BY NEIL BARON
China is using its Belt and Road Initiative as a cyber espionage platform to spy on countries along BRI’s route. And its Made in China 2025 initiative calls for heavy R&D spending on information and digital technology. China is challenging the US as the world’s technology leader and is likely to become the world’s dominant player in crucial technologies, including technology with military applications. Donald Trump’s plan to win the technology race with China won’t work.
He plans to combat China’s ascendancy by relaxing Obama administration restrictions on use of US cyber-attacks on offending countries. But the lack of detail and his firing of security adviser Tom Bossert and eliminating Rob Joyce’s position as cyber-security coordinator have drawn concern that the White House lacks sufficient cybersecurity expertise. He also wants to block US exports to China (even though that can hurt the most wealth-producing American companies), and prevent firms with 25 percent Chinese ownership from buying US technology companies. But China will win without a massive increase in U.S. spending.
Failing to extend America’s technology lead over China would increase our all-too-evident vulnerability to China’s cyber espionage and to other foreign, criminal and terrorist technologies that can kill civilians, disrupt our elections and electrical grid, and corrupt government IT systems in our Departments of State, Defense, Homeland Security, Justice and Federal Reserve Board. These attacks, coupled with attacks on US industries, could shatter American life as we know it. Losing to China would also increase the number of potential attackers because China is teaching governments how to control their media and internet.
China is now a global leader in patents. It's among the top five in the number of sectors covered by US patent filings. Chinese inventors received 11,241 U.S. patents last year from the US Patent office, a 28 percent increase over the same period in 2016, ten times the number received in 2008. 1.3 million patent applications were filed in China’s Patent Office in 2016, more than the combined the totals of applications received in the U.S, Japan, and South Korea and Europe.
Countries with essential technologies generally enjoy larger exports and healthier trade surpluses which bring closer political and military alliances at the expense of other countries. Improved technology could be a powerful weapon for China in its trade war against the US, because it will allow China to grow its exports and manage its domestic markets to reduce the need for imports from America. On the other hand, improved technology would help America compete with BRI for more secure relationships around the world – an area where the US has already lost ground.
Trump should beat China at its own game -- by increasing US investment in its own technology. Otherwise, China will pass the United States in R&D spending by the end of this year. It has already narrowed the gap -- in 2000, China spent less than 10 percent of the US on technology R&D (around $25 vs. $275 billion). Today, it’s more than 81 percent.
Yet the federal government has allowed its investment in basic research (research aimed at acquiring new knowledge without specific immediate commercial application) to fall below 50 percent today from 62 percent as recently as 2016. Basic research represents one-sixth of total R&D spending in the US. Today the federal government spends very little on applied research, which is aimed at a specific problem or commercial objective, and makes up another sixth of total R&D spending. In the 1960s the federal government spent double what private industry spent on applied research. Although Trump asked for a 1.7 percent increase in IT spending this year, it doesn’t compare with the growth in Chinese investment. And even though corporate funding of basic research has nearly doubled over the past decade, it has not been enough to maintain our lead over China.
As Douglas Fuller, an expert in Chinese technology at Zhejiang University in Hangzhou, told NPR: U.S. tariffs aimed at Made in China 2025 are not likely to be very effective and the U.S. would do better to … put more money into cutting-edge scientific research.
Investing in superior technology would help the US develop better trade relationships, healthier trade deficits, closer military and political alliances, more global influence and better defenses against foreign and domestic criminal and terrorist attack. Mr. Trump might consider it as an alternative to provocative, counterproductive tariffs that threaten a trade war and a recession, regardless of the support he can whip up for them from his base.
Neil Baron advised the SEC and congressional staff on rating agency reform. He represented Standard & Poor’s from 1968 to 1989, was Vice Chairman and General Counsel of Fitch Ratings from 1989 to 1998. He also served on the board of Assured Guaranty for a decade.
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