National Security Experts in the United States Fear the Wrong Thing in China

Many believe that regulating Big Tech cedes leadership to China, yet the best protection for America is a thriving startup environment.

Nicolas Chaillan, the Pentagon's top software officer, resigned in September, citing the Department of Defense's dismal track record in terms of technological adoption and innovation. In the battle to develop dual-use technologies like artificial intelligence (AI), quantum computing, and cyber capabilities, Chaillan subsequently said that the US had "no competing fighting chance against China."

Chaillan's departure reflects a broader frenzy in the US national security community, which has come to regard China as a "techno-authoritarian" superpower intent on reshaping global technology standards, exporting digital surveillance tools, and dominating advanced industries that will shape the future of governance, the economy, and military conflict. William J. Burns, the director of the Central Intelligence Agency, has stated that technology is the "primary area for competitiveness and rivalry with China."

The argument over whether or not to subject US tech corporations to data and antitrust regulation reflects the fear of China's technological growth. Several legislation now circulating in Congress attempt to improve antitrust enforcement, increase data interoperability, and prevent dominant platforms from selecting winners and losers in online marketplaces. Former US national security officials have fought against these laws, claiming that they would "give China US technological leadership." Former national security adviser Robert O'Brien has stated that such legislation would be a "gift to China."

At the same time that the US national security community is concerned about changes in US tech regulation, the Chinese government is hammering many of its most powerful companies, including Baidu, Alibaba, Tencent, and others, damaging the country's short-term competitiveness and innovation capacity. As a result of the tough and unexpected restrictions, the market capitalization of China's publicly traded tech businesses fell by more than $1.5 trillion in 2021. Though China's consumer tech leaders may never regain their prior market dominance, there is reason to expect that Beijing's regulatory policies will allow smaller companies to challenge their larger competitors in the long term. To put it another way, the national security community is right to be concerned about China's IT industry, but not about its giants.

In this setting, the US should re-energize the competitive markets that propelled it to the top of the global tech rankings in the first place. Congress should establish conventional antitrust law rather than replicate Beijing's expensive and arbitrary regulatory policy. The American Choice and Innovation Online Act and the Ending Platform Monopolies Act, both filed by the House Judiciary Committee, would help disincentivize anticompetitive acquisitions and prohibit online market owners from preferring their own items. Furthermore, the US government would be prudent to enact legislation that supports technological firms, encourages applied R&D investment, and encourages creative destruction in strategic industries.

There has been a significant difference in the paths of mega-cap technology businesses in China and the United States in recent years. At the same time that China's IT industry is being chastised, US tech firms are reporting record profits.

Following Chinese President Xi Jinping's personal intervention in Ant Financial's initial public offering (IPO) in October 2020, the Cybersecurity Administration of China (CAC) and the State Administration for Market Regulation began to tighten their control over online platforms and consumer internet companies. Antitrust penalties, forced divestitures, and IPO delays have all been imposed on some of China's most well-known software companies. Many private enterprises are postponing long-term investments due to a lack of regulatory openness and predictability, while others have seen employment, revenue growth, and profitability suffer. Didi, the popular ride-hailing service, put its plans to go public in Hong Kong on hold last month after authorities warned that its plans to prevent data leaks were insufficient under China's new Data Security Law.

The new rules are aimed at the same companies that were seen as potential leaders in Beijing's quest to dominate future dual-use IT industries not long ago. "China's private sector, led by Internet companies Baidu, Alibaba, and Tencent... is driving the development of emerging technologies, such as facial recognition and 5G, by establishing innovation centers and funding technology startups," according to the Pentagon's China Military Power Report from 2020. In 2022, the CAC has proposed severe plans forcing internet businesses to acquire investment transaction approvals if their user base or sales reach a particular threshold.

The current shift in government policy is due to a number of factors. The new regulations are intended to protect data security and privacy while also limiting anticompetitive corporate practices. Some believe the crackdowns will shift resources away from "financial technology" and into the "real economy." Most importantly, the new restrictions aim to destroy alternative power centers and strengthen the Communist Party of China's hold on internet.

