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Robert D. Hormats, U.S.-China Internet Industry Forum, Dec. 10, 2009

Hormat, Under Secretary for Economic, Energy and Agricultural Affairs, spoke in San Francisco. The Forum was co-sponsored by Microsoft and the Internet Society of China.
December 10, 2009

Remarks to U.S.-China Internet Industry Forum

Robert D. Hormats
Under Secretary for Economic, Energy and Agricultural Affairs
December 10, 2009

As prepared for delivery:

Thank you very much for that kind introduction and thank you to Microsoft and the Internet Society of China for hosting this event and the numerous sponsors who have supported it. It is a great pleasure to be here among such a terrific group of experts to discuss one of the most important innovations of the last century – the Internet. I am just beginning my third month as Under Secretary of State for Economic, Energy, and Agricultural Affairs. I am glad that I am able to address this Forum on the Internet Industry so early in my tenure.

It is fitting that this forum takes place here in San Francisco – only a few miles from the pre-eminent hub of American innovation in Silicon Valley – after being in vibrant Shanghai last year. Silicon Valley’s high-tech leadership is due in large part to the coming together of academic, private sector and government talent many decades ago and the ongoing partnership and dynamic interchange that it spawned. So I am very optimistic that this forum’s combination of U.S. and Chinese experts in all three of these communities will lead to creative solutions to some of the issues and unmet opportunities both our countries face in the global information age.

Internet Freedom
When President Obama visited China recently, one of the highlights of his trip was a town hall with future Chinese leaders in Shanghai. At this event, President Obama noted that the more freely information flows, the stronger society becomes. The great English writer Samuel Johnson noted that there are two kinds of knowledge: “we know a subject ourselves, or we know where we can find information upon it.” The Internet offers us an unparalleled ability to acquire knowledge if we allow unrestricted access to it. As President Obama noted in his town hall meeting, freely flowing information allows people to think for themselves and generate new ideas. It also encourages creativity.

This is true not only politically but also economically. The Internet has produced entire new industries and revolutionized distribution, design and development of goods and services. Unrestricted access to information is vital to the types of innovation that spark economic growth. As this forum’s panel discussions highlight, the Internet is a tool with tremendous opportunities and challenges. But the Internet is just that – only a tool. It is the users and developers of online content who make our connections to the World Wide Web so invaluable.

Secretary Clinton has made improved access to information a significant part of her policy focus. She said in a recent speech, “President Obama and I are committed to defending freedom of expression on the new terrain of the 21st century.” Within the State Department, our newly revitalized Global Internet Freedom Taskforce is ready to play a leading role in this critical effort.

This task force, a policy coordinating body within the State Department co-chaired by myself and State’s Undersecretary for Democracy and Global Affairs, Maria Otero, works to advance free expression and access to information on the Internet. The State Department monitors and reports on threats to Internet freedom around the world. It pursues the free flow of information and freedom of expression on the Internet in our bilateral relationships and through multilateral organizations.

The right to freedom of expression and the importance of the free flow of information over the Internet were affirmed by all participating governments at both phases of the World Summit on the Information Society in 2003 and 2005, including the Tunis Commitment, and continue to form the foundation of U.S. Government efforts on Internet freedom around the world.

We also work closely with individual companies and industry groups to foster improved access to information. One example is the Global Network Initiative, a group of leading private sector companies, NGOs, academics, and investors that seeks to advance both freedom of expression and privacy in information and communications technologies (ICTs). A number of the authors and leading advocates of the GNI are represented here today. I commend them for their vision and initiative.

As President Obama noted in his town hall meeting, we believe that certain core principles enshrined in our founding documents are universal rights also present in international documents like the Universal Declaration of Human Rights and we speak out for these principles around the world. We believe that commerce should be open and that information should generally be freely accessible.

We recognize that potential downsides and risks may come with new technology, such as threats to children online or the ability for terrorists to use the Internet to organize. We look forward to working with China and the private sector, both here and abroad, to mitigate these risks while maximizing the free flow of information.

U.S.-China government to government economic cooperation has strengthened over the years. We have developed effective and collaborative structures including like U.S.-China Strategic and Economic Dialogue and the Joint Commission on Commerce and Trade. The myriad formal and informal meetings, governmental and business interactions, and events like this, which bring together government, private industry and academia from both our countries are where broader knowledge sharing, collaboration and brainstorming happens.

As Secretary Clinton said at the U.S. Chamber of Commerce, our countries “both know that governments are essential to solving global problems. But there is a limit to what governments can accomplish on their own. That’s why we need partnerships beyond government that stretch across sectors, that engage the full range of talent in our countries – from the expertise of our scholars and scientists to the creative energy of our young people and the adventurous spirit of our entrepreneurs. Business and industry will continue to play a critical role in building a stronger U.S.-China relationship. Individual joint ventures, purchase agreements, and two-way investments have increased bilateral trade by more than 400 percent just in the past decade alone.”

