China and the US can compete in data and semiconductors in a cooperative way
Cooperation is one of three pillars of US diplomatic policy towards China. Secretary Antony Blinken stated, “We’ll compete with confidence; we’ll cooperate wherever we can; we’ll contest where we must. We do not see conflict.” Liu Jianchao, the Minister of the Chinese Communist Party's International Department, who visited the US this month, reaffirmed that China is willing and ready to cooperate with the US in a wide range of areas from trade, agriculture, to law enforcement, and artificial intelligence. Technology is a field where China and the US are competing fiercely, in which data security and semiconductors are the two most important areas. But even if the two need to compete, they can compete in a cooperative way.
Data security
The issue of data security, specifically government access to data, has been a factor that impacted companies operating in each country. On the US side, they believe that there are real data security risks for Chinese background companies controlling vast amounts of data of US persons, as China has national intelligence law and other laws that could provide legal grounds for requiring Chinese companies to submit US data. For China, data security has increasingly become a matter of national security since the Snowden incident. From Apple to Tesla, from accountant audit negotiations to Didi, I see more actions from China. Unfortunately, our two countries have a very huge trust deficit in data security.
Clearly, each country's private sector has been frustrated and hurt badly due to a lack of trust. It would be unfair to say that governments and companies have done nothing to change the situation. On the Chinese side, no government access to data stored in foreign jurisdictions has been pledged through the global data security initiative, but it seems that no one believed or even cared about it. Companies have invested billions of dollars in data localization and independent third-party audits, but it seems insufficient to build trust and eliminate scepticism. Despite Apple's strong collaboration with Cloud Kweichow and Tesla's public promise to comply with China's data law and avoid transferring sensitive data outside of China, security concerns remain on the US side.
Now, China and the US are in a process of technology decoupling, especially in the field of high technology like semiconductors and AI. Should they also have data decoupling? I am not quite sure. However, it's clear that pursuing data decoupling would be a lose-lose situation for both countries. For companies, it will definitely be a disaster as everything in the world is connected by data now. If they do not want data decoupling, they'll need to find a way to maintain the bilateral data flow while minimizing the data security concerns of each side. I believe this is a big area where China and the US must cooperate and should be able to cooperate.
In my mind, one way is whether they can define personal sensitive data in the US context and important data in the Chinese context. They could find some definitions and categorizations of personal sensitive data in various US laws. China also proposed the concept of important data in its data security law. I am always thinking about whether they can find a middle ground based on these definitions and laws. These data are believed to have national security implications for both governments. The problem is that the laws are too vague and too broad, particularly in China's laws. Maybe they can keep this data within our own territory and restrict its cross-border flow while still allowing other data to flow freely. However, the precondition is that they have to reach a consensus on which category of data should be identified with national security implications, and the scope of the category should not be too broad so as not to hinder cross-border data flow, which is crucial for business operations. In this regard, I think it's better to leave it to legal people and our engineers rather than politicians. Politicians and bureaucrats simply talk about differences and risks without proposing practical solutions. Sometimes, they make proposals that will hurt the industry. That's an area where people in this meeting room can play an important role, as it’s experts from think tanks and industries with real expertise to advise the government and draft reasonable rules.
This then makes me wonder if the bilateral governmental dialogue on AI established by the Sino-US Los Angeles summit could be a potential venue to discuss data security and reach an outcome. To me, AI is a big basket that can be filled with a lot of things. As data security is closely related to AI security, it looks like data security is qualified to be a subtopic. The 2nd track dialogue on AI organized by think tanks and industries could make contributions in this regard.
Although it may be technical and not lead to significant policy changes in data security, it's a step forward to a consensus; at least, it will create a solid foundation for further discussions. I do believe that they will have the condition to do that as both China and the US, at both policy and law-making levels, have started to consider defining data related to national security in a more serious manner.
Semiconductors
Another aspect of cooperation, in my mind, is semiconductors. Many Chinese analysts believe that the US chip export control to China is going from a “small yard, high fence” to a model of a “bigger yard, higher fence”. I would not comment on that, but what I want to emphasize is that it is very unfortunate for industries, not only Chinese companies but also US companies. Even export control and investment screening are based on legitimate national security concerns. Nvidia is under great pressure from US commerce and risks losing big revenue in the Chinese market. Micron finds itself in a difficult position, with a quarter of its global revenue at risk.
Like cross-border data flow, the essence of semiconductor export control is balancing national security and international trade of chips and chip-making equipment. It might conform to US national security interests to prevent high-end chips from entering the Chinese market, but it will not benefit the US to further restrict legacy chips and chip manufacturing tools, cloud services, or chips with high performance, but the major use case is for online games. Likewise, self-sufficiency in high-end chips and manufacturing equipment may be necessary for China, but establishing a whole product line for every kind of chip is a great waste of resources.
My current feeling is that when the US government makes decisions to restrict, they know exactly what they want to protect but have very limited knowledge of the cost and China's retaliation. When China takes revenge actions, the only purpose is to show a tit-for-tat gesture, and they don't know whether it will hurt the US and the effect of these actions. They didn’t even publicly admit this was a retaliation. The result is a downward spiral of relations, getting worse and worse. This is a toxic game model and doesn’t make any sense. I think the US policy circle also reflects this, and some research has concluded that semiconductor export control is a game with no winner.
The US and China need some basic principles and frameworks in this game. Even though technology decoupling is inevitable, that does not mean they should not have any communication during the process. It’s imperative for the two sides to bring together experts to discuss the principles and framework of US restrictions and China's countermeasures. The bilateral dialogue on export control established by departments for Commerce of the two sides during Secretary Raimondo’s visit to China may serve as a venue, but I doubt it will have any meaningful outcome. A two-track expert dialogue is also needed to hold a more candid discussion and deliver concrete proposals. Some basic questions need to be addressed through the dialogue. For instance, what is the boundary of national security regarding semiconductors? Shall it make sense to force third countries to take similar restrictions? Is it productive to retaliate by cutting the supply chain of critical minerals?
What Minister Liu Jianchao said at the CFR this month is impressive-“I don’t see any area where China cannot cooperate with the United States". It is this optimism and good wishes that China and the US should uphold in discussing bilateral cooperation in science and technology, even though we are facing a new year with more uncertainty due to the US presidential elections.