BRIAN D. BLANKENSHIP AND Benjamin Denison study the great-power competition dynamics at Miami University and Tufts, respectively. After significant research on the Trump administration's claim that America is now fully embracing the GPC policy and the required capabilities and attributes of a credible player, they concluded that America is nowhere close to having a legitimate and well-thought-out comprehensive policy to be an effective competitor. If it is indeed a competition, American is not ready. Blankenship and Denison conclude:

We contend that many of the long-term trends shaping America's power base, along with the Trump administration's domestic and foreign policies, are working against the United States' ability to successfully engage in the kind of great-power strategic competition being envisioned in the NDS and NSS. With a fiscal policy that has been dominated by tax cuts more than investment in physical and human infrastructure; stagnant military budgets lacking in robust investment in modernization and future capabilities; and a foreign policy that has alienated core allies and fostered distrust of American leadership among US strategic partners, efforts to pursue the goals of the NSS and NDS are unlikely to succeed. (Blankenship and Denison 2019)

While recognizing the deficiency, Blankenship and Denison draw out a battle plan for what it takes to be a true player. The plan had an internal and an external rebalancing actions. The internal balancing required increasing military spending, growing the domestic economy, increasing state revenues, investing in technological innovation, and building infrastructure and human capital. The external balancing required building and maintaining formal military alliances and informal partnerships, obtaining foreign-basing rights, enticing local partners with arms transfers and foreign aid, and working through international institutions.

Performing any of the internal or external balancing acts efficiently and more effectively would require AI. Consequently, the technology that gave China its power is the only remedy to respond to the American national crisis. How quickly can the US mobilize resources and snap out of its complacency is the real question. The American response required two levels of activities to sustain and enhance its position. The defensive capabilities—which include all the political, social, economic, and other capabilities required to sustain its position—to catch up in areas where China is moving ahead and to counter the influence of China.

As we highlighted in the previous chapters, plan A for America had failed. America was losing the AI battle on the domestic front, and it was clear that the national plan would not sustain American leadership in AI, so America needed a plan B.

Plan B, it appears, was architected to confront the rise and expansion of Chinese technology and technology-led expansionist policies. Plan B will be played out in the global theatre. This is the only chapter where we will take a deeper dive on plan B. The rest of the book will focus on the domestic plan.

It is important to note that plan B is not something that needed to be invoked if the competitive distance between the leader and the nearest competitor was not closing fast. It is deployed when the leader's position is threatened.

There are many advantages that America has in plan B. First, unlike the OSTP-led planning where a few scientists developed a national plan without even understanding or using the fundamentals of strategy, strategy methods, and strategy processes, in plan B America had vast experience and truly knowledgeable people who knew what they were doing. America also has existing relationships, strong soft power, and enough forward-deployed resources. American experience from winning the previous Cold War provided a treasure full of wisdom and guidance.

THE NEW LEADERSHIP

The incoming administration of President Biden barely got a chance to celebrate the election victory, and the tide turned against it. During the last several months of the Trump administration and before the elections, the mainstream media was obsessed with the Covid deaths. CNN ran a running measure that displayed Covid deaths in real time. Switching back and forth between reporting stock market indexes and Covid deaths, it was as if the deaths were a source of some performance celebration. On one hand it was increasing the national anxiety about Covid, and on the other hand it was dehumanizing and making such a large loss of life seem like the daily mood swings and reporting of the stock market. This ticker tape of Covid deaths continued in the mainstream media and then somehow miraculously disappeared as soon as the new administration took office. After a dip, Covid cases began mounting again and daily deaths crawled back to 2020 levels, but the media was no longer obsessed with it. There were no indexes, nor any sensational coverage. But instead of Covid deaths, the mask mandates and Covid restrictions became the battle cries. The game was reversed—it was now the GOP trying to discredit and destabilize Democrats—demonstrating that neither party really cared about the rising deaths.

As if the Covid catastrophe were not enough, America decided to pull out of Afghanistan in an erratic manner. The world watched in disbelief as the Taliban, the enemy against which America had declared war two decades ago, ascended victoriously back into power. The American inability to conquer and manage Covid along with the Afghanistan debacle created a perception of weakness. On the twentieth anniversary of 9/11, the Taliban raised their white flag as Afghanistan's national flag was brought down. The courageous act of ending the war in Afghanistan—which had been a drain on the American economy—was tarnished by the chaotic pullout. America demonstrated that even when the upper echelons of government do get the strategy right, flawed execution can hamper progress and leave the nation embarrassed at the global stage. The same was happening with the American AI Initiative.