ICT and Economic Recovery
I believe that investment and innovation in ICTs is vital to restoring global economic health. It both produces growth and enables others to do so. A recently released study from the OECD found that among OECD countries, increasing broadband penetration by 10% leads to an increase in GDP of 0.9% to 1.5%. Other studies suggest that those GDP growth numbers are even larger for developing countries.

According to the Federal Communications Commission, over one million U.S. jobs have so far been created by new small businesses over telecommunications networks. As both our countries work to recover from the recent economic slowdown, development of ICT networks themselves should be recognized as one of the most important sources for job creation. Combine that with economic opportunities for companies based online and the millions of resources and postings for job seekers, and it is obvious that the Internet is one of our most valuable assets for economic recovery.

The establishment of an advanced and accessible network platform on which these creators can build is the foundation of the innovative economy to which both of our countries strive. This is why the United States is focused so heavily on expanding domestic broadband access. Through the American Recovery and Investment Act of 2009, the Federal Communications Commission has been tasked with drafting a national broadband plan to make broadband Internet more accessible and affordable for American consumers.

I applaud China similarly for its commitment to foster its ever-expanding communications network. With the world’s largest population of Internet users (360 million as of September 2009) and some astounding recent growth in numbers of mobile internet users (192 million users as of Sept. 2009, a 62% increase over the previous 12 months), China clearly has an exceptional platform to support the researches, engineers, product designers, and business leaders of the future.

Developing the National Broadband Plan for the United States is a part of a broader Obama Administration strategy to harness the power of American innovation to generate economic security and growth in the years to come. Supporting the foundations of innovation – education, infrastructure, and research – enables us to focus our resources on the tools that allow companies like those here today to continue to innovate and to employ the best talent possible.

At the State Department, we have been tasked to expand our support for innovative U.S. companies in the global market. Part of our strategy will continue to address the market access concerns of U.S. high-tech firms, particularly where WTO or other commitments have not been adequately assured.

We appreciate China’s efforts and its praiseworthy objective to become a leader in innovation, but we certainly do not believe that such a goal requires that China craft policies to the detriment of U.S. and other foreign firms, particularly those already invested and operating in China, and providing significant impetus to China’s innovative firms and industries. To the contrary, we believe U.S. and other foreign investments in China will continue to benefit Chinese consumers, Chinese society, and the Chinese economy if these firms have the unfettered ability to compete for government contracts. We feel that they make a significant contribution to the well-being of China. We also believe that the recently introduced government procurement rules will limit the positive contributions U.S. companies can make to China’s economy.

During an earlier wave of development and great innovative energy in information technology and the Internet (the so called “ era”), start-up companies and venture capitalist seekers were often judged not by the success of one company, but by how many failed start-ups they had endured. Innovators’ failed efforts were worn as badges of honor, signifying resilience in their intellectual talents, as well as the confidence that their imagination and creativity would allow them to design the next innovative technology or application.

We know the era included excesses as well, but our experience shows us how prized and essential is the intellectual froth of creativity and how accepting (and not penalizing) failure, optimizing conditions for competition, and allowing for the greatest experiments in collaboration lead to true innovation. Innovation cannot be mandated; it cannot be designed; it can only be nurtured by the most hospitable environment in which innovation can flourish. For this reason, we strongly believe that any attempt to distort market mechanisms to favor domestic firms, and to disadvantage foreign ones, delays a society’s innovative advances, creates negative trade frictions, and is actually counterproductive. Encouraging the creation of IP for homegrown proprietary standards and to fulfill competition policy aims loses sight of the overall purpose of innovation.

Indeed, the combination of collaboration among innovative people and true and open market competition benefits not just a single country’s economic future but the future of the global market as a whole.

Innovation is a powerful tool to move an economy forward, and I know that the Chinese government recognizes that value. During the conclusion of the March 2007 National People’s Congress, Premier Wen Jiabao voiced his concerns that the Chinese economy, while acknowledging strong performance, was unbalanced, uncoordinated, unstable and unsustainable. As part of his plan to encourage sustainable development, he encouraged intellectual and technological innovation, with the understanding that innovation will create good jobs. It has the power to correct imbalances by adding high value service sector jobs that employ Chinese talent.

The success of Chinese companies shows just how far the country’s high tech firms have come. The expanding global presence of companies like Huawei demonstrates that China is now no longer seen as just a manufacturing hub but also as a hub for innovation and development and this growth has only been possible because of open markets. China’s high tech industry is strong and healthy, and competes for the world’s customers.

Similar Economic Concerns
One of the key goals of the Obama Administration is protecting the stability of the international economic system. China’s leaders have also repeatedly expressed their concerns about the state of the global economy and our common interest in restoring the health of the international economic system serves as the basis for enhanced cooperation.

Key to these efforts is a shared interest in maintaining the infrastructure and policy governance that lets the private sector operate as it should, as an engine for economic growth and well-being. The global private sector has a key role in pushing governments to take action in shaping efforts to respond to economic vulnerabilities.

