.

Now the United States, as most of you know, has never been the easiest player in that except when it’s playing by rules that we wrote, in which case we’re usually willing to abide by them except in those not infrequent times when we’re not. So there was a degree, I think, of constructive interdependence and it wasn’t, in many ways—I wrote the book that David alluded to in 2009 at the heart of the US economic crisis. And one thing that has always struck me about the US China relationship is, you know, look, like everything else, the more secure that you feel about your own domestic, internal situation, the more willing you are to allow for some of the blurring of that sovereignty, or the more willing you are to allow for some of the mutual dependence. And both China and the United States are prime examples of countries economically and societally that are not really interested in having its sovereignty determined by anyone else and in fact are, I think, very similar in that respect.

But in many ways, I mean, this did mutually enrich for a while, whatever disruptions it may have caused. And I do think that there’s a question now given that you’ve got trillions of dollars of supply chain investment over the past 20 years, it’s not just the United States and China, it’s a global ecosystem of production, and you have this break down that’s been long coming, but nonetheless probably could have been avoided. And I think we do have to ask the question of are we in 1953 when the United States and the Soviet Union, it was probably a little bit before that, probably more like 1950, went from maybe there was a possibility that these two systems were going to work together after World War II and instead devolved pretty quickly into a multi-decade Cold War. Or are we in 1983, where Reagan came up and said, “We’re going to build Star Wars, the Soviet Unions an evil empire, we are in a multi-generational struggle.” And three years later Gorbachev comes along and the two of them meet at Reykjavik in 1986 and that conflict immediately dissipates, so that’s obviously not an example China would like to follow if it’s—if they’re cast in the role of the Soviet Union.

So I don’t know, I mean, think there are—you know, obviously we’ll see there’s clearly some permanence as much because of China’s domestic evolution, right? They are much more focused on manufacturing for a 1.5 billion person domestic market. They’re increasingly focused, and we should now turn to the technology part, on their own intellectual property, right? The legacy of the United States was the United States rampantly ripped off everybody’s blueprints, plans, factories, particularly the British throughout the nineteenth century. And then toward the end of the nineteenth century when the Americans started developing their own intellectual property, and Thomas Alva Edison was the premier example of that, we suddenly become incredibly focused on patents and intellectual property protection because we’re the ones developing it. And some of that you could see going on now with China with 5G and with artificial intelligence, right? They’re developing it, they don’t want others to benefit, they want to benefit. That’s part of the principle of IP.

Roach: Wait, wait, it’s not—they are definitely focused much more now on indigenous innovation rather than importing stuff from other innovative societies. But, you know, the idea that they don’t want others to do this, I think, is arguable, Zach. I think especially, you know, I just heard some of the discussion of AI, AI is really a cross-border, cross-institutional, cross-disciplinary collaborative model. The architecture’s pretty open, the algorithms are out there for everyone to see and utilize. And China wants to protect its contribution to that particular technology, as it does in other areas that it’s engaged in, but recognizes that there will be other contributors as well. It’s not, you know, sort of a zero-sum framework that I think they’re fighting just to make certain that they have the dominant share. I realize they’ve made some major mistakes in the PR campaign, whether it’s Made in China 2025, or the AI 2030 plans, and using these plans from a PR point of view to indicate that they want to dominate. And I think they backpedalled on that, and they did make a mistake on that. And that I don’t suspect will happen again.

Karabell: Although they do with 5g and with their own domestic telecom protocols, there’s a degree of paranoia about—I mean, what’s interesting about both that and this whole debate, I’d like to turn a little to Huawei for a moment, they have their own paranoia about vulnerabilities to foreign equipment and hardware makers being able to access their data and their system. I mean part of this is in the AI realm, who’s going to tap this immensity of data, part of it’s who’s going to control the hardware and the digital technology of the future? You know, you wrote a piece for Bloomberg I think two or three months ago about Huawei. And what was interesting about that—I mean, I assume most people in this room are at least aware  of this whole debate, and there may in fact be an executive order this week or coming down the pipe from the White House forbidding American companies to purchase telecommunications equipment that could have national security implications which would, I assume, be enforced through the CFIUS Committee, which is this interagency committee that oversees these things.

But you suggested, which has been a real question, I think, for many of us, that the line between sort of nationalist rhetoric on the part of the United States of we don’t want other countries and we don’t want Americans buying Chinese-made telecommunications and 5g equipment, and whether or not there’s actual back door and other vulnerabilities in that equipment, remains totally opaque, unclear. Maybe you can talk a little more about that, because it was an interesting argument.

