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Trump’s actions could create a digital divide

The US President’s attack on Chinese technology in general, and on Huawei in particular, may have long-term consequences for the development of the sector.

The US President’s attack on Chinse technology in general, and on Huawei in particular, may have long-term consequences for the development of the sector.

by
John Redwood

in Features

30.05.2019

The US suddenly injected a tougher set of actions into the generalised debates over a new trade treaty. Washington seeks fairness and some reassurance about the security of technology data and intellectual property where China and the US do business with each other. This, along with the imposition of higher tariffs, meant the end of hopes of an early trade deal between the US and Beijing.

The US Commerce department added Huawei to its Entity List of those it says are engaged in activities contrary to US national security. In future, any US company – and US ally – will need a licence to trade with those on the list. The citation says that Huawei has carried out “activities contrary to US national security… including alleged violations of the International Emergency Economic Powers Act (IEEPA), conspiracy to violate the IEEPA by providing prohibited financial services to Iran, and obstruction of justice”. The Commerce department is engaged in drafting and granting suitable special licences following the publication of a Presidential Order. The President legislates about unnamed foreign adversaries, defined as “any foreign government or foreign non-government person engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the US”.

Services limited

Various companies have had to respond promptly to this toughening of attitude to technology exports and transfer. Google has said it will no longer be able to supply services such as Google maps and Gmail to buyers of new Huawei smart phones. Large chip manufacturers such as Intel and Qualcomm have indicated they will have to stop supplying Huawei, as has the German chip maker Infineon. The immediate disruption to existing contracts and supplies produced some second thoughts in the US government. The Commerce Department issued a statement that they would make a General Licence available for the next 90 days allowing companies to continue to trade as a temporary measure whilst the department sorts out the detailed specific licence arrangements for the future. It will leave some companies deciding to be cautious as it is not a complete reprieve. They said they “authorize certain activities necessary to the continued operations of existing networks and to support existing mobile services, including cybersecurity research”.

The longer-term consequences are more difficult to read. Huawei is pushing back against the ban in the US courts, claiming the administration has no evidence they are a security threat. It is always possible that this dramatic intervention in the workings of the technology sector is an extreme lever introduced by President Trump to get a better deal out of China across the board. It is possible one day he will decide he has extracted enough from China and move to seal a deal and repeal these measures. The US establishment, however, believes there is a threat from China and is fully behind taking protective measures and pushing hard on the issue. It is possible Donald Trump heeds this and does not move to secure a deal on technology, whilst perhaps finding some deal on food, tariffs and other trade matters. It is possible that any deal is only a short armistice in what is going to become a new cold war between the US and China as the world’s superpower moves to protect its power and influence from the new challenger, the largest country by population soon to become the largest economy and military power on some criteria as well.

The Splinternet

A digitally-divided world could mean in due course rival systems and spheres of influence. Europe and most of the Americas will be on the US system, along with Japan, Australia and New Zealand. Greater China and greater Russia will be on another. There will be a commercial and political battle for much of Africa and Asia, where their choice of digital system will be a statement about their general political positioning in a polarised world. The US is good at claiming extra-territorial powers, as it has with sanctions against various Middle Eastern countries. It will now aim to extend its technology controls to its allies, telling them they cannot expect proper trade co-operation, intelligence sharing and data sharing if they have systems with possible backdoors into the Chinese state. China has been put on alert that in the future they may be barred from more US technology, leading them to want to have more independence in their supply chains and more exclusive control of all parts of their internet service.

The new cold war is being fought around cyberattacks, misuse and abuse of computers, with battles for public opinion with news and fake news in rapid circulation. The US has just upped its game because it takes cyber threats seriously. In the process, it has upset international trade. If followed through, it impedes the development of a world internet and digital system, and makes a digital divide more likely. If the US makes these bans permanent, a cyber curtain comes down along technology borders being hurriedly drawn up. The interruption to trade is a negative for markets. Some companies will lose out in the short term because they straddle the divide. Some companies that are fully committed either to the west or to China as their main marketplace may get a price benefit from reduced competition in their sphere of influence.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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