Strategic Competition

This section introduces the China STC challenge related to strategic competition. China implements a 5-year S&T indigenization plan and a policy of military civil fusion. These points drive China’s approach to technology acquisition with knock-on effects for western STC implementation

Due to the People’s Republic of China’s continued high level of state control in the development of its economy, the government has been able to leverage these mechanisms to achieve strategic goals. Through its policy of Military Civil Fusion (MCF)[4], the PRC can coordinate its commercial sector towards specific national security priorities in a more direct way than true market-based economies. This is documented in the country’s Five-Year Plans[5] (with a specific plan for Science and Technology[6] that is most relevant to strategic sectors). These plans guide the policy for the next five years and set out priorities and methods for achieving strategic goals. Early plans even mention the need to develop nuclear technology to jumpstart their nuclear weapons program[7]. The PRC also assigns funding and responsibilities to industry in pursuit of technology acquisition and indigenization.

Previous examples of these documents outline which target technologies are being developed for indigenous capabilities and that indigenous capabilities themselves are a high priority. By leveraging what the PRC calls ‘cluster development[8]’ it can grow strategic industries more rapidly and with less redundancy by coordinating government and commercial research and development efforts. Cluster development specifically is the idea that advancements in one sector necessarily result in advancements in other sectors. While in free market systems, such as that in the United States, advancements also spillover to other sectors, the PRC’s ability to dictate its economy through MCF means that, as long as it is pursuant to a strategic goal, the transfer and integration of new technologies and advancements in other fields are facilitated by the government.

In practice, many PRC strategic companies are involved in MCF efforts. Many Chinese company websites will include a communist party page. The websites in the past have also often included either a page on military civil fusion or a page on China’s Belt and Road Initiative (BRI) which, while principally a foreign facing development program, is an equally important indicator that a Chinese company is closely linked to China’s strategic objectives.[9]

It is important to note that while the PRC does have a broad MCF strategy, in practice many commercial entities are still operating separately from the government or military. This results in an intentional degree of ambiguity when it comes to enforcing controls geared at military end users versus civilian purposes. This ambiguity facilitates potentially dual-use items to be purchased by a domestic commercial institution that can later utilize that technology for a strategic purpose. This is not to say that every technology traded with a commercial Chinese entity does result in a military end use, however, the structure, laws, and norms within the PRC do require that these actors would work in support of the state if tasked to do so through forced technology transfer.[10] To combat this, business due diligence is necessary beyond the normal  list-based or catch-all based controls, especially considering that many commercial entities intentionally obfuscate information about their connection to government, or more specifically military, funders. The China challenge is considered to be particularly acute at present in part because of certain recent Chinese action. These actions include, but are not limited, to the following and carry specific implications for controls:

• China is at least two decades into a military modernization program that sees China develop substantial military capabilities.
• China is engaged in territorial expansionism in the South China Sea, including the militarization of Chinese-made islands with the purpose of expanding Chinese territorial claims.
• China is engaged in substantial nuclear weapons build up and has little to no separation between its civil and weapons sector.
• China is engaged in a significant missile systems buildup and has no separation between its civil and space sectors.
• Credible sources have alleged that China is engaged in the systematic repression of the Uyghurs in the Xinjiang province.
• Some Chinese entities are engaged in forced technology theft and technology acquisition both for monetary reasons and in support of China’s broader strategic objectives. This includes civilians seeking commercial gain as well as military or state-led initiatives to acquire foreign technology illegally.[11]

At the same time, the Chinese market continues to be a lucrative and important one and it is essential that trade restrictions not overly impede commerce and cooperation with China other than where absolutely necessary. This is thus a difficult balance to strike and requires a nuanced approach to strategic trade management with China.

