It’s up to China to Avoid a Tech Cold War

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This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

It's almost impossible to mention the name Huawei without also mentioning the phrase tech cold war.

The phrase stems from the idea that given hostilities between the US and China, a possible continued prohibition of US tech companies supplying customers in China, and a likely US ban on Huawei's 5G, there will be a fork in technological development between the two countries and the emergence of parallel spheres of influence. Separate, competing standards will emerge; the idea of interoperability will fall to the wayside. With Huawei being the leader in 5G technology, and China's influence strong within South East Asia and Africa's quickly-developing economies -- some of the world's most dynamic -- China is going to have a big influence on the technological (and thus economic) development of that part of the world creating client states.

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To avoid a tech cold war, the ball is ultimately in China's court but the US also has some work to do.

Avoiding a Tech Cold War: Keep the Supply Chains Open

In order to avoid a tech cold war, there needs to be both compromise and co-operation. For this first step, it's up to the US to promote compromise and co-operation.

First: the US needs to make some sort of guarantee that a blanket ban of supplying components for general commodities for Chinese firms won't happen. Instead, there should be a guarantee that components would be supplied to firms that create general consumer commodities. If these firms sense instability in supply they will look for their own domestic sources, and start to deviate away from US-led standards -- and US control. Keep in mind, one of the few legitimate sources of criticism against Huawei is its alleged flouting of US sanctions against Iran by supplying firms in the country with telecom equipment that contained US-made components. In an alternate world where Huawei's gear was full of Chinese-made components, there wouldn't be the same issue, and the US' influence and ability to enforce its sanctions would be reduced.

Curbing of the supply of CPUs, motherboards, and controllers would also accelerate China's efforts to produce its own CPU architecture. A homegrown semiconductor industry and subsequent processors is a goal of Made in China 2025 and efforts would no doubt be accelerated if the supply lines were cut off. It would also be the beginning of the end of x86 and ARM in China, creating a parallel world where interoperability is not guaranteed. As JP Morgan points out in a note on the topic, China imports more semiconductors than it does oil, and it is buying them from the US, Taiwan and Korea.

With supply chains come products. Ensuring that Chinese firms are able to purchase US components has the benefit of both ensuring China continues to subscribe to global technology standards but also ensures that the Chinese market remains open to US goods. This market to any kind of consumer good, thus its essential it stays open for business.

Keeping Emerging Markets Free

Through initiatives such as the Belt and Road Initiative, China is looking to expand its markets to emerging markets within South East Asia and Africa. While this sounds like a logical matching of markets, the reality on the ground is that many countries have now realized this initiative is more of a Faustian bargain than they previously imagined. Many countries have complained about the undue influence from Beijing and rampant cronyism and corruption.

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In Beijing's ideal world these markets would become effective client states, and the biggest customers of China's Big Tech products. In a world where there were two parallel sets of technological standards, these countries would sign on to the set of standards led by China. But even without this, China forces in their domestic Big Tech products and infrastructure by giving these countries massive loans on the condition that they are denominated in RMB and used to purchase goods and China.

Here's where China can step up, by guaranteeing that its Belt and Road Initiative won't be used to either block imports of competing technology or establish preferences. Doing that would both ease the anxieties of the states involved in the initiative while at the same time giving assurance to the US that China won't be pushing out US companies from these new markets -- which should help ease trade tensions.

Create a Switzerland of Tech

In real-world geopolitics, Switzerland is known for its neutrality and a place where opposing forces could meet and engage in diplomacy to try and resolve conflict.

The tech world needs a Switzerland. This is a place where political and industrial giants could meet to resolve differences. It's where standards could be negotiated and formed, as well as materials and hardware inspected to guarantee that there are no backdoors to allow for electronic eavesdropping.

Former Foxconn CEO Terry Gou suggested something similar to this at the G2 and Beyond summit in Taipei this past June, proposing that Taiwan could be the tape that holds a bifurcated tech world together and if the world does split into two it could be what pulls it back together. While a divided, competing, world of technology is not ideal there also needs to be a backup plan to prepare for a worst-case scenario.

China Should Take the First Bold Step to Avoid a Tech Cold War

If a tech cold war is to be avoided, China needs to take the first big bold step. While there have been some baby steps such as Huawei offering to license its 5G technology to a US competitor, China needs to also try and curtail its expansionism. This means no more state-sanctioned technology theft, as well as guarantees to keep markets open both in China as well as in Belt and Road Initiative states.

If the US sees that China is going above and beyond to allow open access to its markets, it will likely, in turn, reciprocate. That means Huawei (though it will still have to build up trust) can have access to the US market to sell its telecom gear, and other emerging firms in the electric vehicle or solar panel sectors can also have access to the market. Competition would intensify -- which benefits everyone -- while standards would remain globalized.


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