America Can’t Win the Tech Race Alone
Keeping Its Edge Over China Will Require U.S. Investment in Innovation Abroad
By Christopher Thomas and Sarah Kreps
January 26, 2024
When it comes to global competition, according to Chinese leader Xi Jinping, “technological innovationhas become the main battleground.” In 2015, Beijing announced its Made in China 2025 plan, a policy that aimed to transform China into a high-tech manufacturing powerhouse and reduce its dependence on foreign technology and imports. China has also introduced the Digital Silk Road, a program in which Chinese infrastructure investment is linked to recipient countries’ adoption of Chinese technologies, as part of its Belt and Road Initiative. At the Belt and Road Forum in Beijing in October, Xi announced a new AI governance program and reiterated his support for international cooperation on science and technology.
In some ways, the United States is mirroring China’s plans. Washington aims to accelerate innovation and stay as far ahead of Beijing as possible on artificial intelligence capabilities and advanced semiconductors. To spur domestic innovation and manufacturing, the 2022 CHIPS and Science Act committed $52.7 billion in U.S. semiconductor research, development, manufacturing, and workforce training. And in its tech policies abroad, the United States is taking what the government calls a “small yard, high fence” approach, using export controls and similar tools to limit the ability of Chinese companies to use foundational technologies such as AI chips and semiconductor equipment. In October, the United States upped the ante by closing gaps in a previous set of export controls, expanding licensing requirements, and subjecting additional Chinese companies to trade restrictions, tightening a policy that China had already referred to as a “technology blockade.”
This reliance on subsidies and export controls has risks. China has responded by placing its own export restrictions on key materials in semiconductor and electric vehicle production and by limiting access to Chinese markets for Micron Technology, a U.S. semiconductor manufacturer. Moreover, the United States’ efforts to reshore production are hindered by bureaucratic red tape. Amid concerns about the environmental impact of new manufacturing sites and insufficient staff to process hundreds of project proposals, none of the funds allocated in the CHIPS and Science Act had been disbursed a year after its passage. Meanwhile, the domestic semiconductor industry faces a personnel challenge: too few Americans have the necessary education in STEM fields, and the United States loses many of the international students it educates to Australia, Canada, the United Kingdom, and other countries whose fast-tracked talent visas are more plentiful and less onerous than U.S. visa offerings.
Washington’s technology strategy focuses narrowly on domestic investment, ignoring the fact that the real competition is happening beyond U.S.—and Chinese—borders. Technological ecosystems, not national industries, are the real competitors. The United States’ success therefore depends not only on innovation and production at home but also on the decisions made by corporations and entrepreneurs in Germany, India, Israel, Japan, Mexico, Saudi Arabia, South Korea, and other countries across the world. To strengthen and integrate these critical components of its broader ecosystem, Washington needs to both invest directly and encourage private investment in technology development abroad. A new type of government-financed tech fund dedicated to this purpose would help the United States build mutually beneficial partnerships, resilient supply chains, and a network with the resources and innovative capacity to lead the world in the technologies of the future.
CLASH OF ECOSYSTEMS
Because technology competition is not just a race between two countries or two sets of companies, it will not be won by a government lab or a company delivering singular, specific technological capabilities. The mark of a successful technology is that it is delivered as a product or service to thousands of businesses or millions of consumers. Achieving this scale requires an ecosystem of companies working together. The world’s two emerging technology ecosystems, one U.S.-based and one Chinese-based, are global, fuzzily defined, and often overlapping networks of research, development, manufacturing, software, standards, and supply chains that collectively produce goods for governments, business, and consumers to use. In this complex competition, the winning ecosystem will be the one whose collective capabilities are the most technologically advanced, cost-effective, and reliable.
The sheer volume of technology use and innovation happening outside the U.S. and Chinese hubs makes a networked approach necessary. The rest of the world accounts for more than 65 percent of all Internet and phone users, 60 percent of engineering graduates, and 50 percent of research and development expenditures. It is not only the United States and China that wish to stimulate their technology industries or stand at the forefront of progress in artificial intelligence and semiconductors. But governments and entrepreneurs in other parts of the world often face challenges in accessing capital—gaps they seek outside investment to fill. The United States and China are such dominant players in this field, too, that public- and private-sector technology actors elsewhere will need to pick a side when they choose which standards to follow, which software to deploy, which AI models to train, which semiconductor suppliers to use, and which customers to serve.
The Chinese government is starting to cater to its global tech ecosystem rather than focus only on its national technology industry. The incentives built into the Digital Silk Road initiative, as well as loan guarantees and subsidies for technology purchases, are encouraging foreign governments across Africa, Central Asia, and the Middle East to adopt Chinese technologies. Meanwhile, China’s high-quality, low-cost 5G networks, electric vehicles, and smartphones are appealing to budget-conscious consumers around the world. For countries with ambitions to advance their digital and AI technologies, Chinese financing and foundational Chinese technologies are a welcome solution.
TIME TO INVEST
The U.S. government is not yet competing on the same level. Nor do its current institutions or traditional tools of economic statecraft give it the flexibility and capacity to do so. To step up its game, the United States will need a new investment fund with a new approach. A global tech fund with a mandate to support critical technologies would help Washington attract governments, private investors, and consumers around the world to the U.S. technology ecosystem and make this ecosystem’s supply chains more resilient.
Current U.S. policies essentially amount to a subsidy program; the global tech fund, by contrast, would operate as an investment fund with an independent, professional, experienced team compensated at market rates. Modeled on successful public-private investment projects such as Digital Invest—a program implemented by the U.S. Agency for International Development that offers government seed funding to bring in private investment capital—the fund would align public investment and priorities with private development incentives. Through Digital Invest, the U.S. government has provided $8.45 million and raised $275 million for investments in digital finance and Internet service provision in emerging markets. The global tech fund would have a similarly self-sustaining structure that would include a mandate to earn an adequate return on investment for taxpayers.
