Apple announced this week (0) that it was opening a new data storage center in Guizhou, a province in southwest China. The move was in response to (1) strict new rules (both sweeping and vague) in China’s newly enacted cybersecurity law. Under the law, companies must store Chinese citizens’ data in China and agree to other onerous and potentially anti-competitive restrictions (see below). The point made here is that Apple’s knuckling under is just another step in a slow but steady drive by Beijing to implement its Made in China 2025 program that aims to replace foreign technology companies and capabilities — often American — with Chinese alternatives. A top priority for the Trump administration — no matter how relations with China work out on North Korea — should be to address with dispatch China’s relentless, market-closing strategy, particularly in the information and communications technology sectors that underpin internet-related goods and services.
To be clear, Apple’s move in China must be viewed also as part of a worldwide trend in which internet companies — for technical reasons and for political decisions based on national sovereignty and data security pressures — have begun investing in data centers in big, important markets, including Germany, the Netherlands, and France. The conditions imposed by Beijing, however, go well beyond the national strictures in other countries. For instance, to offer iCloud services Apple will be forced to partner with a Chinese company — in this case Guizhou-Big Cloud Big Data Industry, which is actually owned by Guizhou province. That partner will manage the operations of the center and handle any requests from the government. Aware of customers’ worries over the new arrangement, Apple immediately announced (2) that it would retain control of encryption keys for the storage facility and that the Chinese operators would not have access to documents stored in the cloud without Apple’s permission.
While Apple will keep the encryption keys, the company will not be able to transfer the data of Chinese citizens out of the country without complying with new procedures. Further, the company, along with other foreign corporations handling large amounts of data, will be subject to annual security reviews (3), the details of which are unclear, but which could result in blocking the export of indeterminate security-related economic, scientific, and technological data. Within the same legal framework, Apple could be (4) forced through an expedited process to give up data that allegedly threatens Chinese national security.
Left alone, without support from the US government, Apple potentially has a lot to lose under the new regime. It is by far the most successful foreign tech company operating in China. China is its second largest market after the US, accounting for more than 20 percent (5) of annual revenues. Despite its commitment to invest (6) $1 billion in China-based research, the company has been subject to arbitrary actions taken by Chinese officials. For instance, Chinese regulators last year suddenly blocked (7) Apple’s iBooks Store and iTunes Movies, and last December, Apple was forced to remove a news app created by The New York Times from its app store.
The rapidly deteriorating competitive climate for US and other foreign corporations in China makes it urgent for the Trump administration to meet Chinese state-capitalist protection head on — and quickly. At the glamorous and largely vacuous Mar-a-Lago US-China Summit in April (8), President Trump and Chinese President Xi Jinping agreed to a 100-day plan to address outstanding economic and security issues between the two countries (only US beef and Chinese cooked chickens benefited). They also established a series of dialogues, including the US-China Comprehensive Economic Dialogue, which is chaired by Treasury and Commerce Secretaries Steven Mnuchin and Wilbur Ross and Chinese Vice Premier Wang Yang. The first meeting (9) is in Washington next Wednesday, July 19. Mnuchin and Ross should use this vehicle to convey to Beijing that the US will not allow its companies to be systematically saddled with protectionist regulations in the Chinese market.
Further, as I have argued previously (10), the US should stand ready to invoke an increasingly strict reciprocity. Large state-backed Chinese information and telecommunications will no longer be allowed to compete in the United States unless US companies are granted equal access and privileges in the Chinese market. Ultimately, it may take a policy hammer to convince Beijing that the US finally means business. If so, it is time to wield the bludgeon.