I will discuss several interrelated themes: first, the shifting economic orders resulting from geopolitical contestation; second, growing technological competition, particularly between the United States and China; and third, the concept and practice of weaponised interdependence, which has become even more relevant in the context of the Russian invasion of Ukraine and the Western response.
Let me start with the first issue. To distil some of the essence of the neoliberal economic order: an economic mindset predominated, creating a strong focus on win-win outcomes and absolute economic gains, and much less of a focus on security issues. This is not to say that security was absent from the neoliberal economic order. Indeed, part of the justification for that order — and for the interdependence to which it gave rise — was that, through trade and investment, it would generate not just greater prosperity, but also peace. Direct measures to ensure national security were, of course, explicitly stated as an exception to all of the trade and investment treaties; but such security measures were seen as an exception rather than as the rule, and the exception was almost never invoked. So security was in at the beginning of the system as a justification, and it was in at the end of the system as an exception though unused, but it was not at the centre. Instead, the centre of the neoliberal economic order was very much an economic mindset. This mindset saw interdependence as opportunity to ensure that we could all do what we do best, in order to create much greater economic efficiency and absolute gains for everybody. That view held from the 1990s to several years ago, when we began to see the emergence of a new geoeconomic order.
To distil the differences between the new geoeconomic order and the neoliberal economic order it is replacing: the first difference is a shift away from belief in ‘win-win’ relationships and absolute gains from trade towards a more zero-sum view of relative gains. This shift to a zero-sum view produces a very different understanding of the relationship between peace and trade. The old neoliberal economic order rested on the assumption that trade and the enforcement of multilateral rules promote peace. By contrast, the new geoeconomic order rests on the assumption that peace is a prerequisite to trade, and that peace is a cause rather than a consequence of the enforceability of multilateral rules. In this new geoeconomic view, interdependence is no longer seen primarily through the lens of opportunity; it starts to be seen, instead, through the lens of vulnerability. The fear becomes that interdependence can be weaponised, rather than being seen through the promise that it increases efficiency. As a result, we have started to see the much more frequent use of national security exceptions in economic relations, and the application of such security exceptions to a much broader range of things than we had seen previously — in trade, in investment screening and in export controls. Instead of being the exception that nobody uses, national security is becoming the (not highly reviewable) exception that swallows the rule.
If we think about how and why this shift in economic orders came about, the United States and China are key actors. There has been a closing gap between the US and China in relative terms; both the US and China gained in absolute terms from economic globalisation, but China used this period to close the gap, economically, militarily and technologically. And that has prompted very strong security and geostrategic concerns in the United States. This is the first time that the US has seen a convergence of economic and security competition. During the Cold War, the US obviously had a security competitor in the USSR, but the USSR was not sufficiently economically strong to be a serious economic competitor. At the same time, Japan emerged during that period as a major economic challenger of the United States, but it was no longer a security challenger. Economic and security challenges both existed, but with different actors and in very different realms.
Now, the US interprets China as both an economic and security challenge. So, we're seeing a different configuration. And this is also happening in a period of deep economic integration and digital connectivity — very much unlike the Cold War, when there was no digital integration and very little economic integration between the US and the Soviet Union. Perspectives are also shifting in China. Among Chinese elites there is a multiplicity of views about how to understand economic interdependence. One view is that economic interdependence is positive, an engine of economic development and technological growth, and therefore a ‘win-win’. Another view in Beijing is that economic interdependence is a source of risk, because it necessitates dependencies and creates vulnerabilities. A third view is that economic interdependence can be a source of leverage, because it can create dependency and vulnerabilities of others; this is a key motivation for the Belt and Road Initiative. These three views have existed simultaneously in Beijing for a while. But, whereas the first (‘win-win’) view of interdependence used to be clearly dominant, this view is now receding, and the second and third views are becoming more prevalent amongst the Chinese elite than they were previously.
These are some of the shifts in mental model that are happening in the US and China (and, indeed, elsewhere around the world). Turning to my second issue, how might these shifts affect the nature of global technology competition?
The US and China are really a duopoly when it comes to global technology; they are way out ahead of any other states. But these two great technology powers also come from different starting points and they have markedly different points of view. The US has been the technological leader; its aim is to preserve that leadership. This means that it often wants to restrain access to technology in order to prevent IP from leaking to a competitor. China, on the other hand, has been in the process of catching up. Although it has not been as much of a technological innovator as the US over the past few decades, its aim now is to catch up to and get ahead of the United States in a number of key technologies. Consequently, its primary goal is to acquire new knowledge and new technologies rather than merely to restrain access to technologies that it already has.
Once one understands this basic configuration, one can start to understand the strategies that China and the US are employing in the global technology arena.
China, for the last few decades, has been using what some of my colleagues at ANU, Andy Kennedy and Darren Lim, call the strategies of making, taking, and transacting. The first consideration for China, when it comes to technology, is self-reliance — the capacity to make its own. China wants to indigenise technological development in order to avoid dependence on the US (in semiconductors, for example). This process has been hyper-charged by geoeconomic developments such as vulnerability to export controls. The second strategy for China is transacting — using financial means to buy technological power. Chinese companies (including Chinese state-owned enterprises) have gone around the world lawfully buying up many different technology companies in order to acquire technological knowledge. And finally, we have taking. Whereas transacting is done through the payment of money, taking is done without the payment of money, and it can be done lawfully or unlawfully. An example of lawful taking is huge downloading in China from all of the repositories of scientific journals and other open access data sources. But there is also unlawful taking, such as the use of cyberespionage to steal materials.
