Robert D. Atkinson
For America to remain the global leader in IT, the U.S. government must formulate a grand strategy grounded in a new doctrine of “digital realpolitik.” The first priority should be advancing U.S. interests by spreading the U.S. digital innovation policy system and constraining digital adversaries, especially China. This will entail working with allies when possible—and pressuring them when necessary.
KEY TAKEAWAYS
U.S. IT and digital policy needs to be guided by a grand, overall strategy, focused first and foremost on maintaining U.S. global tech leadership.
The United States faces a risk where much of the world, including the EU, could align against U.S. IT and digital interests, leading to a many-against-one environment, with detrimental consequences.
In efforts to reestablish closer relations with the EU, the United States should not “give away the store” by allowing the EU to go forward with its increasingly aggressive technology mercantilism.
The United States must enlist likeminded nations in a variety of ways to support U.S. interests—and it should not be reluctant to exert pressure to encourage these nations to come along.
The overarching goal of U.S. strategy should be to limit China’s global dominance and manipulation of markets in the IT and digital space.
INTRODUCTION
For the past quarter-millennium, each emerging wave of general-purpose technologies has widened the scope of global economic integration, raising new questions about international governance and national economic competition. The rise of the digital economy over the last two decades has further deepened and widened global integration as the Internet and related technologies have allowed firms to more easily attain global reach, while at the same time linking the world more closely in a web of information. But there is also a large countervailing force: an autocratic, non-democratic country—China—that is threatening to wrest global leadership in these technologies, with attendant social, political, economic, and security implications.1
Against this backdrop, the key question today is how a world, extremely diverse in income levels, cultures, and types of government, will deal with global technologies and global firms. This is a particularly important question now. For unlike the prior period of globalization—which reached its pinnacle in the summer of 2001 (after China joined the World Trade Organization (WTO) and before 9/11 and the start of the failed WTO Doha round), a time when there was a wishful consensus that most nations would embrace globalization, rules-based open markets, democracy, and cooperation—today’s era is one of nationalization, mercantilism, increased authoritarianism, and tension.
The digital economy entails a degree of overlap—and tension—between economic, social, and political control that is different from traditional 20th century trade in physical goods. The digital world thus is rife with strife: There is conflict over cyberattacks, Internet blocking, and cross-border data flows; over attitudes and policies toward leading information technology and Internet firms; and over technology leadership and competitiveness. Indeed, for many countries and regions, advancement of their own IT and digital firms, sometimes involving active steps to hobble foreign competitors, especially American firms, has become a centerpiece of economic policy. (The Information Technology and Innovation Foundation (ITIF) defines digital economy industries as more than just Internet companies; they include firms involved in the entire “stack” of information technology (IT), including chip design, semiconductors, hardware, software, e-commerce, and Internet services.)
In this world, the United States as the global IT and digital leader has struggled to articulate and advocate for a coherent and strategic response. All too often, U.S. thinking about privacy, tech platforms, national security, and Internet and artificial intelligence (AI) governance is siloed and bifurcated. During the Clinton and second Bush administrations, U.S. policymakers believed that the rest of the world would emulate what was obviously the superior U.S. digital policy system, and they worked toward that end. But China’s unprecedented success in IT and digital industries, coupled with a questioning of the desirability of a U.S.-style light-touch digital regulation and the rise of U.S. “big tech” companies, has meant that the United States can no longer rely principally on persuasion to convince others of the economic and innovation advantages of its approach.
When that reality started to crystalize, the Obama administration made advancing the global “open Internet” one of its top global digital policy goals. Unfortunately, many countries have grown distrustful of the U.S. government, especially after the Snowden revelations showed the degree to which U.S. intelligence agencies were leveraging digital technologies for surveillance. Despite some reforms and engagement by the Obama administration, the last decade has seen retrenchment rather than advancement of the open Internet globally, open governments, and an open, rules-based global digital economy.
The Trump administration’s response to this rising digital competition was grounded in realpolitik and determination to put U.S. interests first, coupled with a reduced presence and advocacy of U.S. interests in international forums. But while the former part of this shift was needed, the reality of the global digital economy is that it is difficult to effectively advance U.S. national interests unilaterally.
