Keith Krach, U.S undersecretary of state for economic growth, energy, and the environment, descends after landing at the Sungshan airport in Taipei in September. PHOTOGRAPHER: PEI CHEN/AFP/GETTY IMAGES

U.S. Policy on China May Move from ‘America First’ to America & Co.

A tech entrepreneur in the State Department is using network theory to counter Chinese pressure.

KEITH KRACH, Fmr. UNDER SECRETARY FOR ECONOMIC GROWTH, ENERGY AND THE ENVIRONMENT

Source: Bloomberg | Reporter: Peter Coy

In tech, Metcalfe’s Law posits that a network becomes more useful in proportion to the number of its users, squared. That means big networks are much more valuable than small ones. A Silicon Valley veteran at the State Department is trying to harness the power of Metcalfe’s Law to build a network of nations to counter China—a notable change in tone after years in which the Trump administration pursued a go-it-alone, “America First” strategy.

Keith Krach was named undersecretary of state for economic growth, energy, and the environment in June 2019. He coined the term Clean Network and leads the initiative, which seeks to keep telecom gear made by Huawei Technologies Co. and other Chinese companies out of communications networks in democratic nations. Krach describes the Huawei effort as a “beachhead” in a wider battle to unite against Chinese economic pressure in everything from investment to strategic materials.

Krach (pronounced “crock”), 63, co-founded Ariba, a business-to-business e-commerce company that was sold to Germany’s SAP AG in 2012 for $4.3 billion. He was then named chief executive officer of DocuSign, which lets people affix signatures to documents electronically. He was recruited to the State Department by Vice President Mike Pence, whom he knew from a stint as chairman of the board of trustees at Purdue University in Pence’s home state of Indiana.

Krach (left), speaks to Brent Christensen, director of the American Institute in Taiwan, during a funeral ceremony for former Taiwan President Lee Teng-hui at Aletheia University in Nee Taipei City, Taiwan, in September.PHOTOGRAPHER: HSU CHAO-CHANG/AFP/GETTY IMAGES

It’s hard to pin down how big a change in strategy the Clean Network represents and how much Krach is responsible for it. Certainly it’s not a one-man effort, and it began before he joined the administration. His boss, Secretary of State Mike Pompeo, is the key spokesman. Others involved in the campaign include officials in the Treasury Department, the Office of the U.S. Trade Representative, the National Security Council, and the Commerce Department’s Bureau of Industry and Security, which has Huawei on its “entity list.” American companies are barred from selling or transferring technology to companies on that list without a license.

“Seven or eight months ago, it looked like Huawei was going to run the table,” Krach says. “They announced they had 91 contracts, including 47 in Europe.” Now, he says, the company has only about a dozen contracts outside China. (Huawei did not immediately respond to requests for comment.)

According to Krach, the Clean Network includes 180 telecom companies and 50 national governments that represent two-thirds of the world’s gross domestic product. Although that’s impressive, all countries aren’t equally committed. The State Department lists Japan as a member of the Clean Network, but the Japanese have resisted a complete ban on Chinese network gear. The department website quotes Minister for Foreign Affairs Toshimitsu Motegi as saying Japan would like to deepen cooperation with the U.S. in cyber security and keep Chinese gear out of diplomatic communication channels.

Exports to China as a Share of GDP, 2018

*2017 figure
Data: World Bank, International Monetary Fund

Some allies grumble privately that the U.S. drive to counter China feels more like arm-twisting than coalition-building. Also, countries that ban Huawei are stuck for now with a 5G duopoly of Sweden’s Ericsson AB and Finland’s Nokia Oyj. Samsung Electronics Co. of South Korea also sells some 5G gear.

Nonetheless, Krach is credited with coordinating a variety of national and regional approaches to network security to shape a more unified international project, relying on trust more than compulsion. His experience with business networks at Ariba and DocuSign “provided the perfect background for leading the Clean Network charge,” Joe Kaeser, president and CEO of Germany’s Siemens AG, wrote in an email.

“In contrast to a somewhat more confrontational style at the beginning of the administration, the Clean Network bears the hallmarks of ‘good old fashioned’ diplomacy,” Krach wrote in an email.

The task of forming networks to counter China’s influence has been made easier by China itself, which has frightened and angered trading partners with its “wolf warrior” diplomacy, a newly belligerent pursuit of China’s national interests. In China’s crosshairs at the moment is Australia , whose government in 2018 banned Huawei from building its 5G network  and is calling for an international inquiry into the origins of the novel coronavirus. In retaliation, China has targeted Australian exports of barley and wine with punitive tariffs and told traders to stop buying the country’s coal, copper, sugar, timber, and lobsters. Exports to China accounted for 6% of Australia’s gross domestic product in 2018.

“They only have one thing, and that’s 1.3 billion customers. That’s what makes China unique. That’s what enables China to threaten and sometimes get its way with other countries,” says Jeff Moon, a former assistant U.S. trade representative for China affairs.

China has also flexed its market power in the U.S. Last year it privately demanded that the National Basketball Association fire the general manager of the Houston Rockets for a seven-word tweet supporting protesters in Hong Kong. NBA Commissioner Adam Silver refused and estimated last winter that the league would lose several hundred million dollars from the Chinese broadcaster’s halt on airing games.

