Episode 22: Jen Zhu Scott & Paul Triolo

Over the years, it just became quite clear that, you know, in our lifetime, not often we get to embrace general-purpose technology really taking off. And AI has become this general-purpose technology. It's going to completely change every single industry.

It's a sort of a natural evolution of China's regulatory structure where these big tech players are both national champions, but they're also like US platforms. They've sort of been able to escape most of the regulatory controls, and now I think Beijing is going to change that over the next 6 to 9 months.

Welcome to Straight Talk, a podcast about big ideas featuring candid discussions with some of the world's foremost thinkers and doers. I'm Hank Paulson, Chairman of the Paulson Institute, and today I'm speaking with Jen Zhu Scott and Paul Triolo. Jen is an entrepreneur and investor focusing on artificial intelligence, blockchain, and other deep tech. She is the founding principal of Radian Partners, which specializes in high-tech investments, as well as the executive chairman of The Commons Project, a technology nonprofit. She was listed in 2018 as a Forbes World Top 50 Women in Tech. Paul is a senior advisor on technology at the Paulson Institute and currently leads the geotechnology practice at Eurasia Group, focusing on global technology policy issues. Paul previously served in senior positions within the U.S. government for more than 25 years, focusing primarily on China's rise as a science and technology and cyber power. Jen, Paul, welcome to the podcast. Technology is at the core of so many of the challenges in the US-China relationship, so I'm really looking forward to today's discussion. But before diving in, let's start at the beginning. How did you each come to develop your expertise and your interest in this area? Jen, let's start with you. How did your interest in technology investing evolve?

Thank you so much, Hank, for having me. I've been really looking forward to this. I come from a family, my parents didn't complete their education in mainland China during these difficult years, but my dad was a self-taught engineer and my mom's a mathematician. And I studied applied math at university and, you know, spending years trying to put some PC together. Over the years, it just became quite clear that, you know, in our lifetime, not often we get to embrace general purpose technology really taking off. And AI has become this general purpose technology is going to completely change every single industry. So I didn't need too much motivation to dive in. And this is the interest I've been spending a lot of time in.

And so then at the university, what did you concentrate on?

I studied applied math in undergrad and studied finance in grad school. And of course, with this combination, I spent years to be head of strategy for Thomson Reuters. And back then, we were starting to apply some of the deep tech, and that was way too early for the financial industry. But that did kind of lay a foundation for me to look into how blockchain could change financial industry and how we can fundamentally combine this financial industry monetary policy and the technology.

Yeah, that makes great sense. Paul, so how did your interest in technology and China begin?

Great question. Thank you, Hank, for, first of all, for having me on. I sort of like Jen, I got an undergraduate degree actually in the technology field. I have a double E degree, that's electrical engineering, from Penn State University. And then I worked in Silicon Valley for a number of years. Before returning to my sort of family roots, if you will, in the liberal arts and studying Chinese and Chinese economy and foreign policy in graduate school. And then as part of my graduate school education, I ended up doing a year of teaching in China, and there my first encounter with Chinese technology was being unable to make a phone call from Beijing to Xi'an, two major cities in China, because the quality was so bad. And so I was kind of shocked, like, here's an amazing country, it's got So many, you know, really good education system, but the phone system doesn't work. But I did sense that this was a sleeping giant in the technology realm at that time, that this was a country that was coming out of the Cultural Revolution and that had so many things going for it in the technology arena that eventually China would become a tech superpower.

Very interesting, because the first big deal I worked on as an investment banker in China taking what is now China Mobile public. And there what they did was they leapfrogged a whole category of technology because they didn't have good landline telephone services, you said, but they developed mobile and rolled it out very quickly. So Paul, set the stage for our listeners. When people in Washington talk about the growing US-China tech competition, what are the core issues on the table? And what is this competition all about?

