Article: The Geopolitics of Technology
Based on our forthcoming book, we published an article in Internationale Politik on the relationship between geopolitics and tech. Read it here. English translation below:
The Geopolitics of Technology
Ansgar Baums | Nicholas Butts
1. Technology: The „Great Residual“ of International Relations
Sometimes the simple questions are the hardest to answer. Here is one: Why do geopolitics change at all? If geography is destiny and the key foundation of geopolitics, it is hard to see why geopolitics should ever change that much. Similarly, demographics are supposed to be the key driver of geopolitics: For most times in human history, demographic change has been glacial - except for a few dramatic cases like the Black Death or the pandemic catastrophe of the Columbian exchange. International relations theory is rather good at explaining the status quo, but notoriously bad at explaining change.
This inability to explain discontinuity might have to do with another blind spot of IR theory: Technology. Obviously, technology can translate into geopolitical power by triggering an increase in productivity, economic growth and ultimately military might. Between 60 and 85% of economic growth in the developed world is based on technological innovation. The story is more interesting, though: Technology can also radically change the meaning of power and geography. Take the example of rubber. Access to natural rubber from South East Asia was essential to aspiring global powers in the late 19th century - until a research team at Bayer in Wuppertal figured out how to produce synthetic rubber in 1909. The British colonial empire in South East Asia did not survive the Second World War, and the US was reluctant to help recreating it. Both would have cared more were it not for what happened in a chemistry lab 35 years earlier.
How about bird shit? 120 years ago, top military brass cared a lot about bird shit and the small islands in the South Pacific it was dropped on. As the main source of ammonia, guano was key to food security. Spain and Peru actually went to war over it in the 1870s. Again, it was chemistry that changed geopolitics. Fritz Haber, inventing a production process for synthetic ammonia, removed guano islands from the “Let’s go to war over this” list (few would object that this was a splendid development). The Bosch-Haber process is still foundational to our food security. Experts estimate that at least half of the nitrogen molecules in your body were generated by the Bosch-Haber process.
Sometimes technology adds an item to the war list. When the British Navy switched from coal to oil-powered vessels at the beginning of the 20th century, it changed the geopolitics of the Middle East. Once oil became a strategic resource, the Persian gulf quickly developed from an economic backwater of a declining Ottoman empire into a battleground of grand imperial designs. The story of oil could be told as a scramble for natural resources. However, without the combustion engine, oil would just be black slime. The geopolitics of energy and raw materials really is about technology. We believe that technology is the most important change agent of geopolitics. Without it, geopolitics would be pretty boring.
2. Geotech statecraft: Controlling the dissemination of technology
No surprise that governments have tried to harness the geopolitical power of technology ever since. On an abstract level, governments are trying to manage national security externalities of technology. As tech companies engage across national borders, they either increase or decrease the national security level of their home countries. We call this approach of in-pricing geopolitical externalities “geotech statecraft”, defined as the intentional manipulation of technology dissemination across borders by governments to capitalize on, reinforce, or reduce national security externalities. Historically, geotech statecraft was based on three policy tools: (1) Controlling the production of technology by establishing monopolies for state-owned companies, (2) controlling exports, and (3) controlling the movement of skilled workers.
Geotech statecraft might either prevent or promote technology dissemination. If you are a hegemon, any technology-induced development which could disrupt your position is not welcome. Hence, you will try to control how such technologies are spreading. Vice versa, if you are a challenger to the existing order, technological change is key to overcome the existing order. You will try to acquire new technologies faster than your competitors. The biggest enemy of intellectual property (IP) rights are nations in a hurry to become a global power - today it might be China, in the 19th century it was Germany and the United States, back then notorious IP violators. But there are also reasons for actually promoting the spread of technology from a hegemon’s perspective: If a technology is a great tool to cement your leadership status. The reason is the “panopticon effect” of what Farrell and Newman call “underground empires”: The ability of a party to derive critical knowledge from information flows which are hosted on an infrastructure controlled by this party. The panopticon effect is not new. Britain had unmatched insights into global trade at the beginning of the 20th century via its financial clearing house function. Manganese imports from Brazil to Germany ran through financial transaction centers in London, as well as the insurance for the shipping. With the outbreak of the First World War, such data on trade became crucial for the implementation of the Triple Entente’s boycott of the central powers. The Snowden Affair of 2013 was another reckoning with the power of the panopticon effect.
