The East-West split in technology is starting to become visible

Huawei has now produced a phone with no US components. Is this a sign of what lies ahead?

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  1. Garry White

Much of the damage from Washington’s trade war has already been done. Huawei has now produced a smartphone that contains no US-made parts at all, eradicating American businesses from the supply chain. With Donald Trump stepping up his campaign against the Chinese technology behemoth at the Nato summit last week, the chance of a digital iron curtain dividing East and West has now increased substantially.

An analysis by UBS and Japanese technology laboratory Fomalhaut Techno Solutions found Huawei’s Mate 30 phone contained not a single US-sourced component. This followed the US Commerce Department’s move to blacklist the communications equipment maker. Of course, many other of its products are still using US parts – microchips in particular – but the speed at which the company has replaced its American supply chain for this phone is remarkable.

US companies wanting to do business with Huawei now need a special licence because the company stands accused of being too close to Beijing. The Chinese company has denied it has any ties to the country’s security services or that it will provide components for 5G networks that will be used in spying.

Politics not espionage?

Huawei’s management argue that attempts to suppress its business are actually part of a plan for the US to maintain its global technological leadership, with security just an excuse. It, therefore, launched a legal challenge to the decision yesterday after the US Federal Communications Commission put curbs on rural mobile providers using a $8.5bn (£6.5bn) government fund to buy Huawei equipment.

The move against Huawei is certainly part of the ideological battle for technological supremacy between Washington and Beijing. However, the security issues are real. Questioned by the Senate Homeland Security and Governmental Affairs Committee last month, Federal Bureau of Investigation (FBI) director Christopher Wray, argued that China should now be viewed as the “most severe counterintelligence threat” to the US, surpassing that of domestic terrorists. 

Mr Wray pointed out that the FBI now has more than 1,000 investigations open into the theft of intellectual property, with almost all having a trail that led back to China. He said that the Chinese cyber threat was “deep,” “diverse,” “wide” and “vexing.”

The US is right to be concerned. This next-generation technology is regarded as so important that it has been dubbed the Fourth Industrial Revolution. US telecoms group Verizon noted that 5G “will enable $12.3 trillion (£9.4 trillion) of global economic output and support 22 million jobs worldwide” as it connects all kinds of devices to the worldwide web and manages massive streams of personal data. That’s why Mr Trump once again targeted Huawei at the Nato summit this week. “I do think it’s a security risk, it’s a security danger,” the president said.

Security apparatus at risk?

Following the event, Boris Johnson said that the integrity of the Five Eyes will be his top concern in deciding whether Huawei will be allowed to build Britain's 5G network. Five Eyes is the anglophone alliance comprising of Australia, Canada, New Zealand, the UK and the US. There are real concerns that should a country embed Huawei devices in its networks then this vital counter-terrorism intelligence-sharing agreement could be at risk. Australia and the US have already banned the company from their 5G network. 

This represented a toughening on his previous stance and was undoubtedly impacted by President Trump. The UK has repeatedly deferred any decision ever since Theresa May's National Security Council ruled in favour of partial Huawei involvement, despite the objections from many cabinet ministers. However, Mr Johnson added that he didn’t want this country to be “unnecessarily hostile to investment from overseas".

However, the importance of Five Eyes means that Huawei components are unlikely to make it into the 5G networks of major western nations that will be built in the future. This is sure to generate a response in China similar to Huawei’s move to reduce its reliance on America.

Chinese company relationships with the country’s government aren't like private sector company relationships with governments in the West. They are likely to yield to the demands of President Xi Jinping, who has been getting more authoritarian after the removal of the two-term limit on the presidency, which effectively allows President Xi to remain in power for life.

All of this means that the shift in global supply chains that we have seen during the trade war will continue. The US has thrown more fuel into this fire after announcing plans two weeks ago to implement Mr Trump’s  Executive Order 13873, which grants Commerce Secretary Wilbur Ross the authority to prohibit or condition certain transactions involving technology “designed, developed, manufactured, or supplied by persons owned, controlled, or directed by a foreign adversary”. A consultation period on the proposals is ongoing, but the new regulations are clearly targeting China.

But what does this mean for global business? The readjustment of supply chains that has taken place over the last year will continue, as this technological cold war enters another phase. This means operating costs are likely to increase and margins will be hit, reducing profitability at many companies. Larger tech groups, with wide margins and deep pockets, will easily be able to take this hit, so once again the benefits of size in a technology space that will increasingly rely on Big Data will be seen. But longer term, as this digital divide grows, the chances of a fracturing of the entire internet between East and West increases. Once again, we are witnessing deglobalisation in action.   

A version of this article appeared in Friday’s Daily Telegraph

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