Imitation Game: How the West is Going China's Way

There's growing optimism that the US and China will soon wrap up a deal to end their $360 billion trade and tariffs spat. But even if China agrees to buy more US petroleum and soybeans or ease requirements that foreign companies hand over intellectual property, President Trump's negotiators are unlikely to get Beijing to bend on a more fundamental issue: the state's heavy hand in directing the economy and the advantages it gives many Chinese companies.


In China's state-capitalist system, the government owns many enormous companies and heavily subsidizes others. It uses its control over these firms to achieve its national development goals, setting priorities by issuing top-down plans that serve as blue prints for the private sector to follow. The Chinese model has been wildly successful – it's lifted hundreds of millions of people out of poverty and vaulted China into the ranks of the world's top technology powers.

The United States has historically taken the opposite approach. The US generally doesn't "do" industrial planning. It views the government's main role as staying out of the way of private sector innovation rather than enabling it. Moreover, today Washington sees Beijing's support for its domestic tech sector and other strategic industries as a form of cheating, because it gives Chinese companies an unfair advantage. US tariffs on billions of dollars of Chinese goods are meant in part to pressure China to adopt a more free-market approach.

But China is unlikely to budge. It views its support for domestic industries as essential to meeting its economic and technological goals, and ultimately to maintaining the Communist Party's grip on power.

In the meantime, at least in the all-important tech sector, Europe and the US are starting to embrace a more pro-active role for government.

Last week, the economy ministers of Germany and France unveiled a "manifesto" for a new European industrial policy. With no Silicon Valley of its own, they argued that Europe needs to do more to support its home-grown companies as they digitize or risk losing its competitive edge.

They want to boost funding for companies working on technologies like AI, change EU antitrust rules to allow national industrial champions to get even bigger, and protect domestic tech companies from foreign (read: Chinese) takeovers. Faced with a rival economic power that's willing to put the full weight of the state behind its technology and industrial development, Europe's two most important economies seem to be saying, "If you can't beat 'em, join 'em" – at least in strategically vital sectors like technology.

That kind of state-driven approach will be a much tougher sell in the United States, but former House Speaker Newt Gingrich penned a little-noticed op-ed in Newsweek last week in which he argued that the US should develop a national policy for next-generation 5G mobile networks. He warned that America's "laissez-faire tendencies" had allowed China to gain an edge in a critical technology, and that without a better strategy, the US could awake to "find that the Chinese have occupied the overwhelming position in wireless on the geostrategic map." His solution? Create a public-private partnership to build a "nationwide" 5G network – a "kind of wireless moonshot (but with private capital)" over the next two to three years.

The US and Europe aren't about to become state-capitalist, but in the tech sector at least, a dawning realization that China won't change is persuading even some of the world's most dedicated free-marketers to think in terms of "Manhattan Projects" and "moonshots" to ensure that government and industry are riding the same train toward the future.

Facebook unveiled plans for a new cryptocurrency and payment system on Tuesday. It's called the Libra, and it's not-so-modest goal is to "reinvent money," and "transform the global economy" so that "people everywhere can live better lives." Ambitious much, Zuck?

This is a huge political gamble, but the rewards could be enormous. Here's a quick look at the tradeoffs:

The risks: Facebook is asking its 2.5 billion users — and government regulators — to entrust it with something that's vitally important to people everywhere and a power that governments jealously protect: access to money. And it's doing so at a time when trust in Facebook and other big Silicon Valley companies is at a low ebb.

Whether it's a concern that Big Tech has become too powerful or that it's not doing enough to protect privacy or put a stop to fake news, it's a heck of a time to launch a new techno-utopian project that could give Silicon Valley much more power — including the ability to track not just what people say they like but how they spend their money.

Mark Zuckerberg understands this — the Facebook founder is setting up Libra as a Swiss-based non-profit that will be governed by an "association" of 28 tech and financial companies and non-profits of which Facebook is just one member. He's also promising that Facebook will not mix personal data with payment information, and to cooperate with regulators.

But this will always be Zuckerberg's baby, and by launching Libra, he's painting a big new political bullseye on his own back.

The payoff: If Libra can survive the inevitable political and regulatory storm (and convince its billions of users that they can trust the underlying technology and financial stability of the new cryptocurrency) the upside could be enormous.