The perception of the world about America was changing. Is America no longer at the helm of the world? The world wondered.

PRESIDENTS MEET AND GREET

A few months after the Afghanistan debacle, and after several weeks of back and forth between the American and the Chinese diplomats, the Chinese and the American presidents decided to meet. Significant maneuvering had taken place before that. A previous meeting in Alaska had exploded with both parties walking away furious at each other. Several small-scale follow-up meetings attempted to repair the relationship between the two giants. But the American style of reaching out to China was from a position of perceived power—a power that China seemed unwilling to acknowledge. Whether that power was real or simply a bluff, China did not show any overt signs of distress. America sent ships, mobilized military drills, and formed the QUAD (Australia, India, Japan, and the US)—but was not able to evoke any meaningful reaction from China. The problem with show of force is that failure to back it up exposes your cards to the adversary. And that was perhaps what China was reading between the lines. Now it was China's turn for the bluff.

When President Biden and President Xi finally met in November of 2021, the atmosphere was cordial. The meeting received wide media attention, and even though it was announced in the media that the more than three hours of discussion was professional, courteous, and positive, the events in the following weeks seemed to suggest that the US and China had not resolved their differences at all. American congressmembers traveled to Taiwan, and China, in response, issued various threats. The Biden-Xi meeting, it seemed, was the last-ditch effort to narrow the differences between the two powers. But concealed in that meeting were some strange signs of American frustration and fragility.

What was missed by the media, and is equally important, is the time of the meeting. The meeting started at 9 p.m. and continued past 12 a.m.—that is Washington, DC, time. For President Xi, it was normal office hours. While we don't know President Biden's bedtime, it seemed like an awfully late time to have such an important meeting. The Chinese media used that as an example of American desperation to have the meeting. From his body language, President Biden appeared less confident, even somewhat agitated, while President Xi seemed far more relaxed. The opening message of President Xi was strategic, elegant, and addressed to the world. The opening message of President Biden seemed very tactical and addressed to China. President Biden had a thick file in front of him and stacks of paper on the side while President Xi had a tea kettle, cup, and what looked like a milk pot. The implicit messaging was clear. President Xi was using every opportunity to show who was in control of that meeting.

FROM DECOUPLING TO RECOUPLING AND BEYOND

As America reemerged after the prodigious debacle of the Great Recession, unharmed and to a large scale unscathed, a debate raged in the higher echelons of economics. This debate was not much visible to the public and to some extent stayed as an intellectual argument within the academic circles—but often splashed out in popular media especially during the times of great change. It was about whether the dependence of the developing countries on developed countries has been diminished to a point where economic crashes in developing countries no longer affect the economic performance of the developing countries. Alternatively stated, in the first decade of the twenty-first century, have the developing economies become self-reliant and independent to an extent where they are shielded and protected from the economic shocks that originate in the developed nations? Various manifestations of the debate explored economic resilience, economic power, institutions, structures, and economic potential that can shield the developing nations from the periodic exuberances and the financial extravagance that has become a habitual indulgence of the rich nations.

The debate came to the front when The Economist took a stab at explaining the phenomenon and made a bold claim. In March of 2008, The Economist published an article that argued that decoupling had happened and that “as the American economy struggles to stay aloft, the developing world is learning to spread its wings” (Economist 2008). This claim was derived from two arguments: first, that trade with the US is only a small part of the Chinese GDP; and second, the investment in the developing economies continued despite demand slowdown in the US.

This did not go well in many circles and as the year unfolded was proven wrong by the economic data. Paul Krugman reacted strongly to the claim of decoupling and pointed out that:

And not long ago everyone was talking about “decoupling,” the supposed ability of emerging market economies to keep growing even if the United States fell into recession. “Decoupling is no myth,” The Economist assured its readers back in March. “Indeed, it may yet save the world economy.”

That was then. Now the emerging markets are in big trouble. (Krugman 2008)

Foreign Policy called the prediction made by The Economist one of the worst predictions of the year (Keating 2008). The data showed that the adage that “when America sneezes, the rest of the world gets a cold” was still applicable. The context of the word “decoupling” seemed to encapsulate both the performance of financial markets and the general business performance as measured by the GDP and the associated supply chain operating performance of firms in an economy.

