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  • Writer's pictureGeopolitics.Λsia

Awakening the Giant: America's Strategic Response to China's Tech-Driven Economic Onslaught

Updated: Jan 18

In the ever-evolving tapestry of global geopolitics, the United States finds itself at a pivotal juncture, grappling with the rise of a formidable contender: China. This contest, particularly pronounced in the realm of technology, represents not just a clash of economic might, but a profound ideological and strategic confrontation. In "Awakening the Giant: America's Strategic Response to China's Tech-Driven Economic Onslaught," we embark on a discerning journey through the corridors of history and policy, tracing the contours of this intricate rivalry.

IBM Quantum System Two, image from [source]

From the assertive economic policies of the Trump era to the nuanced stances of the Biden administration, a thread of continuity emerges – a coherent, adaptable strategy deeply rooted in technological prowess and foresight. Central to this narrative is the role of The Committee on Foreign Investment in the United States (CFIUS) and the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). These pivotal mechanisms have become instrumental in shaping U.S. responses to foreign investments, particularly those from key players like the UAE and Saudi Arabia in sectors as critical as artificial intelligence.

Our exploration revisits the historical milestones that have defined American innovation and strategic thought. From the groundbreaking Manhattan Project during World War II to the Cold War era's embrace of DARPA, and the later challenges posed by the economic rise of Japan, encapsulated in Michael C. Sekora's Socrates Project. We chart how these historical precedents have influenced contemporary tactics, including the tech sanctions employed by both the Trump and Biden administrations.

This article aims to elucidate the underlying principles of this renewed focus on "industrial policy" and strategic technology planning. As the world witnesses a resurgence of intense competition between these two superpowers, we analyze how these dynamics are likely to reach a crescendo by 2030. Through this lens, "Awakening the Giant" offers a comprehensive understanding of the United States' strategic maneuvering in an era where economic prowess and technological innovation are inextricably linked to national security and global influence.

I. The Illusion of the Free Trade

Students of economics are undoubtedly familiar with the Heckscher-Ohlin model, a cornerstone of international trade theory. This model postulates an equilibrium of trade between countries, each endowed with different specializations and natural resources. It provides a theoretical framework for understanding how nations should engage in trade in a world where resource distribution is imbalanced. Yet, those with a keen eye will quickly realize that the idyllic scenario depicted by this model rarely, if ever, manifests in the real world.

The story begins in the waning days of World War II. Even as the conflict raged on, luminaries from the economic discipline convened to lay the groundwork for a new international economic system. At the United Nations Monetary and Financial Conference, held at the Mount Washington Hotel in Bretton Woods, New Hampshire, 730 delegates from all 44 Allied nations, under the leadership of Harry Dexter White of the U.S. Treasury and John Maynard Keynes (who served as a key advisor and negotiator for the United Kingdom,) gathered to shape the post-war economic order. It was here that the blueprint for the General Agreement on Tariffs and Trade (GATT) was drawn, although it faced resistance, notably from the Soviet Union and its allies, with the exception of Czechoslovakia.

Fast forward to the Trump era, an epoch marked by economic discontent in America's rust belt, which arguably propelled Donald Trump to the presidency. In response to perceived imbalances, Trump revoked the Most Favored Nation's Generalized System of Preferences (MFN's GSP) for countries with significant trade surpluses with the U.S. In 2014, for instance, Thailand reported a trade surplus of $15 billion, Japan $67 billion, and Germany $73 billion. Yet, these figures pale in comparison to China's staggering $343 billion surplus, revealing Trump's primary target.

In this context, a pertinent question arises: where does the Heckscher-Ohlin model, with its elegant theory of globalization and trade, stand in the face of such real-world complexities? This inquiry underscores the significant gap between the theoretical elegance of free trade models and the pragmatic, often politically driven, realities of international commerce. It highlights the nuanced and multifaceted nature of global economic interactions, which often transcend the simplicity of classical economic theories.