This brings us to the present moment. The United States needs to move away from an idealist view of digital international relations to a new doctrine of “digital realpolitik”—focusing more on protecting key U.S. interests rather than acting as a global ambassador of Internet openness. The new doctrine needs to move away from the idealist’s dream of a harmonized, values-based global Internet, as this is clearly not going to happen. It also needs to move away from principally unilateral action.
The U.S. government needs to formulate a grand strategy grounded in a doctrine of digital realpolitik that advances U.S. interests first and foremost, recognizing that it should work with allies when it makes sense, and constrain digital adversaries, especially China and Russia.
A realist strategy needs to be based on the central recognition that America must enlist, in a variety of ways, like-minded nations to support U.S. interests, and at the same time not be reluctant to exert pressure to have other nations come along. And given China’s directly conflicting approach to the Internet, this needs to include cooperation on the overarching goal of limiting China’s global dominance and manipulation of competitive markets in the IT and digital space.
Fears of the Internet fracturing at the root system level into a so-called “splinternet” are overblown. But it is true that global digital politics are likely to be highly contentious for the foreseeable future. Permanent alliances may be difficult to sustain, even against China. More likely, alliances will shift, depending on the issue.2
This means that shaping the global IT and digital economy in ways that are in U.S. interests is one of the most important challenges facing U.S. foreign and economic policy going forward. Getting it wrong could lead to a many-against-one environment wherein U.S. IT and digital firms—and by extension, the United States overall—face a challenging environment with consequences for many aspects of American life.
It is long past due to leave behind the hopeful, but naïve, view that most countries will see the digital economy the way the United States has historically seen it: as a force for progress, innovation, and free speech, wherein market outcomes should generally be allowed to prevail, with a light touch of government only in the few places needed. In the future, needed change will come more from appealing to foreign interests, rather than values and ideas.
The U.S. government needs to formulate a grand strategy grounded in a doctrine of digital realpolitik that advances U.S. interests first and foremost, recognizing that it should work with allies when it makes sense, and constrain digital adversaries, especially China and Russia.
This report first discusses why leadership in IT and digital technology is important. It then discusses where major nations or groups of nations stand vis-à-vis IT and digital technology and their strategies and successes. These include the United States, China, the EU, Japan, the Four Asian Tigers (South Korea, Taiwan, Singapore, and Hong Kong), developing nations generally, and disruptive nations such as Russia. The report then enumerates seven undesirable scenarios and how they may develop:
Scenario 1: EU “regulatory imperialism” succeeds, and America is isolated.
Scenario 2: Anti-tech forces turn America into the EU and China prevails.
Scenario 3: The EU won’t budge.
Scenario 4: Nations craft a “digital WTO.”
Scenario 5: China wins the minds (if not the Hearts) of UNCTAD nations.
Scenario 6: The splinternet emerges.
Scenario 7: The United States spends much of its political capital on promoting the open global Internet.
It then lists four desirable scenarios the achievement of which U.S. policy should seek:
Scenario 8: U.S., EU, and non-aligned nations isolate, punish, and defend against IT and digital “scofflaws,” such as Russia.
Scenario 9: The U.S. forms an Anglo-American (and friends) alliance to push back against Chinese innovation mercantilism.
Scenario 10: The United States, the EU, and non-aligned nations cooperate against China.
Scenario 11: The U.S. approach prevails in developing markets.
Finally, the report lists 11 key principles that should guide U.S. IT and digital policy internationally:
Principle 1: Unabashedly support IT and digital innovation, rejecting the techlash narrative and policies.
Principle 2: Embrace IT and digital “national developmentalism” (smart, active policies to support IT innovation and adoption) and bring more nations into that orbit.
Principle 3: Work to limit China’s IT and digital progress, especially when it based on innovation mercantilism.
Principle 4: Actively fight foreign IT and digital protectionism.
Principle 5: Advance IT and digital free trade, especially with like-minded nations.
Principle 6: Resist authoritarian influences in the IT and digital economy but remain focused on key U.S. interests.
Principle 7: Defend the private sector’s core role in IT and digital governance.
Principle 8: Defend the principle that big is not bad, and often is superior.
Principle 9: Defend light-touch regulation.
Principle 10: Defend the mostly open Internet.
Principle 11: Support and advance a robust domestic IT and digital policy that ensures U.S. global leadership.