Roach: Look, the evidence we’ve assembled, whether it’s in telecom or in the broad realm of intellectual property theft or forced technology transfer, which is really the lightning rod in this current tariff debate, the evidence is really terrible. I mean, it was put together by Robert Lighthizer, who is the US trade representative, who is, you know, a longstanding trade lawyer, it’s not clear to me he’s ever taken an economics class or if he did, I’m sure he didn’t do very well at it like most of Trump’s economic advisors who unfortunately a disproportionate share of them did go to Yale.

But, you know, the evidence, Zach, is really, really poor. The Huawei case that you cite, you know, Huawei’s been suspected for probably 20 years of being sponsored by the People’s Liberation Army, of which the founder served in for several years before he started Huawei. And there was a case of hacking that was brought against Cisco, who apparently coded in a sort of a foolproof bug into one of their routers that Huawei was alleged to have copied so when they sold the router, the bug appeared. The case was basically thrown out of court and Cisco settled. There was a more recent case of, you know, some guy went into a factory and stole the robot arm off of, I think, a smart phone sort of testing line. But, you know, beyond that—and then there’s this whole extradition charge with the daughter of the founder going on right now in Canada—the allegations of state-sponsored peel a orchestrated industrial espionage by China’s leading telecom company is not something that we’ve really made even close to a good case in court.

Karabell: Right, and if you’re a non-American purchasing—trying to purchase telecom equipment, right? So if you’re Angela Merkel sitting, thinking do we follow the persuasion and the full court press of the United States and not purchase Huawei telecom equipment for the buildout of a 5G network, you’re also sitting there going, the Americans are saying that Huawei’s going to embed back doors, it’s going to allow the communist party at will to access data and information of a German network, huh, wait a minute, the NSA several years ago tapped my cell phone. So you know, which of these two alternatives is more objectionable? Now you might say that it’s more objectionable that it’s China because they’re not as allied and there’s not the level of kind of decades of treaties and affinity and interaction. I talked to an Indian telecom executive as well as somebody in the Indian government and their attitude was very simple, which is someone’s going to spy on us. It’s either going to be the Chinese, and they’re either going to do it through software which is much more likely than back doors, or they’re going to do it through some sort of technique, or the United States is going to spy on us. And the best that we can do is to try and mix and match enough equipment and enough protocols using Ericson and Cisco and Huawei and whoever else to make that, to create more friction. So, you know, their attitude is someone’s going to be doing it. It doesn’t really—it’s going to happen and how do we make it a little bit more difficult for others to do it. And I mean, for the moment at least it doesn’t seem like the United States has been overly able to persuade, other than Australia, New Zealand, most countries to follow its lead around [OVERLAPPING 0:18:26.5]—

Roach: Well, you know, this administration is having, you know, a hard time with its sort of multi-lateral engagement given its commitment to pull back from supporting most multi-lateral efforts in other areas.

But again just consider this other issue. The big one, forced technology transfer, to do business in China, you’ve got to sign a JV with a partner and the partner says, you know, “I’m happy to do business with you, but you’ve got to turn over your technology.” And—so in a JV, I was in a JV with Morgan Stanley, you share people, ideas, systems, product design, but the allegation is forced, coercion, and the evidence of that is zilch. If you go look at this report that Robert Lighthizer’s lawyer wrote a little over a year ago, 182 pages long, so help me God on page 19, he admits that he has no evidence of the forcing mechanism, so he relies on proxy surveys from trade associations who respond and say, “Yeah, we’re a little uncomfortable doing business in China.”

So this is the way—I could go through the other things like IP theft, even cyber. We don’t have the time to do that, but we made a flimsy case and if we’re going to do what we’re doing in launching a full-blown economic attack on the second largest economy in the world, one that we are very dependent on for reasons that I noted earlier, we’ve got to have a good case. And we have a crappy case. And that I think ultimately will not serve us well not just with our relationship with China, but in the way we conduct ourselves with other quote-partners around the world.

Karabell: Yeah, and it does, I mean I think you and I agree, it speaks to a degree of American insecurity about its economic future rather than a degree of American security. And like a lot of those initial JVs, as you know from being there, were done in the late 90s and into the 2000s and a lot of the initial wave of American companies that relocated and also wanted to tap into the domestic Chinese market were a lot of American brands that weren’t doing so well here, right? I mean, one of the young brands, right, Kentucky Fried Chicken for a while was not exactly anyone’s idea of a hot, cool restaurant in the United States in the 1990s, and if you ever decided that your first date was going to be at KFC, it probably was going to be your only date. But when they went to China they became this, you know, hip, cool, high-end, aspirational, expensive table service brand. And all down the line there were companies that were kind of struggling that found their salvation in the China market, which is sort of a far cry from the price of entry was odious and egregious, but they paid it anyway. So there’s a whole kind of history there that we are forgetting.