3. Technology and US-Chinese great power competition
It should hence come as no surprise that geotech statecraft play a key role in the current great power competition between the US and China. US geotech statecraft developed rapidly over the last years. While President Trump’s administration first focused on tariffs, then on Huawei, the Biden administration has built a whole toolkit to control technology dissemination. In September 2022, National Security Advisor Jake Sullivan described export controls as a “new strategic asset in the US and allied toolkit”. Prior to the launch of the new National Security Strategy 2022, Sullivan told the media:
“On export controls, we have to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors in certain key technologies. We previously maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead. That is not the strategic environment we are in today. (..) We must maintain as large of a lead as possible.”
Sullivan later described the approach as a “small yard, high fence” strategy: Establishing high barriers for the dissemination of a “narrow slice of technologies”. Following up on this, on October 7th 2022, the Bureau of Industry and Security published a list of new controls that squarely aimed at slowing down China’s progress in developing artificial intelligence (AI) capabilities by setting performance thresholds for AI chip exports to China. Other policy tools like controls for cloud computing followed quickly, as well as extended lists of “critical and emerging technologies” (CETs) that might be subject to future controls. But does it work?
4. Limits of Geotech Statecraft
The paradox of geotech statecraft is that while technology is the most important change agent of great power distribution, it is difficult to translate this potential into targeted and effective policies - for three reasons:
Firstly, tech innovation is driven by the private sector, not states or state enterprises - a fact that Ding and Dafoe call the “industrial dependency hypothesis”. AI has a significant impact on future warfare, but its development is driven by private companies who care little about government agendas. In fact, companies and governments are not on the same page at all when it comes to geotech statecraft: As soon as the October 7th controls were issued, affected companies like Nvidia and Intel designed chips that were just under the performance threshold defined by the regulation - which was perfectly legal, but annoyed policymakers in DC to no end. Hardliners like Mike Gallagher, chairman of the Select Committee on the CCP, called for more “patriotic companies”, which sounds hollow to corporations bound by a fiduciary duty to mitigate business risks as best as they can. Companies are set to mitigate effects of such weaponization attempts as any other interference with their business model. As a consequence of the reluctance of companies to act according to the political agenda, the “small yard” envisioned by Sullivan will expand quickly - driven by a “whack-a-mole” with US companies.
Secondly, controls on tech dissemination set incentives for those on the receiving end to invent alternatives. The establishment of US export controls on semiconductors have a significant - and ironically beneficial - impact on Chinese efforts to build an indigenous industry. In the past, attempts to strengthen the Chinese semiconductor industry by showering subsidies in the range of more than $30 billion did not lead to any meaningful results, mainly because Chinese semiconductor customers - with ambitious plans to internationalize - were reluctant to support a lagging domestic semiconductor industry and perfectly happy to buy Nvidia chips. With this choice removed, these Chinese tech companies are now driving innovation in chip development from the demand side. Nothing drives innovation like an annoyed customer - a lesson policymakers from capitalist nations should have learned. US export controls have established an environment where leapfrogging technologies subject to such controls is becoming much more likely. As a consequence, progress in China is much faster than anticipated by many in DC - even in the complicated field of semiconductor production machinery. In an interview, the Chinese managing director of a major European semiconductor chemical company called the semiconductor blockade a “major strategic miscalculation”. In essence, the US is trading a short-term advantage for long-term influence over the global IT stack. Dig a little deeper and you will find that current geotech statecraft rests on a linear model of tech innovation. It assumes that tech value chains feature some “choke points” that could be leveraged to achieve geopolitical goals. Technologists find that assumption bizarre. From their point of view, semiconductor manufacturing is simply applied science. There is more than one way of achieving one’s goals; hence, there is no “secret sauce” that can be protected for long. A semiconductor manager told us: “If you throw enough money and smart people at a problem, you will solve it - and China has plenty of both.” Hence, restricting access to technology first and foremost incentivizes the replacement of it. Experts like Paul Triolo hence fear the equivalent of a “de-dollarization” of tech caused by geotech statecraft.
