US-China Tech Race: the great decoupling

This is an audio transcript of the Tech Tonic podcast — US-China Tech Race: The great decoupling

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James Kynge
(Speaking in foreign language)

A couple of years ago in Shenzhen, I sat down for an interview with Ren Zhengfei, the founder and CEO of the Chinese technology giant Huawei.

Ren Zhengfei
(Speaking in foreign language)

James Kynge
We spoke in Mandarin, and Mr Ren told me about the impact that growing tensions between the US and China were having on his company (overlapping foreign language). By then, Huawei had become the poster child for China’s dynamic tech sector, but also the focus of American anxieties at growing Chinese technological power. It was now on a US blacklist, banned from accessing crucial US technology. The Trump administration had labelled Huawei a threat to national security.

Ren Zhengfei
(Speaking in foreign language)

James Kynge
Huawei, Mr. Ren said, was like a sesame seed being squashed between two sides. But then Mr. Ren switched metaphors. He pulled out an old black and white photo of a Soviet warplane from the second world war. It had been shot to pieces. Its wings and fuselage riddled with bullet holes.

Ren Zhengfei
(Speaking in foreign language)

James Kynge
If the engine has no fuel, it won’t make it home, he said, pointing to the photo (sound of gunfire). If the fuel tank is hit, it won’t make it home.

Ren Zhengfei
(Speaking in foreign language)

James Kynge
But if a few bullets hit its wing, well, the plane will eventually make it back to the Soviet Union. It will just have to fly a bit more slowly, he said. And that, Ren Zhengfei told me, was what it was like for Huawei. Battered by the US economic attacks but still airborne and still determined to make it home.

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This is Tech Tonic from the Financial Times. I’m James Kynge, the FT’s global China editor with the last in our six-part series on the US-China race for global tech supremacy. It’s been two years since my interview with Ren Zhengfei, but the analogy he painted still applies today. If anything, the forces targeting that plane he mentioned have become ever more hostile. In this episode, how the growing tensions between the US and China could split the world into two competing technological spheres. It’s been dubbed the Great Decoupling, and in this final episode I’m asking what that decoupling might look like and whether it’s even possible.

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On the surface of things, the technological landscapes of China and the US are already mostly distinct (nature sounds in the background). It’s sometimes called the Galápagos effect. Like the remote Pacific Islands explored by Charles Darwin, China’s technological landscape has developed its very own unique flora and fauna, different from that found anywhere else on the planet. The natural world analogies don’t end there. Lillian Li writes Chinese Characteristics, a newsletter covering Chinese start-ups. In China, they call people like her sea turtles or Haigui.

Lillian Li
In some introductions usually say, Hi, I’m a sea turtle, and people are now OK I know your life story. You were born in China. You went abroad and then you come back.

James Kynge
Lillian moved back to China in 2020 after living in London and working in tech for many years. And what struck her in that move was how China had developed an almost parallel virtual world.

Lillian Li
I’ll give a very simple but clear example to me. So in the UK or the US you have like Deliveroo or Grubhub or Uber Eats where you order some things off an app and it shows up in maybe hopefully 30 minutes. And there is a Chinese equivalent for each one, but it’s not just for food delivery, it’s essentially a super app. But the plethora of things that’s available in these apps is, at least initially for me, was kind of overwhelming and mind-blowing just to think that they can cram so much into such a small interface. And so just navigating that process, you know, it hits you on a daily basis because we’re so used to taking these things for granted in the west to even think about it. That feels like a very different thing in China.

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James Kynge
One of those super apps is called WeChat. It’s a Chinese version of Facebook. Everybody uses it. I used to use it, too, when I lived in Beijing. It’s handy for keeping in touch with friends. It’s also good for booking doctor’s appointments or paying utility bills and even applying for a job (Advertisement). Amazon has at least three Chinese lookalikes, the most famous of which is Alibaba (bell rings). If you hail a ride in China, you won’t be stepping into an Uber but probably into a Didi instead (ping). And some of those Didi cars are said to be driven by robots, apparently (car sound). YouTube, the US video sharing platform, is blocked by Chinese censorship rules, opening the field for a tamer Chinese equivalent called Youku (ping). In online dating though the tech evolution has followed a familiar pattern. You still swipe right on Tantan to show interest, just as you would on Tinder. It’s really a very striking feature. I’ve had that myself on several occasions. Every time I go to China, this new things I need to get my head around. But, you know, you speak Chinese with native fluency. You read the language. Could you tell us how long did it take you to sort of reorientate yourself in the tech world in China?