Then, the word “decoupling” was being used in the sense that developing economies are no longer dependent on the developed economies. Lately, and ironically, the term has come to signify the need for America to reduce and eliminate its economic dependence on China. The tables had been turned. Instead of a weaker, developing country trying to break its dependence on America, America was trying to do that with China. Perhaps unconsciously, but this use of the term is an acknowledgment that another country has now achieved a status powerful enough to create a certain level of dependency for the US—and hence a need to break that dependence. The burden of such a dependency has become overwhelming. And the US is feeling crushed under that burden.

Decoupling therefore is a survival mechanism. It is a game move where a country runs its economy in a manner where it is no longer dependent on the economic performance of another country.

Willet et al. have explained the different forms of meanings attributed to the term “decoupling” (Willett et al. 2011). They explained that the oil shock of the 1970s took America by surprise. American masses, who were generally shielded from sudden economic shocks emerging from developing economies, had to quickly learn about the global economic interdependence. By the 1980s America developed a more balanced view of interdependence on developing countries, but that was limited to managing the commodity shocks and did not elevate to the level of macroeconomic policymaking. The self-dependence concept tried to take shape in the Asian economies but the late 1990s financial crisis crashed any hopes of flying solo. After 9/11 when America entered a recession, emerging economies (China and India) continued to perform; thus the decoupling evidence continued to mount. On the financial markets side, Goldman Sachs and Morgan Stanley pushed the idea of decoupling. It was not until 2008 when the decoupling debate took a different turn, Willett et al. (2011) explain. The crash in the US had a global contagion effect, and emerging markets followed the decline. The financial system had become one. The deregulation, computerization, reduction in transaction costs, and free flow of capital across borders had created a truly global market. This market was not immune to what happened in one part of the world. It was connected like the body of an organism. The recoupling camp overpowered the decoupling camp, but with the passage of time, decoupling came back into fashion. Was it possible that decoupling in financial markets was becoming its own phenomenon vs. economic decoupling in general? In other words, while capital flowed freely across economies to be invested in various opportunities, was the actual trade dependence declining? The technological containment strategy needed both. On one end it requires diminishing the operational and market access capabilities of the adversaries, and on the other end it increases the cost of capital and reduces the capital flow. American plan B focused on both aspects.

DECOUPLING, RECOUPLING, AND RE-DECOUPLING

Gina Raimondo, US commerce secretary under Biden, could not resist stating the obvious about China: “We want access to their economy, they want access to our economy,” and she added that she would commit to push for US companies to trade with China. “There is no point in talking about decoupling,” Secretary Raimondo said (Williams 2021). On the same day in a different interview she talked about the US needing to work with allies such as Europe to slow down China's “rate of innovation” (Macias and Tausche 2021).

From the outside, US strategy and policy had started to appear chaotic. It seemed that Gina Raimondo was on one hand stating her desire to maintain and even improve the trade bridges between China and the US but on the other hand intended to downgrade China's innovation. And this is not an exactly unworthy, undesirable, or unattainable goal from the US perspective. As Gina Raimondo herself pointed out in her interview with the City Club of Cleveland that the GDP of the autocratic governments has now exceeded that of liberal democracies, it could make sense for the US to take such a rise seriously (Raimondo 2021). Delivered two days before the 20th anniversary of 9/11 and a week after Americans observed the shocking withdrawal from Afghanistan, Secretary Raimondo gave an exhilarating talk at the City Club of Cleveland. She requested the venue, and the City Club of Cleveland was thrilled to have her present an important policy speech. Strangely, the venue for such an important event was rather awkward as her extremely relevant and crucial speech got less than 1000 views in the 90 days after the speech. A critical speech as such should have invited hundreds of thousands of views, if not millions, but it was as if Americans were no longer paying attention to what was being communicated by the Department of Commerce. Worse, the DoC did not consider that such a strategic policy speech needed to be shared with Americans in a more popular forum. Clearly, the need to inform Americans about the AI-centric competition, the rise of China, and the American response in the great-power competitive scenario was not being communicated as it should have been. This was an extremely personal and consequential message for Americans.