Well, this is a great question. So it's at once, I would say, simple, but it's also a fairly complex question. On the one hand, there are some issues that have been around for a long time that are related to trade and technology. So things like market access, subsidies, cyber theft of IP, you know, these are all really big tech issues that were raised in the Section 301 trade investigation, for example, that really started the trade dispute with China. And at the root of these issues is the concern that China's industrial policies and things like theft of IP are giving its companies an unfair advantage in some sectors. And some of these issues really predated the Trump administration, but they came out as a result of the appointment of Robert Lighthizer at USTR, who was really intent on pursuing this 301 path. But the second is a set of issues that are a little newer and related specifically to national security. And there are two main issues here. One is supply chain and what is perceived as overdependence on China. So in the view of some in the Washington policy circles, particularly under this administration, there's also this corollary that this provides Beijing opportunities to do malicious things from a cyber perspective, or even an economic angle to do things like restrict rare earth. So there's a concern about reducing supply chain dependence on China in the technology arena. The Pentagon actually did a study of this recently for key military supply chains, and the number they came up with for dependence on China was so high, they decided to classify it. And then there's the third and fourth issues relate sort of to the future. And this is, for me, is really interesting because when I was in China, as I noted, in 1988, you know, China was not a technology superpower, but these are focused around both economic and national security concerns. So the first is concern about Chinese investment in US cutting-edge technologies. And there's also— there was a growing concern in the Trump administration about a lack of updated export controls so that China was able to take advantage of these lack of export controls to upgrade its technology base. And then, of course, this translates into a potential military threat as China's military modernizes. So therefore, we saw a big emphasis on export controls, tightening export controls, and foreign investment reviews under the Trump administration. But I think the last thing I'll mention is really this, what is sort of new and really interesting to get our heads around, because it's this overarching meme that has arisen in the last 2 years that the US and China are locked in this technology competition. And we're locked in this with the technologies of the future. This is the term some people use. And here I'm talking about next-generation mobile technologies like 5G, as well as things like artificial intelligence and quantum computing. And the critical corollary of this, though, is that China is going to somehow use these technologies in ways that Western democracies find objectionable, such as surveillance, suppression of dissent, and enabling greater espionage. And then also, of course, there's a military component, a national security component to that. So I've seen this incredible change really in the last 30-odd years when I could barely make a phone call from Beijing, and now China and the US are in this competition to dominate the technologies of the future?

Well, I have said a number of times that I think that the competition is fundamentally an economic competition, and at its core, it's technology, a race to set, you know, develop the technologies for the future, set the global standards. And so the key is, you know, how much technology is gonna be sequestered to protect national security and economic security, because If the US sequesters too much, it's gonna hurt our competitiveness. We're gonna have a hard time participating in the global innovation ecosystems and so on. So there's a lot here. And Jen Zhu, you've got a lot to say here about China and the US. So China has just released a 5-year plan, and there's a big focus on innovation and technology. I'd like you to talk about what you see in the motives here. As China pushes for indigenizing technologies. Is that what they're doing, or is it mainly about protecting critical supply chains like it is in the United States? What do you see happening, and what do you see the motives being?

Yeah, this is, uh, similar to the last question, is very complex, but, uh, I'll just, um, probably speaking from China's point of view for a second, I think, you know, pause Absolutely right, right, in terms of how US perceive this as a threat. But for China, you know, Chinese government simply think we are not doing everything because of the US or because we want to compete with the US. There are a lot of very serious domestic demand and necessity they need to address. Take, you know, this Five-Year Plan as example. You know, one of the probably most important geopolitical event, but poorly understand, is the plan of PBOC launch digital RMB. And most of the international conversations about digital RMB is very much focused on how this is going to displace the US dollar. But the start of the PBOC's research was really because the central government wants to use this technology to directly send aid to completely eradicate poverty, extreme poverty, which the deadline is this year. And Xi Jinping regards this as one of the most important legacies, is completely eradicate extreme poverty. Now let's take a little bit of history. Historical view as well. This kind of a China-US zero-sum, you know, especially in terms of technology, I think it's a little bit lack of context, right? If you think about US in the, let's say, in the past 100 years, it's undoubtedly the absolute leader and a power player in technology. But if we stretch the history to about 2,000 years, then China has been in US position for many times. So from China's point of view, on one hand, a lot of people just think these are it's a natural cause. Of course, you know, we spent some years to have to copy and, you know, we didn't, you know, follow the IP rights. But now China is actually innovating on its own. The technology that come out of China actually has not, you know, really being applied in the US. We have seen TikTok has taken a beating, but I think if anyone spend time to see Facebook's Reel, which is the exact copy from TikTok. So the table has turned and from Chinese, you know, government and the people and entrepreneurs' point of view, they think, okay, you can criticize it before in terms of IP, in terms of how to play international rules. But in many areas, China is actually taking the lead now. So the argument about respecting international rule, et cetera, I think, you know, perhaps the current US administration has a lot to answer, especially in the past 12 months. So, I don't think it's so clean-cut, but also I think, come back to your question in terms of this 5-year plan, Paul pointed out this supply chain issue that the US realized that the world is truly relying on China in supply chain. I think that's true, but also the feeling is very mutual because China also feels, okay, AI is really important for us. In terms of AI software, we absolutely have advantage, but in terms of AI hardware, we rely on US too much. And now with all the sanctions, it's very important for Chinese government to start to see how we can develop this technology ourselves, therefore we will not be controlled by other.