II. AI, Middle East and China

In a recent revelation by the New York Times, a meeting between Sheikh Tahnoon bin Zayed, the national security adviser of the United Arab Emirates, and his American counterpart, Jake Sullivan, brought to light intriguing undercurrents in global tech politics. Central to their discussion was G42, an AI firm backed by Sheikh Tahnoon, which has raised eyebrows in the U.S. for its opaque operations and suspected ties with China. G42's rapid expansion, marked by partnerships with AstraZeneca and Silicon Valley enterprises, culminated in a notable collaboration with OpenAI, the creators of ChatGPT. This development, alongside a $100 million agreement to create a leading-edge supercomputer, exemplifies the intertwining of technology and geopolitics.

Meanwhile, a report from Wired delves into the complexities surrounding Sam Altman, CEO of OpenAI, and his multifaceted Silicon Valley connections. Altman's investment network, bolstered by his tenure at startup incubator Y Combinator, has positioned him as a significant influencer in the tech world. However, this intricate web of investments and roles has recently led to his dismissal by OpenAI's board, a decision attributed to undisclosed communications, as per insiders. These events underscore the intertwined relationships and ethical quandaries in the burgeoning AI industry.

The saga further unfolds with OpenAI's ambitious hardware pursuits. Struggling against the "brutal crunch" and soaring costs of AI chips, OpenAI has sometimes limited ChatGPT's features due to hardware limitations, despite its association with Microsoft's cloud services. This challenge led to a partnership with the startup Rain.AI, aiming to develop new AI chip technologies. Rain's journey, however, has encountered setbacks. Following a U.S. government directive, Saudi Arabia's Prosperity7 Ventures was forced to divest its stake in Rain due to China's connection. This move, first reported by Bloomberg, adds another layer of complexity to the already intricate AI chip supply chain, potentially delaying OpenAI's advancements.

The U.S. government's intervention in Rain's affairs not only impacts the company's trajectory but also raises broader questions about Altman's efforts to diversify the AI chip market. Altman's discussions with Middle Eastern investors about launching a new chip company reflect a strategic move to reduce dependence on existing suppliers like Nvidia and Amazon. These behind-the-scenes negotiations, as reported by sources seeking anonymity, reveal the strategic maneuvers playing out in the high-stakes world of AI technology, underscoring the delicate balance between innovation, geopolitics, and market dynamics.

III. Quantum Leaps and Geopolitical Echoes

Yesterday marked a significant milestone in quantum computing, as IBM unveiled the IBM Quantum Heron processor on the ibm_torino quantum system. This cutting-edge processor, featuring 133 fixed-frequency qubits with tunable couplers, represents a quantum leap in technology, offering a performance improvement of 3-5 times over the previous 127-qubit Eagle processors. The Heron processor's advanced design virtually eliminates cross-talk, positioning it as a pivotal development in IBM's hardware evolution.

In tandem with this breakthrough, IBM announced the operational launch of the IBM Quantum System Two at their Yorktown Heights, NY lab. This formidable system, measuring 22 feet wide and 12 feet high, currently houses three IBM Quantum Heron processors. It epitomizes the fusion of sophisticated cryogenic infrastructure, third-generation control electronics, and classical runtime servers. The IBM Quantum System Two, with its modular architecture, is poised to revolutionize quantum-centric supercomputing by enabling parallel circuit executions, a critical step towards scalable quantum computation.

The unveiling of these quantum advancements coincidentally echoes the narrative of Professor Shoucheng Zhang, a renowned figure in the field. Zhang, a member of the expert panel for the Thousand Talents Program in 2009, founded Danhua Capital in 2013, a venture capital firm that raised over $434.5 million. Danhua Capital attracted major investors, including Zhongguancun Development Group (ZDG), linked to China's technology transfer program Made in China 2025. Zhang's contributions extended beyond venture capital; he served as an independent non-executive director at Lenovo Group and Meitu.

The personal story of Zhang intertwines with IBM's quantum journey. His wife, Barbara, a software engineer at IBM, shared a lifelong bond with him since their kindergarten days in Shanghai. The couple's journey, marked by professional achievements and personal milestones, culminated in a tragic end with Zhang's untimely death in 2018, attributed to depression. This poignant aspect of Zhang's life story, juxtaposed with IBM's technological strides, underscores the deeply human dimension of the relentless pursuit of innovation, reminding us that behind every scientific advancement lies a tapestry of personal narratives and geopolitical undercurrents.