Dressed in an ocean-blue jacket with a matching necklace, Secretary Raimondo seemed passionate and animated about selling her vision for investing more back into the US economy. Behind her were a largely invisible American flag, a very visible Department of Commerce flag, and a globe displaying Eurasia. She made a strong case for essential investment back into the economy, of reskilling workers, of making the economy more equitable, and of fighting climate change. This, from her perspective, constituted Biden's signature Build Back Better plan.

As she spoke, the backlog of cargo ships had started to pile up at the Los Angeles port and inflation started creeping up with no end in sight. The supply chains were failing, and the American economy was melting rapidly. American policy and policymakers remained detached from the on-the-ground reality and considered inspiring and reaching out to America as unworthy goals. America stayed uninformed and uninspired—and was about to get slapped with another policy debacle of the government.

THE SHIPS WITH EMPTY BELLIES

Arizona State University is a leader in supply chain management and within ASU, Professor Dale Rogers is a legend himself. If you saw him, you would think that his second job is of Santa Claus—white beard, white hair, large round face with glasses, and a caring look. Whether he brings gifts for children on Christmas is not something we are sure about, but we do know that he possesses a treasure wealth of information on American supply chains and his country can truly benefit from his knowledge. We got the opportunity to get his thoughts about our topic of interest. Sitting on what seemed like a gaming chair, Professor Rogers's home office looked as the Hollywood depiction of a professor's office. With stacks of books and a large white board that served the dual purpose of displaying family pictures and writing on one side and what looked like a worn-out and semi-retired office chair on the other, Professor Rogers talked to us about the American supply chains, AI, China—and he pulled no punches. “This whole supply chain mess that America is experiencing is not due to Covid. The origin of this problem are the tariffs instituted during the Trump administration and then carried on by Biden. I was hoping they would have read the 150 years history of tariffs. They don't work! The decision was all political. And today the entire country is suffering because of that.”

We were fascinated with his articulation of the problem's origin. “America has been told that this is all due to Covid, but you are saying tariffs are the real culprits. Can you explain to us what is transpiring?” We asked him.

Professor Dale explained: “In 2019 Oakland port was the 4th largest port in terms of activity. By mid-2020 it fell to the 9th position. Now you would wonder that how is it possible that Los Angeles ports are backed up with ships waiting months to unload and a port not too far is experiencing decline in activity. Well, the reality is that the Oakland port was designed to be an exports port and while US is getting more stuff in from China as year over year imports with China are up by 31%, US exports to China have declined. The levels are so low that the Oakland port is now used much sparingly than it was in the past. In the past ships would first sail to Los Angeles and unload, and then they would go to Oakland to pick up loads for the journey back. Now not only would they wait for months to unload, but due to the thinning of the exports back to China, they'd just turn around and leave without a full load. The two factors increase the cost of shipping because Americans are now paying for the roundtrip of shipment when they should only pay for one way. Add to that the waiting times because LA port is not very efficient, and now Americans are paying the cargo companies for the delay times. So much for tariffs! I don't think they thought through it. It seems to be a very reactive and political decision—but it didn't stop at Trump, the Biden administration is also moving ahead with it.”

Professor Rogers raised an exceptionally powerful point, and he gave us a unique perspective. The China policy was not delivering results on the domestic front. If the intention was to slow down the Chinese progress, we ended up hurting ourselves more. If the intention was to retard the Chinese innovation, the country is no longer dependent on American innovation. If the intention was to increase power, it didn't happen. If Professor Rogers's analysis is correct, Americans had become a victim of our leaders' miscalculation. “The problem does not end at the LA or Oakland ports. As the freight comes in, a large part of that goes to Chicago's Union Pacific Yard. With underdeveloped infrastructure and delays to unload the freight, we experience more incremental costs. And just as with Oakland, the trucks and trains returning back to the West Coast do so with less than full loads. What do you expect? The costs of shipping a container load from China to California is now $18,000 to $20,000—that's about 9 to 10 times increase than it was just a year ago.”

As we listened to Professor Rogers, we recognized that the emergence of AI has truly set unprecedented dynamics in motion. American competitiveness needed some breathing room, and an open economic conflict with China, while inevitable at some point, was probably launched prematurely and with little strategic planning. The AI technological revolution was showing its mark. The domino effect had started. In Professor Rogers's words, “Our strategy seemed very capricious. You know the saying that ‘when you ask time from an American, he would see his watch; when you ask a Chinese, he would go to his calendar'—they have a long history, and we should have understood that. For thousands of years, they have been inward focused, and there was no need to create economic insecurity that would have forced them to focus externally. Now they look at the choices we make and are probably saying this is no way to run a world-class economy.”

