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Do Tariffs Make Us More Competitive?

When is fear a valid reason for protectionism? At what point does openness become bad business and a national security concern? David Firestein, the executive director of the China Public Policy Center, stopped by the “World Spins” to remind us that relationships make the world go round, and punitive tariffs don’t win trade wars.

David Firestein dropped by last week’s “World Spins” session to reassure us that at about $1 trillion, give or take a few million, the U.S.-China trade relationship is too big to fail. But he had some thoughts on where we’re taking it.

Firestein‘s credentials in U.S.-China relations are wide and deep — the State Department, EastWest Institute, and now, president and CEO of the George H.W. Bush Foundation for U.S.-China Relations — in addition to his role in academia launching the LBJ School of Public Affairs’ China Public Policy Center.

Perceptions of growing authoritarianism

“China’s rising authoritarianism colors U.S. views in a profound way.”
David Firestein

The Uighur minority and the telecom giant Huawei are the poster children of American perceptions of China, prompting national security concerns that have underpinned both the administration’s trade narrative and domestic regulatory actions. On the heels of watching China use facial recognition software to persecute the Uighur and other Muslim minorities, San Francisco banned the technology. Last week those same concerns spread to Washington, bubbling up at the House Committee on Oversight and Reform.

Blacklisted by the administration, Huawei typifies China’s state-supported hybrid economy. The telecom giant sits on a deepening Maginot Line between the Internet of the East and that of the West, drawing a line between American interests and increasingly, everyone else’s.

“In public and private statements, American intelligence officials and telecommunications executives and experts have begun to concede that the United Sates will be operating in a world where Huawei and other Chinese telecom companies most likely control 40 percent to 60 percent of the networks over which business, diplomats, spies and citizens do business.”
David Sanger, The New York Times

There’s a silver lining for Big Tech. Nothing unites like a common enemy, and China has provided Qualcomm, Facebook, Google et. al. with a new “America First” narrative to relieve regulatory threats.

The missing quid pro quo

“China is vastly more closed to us than we are to them,” Firestein said. “When someone from China gets off a plane in San Francisco, they have immediate access to their email through WhatsApp. But an American landing in Beijing can’t access their Gmail.”
David Firestein

For an administration determined to deliver on its “America First” campaign promises, protecting America from China is a top priority. Vice President Mike Pence’s watermark speech at the Hudson Institute frames the U.S. response to Chinese “economic aggression.”

With China, all silk roads lead to intellectual property. In the absence of any Chinese quid pro quo to American openness, in 2018 the administration has expanded its powers to protect domestic technology from foreign investment. The Treasury Department’s Committee on Foreign Investment in the United States (CFIUS) began to block mergers and acquisitions considered a threat to national security. The Export Control Reform Act (ECRA) and the Foreign Investment Risk Review Modernization Act (FIRRMA) are charged with protecting tech sectors that map with its “Made in China 2025” strategy — advanced manufacturing, artificial intelligence, self-driving vehicles, semiconductors and telecommunications.

Applying worst-of-breed practices

Unintended consequences abound. The ban on Huawei network technology hits rural areas the hardest because the small network providers have to swap out cheaper Huawei equipment for more expensive offerings. And faced with its American supply chain being cut off, China will accelerate its build-your-own strategy, a trend that is already impacting U.S. tech companies’ stock prices.

Which brings us to where Firestein breaks rank. A trade strategy based almost exclusively on punitive tariffs has penalized American producers by eliminating lucrative markets, disrupted supply chains and cost consumers at check out.

“The United States is adopting “worst of breed” practices that are destructive to the economy … Our trade deficit with China is the largest good and services deficit dating back to 1776.”
David Firestein

https://www.marketwatch.com/story/heres-all-the-stuff-the-us-imports-from-china-thats-causing-a-huge-trade-deficit-2018-03-23

Nowhere is the cost of the trade war more obvious than in the agricultural sector. Last week at a “hats on” event, President Trump announced a $16 billion farm aid package in a robbing Peter to pay Paul strategy to offset farmers’ losses with taxpayers’ dollars.