IV. Geopolitics not Political Economy, Stupid!

The unfolding of events from the establishment of the Bretton Woods system to President Trump's revocation of the Generalized System of Preferences (GSP), and the Committee on Foreign Investment in the United States (CFIUS) blocking Middle Eastern investments in AI ventures over China concerns, converge to a singular, stark revelation: geopolitics, not the traditional frameworks of political economy, reigns supreme in the global arena. This trend underscores how the refined theories of economic models like the Heckscher-Ohlin are often outpaced by the raw, dynamic forces of geopolitical strategy.

The lens of "meta-geopolitics" brings into sharp focus the overriding influence of geopolitical imperatives over economic theories. Consider the Cuban Missile Crisis, where the world teetered on the brink of nuclear war, reaching DEFCON-2. This period of extreme geopolitical tension highlighted the limitations of economic models in shaping or predicting global events. The crisis demonstrated that in moments of high-stakes geopolitical confrontations, traditional economic considerations take a backseat.

In the contemporary global landscape, while the benefits of near-globalization are evident, they should not be taken for granted. Russia's integration into world trade in August 2012, only to be effectively ostracized following its invasion of Ukraine in 2022, exemplifies the volatile nature of international relations and their impact on economic integration. This new chapter, reminiscent of the Cold War era, underscores the precarious balance that governs global economic ties.

Moreover, the ongoing tensions between China and Taiwan highlight the complex interplay between geopolitical strategies and economic policies. In this context, President Trump's "America First" policy, rooted in nationalism and a response to domestic economic challenges, inadvertently underscored a critical facet of the contemporary era: the intensifying global rivalry with China. The rare bipartisan agreement on trade sanctions and CFIUS interventions reveals a strategic consensus on the need to counterbalance China's rising influence. This intersection of geopolitical maneuvering and economic strategy highlights the intricate nexus between national security and global economic policies, reaffirming the axiom: It's about geopolitics, not political economy, stupid!

V. Synergy of Geopolitical and Innovation Waves

Our analysis, drawing on the Schumpeterian innovation cycle and Kondratieff waves, proposes a model where geopolitical and innovation waves are intertwined forces. This model prompts an intriguing question: how do these waves interact and influence each other? Historical instances, such as the secrecy of the Manhattan Project during World War II and the clandestine operations to thwart Nazi Germany's nuclear program (Uranprojekt,) exemplify this interaction. The Cold War era further illustrates this dynamic, with espionage rings transferring nuclear secrets to Moscow and the birth of DARPA in response to the Sputnik shock, eventually leading to the creation of the internet.

The Reagan administration's Project Socrates, led by Michael C. Sekora, aimed at countering Japan, Inc. during the 1980s, offers another vivid example. This project illustrates how intense geopolitical competition can catalyze leapfrogging innovations. Sekora's insights go further, advocating for a shift in decision-making approaches:

  • Decision-makers should prioritize technology exploitation – the acquisition and utilization of technology, including R&D – as the cornerstone of their strategy. This approach is pivotal for both private and public sectors in enhancing U.S. competitiveness.

  • To outpace its rivals, the U.S. must spearhead the next evolutionary stage in technology exploitation: the automated innovation revolution. This requires a system that enables the U.S. to maintain a significant competitive edge over global competitors for generations.

  • The system developed under Project Socrates within the U.S. intelligence community, and later refined in the private sector, can be a key driver in leading this automated innovation revolution. Such a system would provide U.S. organizations, both private and public, with an unparalleled competitive advantage.

  • Moreover, the automated innovation system should facilitate a coherent, flexible, and independent utilization of U.S. resources, thereby augmenting the competitive edge of U.S. organizations.

These insights from Sekora underscore the profound impact of geopolitical strategies on fostering innovation. The synergy between these waves of geopolitics and innovation not only shapes the technological landscape but also defines the competitive stature of nations on the global stage. As history has shown, the ebb and flow of these waves have often been the catalysts for groundbreaking technological advancements, reshaping the world's geopolitical and economic contours.