Lillian Li
I think in terms of understanding the cultural context of Chinese tech, that actually probably takes six months to learn about 80 per cent of it. That’s all things that I come across regularly that that still kind of baffles me and takes me a while to reorientate.

James Kynge
One of the reasons for this uniqueness of the Chinese tech landscape is that ever since the internet and smartphones came along, the Chinese state has been restrictive to American tech companies working within its borders. Instead, they fostered their own digital platforms.

Paul Triolo
In terms of things like social media and search engines and sort of internet censorship, of course, there was already been a big division of those markets.

James Kynge
That’s Paul Triolo. He’s a senior vice-president at the Albright Stonebridge Group, a consulting firm in Washington, DC. He knows China well. He’s been travelling there every year since 1989.

Paul Triolo
So for example, Google and Facebook and Twitter can’t operate in China. At the top of the stack, if you will, there’s already been some decoupling.

James Kynge
But although on the surface, China looks like a tech universe unto itself, this impression is in fact completely misleading. The roots connecting the US and China go very deep. Take, for example, where the US manufactures most of its high-end tech.

Paul Triolo
US companies and western companies have a big presence in China. China has become this $1tn manufacturing juggernaut and has these very unique capabilities globally to do advanced manufacturing in scale. And so this is why many sectors have become dependent on China. And then we wake up one morning and wow, you know, China is dominating in whatever, rare earths, and you know, EV batteries and electronics manufacturing and packaging and testing for semiconductors, all these key areas.

James Kynge
And then there’s the money issue. Much of the capital and knowhow that propelled China’s rise over the last four decades came either from the US or other countries in the west, and much of the consumer boom enjoyed by the west over the same time period was enabled by China. It’s not too much to say that a big chunk of US prosperity is made in China, and a big chunk of Chinese prosperity is made in the US. But there are plenty of Americans who now want to stop the flow of American capital into China.

Roger Robinson Jr
We’re increasingly in an adversarial position vis-à-vis Beijing, and it’s necessary now to think about how we diversify away from the country.

James Kynge
Roger Robinson is president of RWR Advisory Group, a consultancy that tracks Chinese investments all over the world. People like Roger think the US shouldn’t be funding Chinese tech companies. His lightbulb moment came all the way back in 1999 when he was reading through the investment portfolio of Calpers, the pension fund for California public workers. He came across an unexpected link between Calpers and the Chinese military.

Roger Robinson Jr
I was looking over the Calpers portfolio and their China exposure, and I took note of Poly Technologies, Norinco, China Resource Holdings., There were a number of companies in the portfolio of Calpers that were, in my mind, rather well-known companies of the People’s Liberation Army. And it struck me as ironic and concerning that American public employees were investing in the People’s Liberation Army.

James Kynge
Today, there are thousands of Chinese companies traded on US stock markets, and Roger says the big problem is that the US doesn’t know enough about what those companies are actually doing.

Roger Robinson Jr
Over the past, say, 20 years, not one Chinese company has been compliant with US federal securities laws. That’s a rather extraordinary statement.

James Kynge
What he’s referring to there is the fact that Beijing won’t let American regulators audit the books of Chinese companies. That includes Chinese companies listed in the US.

Roger Robinson Jr
China has steadfastly refused to do so for reasons of national security. And frankly, they didn’t want American, an American entity looking under the hood of Chinese companies because they might see some, shall we say, some sporty transfers of finance with, for example, the PLA or Chinese security services or the intelligence community. And yet they’re in the portfolios of scores of millions of unwitting American retail investors.

James Kynge
So Roger, let me just ask you what you think might be done about this. I mean, what should the US be doing to close, you know, this, well, as you’ve described it, really big asymmetry between what the US investor knows and what they’re actually buying when it comes to Chinese stocks.

Roger Robinson Jr
I mean, I think Chinese companies want to play in the US markets. And I think that even Chinese leadership wants to ensure that that kind of market access continues. After all, the United States has about 66 per cent, I believe, of the world’s liquidity, and our capital markets are, roughly speaking, the size of the rest of the worlds combined. And when you talk about going somewhere else, well, it begs the question, is there somewhere else? I would argue largely no. The Chinese require hundreds of billions of dollars, underlying dollars, a year to keep their growth rate in the zone of viable. That is, avoiding massive social unrest and even putting at risk the Chinese Communist party’s control. So I don’t know how you get there if you truly estrange the US capital markets.

James Kynge
In recent weeks, US regulators have threatened to delist a handful of Chinese companies that failed to comply with auditing rules. But the chances of cutting off China completely from US markets seem slim. China needs US dollars, and for American investors, there’s money to be made in China’s booming tech sector.

