While it is not possible to calculate an exact figure, ITIF conservatively estimates (based on Market-share comparisons) that Amazon and Microsoft’s cloud services (delivered as Infrastructure as a Service or IaaS, which is restricted in China) lost a combined $1.6 billion in forgone revenue over the two-year period from 2017 to 2018. As the China market continues to rapidly grow, these losses will only grow. This estimate is based on these firms having full and fair market access. These (and other U.S. cloud firms) currently face significant restrictions in China, which forces them to set up joint ventures (JV) and licensing arrangements that involve transferring knowledge and know-how to local partners alongside other market restrictions that hold them back from directly competing with their Chinese competitors, such as Alibaba Cloud and Tencent Cloud. There is a stark lack of reciprocity in that Chinese cloud firms face no such restrictions in the United States. Frankly, this is an unacceptable and unsustainable situation.

My testimony focuses on three core issues: 1) How China’s cloud market restrictions forced U.S. cloud firms to help build local competitors, while also protecting and allowing Alibaba Cloud, Tencent Cloud, and other local champions to seize market share and become more competitive in China, and increasingly, in markets around the world; 2) How U.S. cloud firms retain a competitive advantage over Chinese firms in terms of R&D and global operations, but that China and Chinese firms are investing growing amounts of money and efforts to improve their capabilities, competitive position, and global operations; and 3) that the United States needs to prioritize cloud sector issues given U.S. leadership in the sector and ensure that related trade, economic, and cyber and national security policies support—not undermine—the sector’s ability to innovate and compete around the world.

The United States need to take a more targeted and strategic approach as China and its firms are gunning for the U.S.’s position as a leader of the digital economy. China considers cloud computing services as strategic and central to its economic development and national security. For example, in September 2020, China released the “Guiding Opinions on Expanding Investment in Strategic Emerging Industries and Cultivating Strengthened New Growth Points and Growth Poles,” which laid out China’s priorities for the development of strategic emerging industries, including cloud. China’s 14th Five Year Plan (14FYP), which covers China's development from 2021 to 2025, focused extensively on science, technology, and innovation. The 14FYP stated that China promises to make “technological self-reliance and self-strengthening a strategic pillar of national development.” Cloud computing services are foundational for many of the technologies the plan identified as strategic and central to technological self-reliance and national security, such as artificial intelligence (AI), quantum computing, genetics and biotechnology, and advanced clinical medicine.

China’s digital protectionism and focus on local cloud computing firms becomes even more problematic given the country’s ability to guide huge amounts of financing (via direct financing and public procurement contracts) to local firms. For example, China’s recent stimulus plan allocates $1.4 trillion over five years for many areas that involve cloud services, including digital infrastructure like 5G, smart cities, and Internet of Things applications for manufacturing. On January 31, 2021, China’s State Council issued an “Action Plan for Constructing a High-Standard Market System” (Action Plan), which directs authorities to expand investment in new infrastructure construction such as artificial intelligence, cloud computing, blockchain, and other new technology infrastructure as well as data centers, smart computing centers, and other computing power infrastructure.

The United States is the world leader in cloud computing services. China’s market restrictions divert significant sales revenues that supports innovation and job creation in the United States. The impact has been especially damaging given that many U.S. companies’ market access has been denied during a critical, formative period of economic growth in China. The impact of China’s market restrictions go beyond China. Chinese tech firms are taking advantage of open markets in other nations to expand globally. For example, Alibaba Cloud has set up data centers globally, including Australia, Germany, India, Indonesia, Japan, Malaysia, Singapore, the United Arab Emirates, the United Kingdom, the United States (in Virginia and Silicon Valley). Likewise, Tencent Cloud’s global operations are growing rapidly. U.S. cloud firms also stand to lose market share as other countries view the “China model” of digital protectionism as a success and one they want to replicate (such as in Europe and India), in part, because it has used restrictions to support local champions.

Getting China to provide greater cloud market access will not be easy. China sees digital economy restrictions as essential to achieving its most important goal—regime stability. For the longest time, cloud market access was essentially deemed “off limits” from negotiations. This is why, thus far, the United States and other countries that support an open and rules-based global digital economy have been unsuccessful in negotiations with China to get it to open up its cloud market and its broader digital economy to more U.S. digital firms and their digital goods and services. However, there are some recent signs and opportunities for the United States to (again) seek greater cloud market access in China.

China has shown some potential signs that it might be willing to provide greater market access to U.S. cloud providers. My testimony makes three recommendations.

1. The United States should prioritize clear and comprehensive market access in cloud and associated digital services in each forum involving China. China’s large and growing cloud market and digital economy makes it important that U.S. firms have fair market access in the future given global competition is only going to get fiercer with Tencent Cloud, Alibaba Cloud, and others expanding around the world. Even if China doesn’t ultimately come to the table, the United States should remain committed to pursuing clear and meaningful market access as part of multilateral negotiations at the World Trade Organization (WTO) given the benefits this broader market access will provide the sector.
2. The United States should not pursue misguided and self-sabotaging national and cyber security orders that punish U.S. cloud providers for China’s unwillingness to address China-based cyber threats and unwillingness to cooperate with U.S. law enforcement. U.S. cloud firms have no control over the actions of nation states and state-sponsored cyber threats, so should not be made responsible for the latter’s response to U.S. government’s requests for actions and cooperation. The United States should instead pursue updated Mutual Legal Assistance Treaties and CLOUD Act agreements with countries around the world and use other cybersecurity and cybercrime forums to pressure China to take greater action.
3. Congress and the Biden administration should embrace reciprocity. If China does not adequately open up its cloud services market to U.S. firms, the United States should limit their access to the U.S. market. The United States should also encourage allies to do the same as part of broader efforts to confront Chinese innovation mercantilism. If China doesn’t provide reciprocity digital economy market access, this would at least limit Alibaba Cloud and other’s ability to use global markets to become more competitive.
4. Finally, the United States should put China’s cloud market restrictions into the proper broader context in developing a “Grand Strategy for the Global Digital Economy.” The U.S. lacks a coherent and comprehensive strategy to deal with the many international data and digital issues it faces. Its current approach is to address each issue individually and in an ad hoc way. The United States needs a broader strategy if it hopes to address the many interrelated trade, economic, human rights, and political issues raised by global digital issues and conflicts over them.