China and the United States both share similar concerns on some of the major challenges of the Internet, especially regarding protection of children from pornographic content and protection of intellectual property in a digitized age.
President Obama has stated that the threat to our cyber security is one of the most serious economic challenges we face as a nation. Because the Internet is global, digital attacks on a country’s communications infrastructure can come from anywhere in the world. The United States has been at the forefront of the global effort to further economic security and prosperity by making the world’s digital communications more secure. We are actively pursuing international collaborative approaches to address cyber security challenges both through bilateral engagements as well as in various international forums. For example, only two weeks ago, the United Nations General Assembly Second Committee (on Economic and Financial matters) adopted a U.S. resolution (co-sponsored by 18 other nations) advocating the creation of a global culture of cyber security. This resolution provides a tool to assist U.N. member states in conducting self-assessments of their national efforts in the areas of cyber security and critical information infrastructure protection and encourages member states and relevant regional and international organizations to share their best practices in these areas.
On all of these issues, public-private partnerships and government-to-government collaborations form the best combinations of utilizing business and public innovations to contend with these complex concerns.

Intellectual Property Rights (IPR)
Strong legal protections are vital to protecting the Internet from cyber security threats and encouraging innovation and the development of new technologies. China has made tremendous strides on rule of law and transparency issues by taking advantage of Internet technologies, such as publishing draft laws and regulations on the Internet for public comment. From our own experience in the United States, this approach ultimately results in better rules, regulations, and governance.

Over the past 30 years, China has built a legal and administrative framework for patents, copyrights, and trademarks. China recognizes the value of intellectual property rights or IPR and announced the goal of becoming an innovative nation by 2020. As I stated before, we do not believe that it is possible to be a truly innovative nation without a proper legal framework that encourages and rewards risk taking.

In order to foster risk taking, governments must take a firm line against IPR violations. The internet provides the technical means to quickly and efficiently distribute information. Often, creators of copyrighted information – music, movies, and books, etc. – do not receive appropriate royalties. The U.S. recording, music, and business software industries alone estimate that piracy in China cost these industries $3.5 billion in 2008. This represents approximately 1.3% of the U.S.’s 2008 annual balance of trade deficit with China.

China has IP laws and regulations in place. The country is working in an open and transparent manner to enhance these laws to meet international norms and treaty obligations. The U.S. encourages and applauds these actions.

The U.S. is prepared to work with China to expand and improve enforcement of IPR. The U.S. Government and Industry can assist with tools and training for enforcement of both Internet and physical IPR. With respect to the Internet, tools are available to minimize unauthorized file sharing and downloads. China demonstrated its will and the skill as a nation during the 2008 Olympics. That same dedication should be directed to IPR issues in general.
Enforcement consists of two parts, apprehension and punishment. Apprehension is already on the rise in China. Unfortunately, penalties in most cases are minimal and do not deter the criminals from repeating their offenses. The U.S. encourages China to invoke the maximum penalties of the law, whether administrative or criminal.

The Chinese people and Chinese industry want access to the latest U.S. high technology products. I understand some U.S. companies are hesitant to send the latest technology to China because of IPR abuse. Concerns about IPR abuse have been major stumbling blocks in recent Chinese efforts to acquire Saab, Volvo, and other segments of the U.S. auto industry. As Chinese innovators make greater and greater strides, the need to protect IP, both domestic and foreign created, becomes even more apparent.

According to a 2005 New York Times article, while the name Silicon Valley wasn’t used until the mid 1970s, the roots of innovation stretch all the way back to the 1930s, when an enterprising engineering professor at Stanford saw an opportunity for his current and former students to utilize their talents closer to home rather than depart for the East Coast. He developed a tech firm-only business park near where the U.S. Government also had radio and technology facilities and began an innovation transformation. It has taken decades and decades of hard work and some luck and genius to cultivate the seeds laid in the 1930s.

Baidu president Robin Li recently called the question of how to form a Chinese version of a Silicon Valley, the “trillion dollar question.” He said that much effort has been made to “foster entrepreneurship and innovation” in China. But Silicon Valley is a unique place. Informal contacts are often as important as more formal ones.

It’s likely true that replicating Silicon Valley will be an impossible task. Even so, I believe that it was the robust blend of collaboration and competition in the region among innovative people that led to such tremendous output. Countries that can cultivate both collaboration and competition while developing a strong academic foundation have a bright future ahead of them. This is something the United States does very well. America has a strong comparative advantage in innovation – and as long as we retain that we have a bright future in technology and other areas as well. The innovative qualities of China give it a dynamic that will serve its interests well if they have the opportunity and freedom to grow.

Thank you again for inviting me to speak today. I wish continued success to the U.S.-China Internet Industry Forum. I look forward to future discussions with my Chinese counterparts and our business community so that we can all continue to collaborate on one of the most important, exciting and challenging innovations of our time.