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Preventing U.S. Industry’s Exploitation by China’s “Military-Civil Fusion” Strategy

Note:

Below appear the remarks Assistant Secretary Ford delivered to the U.S. Chamber of Commerce via video teleconference on April 2, 2020.  They may also be found on the website of the State Department's Bureau of International Security and Nonproliferation.

Good morning, everyone, and thank you Jeremie [Waterman] for hosting. This is my first Zoom teleconference, and it’s great to be able to continue to interact with industry leaders during this terribly challenging global pandemic that has now crippled so much of the world. I’m glad you’re all participating, and very pleased to be able to talk to you today.

Secretary of State Pompeo has been leading the charge in drawing attention to the formidable challenge we face from the strategy of “Military-Civil Fusion” (MCF) being pursued by the People’s Republic of China (PRC).

As I myself emphasized after coming to the State Department in 2018, MCF presents us with a qualitatively new problem. Under that strategy — in place for some years now but currently being accelerated with special vigor by the Chinese Communist Party (CCP) under Xi Jinping — the PRC has been systematically removing all barriers between China’s civilian and military sectors in order to ensure, inter alia, the now-routine diversion of advanced technology from civilian entities to the People’s Liberation Army (PLA) and the Chinese security services. MCF also involves whole-of-system efforts to acquire advanced technology abroad by means both fair and foul, which is intended to fill gaps in Beijing’s indigenous capability to equip China’s civilian and military sectors for complete self-sufficiency, and later dominance.

It’s been my impression that after many years of complacent enthusiasm about the near-term potential for profits in the Chinese market, Western firms are beginning to wake up to the ugly fact that for certain critical industries, the PRC’s objective — illustrated by, but not limited to, its infamous “Made in China 2025” strategy — is not to have its firms engage with the West in long-term, mutually beneficial relationships. Instead, it is quite clear now that the point of the PRC’s economic strategy for these industries is instead to engage with cutting-edge Western companies only for so long as is necessary to learn how to do what they do, thereafter turning the tables and crushing those companies in the international marketplace with state-subsidized competition. If you want to see the PRC’s emerging playbook for that effort, look no farther than the civil nuclear reactor business — though there are others. But the problem is a long, long way from just being an economic challenge.

MCF is a core element of the CCP’s work to advance its broader geopolitical agenda of strengthening the PRC’s national power and role in the world, with the aim of achieving the CCP’s dream of seizing the leading role in world affairs by the 2049 centenary of the founding of the People’s Republic of China. As Xi Jinping has himself made clear with his vision of the so-called “Strong Military Dream,” the PRC aims to have a military with capabilities superior to any other in the world by mid-century. MCF’s technology acquisition and diversion to military purposes is critical to this agenda, inasmuch as Chinese strategists see the purchase and theft of cutting-edge Western knowledge as essential to the PRC positioning itself on the leading edge of what they expect to be a “Revolution in Military Affairs” driven by the application of Artificial Intelligence (AI) to next generation warfighting in what they call “intelligent warfare.” “Intelligent warfare,” it is predicted, will rely on big data analytics, advanced semiconductors, quantum computing, 5G applications, and machine learning – among several other technologies – and will be applied to aerospace, aviation, civil, and military nuclear technology and autonomous systems in ways that could forever change the way wars are fought and the hierarchy of geopolitical power.

Naturally, all of this this gives both Western governments and Western companies powerful incentives to open their eyes to these threats and start taking effective countermeasures to prevent our technology and intellectual property from being diverted to the Chinese Communist Party’s agenda of developing next-generation PRC military and indeed geopolitical dominance. As Secretary Pompeo has noted, MCF’s

“goal is to ensure that the People’s Liberation Army has military dominance. And the PLA’s core mission is to sustain the Chinese Communist Party’s grip on power – that same Chinese Communist Party that has led China in an increasingly authoritarian direction and one that is increasingly repressive as well. … [W]e need to make sure that our companies don’t do deals that strengthen a competitor’s military or tighten the regime’s grip of repression in parts of that country. We need to make sure American technology doesn’t power a truly Orwellian surveillance state. We need to make sure American principles aren’t sacrificed for prosperity.”

This is most emphatically a national security threat as well as an economic and trade problem.

I’ve spoken extensively about the nature of the threat with which MCF confronts us, and about the peculiar challenges it presents for U.S. and other Western national security export controls, but it’s worth re-emphasizing. With the PRC blurring the distinction between its civilian and military sectors, and the CCP’s ability to compel any civilian entity to support MCF, if any given technology ends up in the hands of anyone under the PRC’s jurisdiction, it can and will be diverted to the PLA or the security services if they want it.

Clearly, this makes administering export controls vis-à-vis the PRC much more challenging — which is why we in the United States government are engaged in a wholesale reassessment of the nature and scope of our controls, which began with our reform of nuclear export controls to restrict the provision of cutting-edge civil-nuclear technology in October 2018. Critically, we learned from our experiences from 2014 through 2018 that the PRC is looking at technology, and applying it to military programs, in ways that we had not previously considered – and we realized that we needed to react appropriately. This example should point all of us to the need to learn such lessons much more broadly.

