China has stolen a march on US in the high-stakes race for 5G and AI supremacy. Image: Twitter

Le Figaro journalist Laure Mandeville recently interviewed Asia Times Business Editor David P. Goldman. The interview ran here in French. An English version is published below with permission:

Laure Mandeville: After the constitution with China’s strong support of the Regional Comprehensive Economic Partnership, or RCEP – a zone that includes many close allies of the US, such as Japan, Australia and South Korea – you framed the situation of the US vis-à-vis China as a “Tsushima moment” for the United States.

You were comparing the US incapacity to contain Chinese technological and economic advances to the disaster encountered by the Tsarist Russian Fleet against Japan in 1905, which led to the Bolshevik revolution. You also talked of a “Dien Bien Phu” moment. Why? Is all lost? Do you think China will overcome the US as a superpower?

David Goldman: Nothing is lost. The West has enormous technological and creative resources. But it hasn’t used them effectively. On the present trajectory, China will surpass the US as a superpower. It wants a dominant economic position based on control of the key technologies of the Fourth Industrial Revolution, especially artificial intelligence applications to large data sets.

It wants control of crucial patents, industry standards and technology that will make the rest of the world pay rent to the Chinese Empire. And it wants an impregnable military position. It wants to be able to bully and humiliate countries that thwart its interest – as it now is attempting to do to Australia, for example.

LM: How did we get there? What were the strategic mistakes that led to this situation? How could the US miss the magnitude of the Chinese economic and strategic challenge for so many years?

DG: After the fall of communism thirty years ago, the United States could not imagine that another strategic rival would emerge. China’s per capita income in 1990 was just one-ninth what it is today. American companies saw China as a source of cheap labor for low-margin manufacturing industries, and American economists thought that Chinese exports of cheap consumer goods were a benefit to the United States.

America simply didn’t imagine that China could make the leap to a technological superpower. We still can’t believe what is happening before our eyes.

LM: Was the key mistake that will change history the fact that American tech companies abandoned the hardware business after the March 2000 stock market crash, to concentrate almost exclusively on software?

DG: It wasn’t a mistake for the stockholders of American tech companies, who added trillions of dollars to their market capitalization during the past twenty years. Successful software businesses have high returns because the marginal cost of adding a new customer is zero. High-tech infrastructure companies like Ericsson and Huawei have a return on equity in the single digits.

The Trump Administration approached Cisco, formerly the top manufacturer of Internet routers, and suggested a merger with Ericsson to create a national champion to compete with Huawei. Cisco replied that it didn’t buy low-margin businesses. Inexpensive hardware from Asia made the software boom possible. Asia subsidized capital-intensive investments while the United States avoided them.

That has had devastating consequences for America’s long-term competitive position and its strategic capability. Meanwhile, the loss of 10 million US manufacturing jobs harmed our social fabric.

LM: The Americans acquiesced to technology transfers and welcomed 350,000 Chinese students at their universities, without particularly controlling what they were doing there. Was it naiveté, geopolitical blindness or rapaciousness that led to such a relaxed approach?

Chinese university students at a graduation ceremony in the US. Photo: AFP

DG: Nearly four-fifths of doctoral candidates in electrical engineering and computer science at US universities are foreign students, and the Chinese are by far the largest contingent. We trained world-class faculty for Chinese universities, who now are among the world’s best. Asians now comprise half of the professional staff of US tech firms. The United States can’t do without Asian immigrants.

In hindsight, we should have recruited the students who we wanted to keep in the United States, and retained the best of them. The dirty secret is that foreign students usually pay full tuition, or 40% above the average tuition, so the universities want a lot of them. We were naive about technology transfer, and careless about theft of intellectual property. But it is an exaggeration to blame China’s rise on IP theft. Some Chinese companies, notably Huawei, have been more innovative than their Western competitors.

Now China graduates six times as many engineers and computer scientists as the US. Twenty years ago the quality of Chinese graduates was poor, but it has improved a great deal and is close to Western standards.

LM: With the arrival of Donald Trump and his declared commercial war against China’s technological advantage, and then the Covid-19 pandemic, we suddenly had, for a brief moment, the feeling that an epiphany was happening, a wake-up call that would lead to the launch of a new strategy towards China.

After relying on “America First,” Mike Pompeo eventually organized the Quad and started to tour Europe to warn Europeans against Beijing. The Europeans announced a committee for screening Chinese investments. Several countries including Britain decided to reverse their decision to accept Huawei’s 5G technology. The hostility to the Silk Road grew. The US blocked TikTok in America. But it seems that these setbacks were only temporary. Has China’s victorious battle against the coronavirus enabled it to reset its strategy?