“I reckon for every one of those, there’s about 99 we don’t hear about,” Krach says. The State Department’s goal, he says, is to make “a security blanket to stand up to that China bullying. When you confront a bully, they back down. But they really, really back down when you have your friends by your side.”

The Chinese government rejects the accusation of bullying. In July, after U.S. regulators labeled Huawei and ZTE Corp. as threats to national security, a Foreign Ministry spokesman accused the U.S. of “abusing state power” to hurt Chinese companies “without any evidence.” Huawei’s U.S. website says: “Everything we develop and deliver to our customers is secure, trustworthy, and this has been consistent over a track record of 30 years.” ZTE says it “attaches utmost importance to our customers’ security values.”

Krach says the lessons he learned at Ariba and DocuSign are “100% transferable” to diplomacy. The four rules of networks, he says, are: Maximize the number of nodes, reduce friction between nodes by building trust, make each node more valuable, and build a network of networks. “That,” he says, “is the game plan.”

In spring and summer 2020, Pompeo and Krach gave speeches and press briefings about an Economic Prosperity Network in which trusted democracies would be the nodes—essentially an economic alliance. It was conceived to have three components: a Clean Network for communications that’s free of suspect components; a Blue Dot Network for global infrastructure investment to counter China’s “Belt and Road” initiative; and an Energy Resource Governance Initiative to secure supplies of rare earth metals and other strategic minerals. Now, Krach says, “The Clean Network is becoming the umbrella brand.”

There’s a good chance the Biden administration will pick up where Krach leaves off, assuming he isn’t asked to stay on, because standing up to Chinese pressure is one of the few issues on which the president and the president-elect agree. Joe Biden “will essentially keep the main thrust of the Indo-Pacific strategy—to compete with and counter China in the Indo-Pacific and globally,” says Derek Grossman, a defense analyst at the Rand Corp. think tank.

The debate in Washington is whether the U.S. should knock heads to get allies on board, or take a softer approach. Antony Blinken, Biden’s pick for secretary of state, and others on the president-elect’s team argue that only a coalition of the truly willing will be sustainable. “We need to rally our allies and partners, instead of alienating them, to deal with some of the challenges that China poses,” Blinken said in an interview in July with the Hudson Institute think tank.

The Clean Network is to China what George Kennan’s “long telegram” [PDF] of 1946 was to the Soviet Union, wrote David Fidler, adjunct senior fellow for cybersecurity and global health at the Council on Foreign Relations, in a blog post in October. Kennan, who was then the chargé d’affaires in Moscow, reported back to his bosses in Washington that the Soviet Union had assembled an “elaborate and far flung apparatus for exertion of its influence in other countries, an apparatus of amazing flexibility and versatility managed by people whose experience and skill in underground methods are presumably without parallel in history.” Kennan formulated the Cold War strategy of containment, which the Chinese claim is now being used against them.

Wendy Cutler, vice president of the Asia Society Policy Institute and a former U.S. trade negotiator, argues that the U.S. could create a united front among free-trading nations through conventional trade and investment deals, such as the Trans-Pacific Partnership, a  treaty from which Trump withdrew as one of his first acts in office. The other 11 nations went ahead with what’s now called the Comprehensive and Progressive Trans-Pacific Partnership. Several of them, including Australia and Japan, also belong to the Regional Comprehensive Economic Partnership, a 15-nation treaty that was signed in November—and does include China. “We made a major strategic mistake by pulling out of the TPP,” says David Maxwell, a senior fellow at the Foundation for the Defense of Democracies. “We really cut off our nose to spite our face.”

But trade deals alone are not enough, says Martijn Rasser, a senior fellow at the Center for a New American Security. For instance, they wouldn’t stop China from exporting its surveillance technology to countries such as Venezuela and Uganda, where it’s been used to target political activists, he says. Rasser worked with peers at think tanks Merics in Germany and the Asia-Pacific Institute in Japan to draft terms for a “technology alliance” that sounds a lot like the Clean Network Krach is organizing.  They released the report, called “Common Code,” in October in order to provide “nuts and bolts, members, functions, etc.—something for policymakers to chew on,” Rasser says.

In August, the Atlantic magazine published an essay by Anthony Vinci, a former associate director and chief technology officer of the National Geospatial Intelligence Agency, arguing that the U.S. and its allies “need a means of taking collective action when Beijing attempts to use economic power as a tool of political coercion.” Vinci, an adjunct senior fellow at the Center for a New American Security, suggested “the imposition of tariffs on Chinese goods by all member nations; the creation of a pool of capital to help a targeted nation withstand Beijing’s pressure; the release of strategic reserves of essential materials, such as rare-earth metals, that China produces and could withhold; and other forms of collective economic defense.”

That’s a step or two beyond anything the U.S. is actively working on. But Krach says the rapid international adoption of the Clean Network this year “proved that China Inc. is beatable, and in the process we exposed their biggest weakness, which is lack of trust.” The power of networks in diplomacy boils down to a simple idea, he says: “If you retaliate against one country, you’ve retaliated against all of us.” — With Rosalind Mathieson

(Updates with statement from Japanese Minister of Foreign Affairs Toshimitsu Motegi in sixth paragraph.)

BOTTOM LINE – The State Department’s Clean Network initiative, led by a Silicon Valley veteran, is part of an effort to create a united economic front to counter Chinese influence.