China’s Sputnik Moment?
How Washington Boosted Beijing’s Quest for Tech Dominance
When executives at the biggest U.S. technology companies are confronted with the argument that they have grown too powerful and should be broken up, they have a ready response: breaking up Big Tech would open the way for Chinese dominance and thereby undermine U.S. national security. In a new era of great-power competition, the argument goes, the United States cannot afford to undercut superstar companies such as Amazon, Facebook, and Alphabet (the parent company of Google). Big as these companies are, constraints on them would simply allow Chinese behemoths to gain an edge, and the United States would stand no chance of winning the global artificial intelligence (AI) arms race. That technology executives would proffer these arguments is not surprising, but the position is gaining traction outside Silicon Valley; even Democratic politicians who have been critical of Big Tech, such as Representative Ro Khanna of California and Senator Mark Warner of Virginia, have expressed concerns along these lines.
But the national security case against breaking up Big Tech is not just weak; it is backward. Far from competing with China, many big technology companies are operating in the country, and their growing entanglements there create vulnerabilities for the United States by exposing its firms to espionage and economic coercion. At home, market concentration in the technology sector also means less competition and therefore less innovation, which threatens to leave the United States in a worse position to compete with foreign rivals. Rather than threatening to undermine national security, breaking up and regulating Big Tech is necessary to protect the United States’ democratic freedoms and preserve its ability to compete with and defend against new great-power rivals.
Competition with China will define U.S. national security conversations for decades to come, and Americans need to think carefully about the role technology will play in this increasingly competitive environment. But to claim that the likes of Amazon and Google are helping counter China’s technological and geopolitical rise simply because they are American companies makes little sense.
Almost all big U.S. technology companies have extensive operations in China today. Google announced plans for an AI research center in Beijing in 2017 and is exploring a partnership with the Chinese Internet behemoth Tencent. Microsoft is expanding its data centers in China and has recently built an entire operating system, Windows 10 China Government Edition, for the Chinese government. Amazon’s cloud service in China is second in popularity only to that of its Chinese counterpart, Alibaba. Apple famously designs its phones in California but manufactures them in China. Facebook, notably, does not operate in China—but not for lack of trying. The company repeatedly attempted to gain access to the Chinese market only to be blocked by Chinese government officials.
Merely operating in China may seem harmless. Yet according to scholars, U.S. government officials, and even American business associations, any U.S. technology company working in China could very well be supporting the Chinese state and the expansion of digital authoritarianism. In the course of their operations in the country, U.S. companies routinely interact with Chinese companies, some of which are run or partly owned by the state. Those that are not still have informal ties to state and Communist Party officials and face strong incentives to behave as the state wishes even without direct pressure from the government. Because the Chinese market and the state are intertwined in this way, Chinese companies that partner with foreign ones are highly likely to pass along operational and technological developments to the Chinese government and military, including in ways that could advance Beijing’s emerging surveillance state and accelerate its ability to spread its model of digital authoritarianism around the world.
These challenges are particularly clear in the case of AI, as commercial innovations in that field can also have military implications. Under Beijing’s doctrine of “civil-military fusion,” Chinese researchers and private companies are working ever more closely with the government and the military, which means that technological innovations that may have originated with a foreign company active in China can find their way to supporting the People’s Liberation Army. “If you’re working in China,” Ashton Carter, a former U.S. defense secretary, has said, “you don’t know whether you’re working on a project for the military or not.”
To claim that the likes of Amazon are helping counter China’s rise makes little sense.
In addition to widely known concerns about Chinese espionage and surveillance, integration with the Chinese market also opens Big Tech—and the United States—to pressure from China, which can use that influence to hurt U.S. interests. Scholars refer to this tactic—turning economic interdependence into political leverage—by a variety of terms, including “geoeconomics,” “reverse entanglement,” and “weaponized interdependence.” Whatever it’s called, China has a long track record of doing it, across countries and industries. To retaliate against South Korea’s adoption of a U.S. missile defense system in 2017, China blocked Chinese travel agencies from offering trips to the country. And after the dissident Liu Xiaobo was awarded the Nobel Peace Prize in 2010, China temporarily blocked imports from Norway.