Trump rolls out $16 billion in farm aid amid Democratic outrage over $64M meat bailout to ‘corrupt’ Brazilians — https://www.nydailynews.com/news/politics/ny-democrat-answers-trump-bailout-meatpacker-brazilian-20190523-ocqbh2tvb5eltlch47ulfykcxa-story.html

In fact, tariffs can make industries less competitive.

It breeds a kind of laziness here,” said Simon Lester, director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute. Tariffs are taxes on outside goods, so they inherently protect some U.S. businesses from foreign competition. “You don’t have to compete with the best in the world you can just relax you don’t have to work that hard and face any competition,” he says.
Marketplace, May 27, 2019

Despite the national security narrative, the relationship between China and the United States is not about military might. Certainly, the U.S. technology industry is rooted in federal defense funding, and the Department of Defense continues to fund innovation. But this is a 21st century struggle not a 20th century one. China’s goals are economic.

“Military interests are a function of power. China is building its military to define its power … But let me assure you, China has no interest in becoming the world’s policeman.”
David Firestein

Relationships make the world go round

The conversation closed with a reminder that relationships grease the wheels that make the world go round. Firestein brought up a flash point from his first few weeks in Austin when two U.S. Congressmen, a U.S. Senator, numerous professors and the University of Texas student newspaper protested an offer from the Confucius Institute to make a donation to the CPPC. Firestein noted, however, that the United States has similar practices, and that in the end:

“Relationship matters. We have to get it in sync.”
David Firestein

What does the future look like?

A year ago, Firestein cautioned that competing with China was like a no-holds barred cage fight in wrestling. China knows what it wants its future to look like. State control provides a longterm planning horizon. It has a clearly written industrial strategy, state funding and a non-interference strategy with its people. The United States operates from tweet to tweet. As for a strategy?

In the end, we’re going to have to step up and compete. China is not our enemy but it is our fiercest competitor.
David Firestein, in a May 2018 talk at the “World Spins”

In the not too distant future artificial intelligence, autonomous vehicles, advanced manufacturing, semiconductors, telecommunications will shape not just American competitiveness but what our world will become. Even the current administration, loathe to cooperate on much of anything, went so far as to endorse a set of international AI guidelines sketched out by the Organization for Economic Cooperation and Development. To echo a comment made by Senator Richard Burr at the University of Texas’ Fifth Annual Texas National Security Forum:

If we don’t create a framework for this technology, who will?
Senator Richard Burr, chairman, Senate Select Committee on Intelligence, Nov. 2018

Taking Care of Business as Titans Clash

Titanic trade clashes, Chimerica, Huawei,’s blacklisting, theft of intellectual property — oh my! As the trade war with China intensifies, Tyler Johnson’s “The Way of the “Laowai” reminds us that international business is an art; opportunity, a matter of perspective.

In the titanic trade clash between China and the United States, Tyler Johnson’s is a calm, sane voice. But then he is a businessman, and businessmen get things done. Johnson spent the go-go years between 2005 and 2015 growing Dell’s Asia-Pacific business. He saw the blossoming of Chimerica and now, on the cusp of what is starting to look like a nasty separation, reminds us there is an art to conducting business with another culture.

What he learned is the subject of a new book, The Way of the Laowai, a testimonial to taking a global perspective. (Laowai means outsider or alien in Mandarin.)

Take note, America: The self-selected attendees at Johnson’s “World Spins” talk were almost all Chinese. As one explained, “I want to learn how you think American companies should compete in China, from your perspective.

It’s complicated

The scale of the trade clash is enormous, and the stakes are high.

China is the world’s most populous country. Its breakneck development over recent decades has added hundreds of millions of consumers to the global marketplace while supplying a vast assemblage of low-cost goods… It is the source of roughly one-third of the world’s economic growth.