Chinese leaders appear to have just grown aware of the costs of the crackdown. Vice Premier Liu He chastised regulators last month for enacting new regulations without first "coordinating with the financial management department to ensure the stability and consistency of policy expectations." While this is a positive indication for Chinese IT companies and investors, the industry still has a long way to recover its losses.

Meanwhile, US technology businesses are thriving. The value of the top five US tech companies—Apple, Microsoft, Alphabet parent Alphabet, Amazon, and Facebook parent Meta Platforms—increased by more than $2.5 trillion in 2021. In 2021, Apple's sales increased by $90 billion, while Amazon and Google's revenues increased by 60% over their respective 2019 levels.

On the one hand, the dominance of US internet platforms benefits US national security by allowing US tech companies to invest their earnings in R&D to drive innovation. Because of their market domination in both local and foreign markets, these companies have access to massive, high-quality data sets that are favorable to AI innovation.

On the other hand, there are apparent drawbacks to big tech's unbridled expansion. The same network dynamics that have kept US tech competitive abroad also stifled domestic economic growth. Evidence implies that huge tech businesses have impeded productivity development by acting as "digital gatekeepers" and limiting startup creation. Other researchers have discovered "death zones," or areas where IT behemoths purchase smaller competitors in order to suffocate competition, drive out alternative investment, and cement their market domination.

Apart from their influence on innovation, digital platforms have worsened societal concerns that have hampered larger efforts to compete with Beijing. American social media corporations have aided the spread of disinformation, radicalized segments of the population, and exacerbated wealth disparity, all of which have contributed to worldwide perceptions that US democracy may not be a viable alternative to Beijing's top-down government model.

These are harsh trade-offs for a Congress that must weigh the domestic effects of Big Tech's concentration against the national security implications. Given the threat that Big Industry poses to good government and economic viability, many national security experts believe that protecting US tech champions is unwise. Congress should make the US technology ecosystem more competitive by prohibiting platforms from abusing their market dominance and devouring smaller competitors.

However, the destiny of big tech is simply one aspect of the US-China technological race. The threat provided by China's national champions is dwarfed by the bigger threat posed by Beijing's developing small and medium-sized IT firms. Despite a prolonged downturn in business mood, China's antitrust-focused policies may provide entrepreneurs greater room to pursue creative destruction and disrupt the products and services of larger competitors. At the same time, Beijing is diverting funds to smaller digital companies in order to help nurture the next generation of creative businesses.

Xi Jinping announced the establishment of the Beijing Exchange in November, with the goal of providing much-needed cash to "innovation-oriented" micro, small, and medium-sized businesses (MSMEs). China's "Little Giants" initiative, which aims to cultivate 10,000 MSMEs producing key niche technologies in industries including robotics, nanotechnology, and quantum computing by 2025, is also ongoing. Surprisingly, Beijing prefers that these businesses remain small, instructing CEOs to focus on specialist technology rather than expanding their market share. China's Government Work Report, released after the "Two Sessions," includes proposals to increase commercial bank lending to small manufacturing enterprises and increase R&D tax credits for small and medium-sized sci-tech firms from 75% to 100%.

Beijing understands that controlling consumer-facing internet behemoths does not have to mark the end of the country's innovation push. Despite the antitrust effort, China's government is committed to out-innovating the US; nonetheless, it feels that increasing competition in its local technological sector is the best way to achieve so. Rather than putting all of its eggs in the Baidu-Alibaba-Tencent-Bytedance basket, Beijing is broadening its innovation environment in the hopes of fostering a slew of cutting-edge startups. Beijing's dual objectives of restricting big tech and encouraging bottom-up innovation may result in even more technical competition for US tech firms in the long term.

The US should pay attention to China's emerging innovation policy. Though Beijing's tough antitrust policies may offer US tech behemoths an edge over their Chinese counterparts for the time being, the US tech ecosystem as a whole may nonetheless suffer from market concentration at home and competition from inventive SMEs overseas.

Beijing's approach to innovation should encourage Congress to approve legislation that stops tech platforms from selecting winners in online markets, protects small businesses from bigger competitors, and makes it simpler to establish a tech company in the United States. Regulating big tech properly is simply one element of the struggle in the quest for innovation. To compete with Beijing, the US must improve the competitiveness of its own innovation ecosystem.

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