To win the Sino-American Cold War, it is imperative that the United States preempt China’s rise to technological parity in areas as diverse as telecommunications, artificial intelligence, biotech, and nano-tech.  Because of its scale, maturity, and ubiquity, telecom supremacy is a particularly urgent battlefield on which America must win.  To disrupt China’s ascendancy in this industry, the United States is feverishly working with its allies to impede China by using the tools of both supply and demand.

Impeding demand means ensuring that the U.S. and its allies exclude Chinese products from their next-generation infrastructure.  In July, the UK government decided to ban the use of Huawei equipment in its 5G mobile communications networks. The decision reverses the UK’s previous openness to the Chinese mobile-equipment giant; that position had put it at odds with its closest allies, the so-called Five Eyes.  The other four members of the Five Eyes alliance - Australia, Canada, New Zealand, and the United States - had long expressed serious security reservations about Huawei equipment.  Particularly because this equipment could be used to install backdoors for Chinese espionage.

Why the change of heart?  Until recently, the British government was basing its security risk-assessment on a narrow set of technical considerations.  That risk-assessment largely hinged on Huawei software’s robustness with respect to malicious third-party attacks.  The UK did not rigorously evaluate the threat from espionage backdoors.  Furthermore, the British government faced a growing sense that Britain could not afford to stand apart from its closest allies on such a sensitive matter.

Now, after Britain’s decision, the remaining Western holdouts, notably France and Germany, are expected to quickly fall into line with the Five Eyes.  So too is India, which was potentially Huawei’s largest non-Western customer.

Furthermore, countries not historically suspicious of China may now follow suit, because they do not want to be trapped using mobile equipment running on technical standards different from those in the main OECD countries. That potentially leaves China with only a few relatively poor foreign customers such as Russia and a motley crew of Asian and African states.

From a marketing standpoint, Huawei, which operates as a de facto branch of the People’s Liberation Army, has had a cataclysmic “reversal of fortunes.”  As recently as the summer of 2019, it looked like the company was poised to take over the mobile world - on a scale that would resemble the market power of Apple, Google, and Samsung combined. Why? Just as countries worldwide were preparing to commit hundreds of billions of dollars to build their communications infrastructure for the next decade, Huawei stood ready with products that were cheaper, faster, and more comprehensive than any of its competitors.

Notably and ironically, COVID-19, which originated in China, has become an important, player in Huawei’s downfall.  First, the Coronavirus distracted governments facing a seemingly urgent 5G deadline; now these governments can comfortably push back their major 5G investment decisions by a year, citing the public-health crisis and fiscal constraints.  By that time, Western competitors to Huawei such as Ericsson, Nokia, and Samsung, are expected to have caught up with the price-performance of their offerings.

Second, COVID19 has laid bare the world’s precarious supply-chain dependency on China.  Washington and London are exploring how the so-called D-10 democracies, made up of the G-7 plus Australia, India, and Korea, can create a “trade bubble” to exclude China from the technological mainstream.  And that bubble will become an integral part of what Trends calls the Technological Iron Curtain.

To finish closing the Technological Iron Curtain, the United States has begun progressively increasing the pressure on China via the supply dimension.  On August 17, the U.S. Commerce Department announced new restrictions on exports to Huawei intended to starve the company of commercially available microchips by blocking sales by any firm, anywhere in the world, of any microchips containing U.S. intellectual property or manufactured using machinery containing U.S. intellectual property.  Given U.S. dominance in the semiconductor sector, this covers just about the entirety of Huawei’s supply of foreign chips.  And Chinese chipmakers are not believed to be anywhere close to capable of allowing Huawei to stave off an existential crisis once its chip inventories are exhausted by early next year.  Assuming the United States can ensure that heavyweights such as Taiwan Semiconductor Manufacturing Co. and Samsung comply with the order, this supply-side pressure will force Huawei to dramatically scale back its ambitions in both 5G infrastructure and sales of smartphones for the next few years.

Not surprisingly, both Huawei and the Chinese government have framed the Five Eyes’ rejection of the company as a U.S.-led, Clash of Civilizations; in effect, they describe it as an attempt by a jealous America to deny China its rightful place in the world.  And, they have in Donald Trump a perfect foil, whose allegedly racist rhetoric has been used to spin a story of Huawei’s persecution.

But every informed decision-maker knows this is not so.  Even before the current U.S.-China rift, Huawei was never really credible as a technology monopolist for the West, in the way Apple or Google are.  Even absent any espionage motives, embracing Huawei seems like a decision that any western democracy would come to regret.

So, what’s the bottom line?

After 30+ years of accepting China’s unfair trade practices, theft of intellectual property, and human rights abuses, the west is hitting back at China’s greatest weakness: its dependence on the global economy for both customers and state-of-the-art technology.  Cut off from both, China’s ambitions for global economic and military dominance appear are seriously jeopardized.  And, Huawei is simply the first such target.

Given this trend, we offer the following forecasts for your consideration.

First, while American technology companies will complain about losing Huawei and other Chinese companies as customers they will soon find new opportunities as global demand shifts to non-Chinese telecom companies.

Second, multi-nationals will soon come to realize that shutting China out of global markets will be worth far more than having access to the Chinese market.

 
The CCP’s Made in China 2025 plan clearly shows that China intends to monopolize every major industry once it has the capability to do so.  Without the promise of access to China’s consumers, the rising labor costs, increasing tariffs on exports, and widely-publicized industrial espionage makes manufacturing in China no longer worth the risks for most companies. Multinationals are increasingly realizing this and making plans to shift production to more trust-worthy Asian countries.