Peter S. Goodman, The New York Times

Separating business from policy is a sticky wicket, especially when two radically-different cultures have bound themselves so tightly together economically. As Li Yuan, the New York Times New New World correspondent wrote :

The two sides have plenty of reasons to distrust each other. The United States blames China for heavy job losses, theft of corporate secrets and cheating at the rules of global trade. China credits the hard work and sacrifices of its people for its success and sees the trade war as driven by American fears of a prosperous Chinese nation. (Photo/Doug Mills, The New York Times)
Li Yuan, The New York Times

Photo cohttps://www.nytimes.com/2019/05/14/business/us-china-tariffs.html
Photo courtesy of Doug Mills, The New York Times

But in the end, business is business, and sometimes getting things done requires a “whatever it takes” approach.

In China, government initiatives drive almost everything. It’s important to understand those initiatives and analyze how they figure into your business model. The more you understand what the government wants, the more likely you’ll be aligned …
Tyler Johnson

A laboratory for future innovation

Over the past 25 years, China has become what Oppenheimer Funds calls a “laboratory for future innovation” for U.S. companies. Big Tech-funded R&D centers place scientists from both countries side-by-side to crack breakthroughs in pivotal data-intensive areas including artificial intelligence and cloud computing. Microsoft Research Asia (MSRA) funds basic research in AI. Google opened an AI lab in Beijing and has a research alliance with Tencent on cloud services. Jeff Ding, a graduate student at Oxford and the force behind the China AI newsletter, is well worth following for a deeper understanding of cooperation between the two countries in R&D and technology (AI) commercialization.

But there are concerns. M.D. Anderson Cancer Center in Houston recently severed ties with three scientists over their ties to China and policy violations with research grants from the National Institute of Health. Writing in The New York Times, Mihir Zaveri noted that a report commissioned by the N.I.H. also mentioned that 39 percent of the Nobel Prizes in physics, chemistry and medicine won by Americans have gone to foreign-born scientists.

Data, ethics and national security

Research spawns innovation and ethical (cultural) concerns. The facial recognition technology that San Francisco banned out of fear it would be abused by the city’s police, is being used in some form by companies in China to save pigs from the devastating spread of untreatable African swine fever — and allegedly to suppress minority populations.

“Today’s battles are all about data, how you get it, who has access to it, and who you can share it … With 1.4 billion people (and limited enforcement of privacy laws), there is plenty of data in China.”
Tyler Johnson

Then there’s national security. At an intelligence forum sponsored by the University of Texas earlier this year, Sue Gordon, the principal deputy director of National Intelligence, acknowledged the reality of concerns over “dirty networks.”

“We have to figure out a world with diverse technology we can’t control.”

Sue Gordon, Principal Deputy Director of National Intelligence

Can a Chinese company, genetically tied to the government, become a global technology leader?

Huawei, the subject of Gordon’s reference to “dirty networks,” is a stunning case study in whether a Chinese company, genetically bound to its government, can thrive as a global technology company. Huawei has made it a point to develop an entrepreneurial culture based on best-of-breed Western business processes.

“Only by learning from them with all our humility can we defeat them one day.”
Ren Zhengfei, founder, Huawei, The Huawei Story

But its blacklisting by the Trump administration is having a trickle-down impact. Just yesterday, Reuters announced Google restrictions on Huawei customers’ purchases of its proprietary offerings, a move analysts expect will hit Huawei’s European business hard.

A big world full of opportunity

At the eye of this hurricane, The Way of the Laowai is a reminder that opportunity is a matter of perspective.

