Snowden and China's High-Tech Trade

Snowden and China's High-Tech Trade

Leaks may accelerate Chinese transitions to domestic electronics and away from American products.

by Yu Zhou

Less than a month ago, former CIA employee and NSA contractor Edward Snowden left Hong Kong and remains in a Moscow transit lounge awaiting his next stop. Whatever the political fallout on relations between the United States, China and Hong Kong may be, it will not last long. Yet the surveillance programs that Snowden helped unveil will have profound implications for technological and commercial competition between the United States and China for decades to come.

Much of the debate surrounding Snowden has to do with the balance between governmental intrusion into private lives and the needs of national security. The United States insists that global monitoring is valuable and necessary to national security. Yet national security, broadly defined, could actually suffer if the reputations and business prospects of U.S. technology companies are damaged by these intelligence operations. Snowden’s exposé reminds people the power that a nation-state has over commercial companies, and is also likely to shift the balance of internal Chinese debate on technological development to be less favorable to American companies.

Today U.S. technology giants are the standard bearers of the tech world: Microsoft, Google, Facebook, Apple, Intel, Cisco, to name only a few. These American companies captured large shares of the global market not only due to their innovation, reliability and stylistic appearance—but also because their identities as international companies embody universal ambitions. These are the concrete benefits of soft power: people share your values and trust your technology, products and services in the most sensitive areas.

The implicit assumption of universality is important to understand today’s consumers, who have much less respect for national governments. They engage in transnational activities on a daily basis: social networking, video gaming, watching TV shows, taking on-line courses and collaborating on international research. Even in China, despite the so-called Great Firewall, young Internet users routinely manage to “bypass the Wall” and access banned information from abroad.

The alleged international surveillance, and the close relationships tech firms have developed with U.S. intelligence agencies, represents a violation of trust, while the Obama administration’s explanation that PRISM only targets foreigners infuriates those foreign consumers. If Snowden is to be believed, intelligence operations have hacked into some of the largest telecommunication infrastructures in China and Hong Kong, potentially creating instability in networks while collecting private information.

While this disclosure should not surprise the Chinese authorities—China conducts its own large-scale hacking operations, and has long claimed to be the biggest victim of cyberspace security breaches—one cannot underestimate its impact on the debates within China regarding future technological development.

When China built its telecommunication infrastructure in the 1990s and early 2000s, most equipment was imported because domestic suppliers were unavailable or immature. The Tsinghua university network hub—a major hacking target identified by Snowden, hosted China’s earliest Internet networks. In those days, Chinese users, especially those in large and critical organizations, favored foreign suppliers because they were more reliable and transparent, even if more expensive. Domestic start-ups often found themselves shut out by high-level buyers because of concerns about quality and service. This is why Huawei, now China’s largest telecommunications corporation, found most of its early opportunities in smaller provincial cities rather than in Beijing or Shanghai.

Domestic alternatives are getting better, but gaps between foreign and domestic products and services persist. The long presence of U.S. tech companies in China, and their dominance in the world market, ensured that American technology has become deeply integrated into China’s technological landscape. For example, China’s supercomputer, Tianhe-2 (the fastest in the world as of 2013), is powered by U.S.-designed Intel chips.

The Chinese government has never been comfortable with the role of U.S. tech giants in its information-technology landscape. Ever since the 1980s, China has been making efforts–sometimes ad hoc, other times systematic—to develop its own domestic technological industry as an alternative to U.S. and other foreign suppliers. The government itself spearheaded some of these efforts, including setting technological standards for third- and fourth-generation wireless communication, and creating alternative satellite-navigation networks (such as the Beidou system ). Domestic companies motivated either by nationalism or commercial interests pioneered others. For example, in the 1990s Kingsoft tried to develop Chinese office software to replace Microsoft; this effort, like many others, failed. The most successful Chinese technology alternatives are Internet-based, either due to Chinese governmental censorship so foreign firms are blocked, or failure of some foreign companies to capture the preferences of Chinese users. Thus China now has its own Google (Baidu), Youtube (Youku or Tudou), Facebook (Tencent QQ and Renren), Twitter (Weibo) and Skype (WeChat).

Since 2006, the Chinese government has strengthened the push for domestic technological innovation through “indigenous-innovation” policies that encourage Chinese companies to self-direct research and development in crucial technological fields, and create their own intellectual property. This in part represents China’s effort to evolve from a low-wage to a higher-wage economy, but underneath it all, national security has always been a key motivation.