The conversation had turned serious and somewhat depressing, and one of the co-authors could not resist asking, “Professor, is there any hope? Based on what I understand you said, America needs a new infrastructure, while it rebuilds new supply chains and that while it tries to outperform China in technology. Is it even possible?”

“Of course, it is possible. But we need the right leadership at the top. We need smart, knowledgeable people who can do great things. I was born right after Eisenhower won his election. Those were the times of great leadership. Now I feel we don't have any. This seems and feels like a very different America than the one I was raised in. But regardless, I believe we can turn things around.”

“How so?” one of the co-authors asked.

“Let me give you an example. I was at a conference in Laredo, Texas. The conference was on Latin American logistics. Several presentations were made, and they were in Spanish. I don't speak Spanish. As the mayor of Laredo gave his presentation, it was also in Spanish. He paused at one point and looked at me and asked my thoughts on what he was talking about, and I had no clue what he had said.” Professor Rogers laughed and the mood lightened. There was optimism in the air, and we couldn't wait to hear the examples of America bouncing back into the leadership position. “The Latin American Logistics Organization is an initiative where we are enabling American companies to build strong supply chains by looking south rather than east or west. For example, China's progress included a Belt and Road plan that stretches from Beijing to Europe. We need a similar program that links us with Central America companies. Nike, for instance, which has invested more than $100 million in El Salvador. Adidas is also looking to invest $80 million or so there. And now Dell is considering refurbishment business going to Central America. China doesn't even want that business. They are not even taking recycling back. So we have come up with the idea of building a network of capabilities in Central America. This can start as a low-tech operation and slowly mature it to move to high tech. After all, go back 50 years and check how Singapore was back then. It takes time, but we have to start somewhere. This can help us build supply chains that are not only closer to us but also they meet national interests.”

“Are there any risks that such plans can falter?”

“Yes. The risk is that we are a democracy, and democracies can sometimes be too slow to react. For example, it is a bureaucratic nightmare to make improvement in and around ports. We must overcome that type of inertia.” In an article in HBR that Professor Rogers co-authored with two other co-authors, the authors emphasized the importance of enhancing near geography alliances:

But the United States can't achieve these goals alone. They will require it to collaborate and strengthen trading partnerships with countries in North America, Central America, and South America and build a reliable, cost-effective land-based transportation network that connects the three Americas. Only with strong partnerships and a Pan-American transportation network will the United States be able to bring manufacturing home from Asia. This reconfiguration would benefit all involved: Creating jobs and promoting political stability in poor countries in the Americas would also build wealth in these nations and slow migration from them to the United States. (Vakil et al. 2021)

We felt that Professor Rogers made an extremely powerful point. With the right leadership America can achieve great things. He gave the example of several companies who are now actively engaged in decoupling. Policy is trickling down, but it is a risky game. Is it too little, too late? Is it too chaotic and unplanned? Is it just lip service and not genuine? Is there still hope that somehow the China-US conflict will just disappear overnight? That this is a bad dream and we will wake up one day and the world will be restored to a unipolar superpower structure? If American leadership does not return, would American democracy turn into autocracy?

ACT 1: THE BATTLE BEGINS

The stage was set to launch the first battle. As America woke up from what seemed like a bad dream, the American might and the playbook were deployed for both defensive and progressive postures. The AI protectionism began when Huawei was banned, followed by dozens of Chinese companies that were prohibited from operating in America.

Before China and the US entered the rivalry zone, the movement to support business in China hurled into the scene with the usual rumbling and roaring. Consultants, trade firms, and US multinationals pushed for more business with China, and analysts rated company stocks based on their China strategy. The China mantra was in full swing when suddenly this move to China came to a screeching halt. Huawei became the first casualty, followed by tariffs, sanctions, TikTok, and escalating tensions in the South China Sea.

Many attributed this change of heart to the peculiar style of President Trump. Blaming China as the job taker, currency manipulator, and IP stealer offered an easy target to arouse Trump supporters. But the new administration under President Biden did not project much love for China, either. Both Democrat and Republicans have made it crystal clear that America will no longer entertain what the US administrations believe to be unfair and heavily skewed policy that favored China at the cost of American prosperity and security. This change of status has not gone unnoticed in China, as the Chinese have also greatly increased the bluster and posturing.