There are China-specific typologies of technology acquisition which are detailed more fully in the Trends in Technology Acquisition section. In brief, China leverages every apparatus of the state to acquire strategic technologies from abroad. This includes commercial arrangements (procurements, buying of foreign companies), sending students overseas, recruiting foreign researchers, and the use of front companies posing as legitimate commercial entities. Additionally, the Chinese government operates a substantial cyberespionage capability that works to acquire strategic technology in targeted areas. Historically, this has included active participation by units of the PLA[12] as well as units of the provincial level State Security offices.[13]^,[14]

Labor and the flow of human capital is one of the top priorities for the PRC’s attempt to acquire foreign technology. In context, it is important to note that the PRC is heavily prioritizing indigenous capacity to produce these strategic technologies to eliminate reliance on foreign actors. In contrast to Russia, for instance, which is currently severely constrained by the impact of global sanctions, the PRC’s strategy of indigenization would serve as a buffer for the potential use of future restrictions by minimizing reliance from foreign nations, namely western states. Because of this desire for autonomy, the PRC has put more emphasis on acquiring the know-how over necessarily any one physical good; thus, recruitment strategies, such as the Thousand Talents Plan, are more prominent.[15]

While the flow of people is generally harder to manage than the flow of controlled goods, the strategy by the PRC does reveal the presence of “chokepoint” technologies. These technologies are ones that, in context, the PRC cannot independently produce yet and may be a hurdle to being able to indigenously produce a larger system. One such example is the use of interconnect technology for scaling supercomputers.[16] While the PRC can produce many of the pieces, they will not be able to indigenously scale up the supercomputers to those of western standards until they gain access to that interconnect processor and semiconductor technology. The upside to this is that while these technologies are often the target of Chinese technology acquisition attempts, they do provide insight into specific areas where the PRC is funneling its resources domestically and allow for more tailored mitigation efforts by western producers.

The China challenge is distinct from the Russia challenge, which is detailed below. In the case of Russia, more than 30 countries have implemented sanctions as a result of that country’s invasion of Ukraine. In the case of China, sanctions do remain in force since the Tiananmen Square incident in 1989 which includes a US, EU and UK arms embargo on the country. However, outside of those measures there are no internationally agreed prohibitions on exports to China. Instead, each country generally assesses potential transfers on a case-by-case basis. A significant number of transfers are stopped each year, but the number of stopped transfers is generally small in comparison to those that proceed. This approach means that China continues to be well integrated into the global economy. It also means that licit transfers can be as important to China as illicit transfers given that there is a good chance that any specific effort to acquire strategic technology through licit means could be successful. This is different from the Russia case in which it is more likely that licit transfers would be stopped. The resources required by countries and companies to conduct a case-by-case approach to managing trade with China is substantial.

Illustrative Case Study: German Engine Technology in PLA Ships Caption: Chinese warship in East China Sea[20]

 

An example that emphasizes how export controls can implicate strategic competition is Case Study 17, the 2021 discovery of German engine technology in warships of the Chinese navy. Two companies, MTU and a subsidiary of Volkswagen, the French branch of MAN, were implicated in a report by German media for the supply of marine diesel engines for the Luyan III class missile destroyers. MTU had also previously supplied engines for the Song-class of submarines.[21]

The media report also mentions the joint venture MTU had to produce engines in China until at least 2020. This further showcases how the PRC uses various methods of technology acquisition to secure strategic technology. The subsidiary of Volkswagen, SEMT Pielstick, also had previously on their website reported their manufacture of PA6 engines for a frigate fleet in China back in 2002.[22]

According to the companies, they are fully compliant with the dual-use designation requirements under German law. This alone highlights the need for due diligence beyond standard dual-use requirements. Legal compliance is not always enough to prevent all risks, such as reputational risks to companies from bad media coverage or national security risks from providing engines to China’s rapidly modernizing navy. [23] In addition to the Chinese acquisition of this German engine technology, the development of this case extends into 2022. In the spring of 2022, Thailand placed an order for Yuan-class submarines from China under the assumption that the German engine technology would be included.[24] The use of German technology in military equipment to the PRC is prohibited following the Tiananmen Square incident in 1989. Reportedly, since MTU’s refusal to send the engine to China, the construction of the submarine has been suspended.[25] While the PRC has offered to include their indigenous diesel engines instead, the Thai officials have rejected such an offer because the engines are not the same caliber as their German counterparts.

This section introduces the Russia STC challenge related to strategic competition. It outlines Russia’s general approach to strategic technology indigenization and acquisition including relevant case studies.