Yeah, you're right. This is a very complicated area. And there's some areas where it's Chinese hardware, right? So when you look at 5G, the advantage Huawei has is not having better software, it's that it's integrated into the hardware. But, you know, one other thing I think that people don't understand as fully is what China is so good at is not necessarily having the very best, most advanced technology. What they're good at is rolling it out and implementing it very quickly and commercializing it and doing that in scale. And often it's technology where there's a universal source code. So again, very complex issue. So, Paul, let me go to you. China also seems to be exerting more political and regulatory control over big tech platforms. How do you see that playing out?

Yeah, it's, uh, it's an interesting parallel to what's happening in the U.S., of course. So in China, the big tech platforms, the Alibabas, the Tencents, the Baidus, have been allowed to develop in a largely regulatory, you know, lax environment. And so particularly companies like Alibaba have branched into a lot of areas sort of outside of their traditional base of e-commerce, so into payments, into investments, into insurance. So of course, recently we saw the whole Ant Financial issue, the sort of a fiasco where at the last minute the Chinese regulatory authorities basically pulled the plug on the world's biggest IPO, at least was likely to be the biggest IPO in history. And the reason for this was there had been increasing concern around these platforms engaging in lending practices and potentially, you know, damaging sort of consumer interests by sort of going outside of their sphere in an unregulated way. Now, of course, Jack Ma's comments also disparaging the regulators contributed to that move, but a lot of these things have been building over the last year. And this is a similar area as other areas where, like, Tencent as a gaming platform, for example, had been brought under further regulation. So in a sense, it's sort of a natural evolution of China's regulatory structure where these big tech players are both national champions, but they're also like US platforms. They've sort of been able to escape most of the regulatory controls. And now I think Beijing is going to change that over the next 6 to 9 months.

And of course, when you look at finance, where I have a real interest, you know, technology has done some incredible things, very, very powerful. And as Jen Zhu talked about, making Making it much more inclusive and bringing it to lower-income people and so on. So it's really great. But regulation needs to keep up. And technology can do a lot of things, but there's no way it can outlaw the, what I would say, economic gravity. I mean, if you're going to have stable financial systems, they've got to be underpinned by capital, right? We saw what happened in the US when we had a run on our money market funds and they didn't have capital. So again, change is happening so fast, sometimes it's hard for regulation to keep up with it. So Paul, continuing with you for a minute, the White House recently issued a list of critical technologies it wants to protect. It looks a lot like many of the technologies China and other countries want to develop. What kind of technology should we really be protecting to ensure national security? You know, U.S. export controls on advanced chips seem to have really constrained a company like Huawei. How do you see that playing out? Look at it first of all from the U.S. standpoint. What do you think the U.S. really should be doing here? And then talk about, you know, the pressure put on Huawei.