Third, taking Huawei out of contention for 5G technology will go a long way toward preempting China’s long-term cyberwarfare ambitions.
According to U.S. Secretary of State Mike Pompeo, “The Trump Administration sees Huawei for what it is  -  an arm of the Chinese Communist Party’s (CCP’s) surveillance state  -  and we have taken action accordingly. We will not tolerate efforts by the CCP to undermine the privacy of our citizens, our businesses’ intellectual property, or the integrity of next-generation networks worldwide.”

Fourth, the U.S. Cyber Command will aggressively respond as China uses Cyberwarfare tactics to retaliate against the United States and its allies.

 
A report released in early August by the Taiwanese firm CyCraft says that Chinese hackers aggressively attacked at least seven major semiconductor vendors over the past two years, attempting to steal their software.  Although the identity of hackers is often difficult to ascertain precisely, the report noted the enterprising semiconductor thieves were familiar with the Chinese written language and took breaks during Chinese national holidays.  Notably, the semiconductor espionage campaign was very sophisticated, involving customized viral code planted in web browsers on corporate networks and a carefully hidden command-and-control server. The attackers also employed powerful tools to crack password protection once they were inside a network or force the system to assign each account a secret additional password known only to the hackers, a technique called “skeleton key injection.”   -   While Taiwan and the United States will certainly take increased defensive action, it’s likely that serious offensive resources will need to be deployed in order to make continued cyberattacks by the Chinese prohibitively expensive.  While Chinese proficiency in this area is high, only Israel has cyber warfare capabilities at or above those of the United States.

Fifth, without the ability to import state-of-the-art chips, China will have to invest tens of billions of dollars and years of effort to replicate manufacturing technologies that took the west decades to develop.

And this effort will be difficult to fund since their revenues will come from serving only the domestic Chinese market and the foreign customers that nobody else wants.  Just as potentially important, the shortage of chips will impact China’s ability to field the latest military hardware and software with which to threaten its neighbors.  And,

Sixth, the administration will ban Tick-Tok and WeChat apps in 2020 unless ownership is transferred to an American company, with significant consequences for U. S. phone makers.

Chinese app platforms routinely violate U.S. laws in terms of the way they collect and handle data.  For example, Tick-Tok collects both the MAC address and the customer identifier and links them together; while the customer identifier can be reset, the MAC address can’t, so this enables the app to track the person across multiple sessions. – What’s not yet clear is whether the Apple Store and Google Play will have to delete the apps worldwide or just in the United States.  Because of the importance of WeChat in China, some analysts believe a worldwide prohibition could reduce sales of iPhones by up to 30%; a US-only ban would probably eliminate only 3-to-6% of iPhone sales.

 
References

1. The American Interest. July 29, 2020.  Karthik Ramanna.  Why Huawei Lost Its Quest for World Domination.
https://www.the-american-interest.com/2020/07/29/why-huawei-lost-its-quest-for-world-domination/

2. com.18 Aug 2020.  Sherisse Pham.  New U.S. Sanctions Strike ‘Lethal Blow’ At China’s Huawei.
https://www.cnn.com/2020/08/17/tech/huawei-us-sanctions-hnk-intl/index.html

3. Geopolitical Futures. February 3, 2020.  Phillip Orchard.  Tech Wars Are Complicated and Hard to Win.
https://geopoliticalfutures.com/tech-wars-are-complicated-and-hard-to-win/

4. com August 20, 2020. John Hayward. Report: Chinese Hackers Target Taiwan’s Semiconductor Industry.
https://www.breitbart.com/asia/2020/08/20/report-chinese-hackers-target-taiwans-semiconductor-industry/

5. com. August 20, 2020. KRISTINA WONG.  Pompeo Says ‘The Tide Is Absolutely Turning’ Against China.
https://www.breitbart.com/politics/2020/08/06/pompeo-tide-absolutely-turning-against-china/

6. com.31 Jul 2020.  VICTORIA FRIEDMAN.  Five Eyes in Talks to Reboot ‘Critical’ Group to Combat Dependence on China: Report.
https://www.breitbart.com/europe/2020/07/31/uk-talks-resurrect-five-eyes-critical-five-group-combat-dependence-china-report/

7. Geopolitical Futures.November 15, 2019.  Phillip Orchard.  Washington’s Chinese Tech Conundrum.
https://geopoliticalfutures.com/washingtons-chinese-tech-conundrum/

8. Financial Times. August 18, 2020. Kathryn Hille, Edward White & Kana Ingaki.  Chip and Phone supply Chin shaken as Huawei faces mortal threat.
https://www.ft.com/content/bdd2a70f-ecd2-4aff-b6c7-c0624bfdeebb

9. National Review. August 14, 2020. JONATHAN D. T. WARD.  America Needs an Economic Containment Strategy against China.
https://www.nationalreview.com/2020/08/chinese-economic-growth-america-needs-containment-strategy-against-beijing/

10. com.August 10, 2020.Chriss Ciaccia.  Apple iPhone shipments could drop 30% following WeChat ban, one analyst says.
https://www.foxbusiness.com/technology/apple-iphone-shipments-drop-30-following-wechat-ban

11. The Wall Street Journal. August 11, 2020. Kevin Poulsen & Robert McMillan.  TikTok Tracked User Data Using Tactic Banned by Google.
https://www.wsj.com/articles/tiktok-tracked-user-data-using-tactic-banned-by-google-11597176738

12. com. August 12, 2020. Hal Brands.  How Far Will China’s Surveillance State Stretch?
https://www.bloomberg.com/opinion/articles/2020-08-12/how-far-will-china-s-surveillance-state-stretch