Simon Lacey, Head of Digital Trade and Geopolitics at the World Economic Forum, in a recent interview with Marc Smrikarov of China-US Focus, discusses areas where U.S. and Chinese interests align, such as global financial stability and freedom of navigation. Additionally, he emphasizes the need for patience and understanding on both sides, and to recognize the importance of cooperation in a shifting multipolar world. He also highlights the fragmentation of AI development between the U.S. and China, warning that the lack of cross-collaboration could hinder innovation, and urges a more rational approach to labeling AI and semiconductors as dual-use technologies in national security contexts.
Marc Smrikaro:
Simon, thank you for being here with us in Hong Kong. And in your role, what do you see as some of the main issues affecting China and the U.S. in terms of their economic relationship and how that's impacting the world right now?
Simon Lacey:
The U.S. and China used to be kind of working along the same track up until probably 2015/2016 when there was already a bit of a rift following the global financial crisis. But you had the issue of commercial espionage and hacking, which was largely solved through an agreement between President Barack Obama and Xi Jinping with the ceremony in the Rose Garden. And you had a range of frictions, but they were largely resolved, and the tenor release started to change, as everyone's well aware, with the Trump administration. That really put the relationship on a slightly more contested basis. There was still plenty of room for dialogue and cooperation. Trump and Xi had a number of meetings, and they were all quite positive, and had a few positive outcomes. So if you remember, ZTE was in some hot water and was very close to being shut out of the U.S. supply chain completely, until Donald Trump stepped in and saved the company. So there were some positive outcomes during the first Trump administration but altogether, the relationship took on a more confrontational tone, and that's continued through the Biden administration and now, particularly through some voices in Congress who have identified China as an existential threat to the United States, and the Chinese Communist Party as a threat, and who are issuing any notion of cooperation with China in favor of confrontation. And if we continue on that path, then there's really only one place that can end, and that's going to be conflict, which will be very damaging for the bilateral relationship, as well as for the rest of the world. So we really need to slowly nudge the U.S. and China back onto a path of concerted cooperation where they have interests that align. That where the focus of my work at the forum is, trying to find areas where we can bring the U.S. and China and partners and leaders from both of those countries together to work on issues where their interests align.
Marc Smrikarov:
Building on that, are there specific areas or issues that you see some daylight and opportunity for more collaboration?
Simon Lacey:
There are plenty of areas where U.S, and Chinese interests align. These are the first and second largest economies in the world, with some of the largest commercial networks from their firms spread out throughout the world. The stability of the global financial system, the ability of their companies to operate and trade abroad, both are key interests and those are areas where they can cooperate. So in terms of financial stability, there are… like the Bank of International Settlements, but also areas where they can promote more cooperation in terms of the governance of the financial system, the stability of the financial system, and then on trade. One area where people actually tend to think that Chinese and U.S. interests conflict, which is freedom of navigation, is actually an area where they have mutual and aligned interests, because both have such extensive trading networks throughout the world that they want commercial shipping to be able to operate freely throughout the world. When you put aside the military tensions surrounding the sort of freedom of navigation issues, commercial shipping and global trading networks is another area where China and the U.S. have interests that are broadly aligned.
Marc Smrikarov:
You touched on this, but there's been an increasing conflation between economic interests and security interests. How do you see that continuing to impact the economic relationship moving forward between the two countries? And do you have any thoughts on how the two countries and also the rest of the world, can try to distinguish between those two in a more, more clear way?
Simon Lacey:
Yeah, I think it's fair to recognize that no country really wants to be told by an international arbiter what they can and cannot do in order to safeguard their national security interests. I think that's a given. But I also think that it's likewise a given that countries, but particularly companies, who are the ones actually using the trading system, want to be able to rely on a predictable, enforceable set of rules, and they want to be able to know where they can export to what they can export. If you adopt an interpretation of national security that's too broad and too all-encompassing, then you massively increase the amount of unpredictability that firms have to operate under. We've seen this in the semiconductor space, where, first there was a ban on advanced chips, and then that was expanded to the audio graphics chips. That is now being expanded to equipment that might help China with the production of legacy chips. And so, if you're a company in the semiconductor supply chain, you really have no certainty about what the future holds and whether you'll be able to do business with both China and the U.S. in the future. It's really about being more targeted, more surgical, more rational in terms of the trade and investment restrictions that governments want to impose, but also before those measures are imposed, it's about having a conversation with the targeted industries, sharing what the objectives are as governments or as regulators, and helping companies to partner with you on achieving those objectives. What most governments mistakenly think about business is the “us” versus “them” approach. Businesses are glad to partner with governments in most instances, to help governments achieve perfectly rational and perfect legitimate public policy objectives like national security. But what businesses don’t want is to be blindsided by regulations or new restrictions that are going to have a disproportionately negative impact on their operating model, which actually didn't really need to happen.
Marc Smrikarov:
You touched on semiconductors there, and I think a lot of the technology trade and innovation space is being increasingly coming under a lot of scrutiny and regulation. AI is a big area right now of development within both countries. How do you see the role of AI development playing out and in the economic and overall relationship between two countries?