Sure, these are two really, really good questions, Hank. So first, I think what's happened in this administration is we've seen the sort of economic security and national security continuum swing hard over towards the national security side. So early in the administration, for example, we have this definition of the US National Security Innovation Base. So basically, that was essentially trying to say all of the US innovation capacity and Silicon Valley and all the great high-tech zones in the US are part of now of a national security concern of the US government. And so what we've seen over the last 2 to 3 years is sort of a playing out of that dynamic and trying to define that. So that includes this list you mentioned, so coming up with lists of technologies. The problem is there's some critics of that approach, right, because you have to keep adding to these lists and then, you know, the technology changes pretty rapidly. When the Commerce Department, for example, tried to come out with a list of emerging technologies to be protected, they got a lot of pushback from industry, which felt that they were much too broad definitions, and so the Commerce Department has so far opted to control very specific applications of some advanced technologies like AI around specific kinds of applications where you can make a link between the application and national security, such as managing AI algorithms, for example, that are used in geospatial object recognition, and that's one of the trends I think we'll see under a Biden administration is trying to look for very narrow applications of advanced technologies and trying to control the broader application rather than trying to say, we're gonna control artificial intelligence sort of more broadly. And I think that sort of LISP concept worked pretty well during the Cold War, but I think now the problem is that in a lot of these technologies, these are by and large dual-use technologies where they're developed by the private sector, the civilian sector, they may have military uses, but the predominant use of these technologies is gonna be in a civilian, in the civilian marketplace. And so the challenge then is trying to figure out how to draw circles around those technologies in ways that industry can understand and make that link between the technology and a military application. And that gets, that gets harder with areas like artificial intelligence and quantum computing, for example.

And governments need to work very closely with business because otherwise, in attempting to protect the US, the government could be hurting the US by cutting off US companies from the most interesting and rapidly growing parts of the market. Markets of the future to the fastest growing economies around the world.

Absolutely.

Jen, anything for you to add on this, Jen, before we move on?

Yeah, I think, I think, you know, it's really important. First of all, every country has, every sovereign country has the right to define what is national security. But you could go as broad as what we are seeing right now that, you know, end of the day, math and physics can also be used for military. So where do you draw the line? Right?

So hammers and nails for that matter.

Exactly, exactly. I think, you know, another potential damage to the US interest is actually— I think Marco Polo did this great analysis in terms of where the AI talents flow, right? Majority of top AI talents in the US, they're Chinese nationals, and they, after finish their education in the US, they actually stay in the US working for US institutions. So in many ways, this kind of argument, the logic doesn't add up because, you know, when you draw this national security security and we want to exclude Chinese, exclude China into this AI equation, you also excluding a segment of most valuable talents, right, and actually coming from China contribute to the US AI development. In many ways, China could also argue, oh, there is a China, you know, brain drain because all the, you know, top talents has gone to the US.

Jen, that's a very good point because there's been real pressure that the national intelligence services, the FBI, the government has placed on universities to protect their intellectual property and their most valuable research. And there have been a number of examples where the research is, you know, has ended up being misused or taken back to China in ways that was inappropriate. But, you know, when you talk to university heads, and they're in a competitive world and they want to stay on top, and the way you stay on top is you're a magnet for talent. And a large percentage of the most important research is done by foreign scholars, and many of them from China. So this is another case where, in attempting to protect ourselves— and there need to be some changes made, in my view, right, to protect national security. But if we go too far, we're going to cut ourselves off from the international innovation system. So it's not a good thing.

So can I just quickly add, I think more importantly, a lot of global problems, you know, you addressed a little bit in the Bloomberg conference, uh, uh, recently. And, um, you know, many global leaders are talking about some of the most damaging problems we're going to face, the next generation going to face, has no national transnationality has no border, right? Climate change, to start with. You know, I guess the next administration and the Chinese government draw a fence, find, you know, where you build the fence, but more importantly, find areas how we can work together to solve this problem. We are all earthlings at the end of the day.

You're darn right. Some of the— the world is going to be a very dangerous place, a very inhospitable place. If we can't work together on common challenges like climate change and rebooting economic growth. We're going to need some common standards for technology and some rules for investment and trade, and we're going to need to work together to combat nuclear proliferation or terrorism. And so there's a whole number of important areas where we need to work together. Jen, I want to stick with you a little bit longer here. So you spend a lot of time with your counterparts throughout industry, the US and China side. How are major players in global tech value chains preparing for the next few years of US-China technology tensions? So, you know, these tensions aren't going away. The question is just how are they going to be managed, right? These tensions are going to be here for a long time and they're going to play out. You can't regulate them away, can't negotiate them away. They're going to be played out, a lot of it in the marketplace. So you see companies seriously diversifying the supply chains from China, or are they taking a wait-and-see approach? What do you see happening?

