Cyberspectives: Adam Segal On China, Cybersecurity, And Global Trade

interview with Adam Segal
Tuesday, June 4, 2019

In this episode, Adam Segal of the Council on Foreign Relations discusses US-China relations in the context of cybersecurity, the digital supply chain, and trade.

About the guest: 
Adam Segal is the Ira A. Lipman Chair in Emerging Technologies and National Security and director of the Digital and Cyberspace Policy Program at the Council on Foreign Relations. His work addresses security, technology development, and Chinese domestic and foreign policy. Segal’s 2016 book The Hacked World Order: How Nations Fight, Trade, Maneuver, and Manipulate in the Digital Age describes the increasingly contentious geopolitics of cyberspace. His work has appeared in publications including the Financial Times, the Economist, Foreign Policy, the Wall Street Journal, and Foreign Affairs.

(the text below has been condensed and edited for clarity).

John Villasenor:          You've done just an enormous amount of work over the years on China. And China's, of course, a top-of-the-news item in relation not only to cybersecurity but to many things. But we'll start with cybersecurity. The Cyberspace Administration of China recently published a draft cybersecurity review measures document that's got quite a lot of press recently, particularly in the context of the broader recent trade tensions between the US and China. So just to start, what is the Cyberspace Administration of China?

Adam Segal:               The Cyberspace Administration of China was set up about five years ago after the Chinese leadership basically decided it needed to have a more robust focus on cybersecurity regulation and organization. President Xi Jinping had named cybersecurity as one of his primary concerns, saying that without cybersecurity, there was no national security. And so they created this new organization, the Cyberspace Administration of China, that in many ways is the implementing organization of what's called the Small Leadership Group on Cybersecurity, which is the top leadership focusing on this area. It helps implement and draft regulations for digital and cyberspace issues.

John Villasenor:          And is it correct that it has the authority, in other words, its regulations are binding in China generally?

Adam Segal:               To the extent that any of this stuff is binding in China. There will still be a great deal of questions about implementation. Other ministries will negotiate and bargain how the policies are actually implemented.

John Villasenor:          And just for context, this podcast will post in early June. Is it correct that these are proposed rules  . . .  and not rules that have actually been formally adopted. Is that correct?

Adam Segal:               That's right. If I remember correctly, basically it's a call for comment right now. They're draft regulations. And so there will be a discussion period, although it's very unlikely to be a public discussion period.

John Villasenor:          And why the attention here in the US press?

Adam Segal:               Well, I think the [draft regulations] are being interpreted as China's response to US actions as part of the trade war and, in particular, US sanctions against Huawei. In May, the Trump administration issued two new orders that are going to affect Huawei. The first one is a blanket ban on US companies purchasing equipment from countries that the US distrusts. And US officials have said that that is agnostic. But everyone realizes it refers to China. The more consequential decision comes out of the Commerce Department, and puts Huawei and 68 of its entities on a list that basically requires US government permission to sell components to Huawei.

And so [China’s draft cybersecurity review measures] include a line that says, “Chinese purchasers, suppliers, operators, can block foreign suppliers if the supply chain seems unreliable.” So people are reading that to mean that it could be used in response to what has happened to Huawei.

John Villasenor:          You mentioned Huawei. Obviously, they've been in the news a lot recently. But there's so many aspects to the Huawei story that it's sometimes to sort of step back and get a holistic view. I think people would maybe appreciate a little bit of background. Even if we sort of put aside the developments of the last few months, I think Huawei's been a focus of attention by the US government for quite a long time. What is the backstory?

Adam Segal:               Huawei, along with ZTE, which is another Chinese telecom manufacturer, has certainly been on the radar for the US intelligence community and the US government for a long time. There was a report that came out of the House Select Intelligence Committee in 2012 that basically raised issues of trust with ZTE and Huawei. That report, or at least the public part of it, has no smoking gun. There is no discussion of, yes, we found these vulnerabilities, or yes, we found these specific instances of cooperation between Huawei, ZTE, and the Chinese government. The suspicion of Huawei in particular has always come in part because its founder, Ren Zhengfei, was a PLA engineer. And there was some contact at the beginning stages of Huawei's growth as a company where they provided some help as the PLA moved from analog to digital communications. There's always been suspicion that the Chinese government provided some subsidies to Huawei. So there has always been, I think, a fear that there were vulnerabilities in Huawei products, and that the US should not use them or rely on them. I think all of this has become incredibly supercharged as we move towards 5G, and the fact that Huawei and ZTE are global leaders in 5G and they are rolling it out globally.