To avoid offending Chinese officials and potentially losing access to the country’s large market, companies are adapting their behavior even outside China’s borders. Hollywood studios have been accused of rewriting scripts and editing scenes for that purpose: choosing to blow up the Taj Mahal instead of the Great Wall of China in the movie Pixels, according to Reuters, and replacing China with North Korea as the main adversary in the 2012 remake of Red Dawn, according to the Los Angeles Times. In 2019, Daryl Morey, the general manager of the NBA basketball team the Houston Rockets, tweeted in support of pro-democracy protesters in Hong Kong; soon thereafter, he deleted the post. In the days that followed, the owner of the Rockets wrote that Morey did “NOT speak” for the team, and the NBA said it was “regrettable” that Morey’s views had “deeply offended many of our friends in China.” (After a public outcry, the NBA clarified that it would not censor or fire Morey.) A year earlier, Mercedes-Benz had posted a quote from the Dalai Lama on Instagram. After an online backlash in China, the automaker quickly erased the quote, and its parent company, Daimler, said that the post had contained an “erroneous message” and had “hurt the feelings of people” in China. The People’s Daily, China’s largest newspaper, later branded Mercedes-Benz as an “enemy of the people.”
Such conduct by Western companies illustrates a broader point: they act based on their commercial interests, not in the name of abstract democratic principles or for the cause of U.S. national security. The same is true when these companies try to influence government policy. The potential stakes are high. The U.S. Department of Commerce, for instance, has the power to set export restrictions on some sensitive technologies, including AI; those restrictions may be important from a national security standpoint, even if they negatively affect some companies’ bottom lines. Yet the dominant ideology among corporate lawyers today holds that the sole aim of managers is to maximize shareholder profits, and corporate lobbyists are thus likely to advocate public policies that support those profits even if they run counter to U.S. national interests.
Practically all U.S. companies active in China are subject to such pressures to one degree or another, and how to address that predicament is another question altogether. But the size and dominance of American technology companies are part of the problem. As the U.S. technology sector becomes more concentrated and the few players in it become more dependent on the Chinese market for consumers and profits, these firms—and, by extension, the United States—become more vulnerable to pressure from Beijing. Antimonopoly policies could help remedy this problem: in a fractured market with many players, the sheer number of firms would all but guarantee that some would build supply chains that circumvented China, or build their products wholly in the United States, or simply choose not to engage in the Chinese market—whether because of idiosyncratic preferences, competitive dynamics, product differentiation, higher costs, or other factors.
Consider another industry whose structure resembles that of Big Tech: Hollywood. Like the technology industry, today’s entertainment sector consists of a handful of studios that are increasingly dominant at the box office and able to pressure theaters to give their content preferential treatment. If these big, integrated companies comply with Chinese censors out of a concern for market access, then U.S. consumers will not see content that offends the Chinese government. By contrast, in a system with a large number of small studios and competitive distribution channels, many companies would lack the size, scope, or desire to cater to the Chinese market, let alone be dependent on it. Nor would they have the power or scale to lock out new competitors through vertical integration. The result would be a market in which Americans had a range of content choices, including entertainment that might not accord with the views of foreign censors.
Of course, in theory, it is possible that a small number of big U.S. technology firms, each with monopoly-like power, might be so profitable as to have no need for the Chinese market, whereas small companies with razor-thin profit margins might depend more on that market for consumers and profits. But this hypothesis has not been borne out. The current technology sector is already highly concentrated, and yet today’s technology companies are not forsaking the Chinese market; instead, they are desperate to expand their business there.
As they do so, they will likely be subject to the same pressures bearing down on Hollywood, the NBA, Mercedes, and other entities that want to operate in China. Companies such as Amazon and Google, which both produce their own content and distribute it through their platforms, may over time be tempted to make that content palatable to Chinese censors. And because those firms have immense market power within the United States, American consumers will be left with no serious, scalable alternatives.
A more competitive technology sector, with many smaller players, would also mitigate the ill effects of lobbying, for much the same reasons. Fewer companies would be dependent on the Chinese market, and those that were would be differentiated enough to often end up on different sides of policy debates. Their lobbying efforts would be less likely to cut in a single direction and thus less likely to capture government.