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Finance is just one area of concern for those worried about the entanglement of the US and China’s tech ecosystems. The US reliance on China to manufacture its technology is provoking anxiety, too.

Donald Trump
We won’t back down until China stops cheating our workers and stealing our jobs, and that’s what’s gonna happen. Otherwise . . . 

James Kynge
Throughout the Trump presidency, tariffs and export controls encouraged American tech companies to move their manufacturing out of China.

Donald Trump
We don’t have to do business. We can make the product right here if we have to, like we used to. Remember? Like we used to!

James Kynge
President Trump may have been replaced, but even President Biden has continued with what some refer to as a Trump-lite policy on China. But China tech analyst Paul Triolo says abandoning Chinese factories is nigh on impossible. Just look at Apple, which makes the vast majority of its iPhones there.

Paul Triolo
If China sort of disappeared from their supply chain, Apple would be in a world of hurt. All the really cutting edge stuff that they do is in China and also all the suppliers they have for the iPhone, for example, all the different pieces of the . . . there’s so many components that make up an iPhone. The bulk of those are coming from China.

James Kynge
I mean, if there was an extreme scenario that unfolded and Apple was forced to decouple its supply chain from China, would there be an Apple?

Paul Triolo
Well, there wouldn’t be an Apple as we know it. I mean, no. There’s no way, for example, that if you somehow, you know, shut down the Zhengzhou facility, that Apple could produce iPhones and iPads and in the quantity and at the price.

James Kynge
Apple is looking at manufacturing in other countries like India, but there are still massive challenges.

Paul Triolo
Probably on the high-end, you’re probably gonna have over the next five years, you know, maybe five or 10 per cent of some advanced manufacturing move out of China, but not a lot. But also think about that, the investment that Apple will require in terms of billions of dollars. The costs are prohibitive. And so it’s sort of this balance between geopolitical pressure and the realities of a given sector is, you know, sort of market-driven concerns. And, you know, who’s gonna pay for it, too? Who’s gonna pay for moving my factory out of China?

James Kynge
Apple is just one of many US companies that does business in China because over decades China has built a complex and efficient manufacturing hub for high-end technology, and it turns out Paul’s family has direct experience of this.

Paul Triolo
My brother is in the contract manufacturing business, at least managing that, through a company in the Silicon Valley. And they did the most of their contract manufacturing in China, they loved the support there. It was, they said, it was amazing. The service, they could get 24 hours to really turn around changes in the manufacturing process. And then they moved the plant to Mexico, and they found a totally different world there where they couldn’t get service. It was sort of sloppy production, and they had to do a lot more oversight of the workers there and of the project in general. So they were very disappointed, and they sort of looked longingly back at China. So there’s a lot of challenges in decoupling in that supply chain space.

James Kynge
US authorities are in a bind. There is a desire to be less reliant on Chinese supply chains and to put limits on US technology being exported to Chinese customers. But if we start counting the trillions of US dollars tied up in this symbiotic system, well, it gets complicated. The difficulty of anything but a superficial decoupling starts to come into view.

Paul Triolo
So I think there there’s gonna be an attempt to, you know, narrow the scope of this decoupling to the key areas and articulate a better strategy around, you know, why there’s a national security imperative for controlling this or that technology. When you talk to Biden administration officials, there is this realisation that, you know, these economies are too tied together to sort of, you know, force them apart in some fundamental way.

James Kynge
Wholesale decoupling may be a tough sell in Washington, but in Beijing, there are signs China is already turning its tech industry inward of its own accord. President Xi Jinping says he wants to see tech giants focus more on China itself and work towards a common prosperity at home.

Could you just introduce yourself so that we can have the audio of you speaking?

Kevin Rudd
Kevin Rudd, I’m the former prime minister of Australia and I’m the president of the Asia Society in New York.

James Kynge
Kevin Rudd is a longtime China watcher who’s met Xi Jinping several times in his diplomatic and political career.

Kevin Rudd
China, though it does not use the term, in fact, it publicly despises the term decoupling, nonetheless, through its own national doctrine of technological self-sufficiency, is proceeding in precisely that direction.

James Kynge
If America thinks it’s in the driver’s seat when it comes to decoupling, it’s fooling itself. In many ways, China started tech decoupling long before the US. Rudd says China’s ambition to make its tech sector more independent comes down to an argument inside China. What should come first? A profitable tech sector or national security?

