October 4, 2021 | What next for US relations with China and the EU? In this issue of The Institutional Risk Analyst, we speak with Dan Caprio, Co-Founder and Chairman of The Provident Group. Dan is an internationally recognized expert on privacy and cybersecurity and a close observer of commercial relations with the EU. This focus on the US-EU trade and political relationship necessarily requires a focus on China as well.
The IRA: The New York Times just published the review of “Red Roulette: An Insider’s Story of Wealth, Power, Corruption and Vengeance in Today’s China” by Desmond Shum. The book describes a nation of 1.5 billion souls who are being held hostage by a criminal gang called the Chinese Communist Party. And the CCP will do anything to maintain power.
Caprio: The CCP is potentially our secret weapon. Serious people are beginning to take a look at the implications for the reassertion of communist ideology in China, but the CCP is about to kill the goose that lays the golden eggs in economic terms.
The IRA: Many in the west see Xi Jinping as a transformational leader, but all they’ve done since the opening under Deng Xiaoping four decades ago is import a lot of foreign capital, spend even more cash on economic disasters such as “Belt & Road,” and incur a huge pile of debt. We’ve been watching a financial implosion in China for years led by HNA, Anbang Insurance and now Evergrande, so the reassertion of CCP control was almost inevitable.
Caprio: In some respects, we should not be surprised by what Xi is doing. Look at the way he has imposed draconian control over big tech, which a year ago was leading the charge for China around the world. All of this regulation and “data protection” is being done under the rubric of the “common prosperity,” but state control over data and technology is a very big part of the new policies.
The IRA: Perhaps the moves by Xi to reassert party orthodoxy is not surprising, but it is also very sad. The economic prospects of China are driven by the private sector. The state sector only consumes value. Over the past 40 years we have gotten a taste for what China could do economically were it a free society. The protests in Hong Kong, the issue of data security vis-à-vis the US, and then COVID seemed to provide the pretext for Xi to clamp down on private political and economic freedom. You spend a lot of your time in the world of global data and security. What is next for the US and EU when it comes to China?
Caprio: It seems that Xi finally decided that the private sector had become too powerful. From a party perspective, he perceived it as a threat to his power so he stepped in. Finding common ground with the EU on China will be a challenge since the Europeans don’t want to be forced to take sides and they are sensitive to not ganging up against China in public.
The IRA: During his entire career, Xi has been very adept at destroying his political rivals. When the Honk Kong pro-democracy protestors came close to tipping over the local government, that seemed to force his hand. The big tech bosses could have posed an even greater threat. But as the old Maoist saying goes, “Political power comes from the barrel of the gun, and the Party shall never be subject to the gun.”
Caprio: The CCP perceived the business sector had become too powerful so they cracked down. The Chinese are very good at coming up with reasons for these changes. It will be interesting to see how this plays out.
The IRA: Interesting is one way to put it. If Xi believes that an independent Taiwan is also a threat, then we may see a move against the island. Military action in the Taiwan Strait could threaten the world’s access to semiconductors, both processors and memory. That becomes a global and common threat to the economies of both the US and EU, since neither has any significant manufacturing capacity in commodity silicon chips.
Caprio: Much of my work over the past several decades has been trans-Atlantic privacy, trade and cyber security. Now we must pivot to deal with a host of issues coming out of China and Asia more broadly. The stability that was assumed in relations with China has now largely evaporated. The US and EU need to work together on China and not just because of shared values like democracy and freedom. Our eyes are wide open when it comes to the risks from China, especially a China that is an increasingly repressive and authoritarian at home.
The IRA: So then, what do you tell your corporate and financial sector clients? Will there be closer cooperation between the US and EU over China issues?