Simon Lacey:
AI has been quite interesting to watch, because for many years, it was assumed that China would have an edge in the AI space. Because, you know, AI models, in order to really be high performing, need lots of data to train themselves on. And China was always assumed to be the place where the biggest pools of data were and so all the U.S. tech companies were very interested in moving into the AI space or setting up AI research labs in China. Even companies that weren't operating in China, like Google and I mean, Amazon, which was operating in China, but didn't have such a footprint as it does in other markets. All of these companies had AI research labs in China because it was assumed that that's where all the data was, and that's where the first really meaningful and scalable breakthroughs would be made in AI. But that turned out not to be the case. So now you've got the U.S. with a sort of very, I would say, a thin marginal lead on AI, but a lot of the generative AI products that we see that have scaled on the market in the West. OpenAI and ChatGPT are the most prevalent examples. The Chinese also have their own alternatives to that, which work just as well, if not better, but that's a completely fragmented market. There's not really that much crossover that happens. The problem with AI going forward is that fragmentation is likely to increase. And what we know from the history of innovation and the whole open innovation movement is that innovation really does require some cross-pollination. If you're going to have two completely separate and fragmented tracks of AI development that are not really talking to each other, that's going to hinder innovation going forward. The other issue around AI, which I think is the elephant in the room, which nobody is addressing, and it also applies to semiconductors because it touches upon this national security issue is what is a general purpose technology and what is a dual-use technology? So semiconductors are on this dual-use list, and AI is increasingly being looked at, particularly by military strategists and those imposing trade and investment restrictions. AI is being looked at as a dual-use technology and one with important, significant, and quite worrying military applications. But the truth is that for the vast majority of uses and applications, both semiconductors and AI, are used in ways that are completely harmless. So we need to find a way to stop labeling everything a dual-use technology, and introducing some rational criteria for defining when a national security exception can be invoked in a way that's reasonable, sensible, and addresses a genuine risk, and when its use might be disproportionate, overly trade and investment restrictive and ultimately doing a disservice to the many potential beneficiaries of those technologies.
Marc Smrikarov:
How do you think such an agreement could come about or should come about? Would it be bilaterally? Would it be multilaterally? Is there a specific form or venue you think to have those conversations?
Simon Lacey:
I think you want to take it out of the political arena as much as possible, and hand that conversation over to the technical experts. We have many international technical bodies that are capable of coming up with standards and regulations on things like that in a way that is largely depoliticized. Of course, you're always going to have the U.S. and China and to a lesser extent, the European companies, or experts and government representatives from the European Union, and from the technologically most advanced countries, including Japan, who are going to be dominating those discussions. But that's just because they're the most advanced in terms of understanding the technologies. They have expertise in those technologies, and they're the ones that can come up with sensible rules on those technologies as to where do you draw the line between something that's general purpose and something that's dual-use? But I think yes, of course, you could have the U.S. and China just come up with a framework and ultimately they will need to buy into whatever framework is agreed upon. But for the sake of global legitimacy, you've got to have as many voices at that table as possible, and of course, that slows things down a little bit, but it's the only way to end up with a tangible result that will be tenable, and will be amenable to the rest of the world.
Marc Smrikarov:
One last question, if you were to give one piece of advice or one recommendation to the two countries right now as to how they should broadly think about the economic relationship and how to advance that in the years ahead, do you have a sense of what that might be?
Simon Lacey:
For the U.S. it's to stop thinking about and treating China like an enemy, because if you treat China like an enemy, China will become an enemy. At the moment, China is certainly not the enemy nor an existential threat to the United States. I don't understand how anyone who really thinks about this issue could come to the conclusion that China represents an existential threat to the United States. Maybe China represents a threat to the unipolar world that the United States has enjoyed since the fall of the Cold War. But there are other factors that are mitigating against the continuation of this unipolar world, like the fact that we have other powers rising as well, but China's is, of course, clearly the leading power. So yes, China does represent a threat to the unipolar dominance that America has enjoyed for the last 30 years, but China does not represent an existential threat to the United States, either militarily, politically, economically, or in any other way. That's what I would say to the U.S. side. And to the Chinese side, I would say, just be patient with the U.S. I think it was Winston Churchill who said the Americans will always adopt the right solution once they've tried everything else. I think there's just a process in the U.S. that needs to run its course as the U.S. adapts to this new multi-polar world where it's no longer the sole superpower. There's just a process of adjustment, a painful process of adjustment that the U.S. needs to go through, and China just needs to be patient with that. China is a country that understands the long game a lot better than the U.S. does. Meaning, I think the U.S. embarked upon this engagement with China back in the 70’s, and then really ramped it up during the Clinton administration, in the hope that by engaging with China, they would change China into something that more resembled sort of the U.S. model of political economy. And that didn't really happen fast enough for the U.S., but China is still in the process of reforming, and evolving, and you've just got to give it time. There is a convergence that's happening to a set of global norms, and it's hard to see that when you know you've got these kinds of headline events happening, such as Trump winning a second term. It's hard to see that nations are converging towards a single set of norms of what's acceptable behavior. The U.S. shouldn't give up on China so soon. Of course, China is a civilization that's much older than the U.S. and the central talent tenants of Chinese civilization predate modern notions of republicanism and democracy by several 1000 years. But still, I think the U.S. should not give up on its goal of transforming China. The U.S. has already had a hugely transformative effect on China, and I would encourage the U.S. not to give up on that process, but to see China as China really is, and not as the U.S. wishes it to be. There's been a lot of wishful thinking in the U.S., going back many, many decades already, to the 1930s in terms of how the U.S. would want China to be. And the U.S. just has to accept China as it is. And China also has to accept the U.S. as it is, in all of its sort of messiness.