WHY NATIONAL IT AND DIGITAL LEADERSHIP IS IMPORTANT
Since the rise of the first industrial revolution in Britain, most nations seeking wealth and power have focused on attaining leadership, or least competencies, in technologies that are emerging, foundational, and propulsive. These technologies change over time as emerging technologies become mature and nations master them. But initially, these technologies are emerging, and most nations seek capabilities. They are foundational in that they apply to many different parts of an economy and society, including to military capabilities. And they are propulsive, in that their growth spurs widespread investment and growth in the overall economy.
For example, when the British led in the development of the railroad, nations around the world sought to also adopt the technology. While the first modern steam locomotive railroad was built in 1830 between Liverpool and Manchester England, it took decades for other nations to attain it. For example, in the United States, rail miles grew from about 32,000 in 1860 to about 180,000 in the mid-1890s. And it was not until 1872 that the first railroad was built in Japan, which the modernizing Meiji government saw as critical to launching Japan into the modern age.3 Likewise, governments have sought to ensure technology capability in every key technology since, including steel, electricity, telephony, aviation, oil, mass production systems, computing, and now digital technologies.
Propulsive industries are almost always characterized by scale and the growth of extremely large firms, in part because only very large firms can assemble the resources to master the complexity of the task at hand.
Technologies such as the railroad and IT and digital today enable “propulsive” industries that generate an economic boom, both through the investment wave generated and the economic benefits they bring. In the late 1860s, about 10 percent of America’s non-farm paid labor and 50 percent of the production of its capital goods industries were involved in railroad construction. During the next major economic transformation in the late 1890s, the steel industry played a similar role. Again, in the early 1950s, the technology systems of chemical processing, electronics, and mass production powered an economic boom, with mass production goods industries such as automobiles and appliances propelling the U.S. economy to new heights.
During their emergent periods, these technologies and industries seem larger than life, capturing the excitement of the entire society. In the boom period of the railroad, it was at the center of the national imagination just as the Internet was from the mid-1990s to the mid-2010s. As one economic historian described it, “Stories about railroad projects, railroad accidents, and railroad speed filled the press, the fascinating subject was taken up in songs, political speeches, and magazine articles.”4 In 1880, sociologist Charles Fraser stated that “an agent is at hand to bring everything into harmonious cooperation, triumphing over space and time, to subdue prejudice and unite every part of our land in rapid and friendly communication ... and that great motive agent is steam.” The rhetoric surrounding IT and digital technology was not all that different, at least until recently. But eventually the excitement dies, and in some cases turns to scorn, as we see with the current “Techlash,” wherein big tech firms and emerging tech generally are accused by many as the source of much that has supposedly gone wrong.5
Propulsive industries are almost always characterized by scale and the growth of extremely large firms, in part because only very large firms can assemble the resources to master the complexity of the task at hand. The United States saw this with the railroad industry, which generated America’s first large corporations, an industry many later industrial leaders, such as Andrew Carnegie, got their start in. Similarly, propulsive industries such as oil, aviation, autos, computing, and software were also characterized by the emergence of very large firms, just as we see with today’s large Internet firms. And from their early beginnings, these firms became global.6 And like now, populist reactions against these large firms emerged. Despite what the populists might say, scale and global reach is a feature, not a bug.
Once most nations have built out or developed a new foundational technology, it and the industry developing it cease to become central, and are usually relegated to routinized policy interest, just as industries such as rail, steel, oil, and mass production manufacturing are today in most developed nations. The excitement and policy focus shifts to the next emerging technology system.
But while the current IT and digital technology system is similar to prior emerging technologies in multiple ways—it is global, propulsive, foundational, and characterized by very large, global firms—it is different in three key ways:
The system is more of a production and consumer technology system than prior periods (e.g., mainframe computers were used by organizations, not consumers; search engines are used by everyone).
They are also a communication technology, which means that they impact what people see and hear, and who with and how they communicate, and thus have a broad political and social impact.
They have a potentially broader impact on jobs than most prior technology systems.
It is these aspects that add complexity to the global digital system, as it means that the technology systems links nations, firms, and people more closely together, often in ways that conflict with individual country norms and rules.
WHERE DO NATIONS STAND?
As noted, nations have long competed for leadership or at least competence in the propulsive industries of the day. So where do leading nations/regions stand when it comes to IT and digital?
America Leads
Since the development of computing in the 1930s, the United States has led the world in IT, with a succession of leading companies.