VI. Strategic Technology Planning in US Policy

The Center for Economic Policy Research (CEPR) recently published a noteworthy paper, "The New Economics of Industrial Policy," which offers an incisive analysis of the evolving U.S. approach to industrial policy under both the Trump and Biden administrations. The paper posits that the U.S. is adopting a "selective industrial promotion policy," underpinned by a nuanced economic framework. This approach raises two primary concerns: firstly, the information challenge in identifying the right sectors to target; and secondly, the risk of political capture, where special interests could skew government efforts away from broadly beneficial goals. These factors generate skepticism about the government's ability to effectively "pick winners" in the industrial sphere.

The paper also invites reflections on the "East Asia Miracle," harking back to the intellectual debate between Ha-Joon Chang and Justin Lin regarding whether industrial policy in developing countries should align with or defy comparative advantage. However, this debate seems less applicable to the U.S. context, particularly in light of its recent trade sanctions in strategic technological sectors. This indicates a deeper, more complex strategy at play.

It appears that the U.S. has been discreetly engaging in "strategic technology planning," culminating in the identification of "critical emerging technologies" (CET). This approach is not just about sectoral prioritization; it involves a comprehensive analysis of global supply chains to pinpoint vital chokepoints. A case in point is the Dutch company ASML's unique role in the high-precision lithography technology sector. ASML's dominance in this field has significant implications for the global microprocessor supply chain, highlighting the strategic importance of controlling key technologies and manufacturing capabilities.

This strategic approach by the U.S. signifies a shift towards a more deliberate and targeted industrial policy, one that transcends traditional sector-based promotion. By focusing on critical technologies and supply chain vulnerabilities, the U.S. policy is framing a new paradigm in economic strategy, one that balances domestic industrial promotion with global technological supremacy. This nuanced strategy underscores the complex interplay between national economic policies and global technological leadership, revealing a sophisticated understanding of the contemporary economic and geopolitical landscape.

VII. Conclusion: Deciphering the US's Strategic Technological Blueprint

To fully grasp the emerging strategic trajectory of the United States, as inspired by Michael Sekora's Project Socrates, it is essential to understand the role of "Strategic Technology Planning" within this paradigm. This concept, originating from Project Socrates, operates as an intermediary layer bridging foresight—encompassing long-term vision and anticipation of future trends—with practical industrial policy implementation. This intermediary role is pivotal, translating overarching, futuristic insights into tangible, strategic policies and actions. By anchoring its focus on technology, this approach ensures that industrial policies are not merely reactions to current trends but are proactive, designed to capitalize on anticipated technological breakthroughs and shifts in the global marketplace.

An example of "technological map" from [source], see further application such as this patent.

A prime illustration of this concept is found in methodologies like "Net Assessment" and "System Dynamics," pioneered respectively by Andrew Marshall (nicknamed "Yoda") and Professor Jay Forrester of MIT in 1956. These methodologies emphasize a comprehensive evaluation of technological capabilities and potentials, essential for strategic planning.

A relevant study in this context is the Carnegie Endowment's "China’s Military and the U.S.-Japan Alliance in 2030: A Strategic Net Assessment," which underscores the significance of strategic emerging technologies and the imperative for U.S.-Japan collaboration by 2030. This theme resonates with the broader strategies of the Quadrilateral Security Dialogue (Quad) and the Indo-Pacific Strategy, both aimed at countering China's influence.

Critical technological developments can be identified through analysis of patent databases or research papers, creating "network graphs" that highlight the importance of specific technologies and mapping their interconnections. In line with this approach, the Biden administration, in its 2021 interim national strategic guidance, identified key emerging technologies including artificial intelligence, quantum computing, clean energy, biotechnology, and advanced telecommunications (5G). This list was expanded in the following year to encompass 19 areas, ranging from advanced computing and biotechnologies to space technologies and systems.

In moments of superpower confrontation, the U.S. has historically been propelled into pivotal roles, often in unexpected ways. From the attack on Pearl Harbor catapulting the U.S. into World War II to the Sputnik shock during the Cold War, these events have reshaped America's strategic focus. Similarly, Trump's "America First" policy inadvertently reignited U.S. engagement in global competition, particularly with China. In this complex geopolitical landscape, nations like Thailand, as remarked by Prime Minister Srettha Thavisin, face the challenging decision of aligning with either the U.S. or China. This dilemma, long observed, is not merely a choice but a necessity, as countries inevitably find themselves drawn into the unfolding narrative of global power dynamics.

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