Experts: China-US Tech Tension Based on Mutual Fear of Vulnerability

Made in China 2025, China's public document of its ambitions for technology dominance, came out of Chinese officials' anxiety about their tech vulnerability due to integration of U.S. and Chinese supply chains, panelists said during a Peterson Institute for International Economics webcast Sept. 23 featuring PIIE scholars and an expert on China's foreign economic policy from the University of Maryland, Margaret Pearson.

Pearson said that when China saw through WikiLeaks that the U.S. government had created a backdoor into Huawei servers, that led to the indigenous innovation push, so that Chinese companies would no longer be dependent on U.S. inputs.

In turn, the U.S. anxiety that Made in China 2025 would lead to Chinese champions surpassing U.S. companies through massive infusions of government cash led to higher tariffs on nearly all Chinese imports, high-tech or not.

Now, Pearson said, many of the Organization for Economic Cooperation and Development nations are trying to "constrain large and strategic Chinese firms," either through restrictions on purchasing their goods, as in 5G equipment, or through restrictions on selling high-tech goods to them.

In the U.S., not only have sales restrictions increased, but there have been expansions of the authority of the Committee on Foreign Investment in the United States, or CFIUS. Pearson said some are saying last week's executive order that directed CFIUS to consider different factors didn't really change how the committee operates, but it still sent a strong signal that security is paramount.

She also said it will be interesting to see what restrictions could come on outbound investment.

"In U.S.-China relations, this focus on security above all" has led to a schism between the government and businesses that operate in China, she said. She said the U.S. government attitude is that U.S. businesses are naive for "wanting to stay in this very dangerous realm. It exposes a deep irritation in the U.S. government of firms lobbying in their own interests."

Both Pearson and PIIE scholar Yeiling Tan cautioned that U.S. policymakers should not assume that just because China announces an ambition to dominate a sector, such as artificial intelligence, that means it will reach the goal.

Tan said, "As with dual circulation, whether a more internal innovation system will be successful remains to be seen."