The particular nature of the IT innovation system played to U.S. strengths. Unlike some sectors and technologies wherein innovation could be pursued more incrementally by incumbent firms, the history of the IT industry is one in which older firms committed to older technologies were regularly replaced with new ones embracing fundamentally different technologies. This relentless Darwinian winnowing and survival of the fittest played to America’s entrepreneurial strengths. Americans were willing to take risks and start new enterprises, often with the support of robust venture capital pools. Indeed, with the establishment of the American Research and Development Corporation in 1946, the United States pioneered the venture capital industry.
As such, one key to U.S. success was the continuing entry of new IT companies, displacing others as leaders. Once-dominant companies such as Cisco, General Electric, Hewlett Packard, and IBM are now smaller than they were at their peak. And once strong companies such as AOL, DEC, EDS, Lucent, Motorola, Myspace, Netscape, Sperry Rand, Sun Microsystems, Yahoo, and Wang are either out of business or were purchased by other firms. And the top digital companies in the United States—Amazon, Apple, Facebook, Google, and Microsoft—are on average just 31 years old. Some of this evolutionary change came about as technology opened up new opportunities (e.g., the shift from mainframes and mini-computers to personal computers, the rise of the Internet, etc.) wherein incumbents could not adapt effectively, and new entrants emerged and thrived.7
This disruptive dynamic played out in the emergence of semiconductors. When Bell Labs pioneered the development of the transistor, it would seem logical for General Electric, America’s sixth largest company, to lead in this technology. But it did not. Other new firms such as Texas Instruments did. And after presiding over the development of the transistor at ATT’s Bell Labs, William Shockley founded his own semiconductor company in Mountain View, California, in 1957, called Shockley Semiconductor Laboratories. Rebelling against his authoritarian style, eight of the young technicians he had recruited—the “traitorous eight”—quit and formed their own company: Fairchild Semiconductor. When two of the eight, Robert Noyce and Gordon Moore, got frustrated working at Fairchild, they left to start their own firm: Intel. Another of the eight, Eugene Kleiner, cofounded the Silicon Valley venture capital firm Kleiner Perkins Caulfield & Byers, which made early investments in companies including Google, Amazon, AOL, Netscape, and Sun Microsystems.
The United States had another key advantage, one which China enjoys today, and that is scale. As noted business historian Alfred Chandler has written, the large American market enabled U.S. firms to successfully enter new mass production industries, such as chemicals, steel, and meat processing, and later autos, aviation, and electronics.4 Because scale mattered so much to innovation and firm competitiveness, U.S. firms such as DuPont, Ford, GE, GM, Kodak, Swift, Standard Oil, and others became global leaders.
Scale mattered even more to IT firms, for which fixed costs were high (writing the code, designing the chip, etc.) and marginal costs significantly lower. This meant that having access to a larger market gave firms key advantages that allowed them to drive down costs and reinvest the profits into the next generation of technology. As David Moschella argued in Seeing Digital, in most businesses, as sales grow, “there are initially important economies of scale due to learning and experience, but these eventually flatten out. In economic terms, the marginal cost comes to equal the average cost of adding more human capacity.” Software and network markets are different: “Here, the marginal cost of adding a new user to, say, Google or Facebook is close to zero. This means that average costs keep falling with volume, generating increasing returns to scale, and a tendency to create highly profitable, winner take-all (or near all) industry structure.”8
And because digital industries, especially information (including search engines and social networking) and e-commerce, are characterized by scale and network effects, U.S. firms were able to capitalize on early leads to be the most competitive in the global market.
That contributed to another key success factor: The United States became a talent magnet, particularly for electrical engineering and computer science talent. Andy Grove, Andy Bechtolsheim, Vinod Khosla, Sergei Brin, Elon Musk, and Peter Theil are just a few of the top immigrant entrepreneurs who helped fuel U.S. IT leadership.
Another key advantage was U.S. government policy. With World War II and the subsequent emergence of the Soviet threat, the federal government constructed the world’s greatest innovation system. The massive expenditures on weaponry and research and development (R&D) in WWII positioned the United States as the leader in a host of advanced industries, including electronics. The response to the Soviet threat—exemplified by the satellite Sputnik—helped cement America’s technology leadership. By the early 1960s, the federal government invested more in R&D than every other foreign government and business combined. And that support for research, as well as contracts to provide needed government services and products, provided critical, although usually overlooked, inputs to America’s key technology hubs, including Boston’s Route 128 and Silicon Valley. Indeed, as late as 1990, Silicon Valley’s Santa Clara County received more Department of Defense (DOD) prime contract award dollars per capita than any other county.9
Absent major policy changes, it is likely that in the next decade America sees continued relative decline, and with it, increased dependency on other nations’ IT and digital products, including from non-allies.