In response to these three strategies from China, I along with Henrique Choer Moraes and Victor Ferguson explain that the US is undertaking three strategies: shielding, stifling and spurring. Shielding is an attempt to protect technological assets at home. We see that happening with investment screening, which stops Chinese investment in Silicon Valley and other major hubs to acquire technology. Stifling is an attempt to stymy China’s technological advances. Take Huawei as an example; the US strategy has been to undermine this company’s capability to advance not just in America but in third markets. Finally, spurring is the notion that simply shielding what you have and stifling the competition is insufficient, and that the US must maintain its lead by investing in order to run faster still. On this view, the best defence is a strong offence — which means putting more money into R&D, and pursuing an active industrial policy in the US and elsewhere.
The foundation of all three US strategic responses to China’s technology rise is a conception of national interest in which absolute economic gains from economic interdependence must be weighed against relative strategic losses in terms of a competitor catching up more quickly as a result of that same interdependence. The political scientist Jonathan Tucker talks about what happens when you have two technology companies, a leader and an up-and-comer, and whether or not they have an incentive to cooperate with each other. From the perspective of the technology leader, here the equivalent of the United States, in terms of absolute economic gains, a greater payoff accrues if you cooperate, even if the other party isn't as productive as you. That openness and interaction and exchange really enhances creativity and breakthroughs. Similarly, you have economic gains if you are the US or China and you're working with each other. Even if the US is further ahead, it will still get something from working with very good Chinese scientists, for example. But what we also know from technology companies is, if you have a leader and an up-and-comer, and if they collaborate, the up-and-comer tends to close the gap on the leader. And this means that, over time, there is a relative security loss for the United States (though not, of course, for the Chinese, who have both an absolute economic gain and a relative security gain).
When I started working on this, the economists tended to look only at the absolute win-win outcomes arising from economic interdependence and technological collaboration, whereas the security community tended to look primarily at the relative security risk. Of course, a national interest function needs to integrate both of these two points of view. And for a long time, the integrated national interest view in Washington was that the US had a net interest in continued collaboration and interdependence. But at some point, the integration of the two points of view can begin to turn sharply. And I think this is what we have seen in Washington, in terms of the current mental model of Sino-American interdependence. This helps to explain why the US has recently reacted to China in the way that it has.
At the beginning of COVID, I taught geoeconomics at Harvard to students from all around the world. One of them, from China, said that people in China talk about there being three or four distinct phases in the US-China technology relationship. She identified the following phases: 1979 to 1989,consisting of early exploration; 1990 to 2010 as a period of stable development, with gains on both sides; 2010 to 2016, with much deeper technological engagement between researchers, but also cyberespionage and increasing concerns about the rise of China; and from 2016 onward, following the election of Donald Trump, an era of new uncertainties, in which a bipartisan consensus has formed in the US that relative gains – limiting exposure – should be the priority. I think that captures quite accurately the trajectory of this particular relationship.
Moving forward, to what extent will technology and technological development be bifurcated between the US and China? A report published last year based on survey data from Chinese and American technology CEOs is worth highlighting here: 97% thought that US restrictions on Chinese technology acquisitions are likely to increase, and only 1% intended to align fully with either the Chinese or American spheres of influence. One-third intended to remain neutral between China and the US, and the remainder –over 60% – hope to maintain a fence-sitting strategy in which they can play both sides off of each other. Is this strategy possible? Will their views change in the coming years? That is what we need to focus on as it unfolds.
I will touch finally upon weaponised interdependence, a topic of particular importance given the war in Ukraine. This idea has come to the fore through the work of political scientist Henry Farrell and Abe Newman, who tell us that our interconnected world is not flat — that there are core nodes controlled by states. States that have power over these core nodes are going to be able to weaponise them through first what they call the ‘panopticon effect’ — the ability of the state controlling the node to spy on what passes through the node. That’s why there are very strong concerns about Huawei and 5G — on the grounds that anybody who has control of digital connectivity and 5G networks, whether American or Chinese, will have this ‘panopticon’ spying capability. And second power over the central nodes also gives the state which has it the ability to construct ‘chokeholds’ — the ability to turn things on and off. So, for 5G, control over the central nodes will give states the power to turn off supplies, or (more subtly) to degrade services gradually or inconsistently — a tactic which is plausibly deniable, but which creates enormous stress and anxiety within victim-states.
At some level, these relationships are general: a state can control central networks if it is in control of central nodes or hubs. But the nature of the nodes or hubs differs depending on which type of connectivity is involved. We've seen many different patterns of connectivity. I'm going to give you two specific patterns — the trade pattern and the finance pattern.
In the trade pattern, the two biggest hubs are China and the US. If you put European states together, they would be a third big hub. But China and the US are really central trading partners for other states, with huge trading connectivity. We can clearly see China weaponising its trading links, as it has done with Australia and Lithuania; and the US is also doing that now, with the economic sanctions it has imposed on Russia. States, even great powers, have different powers; but they share a tendency to weaponise the power they have.
In contrast to the trade pattern, China has been virtually absent from global financial networks. This is one of the reasons why China survived – even did well out of – the 2008 crisis, and helped to pull the global economy through that episode. It was central to trading networks, nut peripheral to the global financial networks. But that is the past. What about our present? It’s characterised, as I’ve already said, by the weaponization of interdependence on both sides (e.g., the SWIFT system, broader economic sanctions, specific targeting of products). These network configurations are also critical to understanding our likely future. I think we will see further efforts from China to find alternatives to the dollar, because it would be intolerable, I think, from the Chinese perspective to risk economic isolation in the event of conflict, in the way that Russia has been effectively cut out of the global financial system by the US.