Sustained pressure from Western governments, led by the USA, is taking its toll on Huawei, as further confirmed by two news stories from last week. The Swedish Post and Telecom Authority (PTS) banned Huawei and fellow Chinese network manufacturer ZTE from its 5G mobile networks to tackle the threat of espionage and “theft of technology”, whilst a senior US official said “the tide has clearly turned on Huawei in Brazil” after a US delegation offered finance to Brazilian telcos that choose to source network equipment from other vendors.
The announcement by PTS placed emphatic conditions on telcos wanting 5G spectrum:
New installations and new implementation of central functions for the radio use in the frequency bands must not be carried out with products from the suppliers Huawei or ZTE.
If existing infrastructure for central functions is to be used to provide services in the concerned frequency bands, products from Huawei and ZTE must be phased out 1 January 2025 at the latest.
The Chinese government responded in typical fashion, threatening the Swedish government with tit-for-tat reprisals. Bloomberg reported on a press briefing where Chinese foreign ministry spokesman Zhao Lijian stated:
Sweden should adopt an objective and fair attitude and address its wrong decision so as to avoid negative impacts to normal economic and trade cooperation between the two sides and avoid bringing any negative impacts to Swedish companies’ operations in China.
Brazil is planning to auction 5G spectrum next year, and a US delegation met with Brazilian President Jair Bolsonaro on the same day as the Swedes made their announcement. This continues a pattern where Brazilian telcos have become a key battleground for US and Chinese diplomats. Bankers in the US delegation have now upped the ante by offering both debt and equity finance to the Brazilian telecoms sector. Reuters reported that the Export-Import Bank of the United States (EXIM) has allocated 20 percent of its USD135 billion portfolio for “commercial deals with companies that want to partner with the United States as part of the Trump administration’s China and Transformational Exports program, which is aimed at neutralizing Chinese competition”.
The Chinese Embassy in Brazil responded via Twitter, accusing the United States of a ‘cold war and zero-sum’ mentality.
a ordem internacional e ameaçam as regras internacionais. Ao ignorar os fatos básicos e produzir comentários baseados na mentalidade de guerra fria e jogo de soma zero, eles têm como objetivo real servir a certos interesses políticos,…
— Embaixada da China no Brasil (@EmbaixadaChina) October 20, 2020
Managing risk without managing strategic risk is like managing your health except for your heart and lungs. Whatever you gain will inevitably be eroded by a fundamental decline in your wellbeing. Though their choice of language is inflammatory, the Chinese are correct to observe the world is entering a new cold war era. The associated risks cannot be managed by simply hoping they will not materialize.
A second cold war appears inevitable not just because the US and its allies have chosen that path, but also because China is incapable of the reforms that might lead others to change course. China threatens to cut imports but a trade war would hurt them most of all; their country exports a lot of manufactured goods, and this trade surplus is only partially offset by importing services. To put it another way, they sell physical objects and buy knowledge, which is why US sanctions on chip manufacturing will cripple Chinese firms that will not be able to make better electronic goods if they cannot learn how to make them. China would be in a stronger position if their domestic markets bought more low-end products of a type that creates many jobs for the people producing them, including those employed overseas. However, Chinese markets have not opened up as quickly as they might, leaving them with less leverage. China has a big economy, but the US economy is bigger, and most of the other big economies are allied to the US. The hostile tone adopted by China’s representatives further undermines the sensitive act of projecting Huawei as a conventional privately-run business with no ties to the Chinese government. That China’s leaders treat the supply of network technology as a strategic imperative just reinforces why it is also of strategic importance to other countries too.
Telecoms networks do not work the way they did during the original Cold War. There were doubtless many who wanted to tap the hotline between the US President and Soviet Premier, which was so memorably depicted during the nuclear war satire Dr. Strangelove. However, communications surveillance used to be too labor-intensive to apply to more than a few selected targets. Automation means it can now be applied to every person connected to a network. And we know the Chinese government has no qualms about surveilling entire populations because they do it to their own people, implementing the most sophisticated monitoring and evaluation program the world has ever seen. A wealth of information is available to their leaders, but they need not rely on human operatives to judge whether a person’s behavior is good or bad because they have algorithms that do it for them. The output is a limitation of the rights and restriction of access to services based on the ‘social credit’ of the individual. The phrase ‘social credit’ is just a euphemism for using surveillance to automate the control of everybody’s choices. This level of automated data capture and analysis is a fundamental threat to other cultures, and it would be deeply irresponsible to ignore the risks simply because Huawei’s equipment is cheap.
As much as we may want to think of telcos as being competitive businesses that purchase equipment from suppliers who work in a free market, that would be naïve. Governments control telecoms prices, decide who can use which land and for what purpose, and impose many conditions on telcos. They even decide who can use radio waves. Nevertheless, the telecoms industry possesses a fair mix of individuals who are genuinely naïve and others whose naïvety is studied. They may try to accommodate both sides of a cold war as long as they can, but their insouciance will prove unimportant at a strategic level. Telcos will inevitably bow to the will of governments, and the growing publicity for human rights abuses by the Chinese government is not going to help the cause of those who hope democracies lack the stomach for a fight. Anyone expecting a reversal of policy if Joe Biden replaces Donald Trump as President of the USA must simply be ignorant of how US politics works. Biden has spent half a century at the top of US politics and has witnessed a steady shift in sentiment as members of both parties supported increasingly tough restrictions on Chinese telcos and manufacturers. Biden’s attitude and connections to China have proven to be amongst his worst political liabilities during the current campaign, so he will not waste political capital by embracing Chinese firms if he wins. US policy is fixed for at least the period during which most rich countries will roll out 5G, and China lacks the diplomatic skills to alter that. This leaves telcos with uncomfortable but necessary choices about how to manage their risks.
Huawei will not disappear overnight, but they will suffer greatly by the reduction in their revenues. This will have a knock-on impact on how much they spend on research and development. Huawei’s massive research expenditure has been crucial to attaining a competitive advantage. Cutting that expenditure will make it harder for them to reduce their reliance on embargoed suppliers, and will also make it more difficult to address ongoing security weaknesses, such as those identified by the UK’s Huawei Cyber Security Evaluation Centre. Or Huawei will be able to sustain expenditure despite an enormous cut to projected revenues, illustrating that the money pumped into Huawei is not just chasing a conventional profit, but is made available because it serves China’s wider interests, encouraging other countries to respond in kind. That means all telcos, apart from those in China, must plan for a future where Huawei plays a more limited role, if any. Some things matter more than money, and supply chains must be reconfugured to address other priorities than the minimization of costs.