Big Tech’s market dominance, some will argue, has benefits: free of constant worries about vicious competition, technology giants can focus on the big questions. They have the time and resources to invest copiously in cutting-edge research, where success is rare but the potential payoff—for technological innovation and thus for U.S. competitiveness and national security—is massive.
Whether or not they say it explicitly, those who want to protect Big Tech from antitrust laws and other regulations are advocating a “national champions” model—a system in which the state shields a few select big companies from competition, allowing them to spend on research and development. But there is strong evidence that this approach is imperfect, at times even counterproductive. As the legal scholar Tim Wu has noted, it is usually competition, not consolidation, that fosters innovation. Competitors have to find ways to differentiate themselves in order to survive and expand. Large, protected firms become lethargic, are slow to innovate, and rest on their laurels.
Companies act based on their commercial interests, not in the name of abstract democratic principles.
Recall the race for supremacy in the electronics industry that played out between the United States and Japan in the 1980s. Japan, according to Wu, chose to protect its national champions, giving direct government support to such powerhouses as NEC, Panasonic, and Toshiba. The United States took the opposite tack. Its largest electronics firm at the time, IBM, came under antitrust scrutiny by U.S. authorities, and the ensuing decade-long legal battle discouraged the company from engaging in conduct that might run afoul of antitrust laws. That created the space for a variety of other hardware and software companies, among them Apple, Lotus, and Microsoft, to flourish. Competition led to innovation and the creation of some of the most forward-looking companies of the era.
National champions also have an incentive to hide breakthroughs that might undermine their market power. Bell Labs, one of the pillars of AT&T’s telecommunications empire, has long been celebrated for its role as an “ideas factory.” But Bell Labs and AT&T also suppressed innovations that threatened their business model. Starting in the 1930s, for example, AT&T’s management sat on recording inventions that could have been used for answering machines, for fear this innovation might jeopardize the use of the telephone.
Skeptics might argue that this time is different—that today’s next-generation technologies are so resource-intensive that smaller companies in a competitive environment couldn’t afford the necessary investments. But even if broken up and regulated, Big Tech’s main players would have considerable money left to spend on AI, robotics, quantum computing, and other next-generation technologies. Facebook would still have billions of users without Instagram and WhatsApp. Amazon’s platform would still have enormous market power in online sales even if it wasn’t allowed to produce its own products.
Whatever resource constraints did arise could be offset by greater public investment in R & D. As the economist Mariana Mazzucato has argued, such government spending has historically been a significant driver of innovation; the Internet, for example, began as a U.S. Defense Department network. There is no reason the government could not play the same role today.
Unlike research by national-champion firms, research funded by public investment would not be tied to the profit motive. It could therefore cover a wider range of subjects, extend to basic research that does not have immediate or foreseeable commercial applications, and include research that might challenge the incumbency and business models of existing companies. Public research could also de-emphasize areas of inquiry that may be profitable but are socially undesirable. For many of the biggest technology companies, surveillance, personalized targeting, and the eliciting of particular behavioral responses lie at the heart of their business models, which means that their efforts to innovate are geared in no trivial way toward improving those tactics. An authoritarian country may see those as valuable public goals, but it is not at all clear why a free and democratic society should.
Public investment in R & D also has the potential to spread the benefits of technology, innovation, and industry throughout the United States. At present, much of the country’s technological and innovative prowess is concentrated in a few hubs—the most prominent being Northern California, Seattle, and Boston. This is not surprising, as unlike the government, technology companies have no reason to want to spread development evenly. Amazon’s competition to decide the location of its second headquarters is a good example. After inviting countless pitches from cities across the country and much public attention, the company settled on New York and Washington, D.C.—two cities that hardly need an economic boost. Public investment, as the economists Jonathan Gruber and Simon Johnson have argued, could remedy these geographic imbalances and spur successful economies in dozens of midsize cities all over the country, with spillover benefits for their regions.