I guess one more kind of question on this, you know, Trump doesn’t get elected in 2020, do you think this is a Trump thing, or is it really an American thing?

Roach: No, it’s an American thing. There’s broad bipartisan support for China bashing. Go back to 1995, New York senator Chuck Schumer joined arms with his buddy, believe it or not, conservative senator from South Carolina Lindsay Graham in going after China for currency manipulation. Schumer—now they don’t write letters, they tweet—so Schumer tweeted—

Karabell: Stay strong, Mr. President.

Roach: yeah, exactly, so Trump goes, you know, editorial support for that hopeful outcome, and a democrat replaces him, I think it’s still, the US is going to be very, very tough on China. So, you raised the possibility of an economic Cold War, I think that’s a reasonable way, I mean we could, it’s not a military Cold War but there are certainly scenarios that you alluded to that could flirt with that. But this is going to be an enduring conflict. We can solve, or try to solve, the bilateral trade imbalance, but—you know, it’s like whack-a-mole, if we close off the China piece, it just pops up elsewhere to higher cost producers, which taxes American consumers.

Karabell: Questions anyone?

Audience #1: There’s some that argue OBOR, one bout one road, is kind of trying to propagate the Chinese way of leading. And some of the deals in doing that are take on the 5G technology, bring in our infrastructure not their infrastructure, and that that’s like a hedge on catch up growths. So catch up growths you can just copy other people, but cutting edge growths you have to innovate. And if we’re moving into a world of AI, one of the biggest sources as we just heard is data, and so if you can control and legislate the data to feed the machines to become smarter, is that a bigger hedge that they’re actually trying to build a whole different economic infrastructure based on this platform, and the fact that they have control at this point of time can give them some time to move forward?

Karabell: I mean the Chinese do have some advantages about data mining in that privacy protections are neither as entrenched nor as expected. I mean if you essentially assume a la Scott McNealy twenty years ago that you have no privacy, get over it, that would describe more of an average Chinese citizen’s approach to privacy. So the licensing of, or the permissioning of your data, becomes far more utilitarian and much less—you know, the moral framework around that just isn’t there as much, so there’s a real advantage. But that’s less about, you know, even the Chinese government right now than it is about expectations of privacy.

Roach: Look, I think you’re right, okay? I think the basic premise you laid out of China using the BRI as a way to expand its global push from a geostrategic point of view as well as a technology outreach point of view, and then utilize the data that’s gathered to enhance its role, there is very much part of its strategy. We on the other hand don’t have a strategy, we don’t have a strategy to develop 5G and we don’t have a strategy that’s really proactive in addressing Asia as the most, potentially strongest growth region in the world. We had one with TPP and on the fourth day in office, the forty-fifth president because it was an Obama plan said, “We’re out.” And we blew that because that really was our opportunity to really engage our allies and engage the region in a framework that was far more powerful than China’s BRI. China stepped into the void left by, you know, our abdication and, you know, that’s the way the world goes. We made a huge mistake there.

Karabell: We’ll do two quick more questions.

Fong: Mei Lin Fong, People Centered Internet. The US economy really grew through helping the rising middle class in the world, in fact right now half the world is not connected to the internet, it’s a tremendous economic opportunity for both China and the US. Why can’t we just pivot to kind of a leader board for this trade war about who expands social and economic opportunity the most for people of the world?

Karabell: Right now, you know, the Chinese, given their massive investments in Africa and Latin America, most of which are designed for resource extraction not necessarily for anything else, has certainly been a benefit to a lot of those countries in terms of their own economic development and we have—we’re trenched a lot from that.

One more.

Merrell: Alex Merrell. I used to work in IP so I have some ideas or questions about that that I won’t get into but in respect of 5G and the absence of good US leadership, I think the private sector, not just the US but the western private sector could actually come up with solutions. Do you have any ideas on that front? Do you agree with that sentiment and do you think we can organize?

Roach: We absolutely could, the question is why haven’t we done it? I would put it back to you. Do you want to respond?

Merrell: Sure. Absence of good private sector leadership, right? I mean, sometimes it’s just in the doing. I have some ideas about this we can chat about later if you like.

Karabell: I think we are at our time, so, we’ll let—

Roach: Well, just because the red light’s beeping.

Karabell: Yeah, no, more like because David’s beeping. And I’ve got to get to my couples therapy, so I think we’re done.

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