As IT entered into a new phase in the 1980s and 1990s, with more powerful microprocessors, the emergence of personal, networked computers and easy-to-use software, it became clear to many policymakers that IT was now a key driver of growth and competitiveness, and that effective economic policy mean getting it policy right.
Successive administrations, supported by bipartisan agreement in Congress, took a number of steps to spur IT and digital innovation, including deregulating broadband telecommunications (as most American homes had access to at least two broadband “pipes”— cable and DSL), freeing up radio spectrum for wireless communications, and taking a light touch with respect to regulating online privacy, establishing Section 230 of the Communications Decency Act to protect Internet intermediaries from liability for content on their systems, opening up the GPS satellite system for commercial use, and using IT to transform government itself. Finally, at least until recently, the prevailing attitude toward IT and digital’s impact on jobs and the economy was positive, with few policymakers wanting to slow down transformation, even if it led to productivity growth and some employment disruption.
While the United States still leads in many areas of IT, its lead is shrinking and, in some cases, such as in telecom equipment to China, has been lost.10 And absent major policy changes, it is likely that in the next decade America sees continued relative decline, and with it, increased dependency on other nations’ IT and digital products, including from non-allies.
China Responds, Mostly Succeeds, and Is Poised for Further Success
In the early 1980s, when China sought to gain advantage in the IT industry, it was significantly behind Europe and the Four Asian Tigers. But it has arguably made the most progress, and succeeded in creating many viable competitors for leading American IT and digital companies, and in the case of telecom equipment, destroying the competition.11
As a result, China’s IT economy is massive. Around 30 percent of Chinese exports are in the IT sector.12 However, much of this output and exports is by foreign multinationals that produce in China. But China has developed some leading multinationals of its own, including Huawei, Lenovo, and ZTE. In addition, its BAT companies (Baidu, Alibaba, and Tencent) have used their protected home market to grow and become dominant in China, before using it as a base to expand into foreign markets around the world.13
China has adopted some technologies at a rapid pace. For example, in 2019, there were an estimated $1.5 trillion of online retail transactions, 25 percent of the nation’s total retail transactions—more than twice both the volume and proportion of e-commerce in the United States.14 This is even more impressive given China’s Internet penetration rate remains low at only 60 percent, and 99 percent of its Internet users have mobile Internet (with 70 percent using mobile payments).15
As in virtually all technology sectors, China’s game plan is the same: first copy foreign technology (often through forced joint ventures, intellectual property (IP) theft, or reverse engineering); then limit access to the Chinese market of foreign firms while supporting domestic firms with a panoply of support, including grants, low-cost and preferential financial loans, tax breaks, discriminatory government procurement and other tools; and finally, supporting “going out” to gain market share outside of China.
China made arguably the most important digital strategy decision in the history of the IT industry. It decided it would not let the giant U.S. dot-coms—especially Google, Facebook, and Amazon—just set up shop and dominate the Chinese market.
China’s first step was to attract foreign investment. In the early 1980s, when Deng Xiaoping opened up the Chinese economy to foreign investment, its main economic development strategy sought principally to induce foreign multinationals to shift relatively low- and moderate-value production to China.16
China’s second step was to attempt to learn from foreign companies, in part by having them train Chinese executives, scientists, and engineers, and also by forcing them to transfer technology as a condition of market entry. Since roughly 2000, when China joined the WTO, it has deployed an array of unfair and often WTO-illegal tactics, including currency manipulation, massive subsidies, and limits on imports in order to both attract foreign establishments and support domestic manufacturers, especially in the IT sector.
The third step was to support Chinese companies in their efforts to copy and incorporate foreign technology while building up domestic capabilities. One important marker for the transition from stage two to stage three was the publication in 2006 of “National Medium- and Long-Term Program for Science and Technology Development (2006–2020),” which calls on China to master 402 core technologies—including a host of IT sectors such as integrated circuits and high-performance computers. China moved to a “China Inc.” development model of indigenous innovation, which focused on helping Chinese firms, especially those in IT and digital industries.
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