Russia is actively developing advanced military capabilities, novel weapons of mass destruction, cyberespionage tools, artificial-intelligence driven weapon systems, and a host of other technologies with military and strategic applications. Overall, based on past precedence, Russia can be expected to try to leverage every emerging technology that offers strategic advantage. That said, while Russia generally has strong research and development capabilities and a strong military industrial base through which to produce strategic technologies, the country lacks many of the prerequisite scientific and technical basis required for specific capabilities and is thus dependent on foreign-sourced technology, goods, and material in many areas. As a result of this, Russia leverages the tools of the state, and willing participants to acquire technology from abroad. This means the use of Russia’s intelligence services, but also Russian nationals inside and outside the country willing to collaborate. In practice this means that networks of Russian nationals are willing to open companies and front companies in the West to send technology back to Russia. These patterns of transfer have been consistent for years and are likely to only grow given the comprehensive export controls introduced against the country in 2022.[26]

Following the February 24^th 2022 invasion of Ukraine the United States, Europe, and major non-NATO partners such as South Korea, Japan and Taiwan jointly tightened export controls against Russia in technology sectors.[27] In practice this means national licensing authorities will not be agreeing to licenses of sensitive technology goods to Russia for the foreseeable future. These new controls, in combination with broad sanctions making financial transactions with Russian entities extremely difficult, forms what is in effect a partial economic blockade of the country. Russia’s leadership has acknowledged that their broader strategy of import substitution, which has been touted for years, did not achieve the intended goals. In a rare admission of failure, Russian dictator Vladimir Putin said at a May 26, 2022 meeting that “[domestic substitution] is not a panacea”.[28]

Russia has spent almost a decade investing large sums of money into projects for domestic substitution and development of emerging technologies with little oversight.[29] The strategy counted on Russia’s strong cadre of scientists and engineers being able to catch Russia up to the United States and China. This included everything from domestic semiconductor production to drones and quantum computers. Russia has made some progress in being able to manufacture more primitive drones and microelectronics , but government neglect[30] and a bad business climate[31] have limited[32] Russia’s technological potential and ability to manufacture at the cutting edge.[33]

In lieu of this, Russian top leadership has planned trade with Asia, as China in particular would serve as a reliable source of goods formerly imported from Europe. Based on available data, this plan has not been nearly as successful as President Putin and his close advisers had envisioned.[34] Fearing secondary sanctions and loss of the more important American market, there is evidence a significant number of Chinese companies have refused to continue their business within Russian entities.21 At present, there has not been a wholistic or systematic investigation of this across the Chinese economy. There are loopholes for Chinese companies that want to stay in the Russian market. For example, AliExpress, China’s ecommerce giant, has been able to stay in the Russian market by becoming a minority stakeholder in its Russian subsidiary and by claiming it does not do business with sanctioned entities.22 The Chinese government has given words of support, but has provided little to no material support based on available open sources.²³ 

The challenge posed by Russia is distinct from the challenge posed by China. Russia has a deep pool of strong universities and academic research centers that have been in place for a century. Rather than a rising country only growing further as a technological world power, Russia is attempting to provide its already world competitive science and technology base with the tools they need to succeed. The fear in Russian society caused by President Putin’s war on Ukraine has caused tens of thousands of Russia’s brightest minds to flee.[35]

To keep its scientific infrastructure stocked, Russia is reliant on foreign supply chains both licit and illicit.[36] This system will continue to operate, and has the potential to become more aggressive as the war forces Russia to rebuild military items.[37] The use of former Soviet republics such as Kazakhstan,[38] Kyrgyzstan,[39] Azerbaijan,[40] and Georgia[41] as transshipment points has become a point of concern.[42] These countries have accepted large numbers of Russians fleeing internal repression and looking for a connection to the outside world.[43] Invariably, these young states have limited capacity to monitor the myriad of informal and formal trade connections between their states and Russia.[44] Many of these countries are Russian allies and continue to be reliant on Moscow for their own economic and physical security.[45] Russia’s defense base, knowing the weaknesses of domestic production will continue to find it necessary to procure the components they need to operate from abroad. The former Soviet republics in the Caucuses and Central Asia are ideal locations given geographic, linguistic, familial and economic ties to Russia. Additionally, Russia can credibly threaten these countries in policy areas important to Russia and has done so since February 24th.[46] Indeed, as the following case study demonstrates, Russia is reliant on illicitly acquired goods for its strategic programs and Russia has built up a substantial apparatus through which to acquire western materials, goods and technology.  

