You Choose, You Lose?
The idea that the world’s states need to choose between the U.S. and China has been an article of faith in the U.S. intelligence community for some time. It broke the surface this week in a Foreign Affairs piece by Richard Fontaine, CEO of the influential think tank the Center for New American Security (CNAS), entitled “The Myth of Neutrality: Countries Will Have to Choose between America and China.” While Fontaine’s article is, as is usually the case, more modulated than the headline, he nonetheless concludes that the “time for choosing has arrived,” focusing in particular on “the effort to separate and safeguard technological supply chains.” SIG questions whether this is really the case.
The first problem with this argument is that technological supply chains are in private hands. The ability of any state, even China, to control its private-sector tech supply chains is uneven at best. This is true not just in present terms — the extent and nature of supply chains are not easy to measure, and measurement and enforcement can use government resources that might be better applied elsewhere — but also in prospective terms: supply-chain inputs and their providers change constantly. Moreover, Chinese and U.S. tech companies alike have multiple subsidiaries, JVs, equity investments, strategic partnerships, and so on outside their home markets, and those entities in turn have their own relationships. SIG’s experience in investigating Chinese and U.S. corporate ownership and part-ownership structures like these across the globe strongly suggests that arranging tech supply chains to conform with the political map will be difficult indeed.
The second problem with the choice argument is that it misses the non-equivalency of the U.S. and China in terms of tech sectors. At least since the expulsion of Google more than a decade ago, China has built its tech sector on the basis of a protected domestic market. As companies like Huawei, Alibaba, Didi Chuxing, and Tencent established themselves and grew, they enjoyed many advantages in having a gigantic captive market. However, that growth model had a dependency built into it, and when the Communist Party decided that Chinese tech companies were gaining too much social power it was easily able to clip their wings. The Party did not blink at liquidating tens of billions in equity value. Chinese tech companies are being obliged to subordinate themselves to state policy priorities, a process that shows no signs of easing. While the Party also works hard to build Chinese self-reliance in terms of supply chains and much else, supply-chain inputs really are the least of it, because the state has so much leverage in the C-suite already. The problem of Chinese tech companies is not guarding the home country’s supply chains but getting into other countries’ supply chains — and China’s autarkic policies, because they amount to a kind of nationalization, only make that problem worse.
The situation in the U.S. is nearly the opposite. The U.S. is an open market. It sources supply-chain inputs, capital, and talent from all over the planet. The most onerous government tech regulations prevent some (not many) U.S. companies from selling into the China market, but in this the U.S. has a willing assistant in Chinese state policy. Corporate espionage and IP theft aside, the Chinese state does not want U.S. companies supplying Chinese markets, except in those instances where Chinese companies still can’t match non-Chinese producers.
There really isn’t much of a choice to be made. China is a non-market economy with a security obsession and it sources supply-chain inputs for those things it can’t locate domestically. The U.S. is a market economy that sources supply-chain inputs from wherever they currently are cheapest. Yes, there are constraints for U.S. companies on sourcing from China, but that leaves all of the rest of the world for U.S. companies to work with.
That points to a third major problem with the choice argument as regards tech supply chains. Companies in the rest of the world can also make things and sell them into their domestic markets and into the 193 national markets that are not the U.S. or China. To the degree that the U.S. or China try to force a choice, the most attractive choice will usually be “both” while reserving the option of “neither.” If these choices are rendered impossible, most countries will choose the U.S., not because of its values but because its open economy has greater possibilities for them. From the supply point of view, as Fontaine notes, China competes well on price — ZTE will build a 5G network for less than Nokia would charge — but as non-Chinese, non-U.S. suppliers increasingly come online, how long can a country with rising wages and government debt, a shrinking workforce, and a non-convertible currency compete on price?
The security question is a separate one: It will not be (and never has been) easy to be an ally of both the U.S. and China, or to be neutral. But in terms of tech supply chains, the choice between the U.S. and China, in most sectors and for most countries, is a false one.