Thirdly, geotech statecraft does not come for free. The question how much the US could or should afford to succeed with sustaining its tech advantage and containment agenda towards China has received almost no attention so far. Deutsche Bank estimated that a Tech Cold War would amount to costs of $250 billion annually to the $5 trillion ICT sector, destroying around 2% of global demand and a 2 to 3% increase in capex and labor costs. Furthermore, information technology and global value chains have arguably been a major deflationary factor over the last 25 years. According to an IMF working paper, digital technologies decreased inflation by around 0.05 base points annually from 2012 till 2019 - most likely this factor has increased since productivity gains by IT have increased since then. The Digital Price Index of economists Goolsbee and Klenow quantifies the extent to which online inflation deviates from the inflation of the whole economy. Between 2014 and 2017, online inflation was 1.3% lower than the consumer price index (CPI). Adjusting for the arrival of new goods, online inflation could be more than 3% lower than the CPI inflation rate. Global value chains have been a key factor behind the growing importance of the global output gap in determining domestic inflation.” Digital services not only increase price transparency to consumers and enhance competition. Information technology also reduces the costs of supply chains and enhances productivity. Each of these deflationary factors is directly impacted by the bifurcation of the IT stack and more resilient yet also more expensive supply chains. Export controls also have an immediate cost on US companies. A research team of the Federal Reserve Bank of New York found that US companies affected by export controls faced negative cumulative abnormal return (CAR - a technical term for a negative stock market reaction immediately after the announcement of export controls) of 2.5% or $857 million in lost market capitalization. Furthermore, the study concluded that entity list-based export controls might succeed in causing a decoupling from China - but mostly at the expense of US companies who were simply replaced by non-US corporations.
In summary, tech dissemination control is less effective and more expensive than anticipated and in the long run, it has a positive stimulating impact on the innovation ecosystem of your adversary. Geotech statecraft might be good politics in the US, but it increasingly looks like it's also bad policy.
5. Great power competition beyond tech dissemination control
So what are the alternatives? We have two suggestions:
Firstly, in an interview with us, William Reinsch of CSIS remarked: “There are basically only two ways to win a marathon: One is running faster, the other way is tripping the other guy over. The US is now much more interested to engage in the latter strategy vis-a-vis China than 10 years ago.” In fact, “running faster” has been a very successful strategy for the US, regardless of the relative rise of China. In almost any conceivable dimension, the US is still the global superpower. Expecting to cement the extraordinary dominance during the unipolar moment after 1990 was unrealistic from the start. But that does not mean that your policy formula was wrong. While the foundations are still solid, recent policy choices - an unhelpful populist rage against migration, the reliance on ineffective and harmful tariffs, and a neglect of international cooperation - are worrying. Rather than relying on tech dissemination control and unilateral action against China, the US should renew its focus on “running faster”.
Secondly, since the leverage of tech dissemination control built up by the US vis-a-vis China will soon evaporate, the US (1) should pragmatically use it while it lasts, and (2) use it for achievable conditions and in consultation with allies. The tragedy of recent US administrations is that one or the other condition was not met. While Trump had a “deal mindset” and ultimately a pragmatist, he had no strategic policy goals. Vice versa, while Biden was clearer on policy goals, the rigid China policy did not allow for any pragmatic deal-making. More worryingly, the Biden administration has yet to express what outcomes it would like to see: What specifically should China improve, by how much and what would it get in return?
In his book The Avoidable War, Kevin Rudd outlines the need for a politically tenable framing of the competition in both countries, highlighting the need to distinguish three tiers: (1) Principles and procedures to navigate each others redlines (Taiwan, e.g.), (2) areas of nonlethal strategic competition, and (3) areas of continued cooperation (hopefully on climate change, pandemic research, and other matters of global concern). It is the next administration’s most urgent task to provide a policy framework that makes sense of redlines, managed competition, and cooperation.