Illustrative Case study: Chemical Weapons Supply Networks One instance that highlights the important role of international supply chains to Russia’s security apparatus is Novichok nerve agents. According to scientists who worked on their development, this family of agents were developed by Russia from the 1970s to the 1990s at least partially for the Ministry of Defense.[47] The same substances and have particular utility in relation to targeted assassinations carried out by Russia’s security services. The agents came to international attention in 2018 when Russian national Sergei Skripal was targeted for assassination with the agent . The UK has blamed Russia for the assassination attempt and open source investigations suggest a Russian military team was deployed in the UK to carry it out. The substance gained greater attention with the failed assassination of anti-corruption activist and dissident Alexey Navalny. That failed assassination was carried out by a team from Russia’s FSB. It is believed that the key entities responsible for Russia’s Novichok program benefited from the use of Western supply chains. A large number of companies, including Russian-connected companies in Germany and Switzerland acted as intermediary warehouses and fronts for the procurement of laboratory equipment and chemicals for entities sanctioned for their ties to Russia’s alleged chemical weapons program. Investigative journalists at independent Russian outlet Fontanka, and confirmed by CNS, highlight a number of linked these sanctioned companies to the Russian government and relevant entities linked to Russia’s alleged chemical weapons program.[48] Others, such as Riol Chemical, supplied chemicals to government contractors of Russia’s security services, specifically Russia’s Khimmed Group.[49] German investigators raided the offices of Riol Chemical in August 2022 as the company did not apply for the right to export the dual use chemicals.[50] Phone intercepts by German police allegedly caught company employees discussing strategies to hide the shipments. This included both using third parties to ship the goods and pretending that some were intended for Lithuania, a strategy the company previously used for illegally exporting special lab equipment to Russia.[51]

It is important to note that Russia’s technology acquisition approaches are likely to change following its invasion of Ukraine. Licit transfers of strategic items from nearly anywhere in the world are now unlikely. Instead, Russia is likely to rely even more heavily on illicit means and to turn to other malign economies to support its programs.

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[1] See for example, https://www.federalregister.gov/documents/2018/11/19/2018-25221/review-of-controls-for-certain-emerging-technologies

[2] See for example https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1867

[3] https://www.gov.uk/government/publications/notice-to-exporters-202217-military-end-use-controls-update/nte-202217-military-end-use-controls-update

[4]https://www.uscc.gov/sites/default/files/2019-11/Chapter%203%20Section%202%20-%20Emerging%20Technologies%20and%20Military-Civil%20Fusion%20-%20Artificial%20Intelligence,%20New%20Materials,%20and%20New%20Energy.pdf

[5] https://cset.georgetown.edu/wp-content/uploads/t0237_5th_Plenum_Proposal_EN-1.pdf

[6] http://www.gov.cn/xinwen/2016-03/17/content_5054992.htm

[7] “The 3^rd Five-year Plan (1966-1970),” China.org, http://www.china.org.cn/english/MATERIAL/157608.htm 

[8] https://cset.georgetown.edu/wp-content/uploads/t0237_5th_Plenum_Proposal_EN-1.pdf

[9]https://asiasociety.org/sites/default/files/2020-09/Weaponizing%20the%20Belt%20and%20Road%20Initiative_0.pdf

[10] https://www.state.gov/wp-content/uploads/2020/05/What-is-MCF-One-Pager.pdf

[11] https://www.nytimes.com/2013/02/19/technology/chinas-army-is-seen-as-tied-to-hacking-against-us.html?emc=na&_r=1&

[12] Ibid.