So I think in the past 18 to 24 months, you know, everything that Japanese auto industry invented in the '80s, that, you know, just-in-time, it's all about supply chain efficiency, has all gone away. Right now it's all about supply chain security. You have to get extra, you have to get early. And the implication to that is the business don't run as efficiently as before. And also, this creates tremendous waste, right? So as a result, I think, you know, after the US election, we probably will see a change. The reason I think, you know, the companies are starting to plan for change, not necessarily change one direction, as, you know, go back to the old way or completely be, you know, super protective of their own supply chain, be self-reliant. I think, you know, the world will be a couple of forces. Number one, Hank, you know this better than anybody else, capitalism is probably the most dynamic force on this planet, incentivize business to run their business, you know, generate profit and be efficient. And I know one company that used to be a Jersey company, they produce these kind of silicon for 5G hardware. Just supplied that specific type of silicon, and they changed to be a Switzerland company, right? Because the largest market is in China. So even with the regulation, even with all this sanction, etc., companies will find their way to look for where the business are. And I think, you know, after the Biden administration, if we can find areas to collaborate and if we can be sensible about managing this. I think it will become not quite as go back to before, it's a global supply chain, but we will probably go back to some sort of a hybrid between self-reliance and also finding sensible collaboration between different parts of global supply chain. I'm unapologetically globalist. I think it's very important for the companies and organizations to collaborate with each other. I think the current climate define many problem by nationalities and by border is not the right way to go about some of the most dangerous global problems.

Jen, to add to that, one thing I will say is I know for certain that for businesses to be successful, they need predictability. Not complete predictability, but they know they can't have certainty. But you can't have chaos. And if they don't have a certain amount of predictability, they're going to move or they're going to change their business strategy or whatever. Now, Paul, I'd like to address the last question to you here on policy and the US. So you stay in touch with a number of people who are in government now, another number of people who'll be going to work in the Biden administration. What is likely to remain the same under a Biden administration's approach to China and technology, and what is likely to change?

Great question, Hank. I think that, as I think I've tried to point out earlier, the goalposts have changed here. So what will not change is that technology will still be a key part of the US-China relationship, and they'll still be concerned about Chinese investment in advanced technologies and controlling exports of certain technologies to China. So that won't change. And I think the other thing that won't change is that we saw in the late days of this administration, the Trump administration, sort of a turning of focus towards some more support for domestic innovation. So for example, support for reshoring advanced semiconductor manufacturing. So I think that that'll accelerate under a Biden administration, trying to invest and help the US companies run faster, if you will. So more offense rather than so much defense. But the big difference is, I think there'll be 3 big differences here that we'll see. One is in Spain, one is in substance, and one is in structure. This is the way I like to describe this. So style, briefly, that's just, you know, the rhetoric around all Chinese students being spies in the US, for example, or China as an existential threat across the board. That kind of rhetoric, I think, will be somewhat reduced, much reduced in a Biden administration. And it will be looking for those kinds of areas you mentioned for collaboration, climate change, fighting the pandemic, et cetera. There'll be much more support for that. In terms of substance, you're going to have the return of a lot of China expertise, right? A lot. There's a huge bench strength from the Obama administration and administrations before that. So there's a tremendous amount of China expertise that will return to key decision-making. And importantly, there'll be a return to process and to an orderly interagency process, which will help get to that idea that you mentioned about businesses being able to understand policymaking and being able to understand, you know, where the administration is going. And there'll be a China tech policy that's embedded in a broader China policy. So it won't be, it won't be coming up from the bubbling up from the bottom from different departments. And then finally, on structure, I think there'll be a couple of attempts to improve the government's ability to analyze technology changes. There'll probably be a technology policy group or a council that will advise the White House that will include a lot of private sector input, for example. There could even be a new body at the White House level that has some overarching oversight of technology policy. That's being discussed also by the Biden team. So there'll be a really different approach to the problem. So there'll be some things that will stay the same, but the approach in general will be much more nuanced and sort of expertise-driven and less ideological than we've seen over the past 4 years.

And that will be very, very welcome. So Jen and Paul, thanks for shedding light on some very important and complex issues. You've given us a lot to think about. Thank you very much.

Thank you. Thank you.

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