Ryan Fedasiuk and Emily Weinstein
The Chinese Communist Party (CCP) has constructed a strategy that is predicated on both passively absorbing and actively acquiring technology from abroad. Although the tech outflow from the United States to China has undercut U.S. national security, stymying it is easier said than done—and Beijing’s playbook is evolving in response to heightening tensions between the two countries.
In a new framework we’re calling “E.P.I.C.,” we attempt to lay out the four key resources at the heart of U.S.-China competition today. These resources—equipment, personnel, information, and capital—represent the foundational tools that China uses in its push to amass comprehensive national power.
The first resource is equipment—most notably, advanced computer chips and the billion-dollar machines that make them. Beijing’s reliance on imported technologies extends well beyond foreign-designed semiconductors, including lidar systems for self-driving cars, engine housings for commercial aircraft, and reagents for gene editing kits, among others. However, despite its multibillion-dollar efforts to boost domestic production in many of these key fields, China still has a long way to go to produce them domestically.
In the 1990s, Beijing’s strategy to absorb foreign equipment revolved around requiring foreign businesses to set up joint ventures in China, then compelling them to share intellectual property with Chinese counterparts. For 30 years, the promise of Chinese market access has persuaded foreign investors to part with their IP and trade secrets—at times with disastrous consequences.
But bilateral technology investment has plummeted some 96 percent since 2016. To compensate for declining investment, Beijing has increasingly turned to shell companies and intermediary agents to source foreign components, reagents, and associated manufacturing equipment. In a recent study for Georgetown’s Center for Security and Emerging Technology (CSET), for example, one of us found that fewer than 10 percent of companies that supply the Chinese military with equipment are named in key U.S. export control and sanctions lists—and some make a business out of repackaging and reselling U.S.-origin equipment to sanctioned Chinese military units.
Although the CCP is taking drastic steps to secure China’s position as a science and technology powerhouse, it has struggled to build domestic supply chains for linchpin commodities like semiconductors and gas turbines. The bottom line is that China will likely remain reliant on foreign equipment well into the 2020s. What’s more, China’s path to foreign technology runs through such U.S. allies as Australia, Japan, South Korea, and the United Kingdom. This presents a strategic opportunity for the United States, which can coordinate with like-minded partners to restrict equipment exports or screen risky investments in particularly sensitive industries.
During a high-level talent conference this September, Chinese President Xi Jinping placed significant emphasis on the role of the CCP in cultivating high-end talent, urging Chinese businesses to “foster a team of engineers who follow the party.” In fact, a CSET study from August demonstrated that China is rapidly outpacing the United States in terms of STEM Ph.D. growth, suggesting that some of Beijing’s efforts in science, technology, engineering, and math are bearing fruit. Still, as noted by the Chinese talent expert David Zweig, China’s quantitative advantages do not necessarily translate into a higher quality of education.
Since the Cultural Revolution gutted China’s education system in the late 1970s, Chinese leaders have been desperately working to reverse the country’s chronic brain drain. By one estimate, between 1978 and 2007, fewer than a quarter of the 1.2 million Chinese who left the country to study or conduct research abroad ever returned. What’s more, among the 390,000 Chinese students who came to study in the United States in 2021, 80 percent of STEM students will stay and likely join the U.S. workforce.
China’s efforts to attract talent have historically focused on recruiting both members of the Chinese diaspora and experts with no ties to the country. Through conditional scholarships and lucrative talent recruitment programs, Beijing has succeeded in luring several thousand of its talented scholars back to the mainland—but not without first shelling out billions of dollars in signing bonuses and offering up prestigious, tenure-track positions at elite Chinese universities. The Thousand Talents Program, perhaps Beijing’s best-known recruitment effort, offered participants hundreds of thousands of dollars in wages, living expenses, and financial assistance for research facilities.
Where it has struggled to recruit talent directly, the CCP has enlisted the help of United Front groups—an umbrella term for government-directed but nominally private organizations located overseas that are designed to forge inroads to industry and civil society. One of their many tasks is to scout out talented foreign scientists and persuade them to take up research positions in China.