Mountains of data are needed to improve AI’s precision and accuracy, and some might think that only Big Tech can collect and handle data in such vast quantities. But this need not be the case, either. The United States could create a public data commons with data collected from a variety of government sources (and regulate it with strict rules about personal privacy), for use by businesses, local governments, and nonprofits to train machines. Any new data would be fed back into the data commons, allowing the quality and quantity of the information to improve over time. Alternatively, the government could require technology companies to make their data available in interoperable formats. If those companies effectively have monopoly power over data, then they could be regulated as monopolies—with public access to the data sets as a condition for their continued protection as monopolies. No legal obstacles stand in the way of these options, and both would enable innovation and expand the number of players working on important technological developments.
For the moment, such public initiatives exist only as proposals. Big technology companies have considerable market power, and the U.S. government increasingly relies on their services, including to run its national security apparatus. Technology is, of course, a crucial aspect of warfare, and firms such as Amazon and Microsoft have contracts to provide cloud services to U.S. defense and intelligence agencies. These technology companies are fast becoming part of the United States’ defense industrial base—the collection of industries that are indispensable for U.S. military equipment. As they do so, the curse of monopoly capitalism that already affects the country’s overconsolidated defense sector—causing higher costs, lower quality, reduced innovation, and even corruption and fraud—will likely grow worse.
Competition and public investment, not consolidation, provide the path to innovation.
To see the challenge ahead, consider the present state of the U.S. weapons industry, which is already remarkably uncompetitive. In 2019, the Government Accountability Office found that 67 percent of 183 contracts for major weapons systems did not have a competitive bidding process. Almost half the contracts went to one of five companies—a stunning testament to the dominance of a handful of firms. And in 2018, the Defense Department released a report on the military’s supply chain that listed numerous items for which only one or two domestic companies (and in some cases none) produced the essential goods. Perhaps most striking of all, the report found that the United States no longer had the capacity to build submarines on a rapid timetable because of single suppliers and declining competition.
Unsurprisingly, as Frank Kendall, a former head of acquisitions at the Pentagon, has pointed out, large defense contractors “are not hesitant to use this power for corporate advantage.” In a recent article in The American Conservative, the researchers Matt Stoller and Lucas Kunce argue that contractors with de facto monopoly at the heart of their business models threaten national security. They write that one such contractor, TransDigm Group, buys up companies that supply the government with rare but essential airplane parts and then hikes up the prices, effectively holding the government “hostage.” They also point to L3 Technologies, a defense contractor with ambitions, in the words of its one-time CEO, to become “the Home Depot of the defense industry.” According to Stoller and Kunce, L3’s de facto monopoly over certain products means that it continues to receive lucrative government contracts even after it admitted in the settlement of a 2015 civil fraud lawsuit that it had knowingly supplied defective weapons sights to U.S. forces.
As technology becomes more integral to the future of U.S. national security, Big Tech’s market power will likely lead to much the same problems. Technology behemoths will amass defense contracts, and the Pentagon will be locked into a state of dependence, just as it is currently with large defense contractors. Instead of healthy innovation, the government will have created what Michael Chertoff, a former homeland security secretary, has called a “technological monoculture,” which is unwieldy and vulnerable to outside attack. The cost to taxpayers will increase, whether due to higher prices or fraud and corruption, and much of their money—funding that could have been available for innovation—will become monopoly profits for technology executives and shareholders.
That technology companies do not want to be broken up is unsurprising. They are profitable, growing, and powerful. Nor is it a mystery why they try to play the trump card of invoking national security in their defense. But even from the viewpoint of national security, the case for shielding Big Tech from competition is weak. Technology companies are not competing with China so much as integrating with it, at significant risk to U.S. interests. In the United States, competition and public investment in R & D, not today’s consolidated technology sector, will provide the best path forward to innovation.
Policymakers should embrace proposals to break up and regulate big technology companies: to unwind mergers and acquisitions such as Facebook’s decision to buy the social networking and messaging services Instagram and WhatsApp. They should require technology platforms such as Amazon to separate from businesses that operate on their platforms. They should apply nondiscrimination principles drawn from public utilities and common carrier laws to digital platforms. And they should adopt stringent privacy regulations.
In this era of great-power competition, the best way to remain competitive and innovative is through market competition, smart regulations, and public spending on R & D. Breaking up Big Tech won’t threaten national security; it will bolster it.