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America’s Perilous Tech Clash With China

“The trade-off we’ve chosen is that the rollout of 5G in the United States will be much slower and much more costly.” So summarized historian and journalist Zachary Karabell at a recent Techonomy roundtable on U.S.-China tech relations. The session was co-sponsored by Huawei, the Chinese telecoms giant that has been frozen out of the U.S. market over security and intelligence concerns. Huawei was represented by Joy Tan, U.S. senior vice president of public affairs. Also joining was Scott Malcomson, author of Splinternet: How Geopolitics and Commerce are Fragmenting the World Wide Web, who has studied extensively the Chinese government’s approach to tech. It was a lively if inconclusive discussion, which did not engender confidence about next steps for American policy.

Tan expressed frustration and perplexity about Huawei’s exclusion from the U.S. market: “The U.S. government never told us their concerns. We don’t understand what the real issues are. There is no proof or evidence of any Huawei wrongdoing.” Karabell agreed that the U.S. government’s increasingly decisive steps blackballing Huawei and other Chinese tech companies, which started all the way back in 2012, have not been bolstered much with evidence. He said when the Trump administration gave a group of European allies the “full court press” to get them to ban Huawei, they were underwhelmed.

The main rationale then and now, Karabell said, has not been specific allegations of misbehavior so much as the argument that Chinese telecoms equipment in the U.S. and allied countries would “provide the Beijing government with an undue advantage in tapping private communications.” And that is essentially the point Malcomson made on the panel. “To me the main question,” he said, “is will the Chinese government influence Chinese multinational companies, tech companies, to carry out its will? And I think the answer is yes. The government of China has not in any way hidden its ability to influence Chinese companies to do what it wants, when it wants.”

For Tan, though, such arguments are beside the point, because, contrary to what most Americans think, Chinese law does not require its companies to take orders from the government outside of China. She said a widely cited 2017 National Intelligence Law applies only inside the country’s borders. As for accusations that the company might install “back doors” or otherwise harvest data from systems around the world, she said Huawei surrenders control over its equipment once it sells to telecom companies. “We have to secure operators’ written approval before we access this equipment,” she explained, adding that Huawei engineers must use specially provisioned laptops provided by the telcos, who monitor every keystroke. “So there’s no way Huawei can do any spying work or any illegal work,” she said. Many Americans “think Huawei can just access the network at any time without any approvals,” she continued. “That is absolutely not true.”

Karabell, however, acknowledged as a given that the two countries spy on one another incessantly. “In terms of asking companies for what is essentially communications intelligence about what’s going on abroad or working conjointly,” he said, “that’s sort of par for the course. I do believe in the moral equivalency here. This is how countries guard their security.” But he asked, “Does the production and location of the equipment provide some sort of competitive intelligence spying advantage?” The answer, he said, somewhat frustratingly, is unclear.

Tan explained the current situation: Huawei cannot procure any U.S. hardware or software products, unless those companies get special U.S. permission. That now includes products made elsewhere with U.S. technology, including chips from global giant Taiwan Semiconductor, a major Huawei supplier. It is thus deprived of critical chips as well as the ability to use Google’s Android smartphone operating system. (Until recently Huawei built smartphone market share steadily for years, and by the second quarter of 2020 was the world’s leading brand with 20% share, according to Statista. But largely because of the components ban, by the fourth quarter Huawei dropped to just 8.4%.) “Mostly the restriction is on the supply chain,” Tan said, “so this has great impact on Huawei’s global business, and also on the U.S. semiconductor industry.” Huawei equipment previously installed by about 40 mostly rural American telecoms carriers also is now being removed.

Tan said there have been several ramifications for Huawei. The portion of its market represented by China has grown from about 50% to 65%. It is, in response to restrictions, now aggressively building up business in new areas. For example, it makes automotive connectivity modules as well as electric car batteries. “China represents a huge market either in infrastructure or the consumer space, so there are many areas Huawei can continue to grow,” Tan said.

Malcomson explained what he believes led to all this: “Chinese policy has been towards self-sufficiency. China is able to generate tech companies, provides a protected market of a quarter of the world, give or take, and they’re able to grow in that market against each other in a relatively controlled fashion until they’re able to go into foreign markets.” At the beginning of the session an audience poll had found that a majority of Techonomy’s audience believe “decoupling” the two economies is impossible, but Malcomson disagreed. “Decoupling has really been China’s policy with technology and many other things for a number of years.” He continued: “I’m not trying to defend U.S. policy as coherent, but I would trace it to a 2015 official Chinese document which laid out the government’s own ambitions. The goal is to make China as invulnerable as possible by creating a global system. Ultimately China wants to have control over these systems from space to underwater and everywhere else.”

Taking global markets away from Chinese companies, as U.S. and allied policy increasingly does, Malcomson said, will push them further to concentrate on China itself, and ultimately make it harder for them to innovate for markets outside of China. That’s partly why, he said later, “I don’t think the U.S. is going to lose the 5G race.”

Karabell by contrast was unwavering that the U.S. rollout of 5G would be impaired by this clash. “I’m not 100% clear what the actual goals of U.S. policy are,” he said. “The only thing that’s succeeded is to crimp the ability of Huawei and some other companies to function. It hasn’t led the U.S. to be able to produce equivalent equipment at equivalent cost. So if the goal is we’re going to prevent them and boost us, there’s some prevention and very little boosting.” He continued: “If the policy is, by doing this we’re somehow going to coerce the Chinese government to act differently because the costs of not acting differently are so great, that’s also been a complete failure. And then there’s just the complete muddiness of it.”

Karabell did concede, though, that U.S. alarm about Chinese tech “has had a somewhat constructive effect in spurring alternate solutions and somewhat more investment.” Yet the man who a decade ago wrote a relatively optimistic book entitled Superfusion: How China and America Became One Economy added glumly: “Competing ecosystems being isolated from each other is likely a long term drag on everybody.”

Fascinating and spirited though the conversation was, it was hard to leave expecting much near-term cleansing of the situation’s muddiness.

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