Has China created its own dilemmas?

The US and China are not just engaging in trade war and military posturing but also in a technological race and ideological challenge, or more specifically, it is about the future of democracy. This article is the second in a three-part series examining the prospects of major economic and political reform around the world in 2019, and the complexities and impacts of this process.

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In many ways, China has benefited much from the innovative competency of the US, and its spectacular economic rise has much to do with the help and support provided by the US and other world powers. The potential for collaboration was huge and there was room for everyone to succeed.

Within a rules-based framework, success reinforces success, and this has kept everyone in collaboration despite the imperfection of our current economic model and its financial system.

In 1975, US president Gerald Ford created the Committee on Foreign Investment in the United States (CFIUS), primarily to monitor the implications of foreign and portfolio investments into the US that might affect its national security. This provision was enacted before the Technological Revolution was in full swing.

The US may have anticipated or had some advance knowledge that such a provision would be needed as a contingent against risks to its national security in the foreseeable future.

Challenging the status quo

As the world transited into the Digital Age, it realized that the rise of China was complex and challenging. With its economic success due largely to an undifferentiated free-trade system, some of its major trading partners are no longer comfortable with China seeking to initiate a new world order that is trade-based, to replace the prevailing and globally accepted rules-based policy. It is also an ideological challenge that affects many aspects of the status quo.

Whenever it encounters bilateral issues with its military expansion or its Nine-Dash Line posturing, from its coastal presence in the subcontinent region to the South China Sea, its official explanation has always been based on its own trade-based policy. This has left world and business leaders wondering how China’s Marxist-influenced ideology of trade-based policy values affect the concept of collective peace and prosperity under the prevailing US leadership.

Technological race

The US did not need any further push once it realized that China had the technology for advancement into quantum computing. Quantum computing will not only radically transform space technology, defense, security and communications, but it will also make cyber-warfare a terrifying reality, as it can be used to overcome even the most advanced encryptions. Such technology can be “weaponized” against anyone, anywhere. It is terrifyingly intrusive, and this realization is more terrifying for the US than its current trade deficit with China.

When the University of Science and Technology of China demonstrated quantum entanglement by sending its quantum satellite into space to release entangled quantum particles back to Earth or show the quality of its satellite-captured images, it thrilled many in China and the region. But the real functionality of quantum computing lies in the management of quantum decoherence, not merely a display of quantum mechanics theory.

The Massachusetts Institute of Technology and IBM had already created quantum-protocol back in the early 1980s. Technically, China is still behind the US and its allies by some 20 years. Still, the US is not taking any chances with the Chinese.

To preserve its global leadership and world order, the US knows well that it must be able to rally its allies once again to support its innovative push in quantum computing and the many related developments. It cannot do this alone and if it fails, the consequences are just too discomfiting. The US needs to leapfrog the Chinese decisively in this technological race if it wants to retain its leadership.

Strategic reform

In this aspect, the US will have to dig deeper into its innovation-chest and bring out even more breakthroughs that it has been developing discreetly if it aspires to change the world strategically for the better, just as it did in its “race to the moon” in the 1960s that eventually ended the Cold War. The US and its allies need a catalyst that can inspire such an innovation push.

They still have to develop concurrently a much more energy-efficient cooling technology to stabilize these powerful quantum computers. The US and its allies know well that they will also have to drive down the unit cost of operating these super-computing systems and set new international standards and protocols for quantum computing and its applications for adoption by many of the financially weaker economies.

CFIUS and FIRRMA

When US President Donald Trump signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA) last August, it strategically fortified the executive power of the CFIUS. The US now has the power of veto against any country that seeks to undermine its national security, including China, and without the need to involve the World Trade Organization or the United Nations Security Council.

It is also working to help its allies develop their own versions of such a provision to protect their own investment reviews and to facilitate information exchange. The European Union, the UK, Canada, Australia and Japan are some of the economies that are putting in place similar oversights to protect their own national security.

With such extensive collaboration, the notion that the US had sidelined its strategic allies may not be true after all. In fact, they have collectively sanctioned Huawei, ZTE, Hytera, Dahua and some other technology companies from Hangzhou, the Chinese version of Silicon Valley, on security grounds, and very much in an orchestrated manner.

The entanglement of China

The detention of Huawei chief financial officer Meng Wanzhou by the Canadians was due primarily to her trying to circumvent the US Financial Compliance Regulation and also Huawei allegedly trading with Iran despite the prevailing US sanctions. When the Chinese arrested three Canadians in a tit-for-tat move, the Chinese inadvertently validated the suspicions of the global community that Huawei was acting as a spy for the Chinese government, and that it has very powerful connections within the Chinese hierarchy.

In light of these sanctions, there is a high probability that the US and its allies may just create a dedicated Internet that is based on a new set of quantum-computing protocols and standards for higher-value sectors such as defense, security, aerospace, healthcare, communications, and other task-critical applications without the Chinese.

If China is unable to be part of this new technological development, all its investment and knowledge gained in quantum computing will be wasted if it cannot find any buyers to reasonably monetize its efforts and investment. The poorer economies that it is currently courting under its Belt and Road Initiative have very little use for such advanced technology. This is going to be the toughest challenge for Chinese President Xi Jinping to address.

China’s dilemma

Even before the current trade war, China’s economy was already showing signs of weakening. The Chinese had been pumping their economy and reducing taxes to try to stimulate growth for quite some time. With the S&P Global Rating approximating its off-balance-sheet borrowing at 60% of its 2017 gross domestic product, such stimuli are nearing the limit of diminishing returns.

To make up for foreign direct investments that are pulling out of China, the Chinese need a good credit rating to attract new FDIs. But as China has stopped releasing some of its critical trade data in recent months, it is making such efforts much more difficult. High-value FDIs come with mutual benefits and demands, and China has to address the valid human-rights concerns of major multinational corporations that safeguard their expatriates – their rights to work and exercise their religious beliefs freely and safely.

China needs to understand that foreigners can respect Chinese laws under the prevailing rules-based policy but if it overly curtails their rights, especially in matters of religion and personal safety, it will be very hard for China to attract critical FDIs at this juncture to support its weakening economy. The global community is looking to China to see how it can or is going to integrate the co-existence of two very conflicting ideologies to back its advocacy of its own trade-based policy domestically. The ball is in China’s court, and it does not look promising.

Chinese legacy challenges

President Xi has indeed inherited just one too many legacy issues. As he reforms the domestic market, addresses trade imbalances and seeks to attract new FDI, his challenges are further compounded by the 90-day trade-war truce and the sanction against its push into quantum technology. China needs the support of its major trading partners more than ever, but it is not going to be easy.

China cannot afford to function in isolation, as that could easily lead it into economic upheaval, and risk rupturing its central control and national cohesion. Nearer home, its undifferentiated foreign and trade policies and posturing in the South China Sea have antagonized many of its neighbors, making them exceedingly cautious when negotiating with the Chinese.

China is in a very difficult position across many fronts. That is the real dilemma that Xi is facing and he needs the full support of his people and the Communist Party to help find new solutions. It has to dig deep to find new approaches in addressing challenges, just as the US has to dig deep into its innovation chest and harmonize its vital relationship with its allies. China needs a new narrative but it needs to reinvent itself first.

This is the second article in a three-part series. Part 3 will examine how the future of the global economy will be defined by the technological race and ideological differences. To read Part 1, click here.