There are roughly 196 countries in the world and close to 800 billion people. That’s a lot to wrap your brain around. Each of these countries is complex in its own way … In every location you want to do business in, you need a grasp of these particulars. In each place, business needs to be conducted differently… The world is big and full of opportunities if you can keep your perceptions in place.
Tyler Johnson

As proof, Johnson proudly brought along his smart, confident 13-year old, Mandarin-speaking daughter Reese, a living demonstration of all there is to be gained from learning the ways of another country. Indeed, she corrected him several times.

What will it take to make us safe?

The Fifth Annual Texas National Security Forum called for closer cooperation between government and the technology community. Is a public-private partnership in our future?

We expect our government to keep us safe. The Constitution cites “providing for the common defense” as part of the reason to even have a government. In the best of times, protecting a country as proudly technology-driven as ours is a tough job. And these are not the best of times.

Ranking members of the Senate Select Committee on Intelligence were in town recently to talk about the challenges of overseeing national security in a cyber world. Below, from left, Senator John Cornyn (R-Texas), Vice Chairman Senator Mark Warner (D-Va.), Chairman Senator Richard Burr (R-NC) and Moderator Stephen Slick.

Photo courtesy of the Texas National Security Review

“Technology is a wonderful thing. It helps us communicate, but it can also be meddled with,” said Burr. “We need to change the entire architecture of government to recognize we’re not in the 20th century. We’re in the 21st century, and that’s not just government (alone), it’s how we integrate that into the private sector.”

We can thank the Russians and Facebook for jump starting a public conversation about technology, sharing, business models and national security. Consider the complexities. Our finance, hospitality (Airbnb), mobility (Uber and Lyft), communications (Apple, Facebook and AT&T), oil & gas (pipelines), as well as many power, water and utility networks, are privately owned, managed and vulnerable.

A broken partnership and the spectre of 9/11

Technology has historically been a collaborative effort between the public and private sectors. Nuclear technology came out of World War II. The networking technology behind the Internet came out of the Defense Dept. via DARPA and the PARC research facility. But these days, the companies with the research and development muscle to push the boundaries of technology are global, rich and fast-moving. Thanks to Edward Snowden, intellectual property concerns, employee activism and a large customer base outside of U.S. borders, they don’t necessarily trust government to lead them down the right path. Google’s withdrawal from Project Maven, the Army’s first implementation of artificial intelligence is a case in point.

“We don’t want to stop innovation,” Cornyn explained. “But we need the private sector to be responsive to the needs of government.” He made a cautionary reference to the government’s failure to predict the incomprehensible horror of the Sept. 11 attacks:

“The most important failure was one of imagination. We do not believe leaders understood the gravity of the threat … No president can promise that a catastrophic attack like that of 9/11 will not happen again. But the American people are entitled to expect that officials will have realistic objectives, clear guidance and effective organization.”

Excerpted from The 9/11 Commission Report

There are striking similarities between Big Tech and Washington. Both profess transparency but value secrecy. Both think globally and maintain strong international allegiances. Both know results matter. Both value the rights, freedoms and security our nation represents. Best case scenario, each provides a check and balance on the other.

Guardrails for the application of new technologies

Big Tech recognizes emerging technologies like AI are potentially dangerous. In June, Google published a set of internal principles that were accompanies by a cautionary memo from its chief executive, Sundar Pichai, “We recognize that such powerful technology raises equally powerful questions about its use.” “

“This is why we’ve tried hard to articulate a set of AI principles. We may not have gotten everything right, but we thought it was important to start a conversation.”
Sundar Puchai, chief executive officer, Google

But Google’s AI principles don’t work for everyone. America’s fiercest competitor, China, requires companies to give up their source code, both figuratively and literally, for government applications. It has made artificial intelligence the cornerstone of its long-term strategy for technology leadership and a way to automate social control. Witness a recent issue of Jeff Ding’s excellent China AI newsletter for a translation of a white paper by the China Academy of Information and Communications Technology (CAICT) for an outline of “how Beijing aims to use AI to automate censorship, control of public opinion, and improved public security.”

