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China Looks at U.S. Tech-Limiting Measures and Sees Gunboat Diplomacy

Scott Stewart
VP of Tactical Analysis, Stratfor
7 MINS READNov 20, 2018 | 10:00 GMT
John Demers, U.S. assistant attorney general for national security, speaks in Washington, D.C., on Nov. 1.

John Demers, assistant attorney general for national security, speaks in Washington, D.C., on Nov. 1 after the creation of a new initiative to crack down on Chinese intelligence officials pilfering intellectual property from U.S. corporations. New measures against China, however, are only likely to strengthen Beijing's resolve to acquire technology by any means possible.

(JIM WATSON/AFP/Getty Images)
  • As China attempts to achieve technological parity for reasons of national security, the U.S. government will continue to deploy a wide array of tools against these efforts, particularly Beijing's attempts to obtain trade secrets illegally.
  • These U.S. actions, however, will merely convince Beijing to break its dependence on Western technology by any means possible, since they vividly remind China about how a technologically superior West victimized it during the days of gunboat diplomacy.
  • Fearful for its own future in the wake of Washington's actions, Russia will also strive to obtain technology by any means possible.

The last Opium War ended 176 years ago, but Beijing remembers the battle well — particularly the West's penchant for gunboat diplomacy. Memories of Western coercion and blockades have already prompted China to bolster the country's navy and take aggressive steps in the South China Sea to fulfill two of its overriding strategic imperatives: prevent any encroachment on the eastern coast and secure maritime trade routes.

The Big Picture

Like the Cold War, the current great power struggles between the United States on one side and China and Russia on the other will involve every facet of national power: military, economic, legal, diplomatic and intelligence. With both China and Russia seeking technological parity with the West — and willing to use any means necessary to achieve it — the struggle between espionage and counterintelligence agencies to acquire or protect technologies will make for an extremely active competition.

Beijing, however, is now preparing to respond to another type of blockade. Late last month, the U.S. Commerce Department announced that it was adding Fujian Jinhua Integrated Circuit Co. to the list of entities facing restrictions, essentially declaring that the firm poses a significant risk to U.S. national security or foreign policy.  A December 2017 indictment accused the firm of illegally obtaining trade secrets for the production of DRAM chips from U.S. company Micron. With the action, the Commerce Department has barred the export, re-export or transfer of U.S.-origin technology, commodities or software to Fujian Jinhua without a special export license — which the department is unlikely to grant anyone.

The action against Fujian Jinhua is tantamount to a blockade on the company, because Washington is using lawsuits to prevent it from selling its chips in overseas markets and imposing technology transfer bans to prevent it from obtaining the components it needs to produce chips. Because of this, the measures are certain to provoke an emotional response among China's leaders, who will see them as an attack on its future development — and perhaps more fundamentally — its sovereignty. And far from persuading China to desist from its efforts to acquire technology by any means necessary, the robust U.S. action is ikely to only encourage more of it.

In Hot Pursuit of Chinese Companies

Three days after Fujian Jinhua was added to the list on Oct. 29, the U.S. Department of Justice filed a civil suit to prevent the firm from selling DRAM chips made by it or its Taiwanese partner, UMC, inside the United States. The suit also applies to other devices that include chips made by Fujian Jinhua and UMC, meaning that foreign companies that wish to sell to the U.S. market will have to get their DRAM chips elsewhere.

The measures against Fujian Jinhua come amid a raft of recent U.S. efforts to halt technology transfers to China, as well as Beijing's industrial espionage. On Nov. 12, The Wall Street Journal reported that in addition to judicial action to counter Chinese spies, the U.S. government will also use tools such as export controls to combat China's theft of trade secrets from American companies. Then, on Nov. 19, the Commerce Department launched a 30-day public comment period to obtain feedback from the technology sector on legislation that would impose restrictions on the exports of dual-use U.S. technology to China if it could pose a national security risk to the United States.

The Response to a 21st-Century Blockade

Taken together, all the U.S. steps are likely to hit Fujian Jinhua extremely hard. In fact, The Wall Street Journal even suggested that they could kill the company, because it relies on U.S. technology and components to produce its chips. (Compounding the issue, Micron filed a civil lawsuit against Fujian Jinhua in December 2017, which continues to wind its way through the courts. Fujian Jinhua subsequently filed a countersuit in a Chinese civil court in July 2018.) From the U.S. government's perspective, damaging or even destroying Fujian Jinhua for stealing Micron's intellectual property would represent a major victory. Contrastingly for China, Fujian Jinhua's demise would represent a significant blow to the country's efforts to become self-sufficient in semiconductor production, including DRAM chips. As a state-owned enterprise, the firm received $5.7 billion in state funding from the Fujian provincial government to build a production plant for DRAM chips, illustrating the government's focus on the importance of developing the technology.

The U.S. government's proclivity for measures to ban knowledge transfers are, ironically, only going to convince Beijing of the need to accelerate its efforts to end its reliance on Western technology.

But in its rush to obstruct China's efforts to develop domestic technology, the U.S. government's proclivity for measures to ban knowledge transfers are, ironically, only going to convince Beijing of the need to accelerate its efforts to end its reliance on Western technology. And technology transfers are not the only means of ending such dependence — the acquisition of coveted technology by any means necessary is another method of ultimately ensuring that Beijing can fulfill its national security goal of achieving technological parity with the West. Faced with such U.S. measures, the hard-liners who have been urging Chinese intelligence agencies to acquire the technologies on the shopping list associated with the "Made in China 2025" initiative by hook or by crook are now likely to redouble their clandestine efforts.

However, as these efforts increase, Chinese companies and intelligence agencies will naturally need to adjust their tactics. This will be especially true as they target trade secrets that are only available from a small number of companies, which will be on guard after high-profile incidents such as the Micron case and theft attempts by Chinese spies seeking the designs for jet engine components. These efforts will involve the use of every tool in the espionage toolbox, including cyberattacks and the recruitment of human sources.

While some of the recent, highly publicized Chinese espionage efforts may appear amateurish, Western governments and companies would underestimate them at their peril. A variety of Chinese agencies and actors will often conduct simultaneous efforts to collect the desired information or technology using multiple approaches — some of which are more sophisticated than others. Because of this, botched or thwarted efforts should not lull potential targets into a false sense of security, because other, more effective operations using sophisticated tradecraft may already be in motion.

China will also use other tools at its disposal. On DRAM chips, China launched a domestic antitrust investigation in June, alleging that the world's leading producers, SK Hynix, Samsung and Micron — which together control about 95 percent of the DRAM market — had conspired to fix prices. On Nov. 19, the trio's stock prices tumbled after the Financial Times reported that China's investigation was making progress. Needless to say, Chinese officials will have even more incentive to press their antitrust case if Fujian Jinhua suffers as a result of the U.S. measures.

Espionage in the Great Power Struggle

Watching on with great interest is Russia, which has its own list of 77 technologies that it wishes to develop indigenously in order to break its dependency upon the West. Without question, the U.S. government's use of virtual gunboat diplomacy against Fujian Jinhua will strengthen the Kremlin's resolve to ensure that it is not on the receiving end of similar actions in the future — especially given Washington's current sanctions against Moscow. This will also result in increased Russian corporate espionage in concert with the Kremlin's efforts to sow discord within the United States, various European countries and the European Union, as well as between Washington and Brussels.

In the end, great power struggles involve every facet of national power, with the military, diplomatic, legal and commercial angles of the struggle obvious for all to see. But lurking in the shadows, battles between intelligence agencies to procure or protect technology may, in the long run, prove to be every bit as significant as those higher-profile struggles.

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