The fund, using a combination of venture capital, private equity, and debt financing, would take on the “tipping point” risk—providing the up-front capital outlay that gives an investment enough momentum to deliver results—for investments that improve the resilience of the United States’ and its partners’ electronics, semiconductor, battery, and green energy supply chains. These tipping point investments would support not just American technologies but also related research, development, and manufacturing abroad. To increase its impact and to ensure balance between public- and private-sector interests, every dollar the global tech fund invests should be matched by at least four dollars of co-investment from the private sector (or much more, following the model of the Digital Invest program). And while the fund would need the flexibility to take a long-term, market-driven investment approach, its performance would also be overseen by a cross-agency government advisory committee—ensuring it remains responsive to national tech priorities.
As a preliminary estimate, the fund would likely need to invest $10 billion to $30 billion each year if it is to be competitive in the battle between the U.S.-based and Chinese-based tech ecosystems. By comparison, China invests more than $200 billion annually in capital expenditures for electronics manufacturing. A meaningful U.S. investment in alternative manufacturing locations—just one of many priority areas for the fund—would alone require billions of dollars in annual outlays.
STRENGTHENING THE NETWORK
When the United States issues subsidies and imposes market restrictions to support domestic industry, it often does so at the expense of countries and companies that play important roles in its wider tech ecosystem. With the global tech fund, however, Washington could forge win-win partnerships. For example, with the Inflation Reduction Act providing powerful financial incentives for electric vehicle batteries to be manufactured domestically, Japanese or Korean companies must adjust their supply chains in order to qualify for U.S. subsidies—an effort the global tech fund could support by pooling resources with Japanese and Korean investors. Similarly, the CHIPS and Science Act has prioritized U.S. manufacturing while ignoring the need for supply chain resilience among the United States’ European allies, whose overall economic health and ability to guard against foreign influence should both be matters of concern to Washington. The global tech fund and European companies and governments could jointly invest in European semiconductor supply chains that use American technologies and equipment.
The global tech fund could also seek similar arrangements in parts of the world where U.S. economic and technology ties are not as deep as they are in East Asia or Europe. In Southeast Asia or Latin America, for instance, the fund could work with regional partners to invest in energy supply chains, focusing particularly on electric batteries and green energy. It could support the United Arab Emirates’ and Saudi Arabia’s AI investments to ensure that Arabic large language models run on American technologies. In any number of countries with top-tier electrical engineering programs, it could finance startups whose next-generation wireless encoding technologies could become the building blocks for 6G standards. It could invest in refining capacity in Australia, Indonesia, and other countries with reserves of critical minerals, such as graphite or germanium, to help the United States diversify its supplies away from China. All parties would benefit in these cases—technological integration based on U.S. standards and software would give the United States influence, the U.S. tech industry would become more resilient, and U.S. financing would help recipient countries position themselves for success in the tech economy.
The global tech fund’s investment would also help the United States mitigate one of the downsides of tech competition: the loss of access to Chinese engineering, scientific expertise, and operational capability. For Chinese technical leaders and entrepreneurs looking to invest and move their companies outside of China, the fund could sponsor the transfer of research and development and manufacturing centers, business operations, and even company headquarters to U.S.-aligned countries. Such a program would be of considerable interest to Mexico, for example, given that the country is already an attractive location for electric battery and new energy component manufacturing.
No nation today can achieve technological self-sufficiency. No nation can even assume it will maintain its current advantages indefinitely—whether those advantages lie in space technology, advanced semiconductor development, or generative AI models. To stay in the game, Washington needs more tools than are currently at its disposal. It needs to help key U.S. partners build technical capabilities and local capacity, ensuring that those partners make technology investments that are favorable to the United States. If the United States is to succeed in the competition between two globe-spanning tech ecosystems, investments of American capital and expertise cannot stop at the water’s edge.
You are reading a free article.
Subscribe to Foreign Affairs to get unlimited access.
Paywall-free reading of new articles and over a century of archives
Unlock access to iOS/Android apps to save editions for offline reading
Six issues a year in print, online, and audio editions
CHRISTOPHER THOMAS is Chairman of Integrated Insights and formerly served as Nonresident Senior Fellow at the Brookings Institution, Managing Partner of McKinsey’s Asia Semiconductor Practice, and China Head at Intel.
SARAH KREPS is John L. Wetherill Professor and Director of the Tech Policy Institute at Cornell University and Nonresident Senior Fellow at the Brookings Institution.
MORE BY CHRISTOPHER THOMAS
MORE BY SARAH KREPS
United States China Economics Business Economic Development Trade Science & Technology Xi Jinping U.S.-Chinese Relations
America Can’t Surpass China’s Power in Asia
But It Can Still Prevent Chinese Hegemony
Kelly A. Grieco and Jennifer Kavanagh
How to Thwart China’s Bid to Lead the Global South
America Should See India as a Bridge to the Rest of the World
GET THE MAGAZINE
Save up to 55%
on Foreign Affairs!
Get in-depth analysis delivered right to your inbox
GRADUATE SCHOOL FORUM
Council on Foreign Relations
Somaliland: The Horn of Africa’s Breakaway State
China-Korea Relations: A Subdued Environment and Missed Opportunities
Scott A. Snyder
Fickle Friends: Sino-Israeli Ties Buckle Amid War With Hamas
Published by the Council on Foreign Relations
©2024 Council on Foreign Relations, Inc. All Rights Reserved.
Subscribe for unrestricted access.