“If America gives up its leadership ability to set a a framework, it’s not going to happen,” warned Senator Byrd. Vice Chairman Mark Warner, both a founder of and an investor in technology companies, was more blunt. “We need guardrails…. We constantly reach out and beg them (the private sector) to work with us in a meaningful way.”

An inflection point in American history

Senator Ben Saase (R-NE) also spoke, describing the long-term race with China as “an inflection point in 230 years of American history,” an opportunity to “organize the American people around long-term competition with China.”

Senator Burr suggested that a public-private partnership located perhaps in North Carolina or Austin could develop the “architecture of cooperation” between the government and private sector.

Certainly, the Army took a calculated risk with its newly-formed Army Futures Command. Based here in Austin, AFS is an entire brigade charged with drawing talent from the start up community to develop the weapons of the future. It’s a big cooperative initiative with a challenging scope.

Never waste a good crisis

Austin has a solid track record of public-private partnerships, most successfully with SEMATECH, formed in the late 1980’s when the semiconductor industry was fighting a losing battle with the Japanese. But P3s are no silver bullet. They are highly collaborative. Competitive issues can be a barrier. They require the participation of top talent. Crises come and go, and their goals and structures must adapt:.

A crisis is helpful to attract support, but there must be an overarching vision to give it the flexibility to adapt as things change. Political, social, economic, and technological conditions are fluid and a P3’s structure, mission and goals needs to reflect those changes.
Collaboration is key, modeled from the top and rewarded at all levels of the organization. Beware of making intellectual property a barrier in this integral process.
Large companies have the resources – talent and support – to collaborate. Smaller companies quickly become overextended. Set realistic expectations with leadership.
Define ROI in terms of the organization’s goals. Establish incremental ROI benchmarks to demonstrate early successes. People will be watching.

A closing note on intellectual property

Intellectual property is a concern in any collaboration, but restrictive IP requirements can torpedo possibilities. I found this article by Charles Duhigg a fascinating case study of the Silicon Valley mindset. It describes tech’s proprietary focus on IP and the lengths Google took to retain the knowledge inside a top engineer’s head, the intriguingly perverse Anthony Levandowski. The piece closes with this quote from Levandowski, who as of this writing is working with Chinese investors to fund his self-driving truck start up:

“The only thing that matters is the future… I don’t even know why we study history. It’s entertaining, I guess — the dinosaurs and the Neanderthals and the Industrial Revolution, and stuff like that. But what already happened doesn’t really matter. You don’t need to know that History to build on what they made. In technology, all that matters is tomorrow.”
Anthony Levandowski, serial entrepreneur and former top Google engineer

For more information, here is a link to the presentations from the Fifth Annual Texas National Security Forum, “The Return of Great Power Competition” and the inspiration for this entry.

China and Innovation: While You Were Tweeting, the Future Happened

David Firestein, the executive director of the University of Texas’ new China Public Policy Center headlined a recent session of our speaker series, The World Spins, with some advice about competing with China.

“In the end, we’re going to have to step up and compete. China is not our enemy. But it is our most formidable national competitor.”

Firestein, an Austin native who spent 20 years in China with the State Department and another 10 as a senior vice president at the East-West Institute, has no illusions about what’s at stake.

“It’s like a cage match in wrestling,” he explained, where one wrestler, the United States,

David Firestein, Founding Executive Director, China Public Policy Center; Clinical Professor of Public Affairs — David FIrestein, executive director of the China Public Policy Center: “In the end, we’re going to have to step up and compete.”

follows the rules, and the other, China, uses any- and everything to win. And winning means becoming the first country in history to be a brutally market-oriented authoritarian dictatorship.

In a cage match, tweets and tariffs are a poor match against a singularly focused industrial policy and a bill of rights that says: Citizen, you stay out of politics, and we, the government, will make you rich.

