13 December, 2018

Facebook’s China Argument

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By Tim Wu

(Alex Merto)

Over the last year or so, Mark Zuckerberg of Facebook and other American tech leaders have issued a stark warning to those who want to see more competition in the industry. It goes something like this: “We understand that we’ve made mistakes. But don’t you realize that if you damage us, you’ll just be handing over the future to China? Unlike America, the Chinese government is standing behind its tech firms, because it knows that the competition is global, and it wants to win.”

This — Big Tech’s version of the “too big to fail” argument — has a superficial nationalistic appeal. It is true that the Chinese technology sector is growing and aggressively competitive, and that many of its companies are embraced and promoted by the Chinese state. By one count, eight of the world’s 20 largest tech firms are Chinese. That would seem to suggest a contest for global dominance, one in which the United States ought not be considering breakups or regulation, but instead be doing everything it can to protect and subsidize the home team.

But to accept this argument would be a mistake, for it betrays and ignores hard-won lessons about the folly of an industrial policy centered on “national champions,” especially in the tech sector. What Facebook is really asking for is to be embraced and protected as America’s very own social media monopolist, bravely doing battle overseas. But both history and basic economics suggest we do much better trusting that fierce competition at home yields stronger industries overall.

That is the lesson from the history of Japanese-American tech competition. During the 1970s and into the ’80s, it was widely believed that Japan was threatening the United States for supremacy in technology markets. The Japanese giant NEC was a serious challenger to IBM in the mainframe market; Sony was running over consumer electronics, joined by powerful firms like Panasonic and Toshiba. These companies enjoyed the support of the Japanese state, through the Ministry of International Trade and Industry, which pursued a nationalistic industrial policy thought to be infallible.

Had the United States followed the Zuckerberg logic, we would have protected and promoted IBM, AT&T and other American tech giants — the national champions of the 1970s. Instead, the government accused the main American tech firms of throttling competition. IBM was subjected to a devastating, 13-year-long antitrust investigation and trial, and the Justice Department broke AT&T into eight pieces in 1984. The effect was to weaken some of America’s most powerful tech firms at a key moment of competition with a foreign power.

But something else happened as well. With IBM and AT&T under constant scrutiny, a whole series of industries and companies were born without fear of being squashed by a monopoly. The American software industry, freed from IBM, came to life, yielding companies like Microsoft, Sun and Lotus. Personal computers from Apple and other companies became popular, and after the breakup of AT&T, companies like CompuServe and America Online rushed into online networking, eventually yielding what we now call the “internet economy.”

Back in Japan, the government was still in love with its champions, promoting NEC’s mainframes, while it doubled down on supercomputers, which it saw as the obvious future of computing. Japan never broke up NTT, its telephone monopolist. Over the course of the 1990s, Japan, late to both software and personal computing, began to lag behind the United States. Its brief lead in mobile phone technology was limited by NTT, which left little room for start-ups. Consequently, Japan’s tech sector largely missed out on the software, personal computer and internet revolutions. It has never really recovered.

That is the risk of a governmental embrace of companies like Facebook, Apple and Google. While they may now seem as extraordinary as IBM did in the 1970s, they might not seem that way a decade from now. And if no one can imagine doing social networking better than Facebook, remember that no one dreamed that the personal computer, once little more than a toy for hobbyists, would displace the mighty mainframe.

If we give these companies a pass when it comes to antitrust enforcement, allowing them to dominate their markets and buy up their competitors, America may lose what has been its signature advantage: its willingness to allow the new to replace the old, to accept rebellion and change — the industrial version of Thomas Jefferson’s cycle of rebellion and the “blood of patriots.”

And then, as Zuckerberg has prophesied, the future of tech may very well belong to China after all.

Tim Wu is a law professor at Columbia University in New York and the author of “The Curse of Bigness: Antitrust in the New Gilded Age.”

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