[13] https://www.justice.gov/opa/pr/four-chinese-nationals-working-ministry-state-security-charged-global-computer-intrusion

[14] https://www.justice.gov/opa/pr/chinese-intelligence-officers-and-their-recruited-hackers-and-insiders-conspired-steal

[15] https://cset.georgetown.edu/wp-content/uploads/t0237_5th_Plenum_Proposal_EN-1.pdf

[16] CNS HPC mapping report findings.

[17] https://www.justice.gov/opa/pr/chinese-national-sentenced-more-three-years-federal-prison-attempting-illegally-export

[18] Ibid.

[19] https://seawaves.com/?p=13221

[20] Image from: https://en.wikipedia.org/wiki/Type_052C_destroyer#/media/File:PLANS_Changchun_(DDG-150)_20180420.jpg

[21] https://www.dw.com/en/german-engine-technology-found-in-chinese-warships-report/a-59740301

[22] Ibid.

[23] https://www.theweek.in/news/world/2021/11/07/german-engines-powering-china-warships-eu-arms-ban-torpedoed-by-dual-use-tech.html

[24] https://www.thedefensepost.com/2022/04/13/thailand-chinese-submarine/

[25] https://eurasiantimes.com/thailand-rejects-to-buy-yuan-class-subs-china-german-tech/

[26] https://www.justice.gov/opa/pr/russian-agent-sentenced-10-years-acting-unregistered-russian-government-agent-and-leading

[27] https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/24/fact-sheet-joined-by-allies-and-partners-the-united-states-imposes-devastating-costs-on-russia/

[28] https://rg.ru/2022/05/26/putin-importozameshchenie-ne-panaceia.html

[29] https://www.youtube.com/watch?v=6dIjeUB51-s&ab_channel=%D0%90%D0%BB%D0%B5%D0%BA%D1%81%D0%B5%D0%B9%D0%9D%D0%B0%D0%B2%D0%B0%D0%BB%D1%8C%D0%BD%D1%8B%D0%B9

[30] https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain

[31] https://www.nytimes.com/2021/08/06/world/europe/russia-american-investor-calvey-sentence.html

[32] https://www.rferl.org/a/emigration_blues_russias_sixth_brain_drain/2294463.html

[33] https://www.themoscowtimes.com/2020/06/08/russian-investment-world-rocked-by-yet-another-criminal-case-a70507  

[34] https://www.aljazeera.com/economy/2022/4/1/for-isolated-russia-replacing-key-imports-an-uphill-battle

[35] https://www.nytimes.com/2022/04/13/technology/russia-tech-workers.html

[36] See case studies 23, 24, 25, 27, 28, 29, and 32.

[37] https://www.oryxspioenkop.com/2022/02/attack-on-europe-documenting-equipment.html

[38] https://archive.ph/x8voi 

[39] https://news.obozrevatel.com/economics/analytics-and-forecasts/visa-ot-kirgiza-kak-rossiyanam-pomogayut-obhodit-sanktsii.htm

[40]  https://tass.ru/mezhdunarodnaya-panorama/15071735

[41] https://news.obozrevatel.com/economics/analytics-and-forecasts/rossiya-obhodit-sanktsii-s-pomoschyu-gruzii-na-granitsah-vyistroilis-ocheredi-iz-fur-video.htm 

[42] https://www.kommersant.ru/doc/5380684?query=%D0%BA%D0%B0%D0%B7%D0%B0%D1%85%D1%81%D1%82%D0%B0%D0%BD

[43] https://www.rferl.org/a/russian-emigres-central-asia-ukraine-war/31883254.html 

[44] https://thediplomat.com/2022/07/russias-war-puts-central-asias-economies-in-a-difficult-position/

[45] https://abcnews.go.com/International/russian-troops-begin-leaving-kazakhstan-government-restores-control/story?id=82243668

[46] https://korrespondent.net/world/4487555-putyn-obydelsia-na-kazakhstan-y-nachal-torhovuui-voinu 

[47] https://thebell.io/razrabotchik-novichka-vladimir-uglev-partii-sostavlyali-ot-20-grammov-do-neskolkih-kilogrammov

[48] https://www.fontanka.ru/2021/03/05/69797849/print.html