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The Digital Silk Road is one of the flagship projects in China's Belt & Road Initiative

The Digital Silk Road

As one of Chinas grand proposals within the Belt and Road Initiative (BRI), the Digital Silk Road (DSR) project was introduced in March 2015.The DSR incorporates four interrelated, tech-focused components. First, China is investing resources into digital frameworks abroad, including fiber optic cable lines and data hubs. Secondly, the project focuses on creating cutting edge innovations - like satellite navigation systems and smart city projects - which will be fundamental in giving China an edge as a global economic and military power. China is working on rapidly expanding its area of DSR projects. In 2019, the Chinese government launched a new project called the "Belt and Road Digital Economy International Cooperation Initiative'' with a number of nations including the United Arab Emirates, Thailand, Turkey, Laos, Serbia, Kingdom of Saudi Arabia, and Egypt. The Chinese government also established cooperation agreements with 16 other countries to develop technology focused projects under the umbrella of the New Silk Road Initiative.

From a mid to long-term perspective, China plans to strategically fortify this digital initiative. In April of last year, a report published by the Office of the Leading Group for Promoting the Belt and Road Initiative highlighted that the Chinese Communist Party (CCP) has actively focused on the DSR Initiative with innovation-focused industrial frontier areas. These include cloud computing, nanotechnology, quantum computing, big data, artificial intelligence, and smart cities.

China has made significant telecom investments globally under its flagship Belt & Road Initiative

Impact of Covid-19

Covid-19 has significantly impacted the Chinese economy, particularly the small-medium enterprises. Thus, the governments fiscal and monetary policies have shifted focus on stabilizing the domestic economy. This has strongly impacted the BRI. However, the Information Communication Technology (ICT) infrastructure projects are more cost-effective and can be completed at a faster pace compared to transportation and energy projects. Therefore, the DSR projects are more likely to attract significant investment and garner more interest from investors as compared to other BRI projects after Covid-19.

Is the Digital Silk Road a challenge and a national security threat to the US?

Fitch Solutions believes that the race in technological advancements will continue to be a key focal point of tension between the US and China. The Digital Silk Road is an essential pillar of China's global infrastructure strategy to manage the flow of data worldwide. Most of the infrastructure that is being used within the DSR projects involves little if any US technology, which is a cause of major concern for many Western policymakers and business executives. This is compounded by the fact that data traffic monitoring within China has greatly increased and thus the potential interference with sensitive monetary and security-related data could also be significantly compromised. Chinese tech firms have become highly proficient at using artificial intelligence (AI) to strengthen both their local businesses and relationships with consumers. The data and information accumulated from end-users will give Chinese companies considerably greater insights which will ultimately help them in gaining substantial market share within the BRI countries.

The Belt and Road Initiative supported by the DSR projects do not come without criticism and controversy. Critics have claimed that many Southeast Asian countries involved in the BRI have been drawn in by China's rigorous laws on the localization of data. However, some analysts argue that such changes are mostly being made to protect the information of citizens and incentivize foreign investments into local data hubs, rather than an inclination for ascribing to China's model of cyber administration. Nonetheless, the potential for these structures to be utilized by local governments to clamp down on social discord and political opponents cannot be ignored.

Smart City, Guangzhou Urban Skyline

The BRI has advanced Chinas technological prowess to the point where it now poses as the quintessential challenger to the US in terms of global technological partnerships. Earlier this year in February, the CCP made a concerted effort to focus on digital infrastructure projects including 5G expansions as one of the critical solutions to bolster their economy after the Covid-19 pandemic. Chinese companies such as Huawei Marine Networks have already laid down about 36,964 miles of undersea fibre optic cables in more than 95 different projects spanning the Indo-Pacific, South Pacific, and the Atlantic oceans. Chinese firms' global share in such transnational undersea cable projects have skyrocketed from a mere 7% in 2012 to 20% in 2019.

Expected market growth of 5G subscribers globally.

What choice will the US make?

American business leaders and the Trump administration are clearly intent on protecting US companies and supply chains from heavy reliance on China. For example, the Semiconductor Industry Association (SIA)s recent $32B proposal aims to sharpen the edge of the US semiconductor industry. Semiconductor chips underpin some of the critical commercial and defense technologies of the future which include 5G networks and artificial intelligence. Furthermore, US Justice Department officials tacit pressure on a high-capacity undersea data cable system to bypass Hong Kong is a clear example that reflects Americas hardening stance on China.

In the Covid-19 era and especially given the acrimonious sentiment in Washington and Beijing with respect to Sino-US relations, it is incumbent to not forget that competition and cooperation have always defined US-China relations. The United States is currently losing the race against China in the digital space. However, that does not mean the race is over. Public-private partnerships are needed now more than ever. The US government and the private sector must invest significantly more resources into developing technology and advancing innovation at home. Failing to do so could risk the US permanently losing its global technological leadership to China.

A special thanks to Jeeho Bae and Yaser Faheem for contributing to this article.

Authors:

Mr. Earl Carr is the Vice President of International Research at Momentum Advisors, a New York based SEC-registered international wealth management firm. Jeeho Bae and Yaser Faheem are Research Consultants at Momentum Advisors.

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