Innovation and Antitrust in Competition with China

Commentary by James Andrew Lewis

Published April 29, 2024

Digital technologies and services are now at the center of economic activity. The technology responsible for such changes evolved rapidly and is complex. The internet and digital technologies eroded borders and sovereignty, complicating the task of rule-setting. Governments were unsure how to treat the new engine of growth and its advocates called for government to play a minimal role. The result was a degree of governmental paralysis. From the start, technology was lightly regulated, and this no-regulation approach continued even as technology grew in importance. But the appeal of light-touch tech regulation ended some years ago, and Big Tech now faces a wave of rulemaking.

The problems that call for regulation are protecting competition and privacy. There are clear anticompetitive practices. When a company can charge fees without facing market pressure on prices, there is harm. Competition is hampered by self-preferencing, as when a software company directs users to its unpopular search engine and not others. The charge is that a few companies have achieved such dominant positions in the market (because their products and services are often preferred by users, it should be noted), so they can exploit this dominance for anticompetitive advantage.

There is also clear damage to privacy, which has been largely eliminated by digital technologies. The business model of the internet is for its users to trade their data in exchange for online services. There is some appeal to this model as it requires no cash payment, and it is seamless and transparent. But companies collect immense amounts of data on those who use their services for data-processing on markets and trends, reinforcing competition problems, since competitors may not have the same access and often sell it to others. Users have no idea what is being collected, how it is being used, or who has access to it.

Some would also argue that anticompetitive behavior harms innovation and economic growth, but this assertion deserves a closer look. To date, many efforts to protect competition and privacy have provided more harm than benefit. The European Union, for example, protects its citizens' privacy but at the cost of economic growth. There is good evidence of harm to innovation, and it is reasonable to fear that overzealous or badly designed competitiveness policy will create similar damage.

Competitiveness and privacy are important and complicated issues, but do not pose the same national security and economic considerations as innovation and technological leadership. Innovation is the result of a complex mix of markets, entrepreneurs and researchers operating in a supportive governance environment. The United States has done exceedingly well at technological innovation, but so has China using a different, nonmarket, economic model.

One major difference is that the United States already leads in technological innovation. The United States, according to the Economist, is "the world's richest, most productive and most innovative big economy." Its "system" may not be perfect, but it is better than others. The arguments by antitrust assume that antitrust measures against Big Tech will improve innovation. This assertion remains hypothetical, since evidence of harm is lacking and the risk of damage from applying conventional remedies to an already effective system is considerable.

The counterargument is that the lack of competition harms the ability of the United States to innovate, but this harm is smaller than the harm that slows innovation in China and the European Union. Second, U.S. success in a politico-military competition with authoritarian states is by no means assured. China, using a variety of techniques (some licit, others not) seeks to dominate technology and the global economy. While the United States is still leading in innovation, adopting the wrong policies can end its lead.

Both China and the United States have advantages and disadvantages in this contest. China's increasingly stultifying political environment and its fraying relations with other leading economies are handicaps, but China remains an immensely attractive market for international companies, has a talented labor pool. Its government is focused on using technology to gain strategic advantage and is not shy about using subsidies and espionage to gain commercial advantage. Chinese technology is increasingly competitive. China's leader, Xi Jinping, is committed to restoring China to what he considers its rightful place at the center of the world stage.

Soon after China's World Trade Organization (WTO) entry in 2020, Chinese firms, supported by their government, sought to take dominant positions in key industries. China's industrial policy successes created risk to U.S. national interests as the nature of strategic competition has changed from which side had greatest quantity of twenty-first-century weaponry to which country was most innovative and led in key technologies.

While there is copious literature on how the United States is falling behind China in technology, a literature that goes back to the 1950s, the notion of a laggard United States is, frankly, suspect. The charge, however, is used to buttress calls for disruptive reform. The United States, while outperforming China in creating technology, faces problems that China does not. One is that there is a growing ideological dispute over how best to accelerate U.S. innovation. The focal point of this dispute is antitrust. Using precedents from the history of antitrust, advocates of this position say that Big Tech is slows innovation. To accelerate innovation, it should be disrupted, with the expectation that innovation would accelerate as a result. Unfortunately, this prediction of acceleration is unproven. The current innovation system in the United States is already outperforming others.

Disruption and Creative Destruction

The narrative for how antitrust contributes to innovation revolves around the idea of disruptive technology. The term was conceived in the 1990s and is derived from the internet's history. In this legend, brash, nimble innovators and their start-ups overpower sluggish corporate giants. Protecting "disruptive innovation" is a central aspect of an alternative innovation policy. Those holding this view believe that dominant firms engage in anticompetitive conduct to eliminate the threat of disruption, and this harms innovation. It is ironic that the disruptors of the start of the internet age are now accused of being sluggish giants. A case can be made that they are sluggish, but they also invest heavily in research and have developed investment strategies to gain access to innovation.

The dilemma is that a dominant firm may have a superior position in a tech contest because its technology is better. In the near term, it may exploit this dominant position for competitive advantage. In the long term, any risk to innovation is tempered by the appearance of new technologies that will erode any advantage, the way the search engine market is being reshaped by artificial intelligence (AI), but supporters of more aggressive antitrust measures fear that tech giants will use their power to block this change or monopolize the benefits.

Powerful economic theories underpin the case for disruption, beginning with Schumpeter's theory of creative destruction. Technological change is essential for growth as old firms and technologies are replaced by new ones. Creative destruction leads to change and long-term economic advantage. The question is not just whether the current giants stifle creative destruction. Equally important is the question of whether disruption will also create short-term disadvantages in the contest between the United States and China if its effect is to damage the most successful firms.