John Villasenor:          From China's standpoint, one would imagine that the sorts of things that are occurring now give them a very strong incentive to try to redouble their efforts to build an electronic supply chain that depends as little as [possible] on the US. And I guess my question is: How successful do you think China will be at doing that? And relatedly, what do you think the longer-term consequences of that would be for the US?

Adam Segal:               So many US and Chinese technology companies rely on global supply chains that are so tightly linked to each other. Huawei has said that there's about 1,200 US suppliers. So the short-term and long-term disruptions could be massive. And both sides benefited from this relationship, increased efficiency and scale for both sides, and helped both sides innovate faster. I am slightly worried that the longer-term effects are going to be worse for the United States than for China, because China has a model in place that allows it to double down on indigenous innovation. It can easily increase its spending on R&D and other things that the government does. It's harder for the US to get a political consensus behind increasing spending these days. And the US benefited from openness in ways that I think it could be severely hurt if these supply chains are severely disrupted.

John Villasenor:          If we take a step back [and] we look at what's happening between the US and China, of course, there are different aspects of the tension. There's the trade tensions. There's technology tensions. But some people have termed it a “technology Cold War.” Is that a description that you think is accurate? And why or why not?

Adam Segal:               I think it captures the intensity and what might be at stake in the conflict. But it's not a Cold War in the sense that the US and Soviets stood facing each other with two separate blocs. The US and the Soviets did a minuscule amount of trade with each other. And personnel flows, people-to-people relations, were all pretty small. So while we may have an intense conflict over technology issues with China, we're having it with a country that we are so tightly interlinked [with], both on the economic front, but also on science and technology issues more broadly, I think. The flow of personnel and the amount of scientific cooperation that happens between American universities and Chinese universities, cooperation between companies and universities, it's just at a scale that did not exist during the Cold War and I think really changes the nature of the competition.

John Villasenor:          From the standpoint of US consumers, does any of this lead to consequences that they might notice?

Adam Segal:               I think the average consumer is going to start noticing, because prices will start going up. I think there is a widespread sense that the trade war and the tariffs are going to be around at least for a year maybe, if not more, under President Trump. Prices are going to go up. I think the average user is going to see that. I think long term, I do think that the roll-out of 5G in the US and other Western markets will be slowed.

John Villasenor:          A delay with 5G would be, I think, a concern. It seems like that would have tangible, concrete effects . . . knock-on effects in a number of different industries.

Adam Segal:               Yeah. I do think we're going to enter into a slower period. And just the amount of uncertainty about those knock-on effects, I think, is also going to slow things down. China's not going to be the only country that draws the lessons about how the US is going to take advantage of other countries' dependence on US supply chains. Henry Farrell and Abe Newman have popularized this idea that the US is weaponizing interdependence across a range of issues. If I'm a country with technological ambitions, and moving up the supply chain, I'm going to wonder if the US is going to be a reliable supplier, especially if I have some political tensions with them, that they're going to try to impose costs on me.

John Villasenor:          And that lesson, of course, will live long past any of the particular tensions of the moment between the US and China on these issues.

Adam Segal:               Yeah, because it's not like you can keep moving supply chains back and forth. Once you start moving them and rebuilding them, there's a huge amount of sunken costs that you're going to want to take advantage of.

John Villasenor:          And given that the US and China are the two world's largest economies and, at least as things look right now, seem to be in the process of erecting some pretty significant restraints on trade. Is it correct that, that's also going to impact the global trade environment?

Adam Segal:               Yeah. I mean, look, historically, the US has been a promoter of free trade. The US was building the TPP, the Trans-Pacific Partnership, in an effort to help encourage the free flow of these goods. In the wake of President Trump's distrust for trade deals, multilateral trade deals, the Chinese have tried to position themselves as being the protector of free trade, and at Davos and other places, have given these speeches that have suggested that somehow they're going to step into the breach. I don't think anyone believes that. And it's been not particularly convincing, given the restrictions and non-market trade barriers that the Chinese have in place.

John Villasenor:          And presumably, the more siloed the global ecosystem becomes, then—you mention deficiencies and things like that—there is presumably a loss of efficiency when you have people unable to leverage global supply chains in the way that they have until fairly recently.

Adam Segal:               Yeah. These supply chains were built because they provided this efficiency and competitive advantages. And dismantling them without really knowing, or moving them without really having a sense of what's going to replace them, and where the production is going to be along the supply chain, I think is going to be incredibly disruptive.