Caprio: The EU was obviously relieved by the outcome of the US elections last November. The EU was ready to go with a plan for a new Trans-Atlantic agenda, at least in part to have a common approach to China. Part of that included the creation of the Trade and Technology Council (TTC), which is intended as a vehicle for renewed Transatlantic cooperation. But the reality is that it is very difficult to stand up a new organization and make it effective, especially after the US-UK-Australia submarine deal. The TTC meeting in Pittsburgh last Wednesday almost did not occur because of the reaction by France to the submarine deal. So, while the TTC goes forward, US-EU cooperation on China will have to wait for a while. Common tech and trade standards are an aspirational goal, but the subtext is China. Both sides are discovering that these sorts of bilateral organizations are much easier to propose than to make real and substantive. But the TTC is a step in the right direction and I’m optimistic some good will come from it. Hudson Institute had a good discussion on the TTC on September 29, 2021.
The IRA: The Chinese have been astute in their dealings with the EU, staying largely out of the crosshairs of the regulators. The major targets for EU regulators are American companies such as Alphabet (GOOG) and Apple (AAPL), for example.
Caprio: To that point, the really interesting aspect of the transatlantic relationship is the whole discussion about privacy and how it’s overshadowed by national security and surveillance concerns. The Europeans view privacy as a fundamental human right and it’s embedded in their Constitution. Both sides recognize we need to negotiate a new Privacy Shield deal as soon as possible. There seems to be a commitment to get that done before the end of the year. We need a comprehensive federal privacy law in the US since the lack of such a law is hurting the US around the world. The EU had a data directive law in the late nineties and now GDPR, yet the law entrenches large incumbents and the European are having a very hard time enforcing it.
The IRA: The US and EU are polar opposites in many ways, first and foremost how they conceive of freedom. The EU view of economic freedom, for example, is a lot closer to the deterministic and authoritarian world of China than the US. How do we bridge this gap? Has the EU gone a little overboard with data security?
Caprio: The European Court of Justice (ECJ) invalidated the EU-US Privacy Shield in July 2020 on national security and surveillance grounds. The ruling from the ECJ focuses exclusively on the US while giving the Chinese a pass. The EU and China do not share common values. The EU adopted a risk based approach to privacy yet they continue to struggle with the question of harm to what. The ECJ rulings have very little to do with privacy and are a backlash partly due to the revelations by Edward Snowden. All of the concern has been on the US and almost zero on China. This discussion is not about privacy but rather about national security, but the Schrems II decision by the ECJ has thrown this whole discussion into chaos and focused EU attention on the US.
The IRA: Sounds like a heavy lift. Where does the solution begin for commercial users of data? Don’t the national security arguments win out?
Caprio: A solution is going to take a lot of political will on both side of the Atlantic. Transatlantic data exchange is at risk under the new EU data protection regime. Large companies can deal with the new rules, but small businesses dealing with data transfers on an ad hoc basis is untenable. GDPR is an effective barrier for smaller US firms that want to do business in Europe. Smaller firms cannot afford the cost of compliance with EU law. Under the old regime known as “privacy shield,” there were perhaps 5,000 US firms participating and 90% of these were small enterprises.
The IRA: The damage from Snowden continues to grow. This is not very well understood by US investors and corporate managers.
Caprio: The EU believes that privacy is a fundamental right. The Snowden revelations are very fresh in people’s minds in Europe. Those revelations have animated a lot of actions in the EU against US companies in the past few years.
The IRA: The Chinese government is obviously going to play the EU and US off against one another to take advantage of the fallout from Snowden. How do you see this playing out for the next three years of the Biden Administration?
Caprio: The Biden Administration could use Executive Orders to satisfy most of the EU concerns, but that does not result in the US having a data protection law at the federal level. The EU would like to see the US change federal law to align with their data protection regime, but that is a big ask. The EU wants redress rights for EU citizens in the US. They want a legal right of appeal. My guess is that the Biden Administration will go with an Executive Order.
The IRA: Well perhaps the EU should seek rights of redress in China as well. Chinese citizens lack such rights, but perhaps foreigners will be given unequal rights of action in Chinese courts?
Caprio: Well, yes. The Chinese are in the midst of creating a data protection law. I have heard serious people saying that the US should follow suit. The Chinese law is first and foremost about internal control. Is the Chinese law going to do anything about state power and surveillance? No. But the US is frequently compared to China nonetheless. We have a lot of work to do in coming months. But we need to fix the US-EU divide on data security if there is any hope of a common approach to China.
The IRA: Thanks Dan. Keep fighting.