DG: China’s “Wolf Warrior” diplomacy damaged its standing. Germany’s foreign minister publicly rebuked his Chinese counterpart Wang Yi in September after Wang warned that the Czech Republic would pay a “heavy price” for the visit of its Senate president to Taiwan, and there have been many similar incidents. Opinion polls in the US as well as Europe show growing hostility towards China.

Western sentiment favored a coalition against China, but sentiment could not compete with power. China is the only major economy in the world that will grow during 2020, thanks to its remarkable success in suppressing the pandemic. Its technological power in 5G and, more importantly, the industrial, commercial and medical applications made possible by 5G, have persuaded most of the West it cannot isolate China. That is also the view of Biden aides such as Jake Sullivan, the designated national security advisor.

LM: Germany just announced that it will allow Huawei 5G to be installed. What conclusions do you draw from this decision? Is this short-term logic, that will hand the control of big data to China? 

DG: To my knowledge, Germany has made no announcement, but the German media have leaked the draft law that the government will present to the Bundestag, which allows Huawei 5G. Trump’s defeat in the US election probably tipped the balance in favor of Huawei. Huawei always has viewed 5G as the core of an “ecosystem” of new technologies that 5G makes possible.

Huawei is in the crosshairs of US President Donald Trump’s tech war. Image: Facebook

As the chief technology officer of Huawei told me, the “control point” in the world economy is the porting and storage of data in machine-readable form. If oil was the fuel of the 20th century, data will be the fuel of the 21st century. China for example has already digitized the medical records and sequenced the DNA of hundreds of millions of its own citizens, and Huawei expects to add the records of another half billion people outside of China during the next ten years.

This sort of database will transform pharmaceutical research, and every major European pharmaceutical firm now has an AI joint venture with one of the major Chinese tech companies. It also can revolutionize manufacturing and logistics. With Russia and Germany integrated into Chinese systems, Beijing will have a Fourth Industrial Revolution complex that reaches from the South China Sea to the Rhine.

LM: Obama had launched the Trans-Pacific Partnership. Now there is a China-led trade zone, the RCEP. Have Australians, South Koreans and others decided to go back to China in a realpolitik move, because they see America as a declining power, engulfed in internal wars and not to be trusted?

DG: The Regional Comprehensive Economic Partnership will cut tariffs dramatically – by about 90% in the case of Japanese exports to China – and now China is trying to negotiate free trade areas with South Korea and Japan. Asian trade is now as concentrated within Asia as European trade is concentrated within Europe.

The logic of the development of an Asian internal market is similar to that of the European Community, and it is not surprising that the Asians are creating a giant free trade zone. Australia is in a nasty fight with China, but it now sells a higher proportion of its exports to China than ever before. It could not afford to stay out of the RCEP.

The American consumer for decades was the main source of demand in the world economy. Now the internal Asian market is far more important. South Korea, for example, exports twice as much to China as to the US. I am sure that the Japanese and South Koreans like the United States much better than they like China, but the economic logic behind an Asian free trade zone is overwhelming.

An Asian free trade zone certainly is compatible with America’s role as the leading superpower, just as the European Community originally was formed with American sponsorship during the Cold War.

The difference, of course, is that China’s economic strength makes it a magnet for all the Asian economies. In this context, it is noteworthy that Japan and South Korea politely rejected American demands to exclude Huawei from their 5G networks.

LM: What can and will Biden do in this very challenging situation?

DG: Biden’s campaign platform included measures to promote American research and development, but he did not seem to give this idea any priority during the campaign. We have seen a number of policy papers from universities and think tanks in the Biden camp, and their proposals for supporting technology are not very ambitious.

For example, a recent paper from the Asia Society entitled “The China Challenge” argues that the United States should not try to create its own national champion in telecommunications to compete with Huawei, but instead should subsidize a software-based approach.

Democratic presidential candidate Joe Biden speaks at a ‘Build Back Better’ clean energy event in July in Wilmington, Delaware. Photo: AFP / Olivier Douliery

I fear that our software companies will still be writing and testing code while Huawei dominates mobile broadband across the Eurasian continent. To maintain its technological edge over China, the United States would have to take dramatic action. The fact is that we have a great deal of catching up to do.

To restore high-tech manufacturing, we would need the sort of tax credits and subsidies for capital-intensive industry that Asian governments provide; we would need the sort of support from the Defense Department that led to every important technology of the digital age, from microprocessors to the Internet; and we would need a greater emphasis on mathematics and science at every level of education.