But since I have the pleasure of speaking to the Chamber of Commerce today, I’d like to stress an additional — and absolutely critical — piece of how we in the West must respond to the MCF challenge: the role of American private industry as partners in preventing U.S. firms from being exploited in the service of the CCP’s global ambition.

To be sure, not all of you do business in China or with PRC entities. My message to all of you, however, is that MCF is a full-spectrum challenge. We must understand this, and we must meet this challenge on a number of fronts. It is not just a problem for Western firms that face technology-transfer demands when working in China or engaging with PRC entities, nor just a problem of securing one’s own enterprise against the PRC’s systematic industrial espionage and cyber-facilitated intellectual property theft.

Under the auspices of MCF, for instance, great emphasis is placed upon means of technology access and acquisition that are simultaneously overt and clandestine — in the sense that they involve open engagement with Western technology-holders by persons or entities who may appear to be legitimate, but who are in fact deliberately working to support MCF programs. PRC defense sector entities, for instance, can and do offer stipends to civilian students, scientists, and technicians when they go abroad, with the understanding that MCF-targeted technologies with which these persons come into contact when working or studying in the West will thereafter be made available to those defense firms back in China. Quite a few efforts also exist — including the notorious “Thousand Talents Program” — to build quiet collaborative relationships with Western entities and individuals in cutting-edge fields that are of interest to MCF planners. Such collaborations are sometimes quite legal, but may also be deliberately opaque, so as to obscure the conflict-of-interest and research integrity challenges they present in Western industry and academia.

PRC entities have also gotten quite good at gaining access to Western technology through means intended to work around long-established U.S. procedures for screening corporate acquisitions for national security implications — such as through the Committee on Foreign Investment in the United States (CFIUS). To avoid CFIUS strictures, PRC entities in MCF-targeted fields have used new ways to gain access to Western technology, such as through joint ownership schemes or venture capital investments in cutting-edge start-ups. (We are implementing regulations under a law passed in 2018 designed to address some recognized gaps in CFIUS jurisdiction, but this whole area is an ongoing “whack-a-mole” challenge.)

Sometimes the linkages are simply hard to see. In 2014, for instance, a company that provided important components to the nuclear propulsion program of the UK’s Royal Navy was purchased by a respectable Italian company in which a PRC company had a 40 percent ownership share. That Chinese company just happened to be in the business of working on floating nuclear power plants to provide power to the archipelago of constructed islands with which Beijing is colonizing the South China Sea – and floating nuclear power plants, moreover, based upon naval nuclear reactor designs. Such multi-link chains of potential access are hardly coincidental, of course, but they can sometimes be difficult to see ahead of time.

Military-Civil Fusion involves systematic efforts to do all of these things, and more. By design, therefore, it can be difficult for the PRC’s Western technology targets to ascertain whether their partner is a “true” or “purely” civilian economic actor or whether that partner is there at least in part on behalf of the MCF apparatus.

Because Chinese laws require cooperation with the security services moreover — and because the entire power of the PRC security apparatus lies behind MCF — it is also easy for the CCP to co-opt or coerce entirely legitimate civilian entities into cooperation after the fact, once they have gained access to Western technology. Your Chinese partner may have had the best of purely commercial intentions when your cooperation began. But it is clear that if the CCP wants your technology your partner will be required to provide it.

MCF, launched in 2009 and elevated to a national-level strategy in 2014, is an effort that Xi Jinping now personally oversees. Under our system of rights-based liberties and democratic self-government in the United States, we cannot force citizens to transfer technology to the Pentagon or the CIA, but such compulsion is both easy and routine for the CCP in the PRC.

This is why I am so keen to talk to you today. My impression is that U.S. industry has become quite good, over the years, at developing sophisticated “know your customer” (KYC) practices that help American enterprises avoid entanglement with money launderers, drug dealers, sanctions evaders, proliferators, and other such dangerous actors. This is done for very good reasons, as it’s well understood that involvement with such entities represents an important potential source of business, legal, and reputational risk that due diligence can help avoid or mitigate.

Given what is now known about the national security implications of the PRC’s MCF strategy, I’m here to suggest that it’s time to begin to expand our concept of KYC vetting to include helping protect U.S. businesses, the U.S. economy, and indeed America’s future national security from the systematic technology-transfer and military diversion threats represented by the Chinese Communist Party’s MCF enterprise.

I cannot offer you a fool-proof recipe for how to meet this challenge. These answers can only be found through a partnership in which U.S. industry and government develop good approaches together over the months and years ahead — and in which we compare notes and share “best practices” with other stakeholders, so that we can evolve global “coalitions of caution” that protect against these threats while not stifling economic vibrancy and the many benefits that can still be had through prudent engagement with China.

I hope that my remarks today will help catalyze more conversation about these challenges and creative thinking about MCF-related de-risking. We need such creative thinking to help all of you prosper in the face of PRC competition and to help our country prevent the kind of geopolitical eclipse that seems to be envisioned for it under the CCP’s MCF and “Strong Military Dream” strategies.

So I offer you today both a wake-up call and an outstretched hand. We need to meet this challenge together, and on behalf of the U.S. Department of State, let me say that we are looking forward to working with all of you.

Thank you.

-- Christopher Ford

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