As the rhetoric heats up, pundits and experts who lived through the actual Cold War may try to project a familiar pattern of the US-USSR-style rivalry. Some are even calling it Cold War 2. The imagery of Americans fighting wars in Vietnam and Koreas, bomb shelters, backyard bunkers, and school bomb drills is being used to project the new rivalry. But we beg to differ. We do not see it either as a cold war or a hot war—at least not yet.

We attribute this rivalry between the US and China to the “AI War.” However, we do recognize that the AI War is not any less dangerous than a cold or a hot war and that it must be taken seriously.

Both China and the US understand that something fundamentally different is at play here. The advent of AI is not as simple as the rise of computing or the Internet. When humans create synthetic intelligence, they have essentially tampered with the evolutionary dynamics and redefined the course of the human civilization.

The regular information technology (IT) is no longer a competitive advantage for either companies or countries. Artificial intelligence and the legacy IT are widely different. In regular information technology, computer systems are designed for data (store, organize, process, and analyze). In AI, computer systems are designed from data (machine learning). Machines can learn, adapt, and accumulate experience. And that changes everything.

More than anything else, the greatest difference is that artificial intelligence is altering the scientific process itself. The creation and discovery of knowledge is no longer a linear process based on hypothesis leading to data accumulation and experimentation. It is now reversed, where data leads to an incessant and perpetual automated search for knowledge. Computers are the new scientists.

Intelligent systems can be deployed to automate work (e.g. robotics), reinvent finance, develop intelligent and integrated weapon systems, improve the national security apparatus, enhance intelligence and situational awareness, restructure supply chains, understand and influence social dynamics and political systems, accelerate innovation and scientific discovery, reshape manufacturing and distribution, redefine social norms and values, and advance business operations. AI is changing all aspects of a state.

AI, therefore, is the most critical capability for a country and the ultimate determinant of economic, military, technological, and soft power. The older advantages will become irrelevant as the new revolution allows countries to reinvent themselves. As the IT revolution did during the 1990s, the AI revolution will create winners and losers.

In this new era of AI War, the two primary and most advanced and strategic rivals are the US and China. And the first and perhaps most critical battlegrounds of the AI War are the supply chains of these countries.

As can be observed from the table below, in the opening scene of the AI War, the pattern of US interventions to block and tackle China's rapid advances in AI happened in the three arenas:

Architecting and deploying the AI advantage also requires significant human capital in STEM (science, technology, engineering, and math)—and in terms of sheer numbers China has a significant advantage over the United States.

WHAT ARE THE DRIVERS OF THE AI LEADERSHIP?

The AI National Strategy:

A national strategy of AI is developed by looking at multiple variables and focuses on industrialization, science, and technology. The AI-centric transformation is aligned with redesigned economic, social, and political structures and institutions.

1. Data and data science: AI systems are designed from data, and hence data becomes the key ingredient of systems. But getting data requires a comprehensive strategy that includes building data centers, building applications that collect data (for example, social media), integrating data across sectors (for example healthcare), improving telecom networks (for example, 5G or 6G), AI development platforms (algorithms), and building data science talent.
2. Algorithms, models, skills: This includes building capabilities by developing skills to deploy models and algorithms. It includes developing data science and automation talent in different types of machine learning including supervised, unsupervised, and reinforcement learning.
3. Processing: The third capability area is semiconductors and now the upcoming quantum computers.

This book shows how to build national and company capabilities to take maximum advantage of the decoupled economy.

WARNINGS WERE ISSUED

In October of 2021, Financial Times reported that US intelligence officials had launched a formal campaign to warn American firms about doing business with Chinese AI firms (Sevastopulo 2021). This was premised upon making it hard for China to gain access to American technology and to protect American intellectual property. The National Counterintelligence and Security Center (NCDC) was undertaking efforts to increase awareness about the Chinese firms in five sectors—of which AI was the first. The NCSC alleged that China was using various means to obtain intellectual property and data on Americans. In doing so, the NCSC's acting director Michael Orlando said that China was using an integrated front of Chinese companies, government, and academics to get its hands on American intellectual property. The civil-military dual role of AI made it even more dangerous. Orlando acknowledged that the narrative is still a hard sell for Americans. The FT article reported that Orlando did not mention which companies he was meeting with, but he gave the example that DNA data of Americans was being taken to China and that possessing such large data sets would give China incredible advantage. This was a unique operation. Even though NCSC was telling companies not to stop trade and business with China but only to increase caution, this communication by itself would result in increasing the transaction cost of dealing with Chinese firms.

