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The Great Moderation? China and the U.S. in Cyberspace

Sep 29 , 2016
  • Susan Ariel Aaronson

    Research Professor of International Affairs, Elliott School of International Affairs, GWU

In 1985, historian Walter McDougall wrote a Pulitzer Prize winning history of the Space Race. Therein, he argued that the space race wasn’t simply a competition between two nations to get into space, but rather a competition between two different systems and worldviews. Both countries had to adapt to compete effectively. The Soviets had to become more open and receptive to free speech to facilitate the technological innovation necessary to get to space. The U.S. had to create a new bureaucracy to support innovative space research (NASA) and learn to rely on technocratic initiative, as well as rugged individualism. 

The U.S. and China may be experiencing a similar phenomenon in cyberspace. Chinese officials are evolving; they recognize that if they want to develop an adaptive economy that provides economic growth and political stability, China has to become less dependent on the state and more open to market forces and the rule of law. Meanwhile, America’s internet innovators are increasingly turning to the U.S. government to protect them from cyber-hacking, cyber-theft, data localization, and censorship.


The U.S. and China are the world’s two largest internet economies; increasingly competing in the Internet’s growth areas of mobile, apps, artificial intelligence and IT devices. The U.S. has seven of the largest global internet companies while China has four. Some 84% of Americans are already online, while less than 45% of China’s population is online. While the U.S. infrastructure is uneven (some Americans have superfast Internet while others still use dial-up), China has the world’s largest number of internet users, some 649 million, and is rapidly updating its mobile network-- China is already moving to 5G.


China has been able to quickly invest in, build, and benefit from the Internet economy because Chinese officials set the parameters for economic development. In 2015, China adopted a new Internet Plus plan to transform its labor-intensive manufacturing sector into an IT-driven base that is more efficient and global. However, Chinese officials claim the government will let market forces guide the implementation of Internet Plus. In July 2015, the State Council unveiled the Internet Plus Action Plan, which is also intended to increase the international presence of Chinese Internet companies. These efforts seem to be paying off: In August 2015, as more people access the Internet through their phones, The New York Times reported that China leads the world in mobile web innovation. Chinese firms were the first to create a flirting app called Momo. Chinese companies were the first to use drones to deliver packages and food, while Chinese consumers were quick to adopt smartphone-based digital wallets. Not surprisingly, growing numbers of Western tech companies are investing in and monitoring Chinese mobile app innovations.


Meanwhile, a growing number of U.S. internet firms are turning to the state to help them maintain market share, protect intellectual property, or compete more effectively. And given the import of the Internet sector to U.S. economic growth, U.S. trade policymakers are becoming more responsive and proactive on their behalf. The Obama Administration has made fighting digital protectionism and cyber-theft a top priority. Policymakers are using speeches and reports to name and shame China. In 2014, the U.S. argued that China failed to create an appropriate regulatory context for the free flow of information online. In 2015, U.S. officials asserted that China uses a wide variety of protectionist strategies, including discriminatory regulatory processes to frustrate efforts of U.S. suppliers of Internet-related services such as electronic payment services. In the same 2015 report, the U.S. also stressed that China’s Internet regulatory regime is restrictive and non-transparent, affecting a broad range of commercial services activities conducted via the Internet.


In 2016, however, the U.S. became much more specific with its concerns about China’s digital policies, noting that China used national security (what China terms information sovereignty) arguments to justify censorship, industrial policies, cyber-theft, and protectionism. It noted, “In June 2015, China passed the National Security Law with the stated purpose of safeguarding China’s security, but it included sweeping provisions addressing economic and industrial policy. China also drafted laws relating to counterterrorism and cybersecurity in 2015 which, if finalized in their current form, would also impose far-reaching and onerous trade restrictions on imported ICT products and services in China.” The U.S. also criticized Chinese management of the Internet.


China’s Internet regulatory regime is restrictive and nontransparent, affecting a broad range of commercial services activities conducted via the Internet.” And for the first time ever, the U.S. Government described the Great Firewall as a trade barrier, perhaps building a case to bring to the WTO for dispute settlement. “Over the past decade, China’s filtering of cross-border Internet traffic has posed a significant burden to foreign suppliers, hurting both Internet sites themselves, and users who often depend on them for their businesses. Outright blocking of websites appears to have worsened over the past year, with 8 of the top 25 most trafficked global sites now blocked in China.” 


The U.S. has yet to go beyond words; it has relied on naming and shaming rather than actual protectionist retaliation to respond to Chinese policies. However, U.S. firms are trying to obtain protectionist remedies. In August, 2016 U.S. Steel accused the Chinese government of conducting cyberattacks meant to benefit its own state-run steel industries. The company asserts that Baosteel used the information stolen from U.S. steel to make its own high strength steel. Should the case move forward, it would allow the U.S. government to block imports of products manufactured using U.S. trade secrets stolen through a cyberattack.


The U.S. strategy has delivered some changes to Chinese policies. In 2015, the two nations signed the U.S. China cyber agreement, with which the two states pledged not to conduct nor condone cyber-theft online. In July 2016, the cyber-security firm FireEye also reported that it had seen a decline in China activity against entities in the U.S. and 25 other countries. U.S. national intelligence leaders now cite Russia as America’s greatest cyber threat. In September, China hosted the G-20. Under its leadership, the Chinese hosts drafted and later endorsed a blueprint that affirms the global nature of the internet and expressed the G-20’s commitment to the free flow of information, ideas, and knowledge across borders, freedom of expression, and the multistakeholder approach to internet governance. The G-20 countries also agreed “that applicable frameworks for privacy and personal data protection… have to be respected.” In short, China accepted global norms regarding how the Internet should be governed and agreeing to respect privacy rights.


However, China has not become a responsible steward of the Internet. In September 2016, Bruce Schneier, one of America’s most respected cryptologists, expressed concerns that China may be responsible for repeated persistent DDOS attacks against the basic infrastructure that enables the Internet. Moreover, China continues to hack, to undermine human rights online, and to take actions that undermine freedom of expression in the U.S. and other countries.


Nonetheless, China remains determined to becoming an information and services based economy. In order to do so, it needs foreign investment, international interchange, and foreign competition. To some degree, both countries are learning to adopt some aspects of the other's approach to economics and governance. Hence, China is learning to accept multi-stakeholder internet governance, to reduce dependence on the state, and to be more open to the rule of law. Meanwhile, U.S. policymakers and executives are realizing that they can move that process along by relying on state power and voice. 

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