Competition is not a domestic issue nor one purely of economics. The U.S.-China competition is global, particularly as each side can offer competing products or services. In the near term, hurting Apple may help Huawei (and with it, Chinese intelligence efforts). Antitrust supporters argue that over time, the harm to Apple or others will be compensated by increased innovation from new disruptive competitors, but the near-term effect may be to provide an advantage to China.

The progressive antitrust argument rests on the assumption that there is currently harm to innovation rather than hypothetical loss and that disrupting the dominant company can also be done without disrupting the current innovation system. This gamble means that the United States might avoid harm as it disrupts its currently effective innovation process while China's firms are not similarly constrained. In an actual military conflict, this would be a remarkably bad idea, but while competition is intense, the United States is not in a direct military conflict with China. That makes the issue with disruption one of market leadership, whether China's firms would gain market share in supplying technology and services at the expense of hobbled U.S. tech giants in ways that cannot be later repaired.

The dispute over innovation and antitrust reflects differing philosophies on how innovation works in the United States. The Federal Trade Commission (FTC) and others often appear to accept the millennial idea of antiestablishment disrupters displacing stuffy corporations with new technologies that bring greater efficiency and better service and that the presence of tech giants now stifles this source of innovation. This was true at the dawn of the internet age but may no longer be accurate. The environment has changed since 2000, and major companies rarely now ignore technological change or slumber while disruption creeps closer. While there is still a degree of truth in "innovator's dilemma" narrative, there are also worrisome precedents-from the dot.com boom to cryptocurrency and AI hype. The prospects for mesh networking, a favored idea in research communities, as a disruptive alternative to the tech giants, is an example. Mesh networking is nonhierarchical, eliminating the role of what we can call "gatekeepers." While technologically feasible, mesh networking has never been widely adopted because of its complexity, one reason why new competitors to Twitter were unable to take advantage of that company's stumbles; what works on campus may not work in the market.

There are several tradeoffs to consider. One involves sustainability. Most start-ups fail. A tolerance for failure (and risk-taking) is a strength of the U.S. innovation system, but investors would be pleased if even 30 percent of the new companies succeeded. Trading established companies with adequate performance for potentially more innovative start-ups whose success is uncertain creates risk and cost in a competition with China.

One solution that encourages innovators and entrepreneurs to take the risk of failure has been to allow them to be bought by larger, established corporations. In some sectors, like defense, buying innovative start-ups is a primary source of innovation. Two decades ago, when the United States was more comfortable with the lead, it and its allies had over China in technology, dismantling the current innovation system in pursuit of hypnotical gains may have been a tolerable risk, but that is no longer the case. That means the FTC and Department of Justice (DOJ) antitrust effort need to be subsidiary to larger strategic concerns and made as part of decisions on national security, particularly as some actions (such as blocking acquisitions and partnerships between start-ups and big tech firms) will likely have a chilling effect on the U.S. innovation system.

Another tradeoff is possible future gain in exchange for potentially immediate loss. There is good research on how antitrust measures can increase innovation, but the effect is not immediate. This makes competition different from early antitrust episodes (Standard Oil or AT&T) in that the issue is not purely domestic, the United States cases an aggressive competitor, and there is risk that in the time it would for the U.S. innovation system to recover from antitrust action, China would pull irreversibly ahead. This kind of irreversible loss of position has been an element of industrial competition among great powers since the 1900s and must be avoided.

A powerful counterpoint to antitrust measures can be found in the actions of the European Commission. Europe, despite strong research capabilities and an energetic (if often frustrated) entrepreneurial culture, is not an innovation powerhouse and lags far behind the United States and China. The FTC and DOJ have worked with the European Commission in developing antitrust policies and regulations, but an attempt to align or transplant Brussel's regulatory culture to the United States creates a significant risk of damage to U.S. national security and the ability to innovate and create new technologies while providing an advantage to China. The United States must decide if it is willing to take a large gamble-that reassembling its innovation machine during an international competition can be done without loss.

Acting against harm to privacy or ending self-preferencing are essential, but discounting the contest with China (as many antitrust initiatives seem to do) or arguing that any risk to innovation can be compensated in a timely fashion by the unproven benefits of disrupting tech giants may reflect a degree of hubris. U.S. foreign policy has been scarred in this century by hubris. There may be a similar degree of hubris in our approach to tech competition with China and antitrust. The argument that there is some set of changes that promise hypothetical improvements and that "disrupting" the successful U.S. innovation machine in mid-race can be done without risk in the current politico-military contest is quite a gamble. The antitrust question is not simply one for lawyers and businesses; it is now over industrial policy and national security, and these should take priority.

The central question is whether the United States needs national champions for a military competition with China or, conversely, whether it should harm any de facto national champions during that contest. The answer to the latter question is clearly no. A strong case can be made that de facto national champions do not give other nations an advantage in competing to innovate. If one assumed, optimistically, that there is ample time to dawdle in this contest with China, Russia, Iran, and others, antitrust advocates might have a point; but if one assumes that the risk of great power conflict is greater than it has been in decades, now is not the time for an experiment in legal theory. If predictions of "Peak China" have any merit, and if the United States can avoid a clash in the years it will take China under Xi to decline, it can later afford testing antirust policy some years from now, but not at the moment.

James A. Lewis is a senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, D.C.

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