American firms will be more wary, more cautious, and more concerned about dealing with Chinese firms. If the suggestions and warnings from NCSC were taken seriously by US firms, the work on alternative supply chain options would have already begun in many firms. However, to find such a narrative credible, Americans must believe that the Chinese rhetoric is not just posturing and that it is real and permanent. And that has yet to happen. The crackdown of Chinese firms started under the Trump administration and continues under the Biden administration.

The Department of Commerce placed several Chinese firms on the Entity List. As part of the stated policy, the Entity List's objective was defined as follows:

The Entity List (supplement no. 4 to part 744 of the EAR) identifies entities for which there is reasonable cause to believe, based on specific and articulable facts, that the entities have been involved, are involved, or pose a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States.

The list included companies (and individuals) not only from China but also Chinese or China-related firms operating from other countries such as Pakistan, Singapore, and Japan.

• CHINA: Corad Technology (Shenzhen) Ltd.; Hangzhou Zhongke Microelectronics Co., Ltd.; Hefei National Laboratory for Physical Sciences at Microscale; Hunan Goke Microelectronics; New H3C Semiconductor Technologies Co., Ltd.; Peaktek Company Ltd.; Poly Asia Pacific Ltd., (PAPL); QuantumCTek Co., Ltd.; Shaanxi Zhi En Electromechanical Technology Co., Ltd.; Shanghai QuantumCTek Co., Ltd.; Xi'an Aerospace Huaxun Technology; and Yunchip Microelectronics.
• JAPAN: Corad Technology Japan K.K.
• PAKISTAN: Al-Qertas; Asay Trade & Supplies; Broad Engineering (Pakistan); Global Tech Engineers; Jade Machinery Pvt. Ltd.; Jiuding Refrigeration & Air-conditioning Equipment Co (Pvt) Ltd.; K-SOFT Enterprises; Muhammad Ashraf; Muhammad Farrukh; Prime Tech; Q&N Traders; Seljuk Traders (SMC-Private) Limited; and U.H.L. Company.
• SINGAPORE: Corad Technology Pte Ltd.

During his last weeks in office, President Trump blacklisted several Chinese technology firms. The allegation against them was the dual-use of AI technology being deployed to violate human rights—especially in the Uighur Muslim area of China. The list included firms such as SMIC—a Chinese semiconductor manufacturing firm.

Despite the bold action by President Trump, many conservatives believed that this was simply a whitewash. Reuters captured these sentiments expressed about SMIC:

It's a nice (public relations) line: “We're putting it on this bad guys' list,” said William Reinsch, a former Commerce Department official, who said he imagines the agency was already blocking shipments of such technology to SMIC. “As a practical matter … it doesn't change anything.” (Alper and Pamuk 2020/Reuters)

Republican Congressman Michael McCaul, ranking member of the House Foreign Affairs committee, echoed Reinsch's comments, saying he feared the rules were more “bark than bite”: “I have concerns it undermines the intent, and may create an exception for malign actors to evade U.S. export controls,” he said in a statement.

Clearly, certain voices from America wanted more than just blacklisting the Chinese.

In November of 2020, President Trump had placed 20 Chinese companies on the list where Americans were asked not to invest in them. In May of 2020, he had also asked the federal government pension funds to not invest in Chinese firms. President Trump's guidance was initially met with skepticism by the pension funds, but when it was made clear to them that the president was not playing games, they backtracked and supported the mandate. The escalation was real.

This implied two things were happening simultaneously. America was approaching decoupling from two angles: first, from the trade angle; second, from the financial side.

In June of 2021, President Biden added other restrictions on 59 companies as a continuation of President Trump's stance on Chinese tech and telecom firms. The presidential order banned Americans from investing in these firms. Investors were given time to divest their holdings or keep them but will be required special permission from US Treasury to sell their securities after one year. This included banning Americans from investing in funds that include these securities.

