China Is Rapidly Deploying Its Own Export Controls To Prevent The Outflow Of “Capital, Data, Talent, And IP”

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In what is now being dubbed an "unmatched" toolkit among OECD economies, China is rapidly flexing its muscles to prevent the outflow of indigenous capital, tech, and talent, leading to an inevitable bifurcation of the global economy.

There is a popular perception that hardly any innovation takes place within the Chinese economy, that any headway is a result of borrowed or stolen Western tech. While this assertion might have been true for much of China's recent rise as a major economic player, there are increasing signs that it no longer holds true.

For one, China edged out the US in 2022 to publish the most cited research papers, which is one of the most important characteristics of the quality of a given paper.

As per another measure, which used fractional counting for researchers belonging to different countries, China accounted for 27.2 percent of the most cited papers published in 2018, 2019, and 2020, edging out the United States, which accounted for 24.9 percent of this august cohort.

Now, as per a new report by Merics, it appears that China is rapidly strengthening its own export controls to prevent the outflow of its indigenous capital and IP.

China’s Toolbox Is Unmatched By Any OECD Economy When Monitoring And Limiting Cross-Border Flows Of Capital, Data, Talent, And IP

In response to the Western bloc's export restrictions on China, the Asian giant has, in recent years, implemented its own export control regime on gallium, germanium, and graphite, and restricted the transfer of IP vis-a-vis rare earth magnets, which are used within EV motors and wind turbine generators. Of course, gallium and germanium are critically important metals for the global electronics industry, with China maintaining a monopoly by controlling ~90 percent of their supply.

But, the report notes that China is now transitioning from a "technology seeker to a technology provider" economy. At the same time, Beijing appears intent on limiting foreign access to its home-grown innovation:

"While its aggressive efforts at appropriating foreign technology have long been a prime cause for concern, foreign governments and firms now face an additional challenge: As Chinese companies ascend critical technology value chains, Beijing appears intent on monitoring and limiting foreign access to those."

The report notes with concern the overarching policy of Xi Jinping, the Chinese President, which centers on deterring foreign export controls by attaining "technological superiority."

The above snippet summarizes China's expansive toolkit to limit foreign access to its indigenous technology. The playbook not only includes explicit export licensing requirements but also leverages blacklists, data localization requirements, restrictions on the mobility of indigenous talent, and mandatory CCP control over sensitive R&D activities.

Often, China tries to obfuscate its export controls by using euphemisms or deliberately innocuous terminology, For instance, its rare earth restrictions against Japan in 2011 were billed as a measure to address environmental concerns.

Of course, China is aware that export control is a double-edged sword, that it provides an increased impetus to its competitors to diversify. The CCP's long-term goal, however, is evident:

"While remaining mindful of these limitations and avoiding overreactions, the PRC’s trading partners should take seriously China’s long game to shore up and leverage its technological dominance."

As far as the thorny issue of intellectual property rights is concerned, China has mandated a security assessment since 2018 for transfers deemed restricted. One such example is TikTok's content recommendation algorithm. Another example is the 3D laser scanning tech or LiDAR, with application ranging from drones to autonomous navigation in cars.

This approach can backfire, however:

"Ultimately, banning technology exports – or tightly restricting licenses – could backfire for China. Where foreign firms hold relevant technical expertise and IP, imposing export controls can erode rather than protect a country’s advantage by further incentivizing de-risking efforts elsewhere."

While the report concedes that China does not have an "unassailable lead" that would give its toolbox the same heft as that enjoyed by the US, it nevertheless gives Beijing a front-seat view of its indigenous technology landscape, allowing the CCP to rapidly deploy its massive financial resources to nurture key strategic industries and institute protective measures where the technological lead appears promising.

The report concludes with three recommendations:

1. Increased monitoring of China's EV, solar, and lithium-ion industries
2. Identify discriminatory licensing practices by coordinating with the private sector
3. Establish an OECD-wide intelligence-sharing net to increase resilience

Do you think the ongoing bifurcation of the global economy is irreversible? What are your thoughts on China's targeted approach to export controls? Let us know in the comments section below.

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