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America Needs Big Tech to Beat Big China

America Needs Big Tech to Beat Big China

May 10, 2024

Over the last few years Washington has become laser focused on the threat from China, including as a formidable competitor in a host of advanced technologies. Congress responded with key legislation, including the CHIPS and Science Act, and the Biden administration has pushed for export controls on semiconductors and related technologies and increased science and technology spending. However, there is a growing realization that the U.S. debt and budget deficit are approaching crisis mode, as Chase CEO Jamie Dimon has recently warned. As such, the battle going forward is likely to be mostly between U.S. firms acting on their own against competing against Chinese companies backed by the deep pockets and heavy hand of the Chinese Communist Party.

So, how should U.S. policy, particularly antitrust, treat large, sophisticated, and powerful technology firms, given this new fiscal reality? On one side are those who argue that breaking up or taking other aggressive antitrust actions leading U.S. technology companies will only strengthen China’s hand by enabling its companies to compete against hobbled U.S. technology corporations. The argument goes that big American companies, who have the revenues to fund R&D and other investments, will weaken, if not crumble, if the antitrust cudgel is applied to them, as many have in the past under similar antitrust enforcement.

On the other side are the anti–big business, neo-Brandeisians and their leader, Federal Trade Commission Chair Lina Khan. Khan and her allies seek to transform the U.S. economy into one that is dominated by small and mid-sized firms—or, in industry sectors where scale economies or technological complexity makes that impossible, into one that is operated or heavily regulated by government.

To date, the neo-Brandeisian movement has made astounding progress, albeit not so much by winning actual antitrust cases, because courts have repeatedly held the FTC to account on matters of the law, but in successfully convincing a large share of policymakers and others that big corporations are the problem. Put bluntly, if you say “monopoly” frequently enough, people will start to believe it. Indeed, many now believe that America is mired in a monopoly crisis that is killing small business, suppressing wages, fueling inequality, and harming innovation—even though all of those claims have been shown to be wrong.

Impervious to these analytical critiques, neo-Brandeisians face only one remaining intellectual hurdle to achieve their goal of a remade American economy: the argument that breaking up or shackling America’s large technology multinationals will be handing Chinese President Xi Jinping a present wrapped in a bow.

Knowing that this truth is the movement’s Achilles’ heel, they have recently begun a campaign to discredit this argument. The most recent entrant in the battle was Lina Khan who launched a counter strike with a recent speech at the Carnegie Endowment and an article in Foreign Policy. After raising some anecdotal horror stories supposedly caused by monopoly (for example, a largely government-funded black powder factory that exploded) and blaming monopoly—rather than Chinese competition, of course—for the fact that the United States didn’t produce enough masks and personal protective equipment during COVID-19, she goes for her key point: “To stay ahead globally, we don’t need to protect our monopolies from innovation—we need to protect innovation from our monopolies.”

At first blush, it would seem to be a compelling argument. Khan asserts that past antitrust actions to break up or weaken American technology leaders actually spurred more innovation. It’s as if she sees the rotting corpses of big technology companies killed by the Justice Department and the FTC as providing the rich compost in which an array of new technology startups can sprout. Of course, these if these startups get big, as Google and Meta did, they too will likely face antitrust action and be crushed and recycled to provide fertilizer for the next generation of innovative startups.

But there are two key reasons why Kahn’s narrative that breaking up big technology companies will help, not hurt U.S. competition with China are wrong. First, it’s not true that past antitrust efforts attacking large American tech corporations were a resounding success. In fact, they did considerable harm. In the 1950s, RCA was the largest consumer electronics firm in the world—the Huawei of its time—created by the U.S. government to ensure U.S. independence in radio technology. However, when the DOJ forced it to give away all of its patents for free, the result was in fact more competition—not from other U.S. companies, but from Japan, whose electronics companies reaped the benefits of a cornucopia of leading-edge technology from RCA.

Likewise, when the DOJ pressured AT&T’s Bell Labs to license its transistor technology to other firms for a trifling sum, they did—including to foreign competitors like Siemens and Ericsson, which then enjoyed a leg up over American competitors. Moreover, the demise of Lucent was caused in no small part by a long string of aggressive antitrust actions against Western Electric (its predecessor).

Indeed, the break-up of AT&T, commonly cited by neo-Brandeisians as an example of a good break-up, led to the decline of Bell Labs (once the world’s leading research laboratory) and similarly allowed foreign companies to dominate the global telecom equipment market. Similarly, when DOJ sought to break up IBM into separate mainframe and small business system companies, IBM leadership became timid and took their eye off the competition. The result: By the late 1980s, the idea that IBM needed to be broken up was laughable. Today, the company is a shadow of its once-gigantic self.

Neo-Brandeisians conveniently ignore the fact that the United States was dominant in technology in the 1950s and 60s before antitrust authorities took a sledgehammer to the country’s leading technology firms. But the evidence is clear: Rather than spurring innovation, attacking America’s technological leaders has enabled European, Japanese, and now Chinese firms to succeed.

Neo-Brandeisians also argue that it was the DOJ’s actions against Microsoft enabled today’s tech giants to emerge. In truth, when the settlement was finally approved in June 2004, it included minor but still helpful actions such as requiring Microsoft to provide third-party developers information about its application programming interface. But that had little to do with the emergence of large tech platforms. By the end of the year, Google had already gone public, Amazon had beta tested its first cloud offering, Apple had begun work on the iPhone, and Facebook had been founded.

Which brings us to today. As the Biden administration implements the CHIPS and Science Act and takes other actions to avoid losing more technology leadership to China, one thing that is no longer on the table are big subsides of the kinds China showers on its companies. The CHIPS funding was a one-time affair, because our massive national debt will require budget austerity as far as the eye can see. Moreover, the challenge goes far beyond semiconductors, as China, as a share of GDP, produces twice as much value added output in advanced industries like electronics, machinery, and computers as the United States.

This means policymakers need to rely on U.S. companies’ own efforts to fund the truly massive levels of R&D needed to beat China’s state-backed technology leaders. Of the top R&D spenders in the world in 2021, five were American tech companies (Amazon, Alphabet, Meta, Microsoft, and Apple), and the other was Huawei. These five firms invested more in R&D than the top 81 Chinese-owned firms combined, with Amazon by itself investing more in R&D than the total amounts spent by Canada, France, or Italy. And yet these are the firms Khan (and the EU) is so aggressively seeking to cut down to size.

As important as entrepreneurial tech firms are to the U.S. innovation ecosystem, the reality is that many are sitting ducks for Chinese technology predation because they lack scale and deep pockets. As such, the sooner U.S. policymakers realize that in the ongoing techno-economic competition with China, a key component of America’s arsenal of democracy is its large, highly innovative technology firms, the better off we will be. But alas, if we go down the neo-Brandeisian “Big is Bad” path, all Xi Jinping may have to do is wait.

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