Among the defense companies on Biden's list are Aviation Industry Corp. of China, Ltd., which is one of the best known of the Chinese military giants; China North Industries Group Corp.; China Aerospace Science and Industry Corporation Ltd.; and China Shipbuilding Industry Co. President Biden's list also includes Hangzhou Hikvision Digital Technology Co., the developer of surveillance cameras and facial-recognition technology that US alleges has been deployed for Uighur persecution. Companies on Biden's list that weren't covered in Trump's initial ban include Zhonghang Electronic Measuring Instruments Co. and Jiangxi Hongdu Aviation Industry Co. Other companies included are: Proven Honour Capital Ltd.; Proven Glory Capital Ltd.; Shaanxi Zhongtian Rocket Technology Co.; Inner Mongolia First Machinery Group Co.; Changsha Jingjia Microelectronics Co.; China Avionics Systems Company Ltd.; China Satellite Communications Co.; China-based Costar Group Co.; Fujian Torch Electron Technology Co.; and Guizhou Space Appliance Co.

Many of the companies in Biden's order were already on the Trump administration's list, and they included both telecoms and semiconductor manufacturing firms. For example, China Mobile Communications Group Co., China Unicom Ltd., China Telecommunications Corp., Semiconductor Manufacturing International Corp., and Inspur. In December of 2021, the US blacklisted several Chinese companies including DJI and SenseTime.

Blacklisting was designed to increase the transaction cost for the Chinese companies and would make it difficult or even impossible for them to expand in the Western markets. It will slow down their revenue growth and affect profitability in lucrative Western or American markets. The associated financial blacklisting was there to increase the cost of capital for the Chinese firms and to reduce their access to capital. Another goal could have been to avoid the American know-how and intellectual property ending up in China; however, by that time Chinese technology in most areas had already developed to a point where there was no need to steal. In some areas, however, such as semiconductor manufacturing, China was still behind.

While technology protectionism may have been helpful and the growth of Chinese firms would have been contained, the access to financial capital is a different issue. Capital has truly become global, and the cost of capital would likely not get affected whether Chinese firms were raising money in New York or Hong Kong.

In an article titled “Chinese Companies Turn Table on US' Financial Decoupling Push” in January 2022 in a Chinese government-run media, the Chinese analyst Wang Cong claimed that the financial decoupling did not have any material impact on China. China, the analyst claimed, was able to take companies public in Hong Kong and American investors missed in the returns created by those IPOs. By that time there was no uncertainty in the Chinese circles that America would continue with this purge.

Throughout this back and forth with China, China had one hugely strong card in its pocket. For years to come, China would depend on its own markets and did not necessarily need to rely on foreign markets. The domestic growth in China was sufficient to drive powerful demand for Chinese companies. China is not Japan, and the 1980s playbook may not work with China. China is also not the Soviet Union, and the Cold War playbook may not work for too long. America must develop a strong domestic strategy.

The Chinese government also took actions to ensure that Western influence would not penetrate in China. The ideological carriers of soft power—movies, programs, games—have come under scrutiny in China. Additionally, the Chinese government also reined in the private education sites in China and the Chinese large tech firms.

It seems that President Xi was responding to an effective American strategy to contain China's technological prowess. Only time will tell whether the policy of containment works. China is down to basic maneuvers to guard against the advances. America has deployed every ounce of experience and capability to contain China, and America's experience from the Cold War is coming in handy.

ALLIES AND ALLIANCES

The US has also become far more aggressive in developing and using alliances in the China containment strategy. American allies include not just the UK but also many Pacific regional players, including Japan, Australia, and other Pacific nations. The greatest prize for America came from India. One of the most powerful countries in the region, India came on the US side to confront China. A border skirmish with China rapidly developed anti-China sentiment in India. America possesses deep relationships on a global scale. These relationships have been nurtured and cultivated over decades.

The narratives about Uyghur issues, Hong Kong protests, and Taiwan are also helping the US cause an increase in China's transaction cost to conduct business.

PLAN B IS WORKING, OR IS IT?

Plan B has certainly created higher transaction costs for Chinese firms. The Chinese firms would have to try harder and use other options to grow. One example of that was when Taiwan Semiconductor Manufacturing Company suspended chip sales to Huawei. The strategy of containment may be able to slow down innovation—as Secretary Raimondo longed for—but it would be hard to sustain that. The international growth options for the Chinese tech firms are becoming more limited. The American AI Initiative got some breathing room to find its glory. It all now depends on the domestic strategy. How fast can America rebuild its AI capability was on everyone's mind. America needed a miracle.

REFERENCES

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