One battleground: artificial intelligence and big data

If you’re not reading Jeff Ding’s ChinaAI Newsletter, you should be. Ding, who is a graduate student at Cambridge, shares translations of Chinese policy, strategy and technology. His most recent is a report from boutique private investment firm Rising Investments on China’s Civil-Military Fusion. The report notes that although applications based on artificial intelligence (big data, internet) need time to developed.

AI military applications still need a lot of time: products for the military industry require “high reliability,” so emerging technology like AI will be used as reserves and not be applied until they are mature, and the related technologies for AI (big data, internet) also have a number of security issues.
Intelligent weaponry and intelligent robots will have a major impact on the strategy and the tactics of future wars.

China also plans to use the same public-private partnerships that built the American technology sector to achieve its goals.

China did not permit non-government capital to enter into national defense industries until 2005. They are still looking for the emergence of a 50-100bn military industry private corporation on the scale of say Lockheed Martin.
The goal is to have over 80% of defense industry information construction technology come from private enterprise. China hopes to reach the first wave of peak civil-military fusion in 3-5 years.

Will political turmoil stifle American innovation?

Without the Dept. of Defense we wouldn’t have the Internet or email, much less venture capital and private equity. Read Andrew Ross Sorkin’s excellent article about the push back against defense contracts among the employees of Silicon Valley technology giants. Sorkin quotes Adam Grant, a professor at the Wharton School and a member of the Defense Innovation Board, an independent federal advisory committee set up under President Barack Obama, said he believed that the partisanship that was contributing to the debate would ultimately stifle innovation.

“I worry that it will stall progress,” said Grant. “Innovation has been fueled for decades by private-public partnerships. It smacks of cutting off your nose to spite your face.”

Meanwhile, Firestein reminded us, China is in that cage match, its eye on the long-term, even as American strategy changes with an election cycle, from tweet to tweet. It’s hard to win a cage match when it’s unclear what winning looks like.

“I think we’re at the beginning of a major transformation and a technology revolution that is, by an order of magnitude, more disruptive than the internet revolution 20 years ago,” Robert Manning, a senior fellow at the Atlantic Council recently told American Public Media’s Marketplace Report.

“If we don’t get wise to these trends that are reshaping our economy and are going to affect the way we work, live and everything else, the future is going to take us by surprise.”

Can Tech Companies Protect Privacy — and Still Make Money?

In the early days of the dot-com bubble, I learned that first and foremost, technology companies must deliver value to customers. It’s best to do the right thing by customers in terms of privacy, but profit comes first. Given this, the FTC and Congress need to do more to protect consumers’ personal infomation.

If you Google the phrase “My friend is addicted to _______,” you do not get “opiod” (which is good). You get “phone.”

There is no constitutional right to privacy. In the 1970’s, the Federal Trade Commission was charged with protecting and regulating privacy rights, but the FTC has hesitated to move decisively. Unlike the Europeans who’ve been quick to cry foul, we’ve maintained a hands-off approach — so far.

Long ago, I took a job on the frontier of the New Economy when a venture-funded start-up hired me to roll out their opt-in personalization offering, a service that would help large brick-and-mortar retailers boost their online loyalty (and sales) by tailoring web views to shoppers’ traits — gender, geography and shopping habits. It was a great customer service idea, one that has evolved to the point that the Zappos we admire online now haunt us for days.

We took a white-hat approach, jumping into the thick of it. We formed a privacy advisory council, met with Congressional representatives, influencers and media. We joined and participated in the FTC’s Advisory Committee on Online Access and Security. When I saw our CEO recently, he reminded me, “We were so far ahead of our time.”

But if you’re big and want (or need) to feed investors and stakeholders, the temptation to step over the line to get ahead is going to be even greater. It gets hard to even see the line when you’re in the rush of generating and executing great ideas.

Postscript: The Washington Post reports that the FTC has asked Facebook, whose entire business model seems to be built on selling users’ data, to appear and an expanding Congressional probe is including Google and Twitter. Should be interesting.