How enormous? The Libra website claims that more than 30 percent of the world's population — about 1.7 billion people — currently lack access to traditional bank accounts. Many more pay steep fees to transfer money using traditional payment services. Libra, by contrast, promises access to anyone in the world with a simple smartphone — and to make payments as inexpensive as sending a text message.

Plug those capabilities into a social network whose user base is roughly double the population of the biggest country in the world, and the results could be revolutionary — not just for billions of people who would gain new access to financial resources, but for Facebook's business model, and for central banks and governments that have traditionally sought to control the flow of money through their economies.

That would be a techno-utopian dream come true, but it's a power that governments won't willingly surrender.

If Willis's story on Tuesday about Argentina being plunged into darkness after a nationwide power failure didn't get you packing a flashlight and checking that your car has a full tank of gas, this one should. Over the weekend, the New York Times said anonymous US officials had revealed a US campaign to plant "potentially crippling malware" inside Russia's power grid "at a depth and with an aggressiveness that had never been tried before."

Quick thoughts:

This is a big provocation. It's the cyber equivalent of mining a harbor — an aggressive move that falls short of actual conflict but sends an unmistakable message: mess with us, and we'll mess you up.

The leak was probably intentional. The campaign fits with the new US strategy, launched under the Trump administration, of trying to deter cyber adversaries like Russia, China, and Iran from hacking its critical infrastructure. By disclosing the US campaign, US officials are effectively telling Russia (and by extension China and Iran), that they've got a loaded gun cocked and pointed at their economies.

That's dangerous. People — and governments — may not always behave rationally when a gun is pointed at their heads. Russia might be even more inclined to lash out. And unlike more conventional forms of conflict, cyber isn't a domain where the US can be sure it has an overwhelming advantage if push comes to shove.

It gets worse. The Times said US cyber officials described a "broad hesitation" to go into details of cyber operations against Russia with President Donald Trump because they feared he might cancel it or tell other governments about it. Among other things that are disturbing about this story, a lack of communication between the President and US cyber warriors could send mixed signals that further embolden US adversaries.

It's no secret that cyberattacks are becoming more commonplace. But where do most of them originate and what countries do they target most? The graphic above shows the most significant offenders and victims since 2006. Hackers in China, Russia, Iran, and North Korea account for three-quarters of all major attacks. Nearly a fifth of attacks, meanwhile, have targeted institutions or companies in the United States.

(At least that we know of: this chart highlights known attacks on government agencies, tech companies, and other operations that caused more than $1 million in economic damage. But many cyberattacks are never disclosed, and some countries are more transparent than others, so consider this a cross-section of a much bigger — and more disturbing — picture.)

China's outrage against Swiss bankers – Paul Donovan, an economist at UBS and a former colleague of your Wednesday Signal author, ended up in hot water last week after he wrote that an outbreak of swine fever that had pushed up pork prices in China, "matters if you are a Chinese pig. It matters if you like eating pork in China. It does not really matter to the rest of the world." The Swiss bank put Donovan on leave after a nationalist tabloid picked up the story, unleashing a torrent of invective from angry Chinese citizens, industry groups, and clients. Although we're a bit puzzled at the intensity of the outrage, we're following this story closely. The anger of 1.4 billion people is a powerful thing, and if the US-China standoff over tech and trade continues to escalate, US firms could soon find themselves on the receiving end.

What we are ignoring: Trump on ICE

Trump's Deportation Threats – As Donald Trump revved up his official reelection campaign in Florida on Tuesday, he took to Twitter to vow mass deportations of "millions of illegal aliens" starting next week. We are ignoring this for two reasons: First, it looks more like a campaign trail stunt than a well-thought-out plan — the scale of deportations Trump envisions would require massive logistical coordination, and it's not clear that Immigration and Customs Enforcement (ICE) can deliver it — even if the federal force got help from local police, who may be reluctant to participate in mass arrests in their communities. Second, while this type of rhetoric may play directly to Trump's base, images of crying children torn from their parents will galvanize the president's opponents — and, in particular, the suburban women crucial to his 2016 victory. We're not ignoring the pain and trauma that mass deportations would inflict on immigrant communities if Trump delivers on this threat. We're ignoring a boast that's likely to prove a political bust.