Kevin Rudd
We don’t simply have this magical black box called the Chinese party state, which has a uniform view on everything. It’s more contested internally than that. There are those within the Chinese system who deeply critique, for example, the current pattern of Chinese economic nationalism.

James Kynge
That’s one camp. Rudd says they’re advocating for a global, more free market China.

Kevin Rudd
On the other hand, the Chinese party state and the security apparatus are driven by a different set of concerns. Not the efficient use of capital, but actually the ultimate security and survivability of the party. So these two sets of constituencies that work in the Chinese system. Who currently is dictating the traffic? It's the intelligence security and what I describe as party apparatus as opposed to the generation of financial and economic technocrats.

James Kynge
For nearly half a century, China has been fixated on economic growth. Under the former Chinese leader Deng Xiaoping it was the idea of economic development as the core truth or Fāzhǎn shì yìng dàolǐ in Chinese. But the US-China rivalry is intensifying Beijing’s shift away from this old economic mantra. Right now, it’s the security of the state that’s taking precedence over economic development. This marks a massive change in how China is governed. Kevin Rudd doesn’t think decoupling is going to happen any time soon, but that’s certainly the direction of travel. Are we headed towards a bipolar world then?

Kevin Rudd
It’s beginning to look like that. But if I was to ask you tomorrow, would each side agree to a decoupling of trade? Probably not. Would they agree to a decoupling of capital markets? Probably not. Would they agree to a decoupling of currency markets that’s already occurred because the renminbi is not tradable? Would they agree to a decoupling of technology markets? Probably for the reasons we just discussed. Decoupling of talent markets, increasingly so. But the trend line is in the direction that you described. But the conditions precedent are not all there yet.

James Kynge
Regardless of which side is instigating it, separating the US and Chinese tech sectors would be potentially crippling for both. That’s why the great decoupling narrative that dominates the media and politics these days is either highly suspect or hopelessly vague. Beijing and Washington both have hawkish factions. Despite the political considerations, decoupling would have an enormous and unsustainable impact on the two countries, not to mention the fallout for the rest of the world.

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Over the course of this season of Tech Tonic, I’ve seen two broad themes emerge in the story of the US-China tech race. The first is the pervasive anxiety in the US about China’s technological rise. It’s caused the US to challenge China in all kinds of ways. There’s the crackdown on Chinese espionage, putting scientific exchange between the two sides at risk.

Lillian Li
This is something we often hear from the government: the argument that people of Chinese descent are somehow more prone to committing acts of economic espionage.

James Kynge
There’s the efforts to stop China getting hold of the technology and knowhow that could help it steal the lead on the US and strengthen its military.

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Nick Shenkin
They’re targeting biotech, nanotech, agtech, quantum technologies. The breadth of the technologies that they intend to acquire is really breathtaking. I mean, it is across the board, it is part and parcel of their attempt to build a siege economy in technology.

James Kynge
And the second theme is that China insists on being in control of its own technological future to become a self-sufficient technological superpower, trying to build its own semiconductor industry, forge its own path into space.

Todd Harrison
Now we see China building a space station of its own, developing a lunar exploration programme of its own. If you wanna be a superpower on the world stage, you’ve got to be able to use space.

James Kynge
And trying to grow its influence internationally, exporting surveillance tech around the world.

Danilo Krivokpaic
And I counted 18 of these new tech, high definition cameras covering this square. What we are afraid of is to have the whole city covered with this state of the art technology.

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James Kynge
Perhaps the reason there’s a technology war isn’t really because of technology at all. It’s a fundamental distrust between two global superpowers. Technology is just the battleground because whoever controls technology controls the future. A final thought from Kevin Rudd.

Kevin Rudd
The US-China relationship, however it’s described officially by Washington and Beijing, can best be seen as a relationship now anchored in direct strategic competition at every level. It is the most adversarial the relationship has been in the last 50 years since Nixon and Kissinger first went to China in ‘72. Technology, together with finance, are now described as the central theatres through which that competition is conducted short of full-blown war.

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James Kynge
You’ve been listening to Tech Tonic. We’ll be going on a break until our next season, which will be released this summer. I’m the FT’s global China editor James Kynge. Our senior producer is Edwin Lane, and our producer is Josh Gabert-Doyon. Manuela Saragosa is our executive producer. Our head of audio is Cheryl Brumley, and our sound engineer is Breen Turner. Music on this season composed by Metaphor Music. If you like the series, do leave us a review. It helps other people get to know about our show. And for more stories about technology from the FT, head to the links in the show notes. Also there is a discounted FT subscription offer. You can listen to every episode of this Tech Tonic season by subscribing wherever you get your podcasts.

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