Above all, we would need the sense of national purpose that John Kennedy evoked with the space program or Reagan with the Strategic Defense Initiative. Considering that we have just spent several trillion dollars subsidizing incomes and supporting capital markets, another trillion dollars to support technological superiority doesn’t seem extravagant.

And that is what I think it will take: Another trillion dollars in government spending over the next ten years. We also would need to revisit immigration policy. We cannot do this, or cannot do it fast enough, without highly-skilled Asian immigrants, including Chinese.

LM: Could a technological alliance with Europe, along with a free trade zone with Europe that Japan and other Asian economies could join, change the game at this stage? 

DG: I have no doubt that a credible American initiative would be most welcome in Europe, Japan, South Korea and of course Taiwan, and that our allies would want to join us. We have taken the problematic position during the past several years of discouraging our allies from using Chinese telecommunications technology without offering a competing technology of our own.

I think that Europe and Japan are well aware of the superiority of America’s approach to innovation. China is very good at meeting specific goals. But Americans and Europeans are more likely to make fundamental discoveries that the planners never expected. Every one of the great American digital-age inventions started with a Defense Department subsidy, but every one of them involved a discovery outside the scope of the original project.

The optical network is an example. It began with a military project for night-time illumination of battlefields. RCA Labs discovered the semiconductor laser, which made optical networks possible and created a whole new industry.

LM: In the book you published in June, you show how China has created a strategy to conquer the world technologically and economically. What is happening exactly and what will be the result?

DG: China knows exactly where all its citizens are at all times, through phone location and facial recognition; whom they are with; what they have posted on social media; and what they have purchased. This gives the Chinese government a degree of control over its population that no other dictatorship in the world has ever enjoyed.

There is a good deal of talk about China exporting its political model along with its technology and there certainly will be some dictatorships that use Chinese technology for political repression. This can be, and often is, exaggerated. 

China aims to install 450 million surveillance cameras by 2020. Image: AFP

China’s aspirations as a superpower are different from America’s, just as America’s aspirations were different from Britain’s and Britain’s were different from those of Napoleonic France. Unlike the Soviet Union, China has no ambition to remake the world in its own image.

China has never showed much curiosity as to how the barbarians – that is, everyone but the Chinese – are governed. The Chinese Empire wants to collect rent from the rest of us, to bully other countries into supporting Chinese interests and to win any likely military conflict.

That’s bad enough. I don’t think China has the intention, let alone the ability, to impose its system on much of the rest of the world. It will probably help keep some obnoxious regimes in power.

LM: Many Chinese experts don’t share your pessimism because they point to the intrinsic weaknesses of authoritarian and totalitarian regimes. This idea of a weak China that will be challenged effectively in the long run was shared by the Trump administration. What is your answer to their arguments?

DG: I support democracy because I like it, not because democracies always are more efficient than dictatorships. In general, democracies are less likely to persist in error and more likely to succeed than dictatorships. In the short run, there are many exceptions to this rule – for example, France versus Germany in 1940.

The Soviet Union came very close to winning the Cold War. After Russian weapons shot down 100 Israeli planes during the 1973 war, most analysts believed that Russia would win a conventional war and would eventually win the Cold War. The US turned that around in less than a decade, but the outcome was hardly predestined.

For 30 years we have consistently underestimated the robustness of the Chinese economy and the capacity of the Chinese to solve enormous problems – for example, the migration of 600 million people from countryside to city in just three decades. When the Covid-19 pandemic began in January 2020, the favorite phrase in the US media was “China’s Chernobyl moment.”

To be more specific, the flaws in the Chinese system tend to be exaggerated by Western analysts. It is true that China has a rapidly aging population, but it is not aging nearly as fast as Japan’s or South Korea’s. In the long run that will create serious problems for China, but it won’t do so during the next 20 years, which will be decisive.

China is a fast-aging society due to past population policies. Image: AFP

It is true that China has a lot of debt, at about 300% of GDP, but the US has the same ratio of debt to GDP. China is doing rather a good job of deleveraging its financial system at the moment. Many US analysts thought that US sanctions on semiconductor exports would cripple Huawei, but China has shown a good deal of inventiveness in working around US restrictions, and its buildout of 5G does not appear to have slowed.

The United States took a big risk by imposing extraterritorial controls on sales of advanced computer chips to China from third countries that use American technology to make chips. That creates an incentive to build semiconductor supply chains without American technology.

It is certainly possible that China will be crippled by internal problems, but I do not think it is probable. Counting on China to collapse is not a strategy. We are better off assuming that China will not collapse internally, and that we must mobilize our own strength and resolve to meet the challenge. One might think of this as a variant of Pascal’s wager.