In the near to medium term, Beijing is likely to shift its focus—away from attracting foreign talent, and more toward preventing its most elite scientists from leaving the country altogether. Over the past decade, China has invested tens of billions of dollars into its education system. Chinese universities have climbed in global university rankings, and, by 2025, China’s education system is projected to produce twice as many STEM Ph.D.s as the United States each year.
At the same time it has adopted coercive measures to absorb IP from investors looking to enter the Chinese market, the CCP has encouraged Chinese firms to “go out” and seek investment opportunities abroad—with little regard for business’ bottom line. In some cases, Chinese investors are aided by the state itself. Another CSET study profiled Beijing’s corps of 150 “science and technology diplomats,” who are tasked with monitoring foreign research breakthroughs and identifying investment opportunities abroad on behalf of Chinese businesses. Between 2015 and 2020, they identified and published 642 “cooperation opportunities” in 37 countries—and generally succeeded in advancing Chinese equity in strategic industries such as artificial intelligence and electric vehicles.
Where state-backed technology brokers struggle to reach deals, Chinese security services have turned to outright espionage. Since 2006, state-backed hacking groups have targeted a myriad of industries ranging from aerospace to healthcare. But following the CCP’s new cybersecurity regulations, which require bug bounty hunters to divulge early knowledge of computer exploits to the state, foreigners should only expect China’s cyber espionage campaigns to grow more sophisticated and damaging.
The fourth resource is capital—funds that accelerate the development and acquisition of the other three resources at the heart of China’s technological progress. It is also a resource that China has unequivocally excelled at amassing.
Broadly, the CCP has encouraged foreign investment in what it terms “strategic emerging industries” and high-tech sectors. Throughout the 2010s, U.S. firms including Goldman Sachs and Sequoia Capital invested in Chinese technology startups such as Alibaba and Didi that would later go on to rival the United States’ own technology champions. And, as our research has shown, some recipients of U.S. investment today supply the Chinese military with battle management and cybersecurity software. Even as U.S. investment wanes, global investment into China has expanded, in part because finance is one of the very few areas where China has loosened regulation in recent years. In 2020, despite a global downtrend brought about by COVID-19, foreign direct investment into China expanded to $212 billion—a more than 10 percent increase over the previous year.
Even the subsidiaries of China’s state-owned defense enterprises raise funds on foreign stock markets to pay for their advancements in military technology. In her recent congressional testimony, for example, Claire Chu of RWR Advisory Group pointed out that, by the end of 2016, China’s 12 major military-industrial groups had listed 111 publicly traded companies on overseas stock exchanges. Former U.S. Secretary of State Mike Pompeo has also argued that many major stock and bond indices in the United States include sanctioned Chinese defense companies.
What’s more, Beijing seems to be entering a period of even more intense reliance on foreign capital markets and direct investment. Beginning in 2016, Chinese regulators have taken a sledgehammer to the high-tech and private property sectors, as part of a broader effort to fundamentally remake China’s economic growth model and avoid the so-called middle-income trap. But the moves come at a time when Chinese corporations will need large amounts of capital to sustain their continued advancements in science and technology.
Economists and security practitioners alike have long warned of the risks associated with broad U.S.-China economic decoupling. But to ensure that U.S. financiers do not indirectly aid in China’s technological leapfrogging and military modernization, the U.S. government is now considering ways to monitor and screen investments made by U.S. investors abroad, a move that will likely be met with significant pushback from U.S. business leaders with close ties to Chinese officials. At the height of the U.S.-China trade conflict, CEOs from UPS, Pfizer, Goldman Sachs, and others met with Xi in Beijing, where he encouraged them to stand up against “protectionism, isolationism, and populism,” and promised to further open China’s market to foreign investors. Just this week, Chinese Vice Foreign Minister Xie Feng repeated the call for U.S. business executives to “speak out for what is right and encourage the U.S. administration to follow a sensible and pragmatic China policy.”
China’s economic and military strategy is fueled by technology. Although the Chinese economy has made impressive gains by promoting innovation at home, the resources that drive its technological progress are still largely sourced from abroad—a trend that will likely continue well into the 2020s.
These four elements—equipment, personnel, information, and capital—are the four pillars of China’s playbook to become a technology superpower. Each of these pillars presents a challenge to the United States—but also offers leverage points and opportunities for America to defend and sharpen its technological edge.
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