Digital Economy Dispatch #149 -- The Drive for Digital Dominance in the Digital Cold War

The Drive for Digital Dominance in the Digital Cold War
17th September 2023

I’ve never owned an iPhone. Or a Mac, come to think of it. Apple products have never been my thing. Even so, it’s hard to be anything but impressed by the way Apple have maintained appeal for their products over more than 30 years to become a $3 Trillion company. So you know something is up when the latest release of an iPhone is upstaged by a rival announcement by a Chinese equivalent from Huawei. Some even described the iPhone 15 as “disappointing” and “underwhelming”. Along with a Chinese government ban on iPhone use by government officials, over 2 days Apple saw a 6% drop in its stock price (equivalent to a loss of over $200 Billion).

Seen in isolation, this kind of thing is not what you’d expect. However, what’s happening is perhaps more readily understood if we see it as just the latest event in a bigger drive for digital dominance that is taking place around the globe today. As the role and influence of digital technologies grows in every aspect of our lives, it seems inevitable that their ownership, focus, and control have become central within a much broader geopolitical context. From computer chips to mobile phones, over the past few years the questions about who benefits from their design, supply, and use have become more urgent. Now adding to this wave of digital technology nationalism is increasing recognition that AI will be a critical component of this digital transformation. Leadership in the key aspects of AI research has been added to the list of critical technologies.

Chip Wars

Why does this matter? Let’s take the recent clashes between the US and China over the supply of computer chips as an example. The so-called “chip wars” that are now taking place is a recognition of the importance of semiconductors and related products in everything we do. Through a series of new laws, export controls and investment strategies, the US and China are finding ways to advantage their own nations’ digital transformation efforts, particularly as it relates to high-powered semiconductors and their related products. For example, it has led to initiatives such as the CHIPS and Science Act in the US, legislation that provides over $280 Billion in new funding to drive domestic research and manufacturing of semiconductors in the US.

We are all aware that the digital revolution is fundamentally grounded in the availability of cheap, high quality computing capability. Without a ready supply of chips, this would be impossible. Something we experienced only too recently. During 2020 and 2021, interruptions to the supply due to the impact of Covid and extreme weather conditions led to problems across a very wide set of application domains. Delays and cancellations became commonplace as chip shortages caused car factory closures, laptop scarcities for remote office workers, and long supply chain delays for manufacturers of every kind of smart product from toasters to thermostats.

With the role of AI ramping up concerns about the criticality of digital technology to the US and China, events such as the launch of Apple’s new iPhone and Huawei’s rival offerings take on broader significance. They must be viewed through the lens of ongoing tensions between China and the US that highlight several critical aspects of the impact of digital technology on geopolitics, trade, and national security:

• Technological Competition as Geopolitical Power: The rivalry between China and the United States over semiconductor technology illustrates how digital technology has become central to national power and influence. Semiconductors are the foundational components of modern electronics and critical for various industries, including defence, telecommunications, and the automotive sector. As a result, control over advanced digital technology is viewed as a source of strategic advantage.

• Supply Chain Vulnerabilities: The chip wars have exposed the vulnerabilities in global digital technology supply chains. Many countries, including the United States, have become increasingly concerned about their reliance on foreign suppliers, particularly in light of disruptions caused by events like the COVID-19 pandemic. This has led to calls for reshoring access to digital skills and knowhow, and increasing domestic production capacity.

• National Security Concerns: Lessons from conflicts such as those taking place in Ukraine demonstrate the crucial role of digital technologies in the functioning of military and defence systems. As digital technology becomes more integrated into military operations, securing the supply of advanced digital technology has become a national security imperative for both China and the United States.

• Economic Implications: Digital technology supply and access have significant economic implications. Sectors such as the semiconductor industry are major drivers of economic growth and innovation. Both China and the United States are investing heavily in research and development, as well as infrastructure, to bolster their digital technology sectors. From semiconductors to AI systems, the competition is not only about national security but also economic leadership.

• Innovation and Research: The competition between China and the United States in digital technology underscores the importance of investments in innovation and research. Both countries are investing in pushing their research and development, including university research activities, to stay ahead in many aspects of digital technology. This has significant implications for their national research strategies, education programmes, and broader skills initiatives.

• Technological Decoupling: These concerns have inevitably contributed to discussions about technological decoupling across nations, where countries reduce their dependence on each other's technologies to enhance their strategic autonomy. While this can lead to more self-reliance, it is also inevitably disrupting global innovation and cooperation.

Stronger Together

The impacts of the drive for digital dominance affect all of us in different ways. One of the consequences of this struggle has been a push by several countries to accelerate their investments in digital technology research and development in order to ensure their national interests are maintained. While this has many positive implications for local research advancement, such as the additional $250 Billion from the CHIPS Act, it also has more worrying implications for wider data sharing, integration, and cooperation across the globe.

A recent HBR article described this struggle more broadly as a "Digital Cold War," aimed at gaining advantage in the deployment of digital technology. It points out that for China, upgrading its digital capabilities and capacity has been a major focus for some time. Now, AI is identified as the most decisive technology in this competition due to its disruptive ability to rapidly transform society. As a result,  in the opinion of some groups, China is now ahead of the US in many of the key areas of AI. A view that was confirmed recently by Nicolas Chaillan, the Pentagon's first chief software officer who resigned in protest against the slow pace of technological transformation in the U.S. military.

In response, the HBR article argues that democratic nations must prioritize collaboration and transformation over competition and disruption in the AI field. In particular, data sharing and international collaboration in AI development is stressed. As the article points out, AI's power depends on aggregated data, and countries that work in isolation with restricted data flows will not maximize the potential of the technology. International coordination is essential to unlock the world's collective knowledge and capabilities. Such alignment requires coordination on the tenets of responsible innovation, collaboration between private actors and government institutions, and strong governance to address the potential risks of AI to ensure AI's positive impact on society and democracy.

Yet, cross-nation alignment and cooperation in this area does not come easily. Many different groups are looking at ways to make this happen. It requires significant attention to bring together many aspects that must be coordinated, from procurement and acquisition regulations to shared data agreements and standard operating models.

Looking Forward

In this era of digital transformation and global competition, the pursuit of digital dominance has unveiled complex challenges and opportunities. From the recent Apple-Huawei rivalry to the "chip wars" between the US and China, it's evident that digital technology has become a linchpin of geopolitics, trade, and national security.

These dynamics underscore the importance of collaboration, particularly in the realm of AI. Recognizing that AI's power hinges on shared knowledge, it is imperative that nations work together to prioritize international cooperation and data sharing. The path forward demands responsible innovation, public-private collaboration, and robust governance to ensure AI's positive impact on society and democracy.

Cross-nation alignment and cooperation are not without obstacles, but they are essential for unlocking the collective potential of this transformative technology. Together, we can navigate this digital landscape and harness its benefits for a brighter future.