Xi’s Costly Obsession With Security
How a Quest for Control Threatens China’s Economic Growth
Over the past year and a half, the Trump administration has waged an extraordinary campaign against Huawei, the Chinese telecommunications giant, involving criminal indictments, trade sanctions, and diplomatic pressure on U.S. friends and allies. In May, the administration raised the stakes even further. President Donald Trump signed an executive order blocking U.S. businesses from using equipment and services made by companies controlled by “adversary governments.” Although the order did not name Huawei or China, it was clearly aimed straight at them.
The same day that Trump signed the order, the Commerce Department placed Huawei and 68 of its affiliates on a list of firms to which U.S. companies may not sell components without government approval. Huawei will suffer even more serious consequences from its inclusion on this list than it will from the executive order. Four major U.S. technology companies—Broadcom, Intel, Qualcomm, and Xilinx—almost immediately stopped working with Huawei, and Google announced that it would no longer provide the Android mobile operating system to Huawei smartphones. Although the Commerce Department later suspended the ban for 90 days, Huawei’s future remains uncertain. At an event at the company’s headquarters in Shenzhen, Huawei’s founder, Ren Zhengfei, said he expected revenues to decline by $30 billion over the next two years because of U.S. actions, down from an annual $107 billion in 2018.
Huawei does pose a threat to U.S. security, but that is not the only reason for Washington’s assault on the company. Rather, the moves are a gambit in a larger battle over the future of the digital world. U.S. Secretary of State Mike Pompeo said as much in a May 2019 speech in London, where he warned his hosts that using Huawei technology in British 5G networks could allow China not only to access valuable data but also “to control the Internet of the future” and possibly “to divide Western alliances through bits and bytes.”
The White House is right to focus on technological competition with Beijing. As I wrote in this magazine last year, China has been hard at work trying to remake cyberspace in its own image, using domestic regulation, technological innovation, world-class companies, and foreign diplomacy. If it succeeds, the Internet will be less global and less open, and Beijing will secure the economic, diplomatic, national security, and intelligence benefits that once flowed to Washington. But the Trump administration’s approach to this problem is not as effective as it could be. Much of the world has still to be convinced that the security hazards of using Huawei equipment outweigh the economic benefits. And the administration’s emphasis on decoupling the U.S. and Chinese scientific and technological ecosystems risks slowing American innovation and accelerating China’s plans for technological independence.
There are better ways to slow China’s technological rise, and they tend to involve expanding U.S. influence and fostering innovation at home. Rather than attempting to strong-arm other countries into abandoning Huawei, the United States should offer them alternatives that can compete on price and efficiency. Washington should work with allied governments to improve their cybersecurity. And it should invest in research in order to master both 5G technologies and the ones that will come after that.
Fifth generation networks have the potential to be a big deal. Under specifications set out by the International Telecommunication Union, they will deliver up to 20 gigabits of data per second with response times of under one millisecond. Users will be able to download movies in a few seconds, self-driving cars will be able to make artificial intelligence–powered decisions through near constant communication with cloud servers, and farmers will use drones, weather satellites, and sensors on the ground, crops, livestock, and machinery to water, feed, and fertilize more efficiently and sustainably. The countries that deploy 5G first will reap major economic and security benefits.
But the technology will also bring new threats. The U.S. government argues that the nature of 5G networks is such that there is no way to make Huawei’s involvement in them safe, given the company’s close ties to the Chinese government. So much data is transmitted over 5G networks that the security practices used in third- and fourth-generation networks—such as separating the core from the periphery, which keeps unreliable providers away from critical networks—will not work. And unlike in past networks, the manufacturer will push out a stream of software updates faster than inspectors can verify them.
The architecture of the 5G system thus requires users to trust the provider. U.S. officials argue that such trust is impossible when the Chinese Communist Party can demand access to data from Huawei or order it to disrupt service. As Pompeo told his London audience, “As a matter of Chinese law, the Chinese Government can rightfully demand access to data flowing through Huawei . . . systems.” Washington points to indictments alleging that Huawei’s chief financial officer committed accounting fraud and violated sanctions on Iran, and that the company stole trade secrets, as further evidence of Huawei’s untrustworthiness. (The United States has, however, never provided any public evidence that Huawei has intentionally placed backdoors or vulnerabilities in its equipment.)
Huawei officials strenuously deny that they are beholden to the Chinese government. Asked whether the company had ever given data to the Chinese authorities, Ren told CBS News, “For the past 30 years, we have never done that, and the next 30 years to come, we will never do that.” Given the Communist Party’s unfettered power in China, such assurances are hard to credit. Still, the United States has had limited success in convincing even its allies of the dangers Huawei poses. Australia and Japan have banned the company, but many other countries in Europe, Latin America, the Middle East, and Southeast Asia have said they will carry on using it.
The biggest blow to U.S. efforts comes from France, Germany, and the United Kingdom, which appear to have concluded that they can mitigate the risks of using Huawei products by using different vendors alongside Huawei equipment, keeping Huawei out of more sensitive networks, continuously monitoring the networks, and designing redundant and resilient networks so that if Huawei equipment is compromised, the entire system does not fail. Other countries are likely to use these decisions as cover to defy Washington, even though the Trump administration has threatened to curtail intelligence sharing if Paris, Berlin, and London move ahead.
Rather than attempting to strong-arm other countries into abandoning Huawei, the United States should offer them alternatives that can compete on price and efficiency.
The reluctance to abandon Huawei largely comes down to economics. With the help of government subsidies, a history of innovation, and a guaranteed majority share of the Chinese domestic market, Huawei is able to offer its services and products at significantly lower prices than its European competitors, Ericsson and Nokia, can muster. (There are no U.S. companies that manufacture the equipment to transfer signals between mobile phones and the towers or the sites that make up the 5G network.) On top of that, many countries do not entirely trust the United States. Trump imposed similar sanctions on ZTE in April last year, only to abandon them three months later, and at the June 2019 G-20 summit meeting with Chinese President Xi Jinping, Trump announced that U.S. companies would be able to sell to Huawei as long as the transactions did not create a “great, national emergency problem.” This week, the Commerce Department announced it will issue licenses to companies to sell goods to Huawei when there is no threat to national security. Foreign governments have concluded that the Trump administration is exaggerating the risks of doing business with Huawei in order to win trade concessions, and they fear banning the company only to be exposed to retaliation from Beijing after Washington reaches a final deal.
Washington’s warnings of Chinese spying also look cynical in the wake of the 2013 revelations from former National Security Agency contractor Edward Snowden that the NSA exploited U.S. technology companies to snoop on foreign citizens and governments. Many governments expect Beijing and Washington to spy on them, the thinking goes, so they might as well benefit from cheap Chinese technology along the way. Or as Malaysian Prime Minister Mahathir Mohamad put it in May, when he announced that his country would use as much Huawei equipment as possible, “Yes, there may be some spying, but what is there to spy in Malaysia? We are an open book.”
The decision to put Huawei on the Commerce Department’s entity list is an attempt to work around foreign governments and go straight to the customers. Even if officials decide the security risks can be managed, telecommunications carriers are unlikely to use Huawei equipment as long as the company’s access to crucial U.S. components remains in doubt.
One result of the Huawei ban is already clear: China will double down on its drive for technological autonomy. “Only if we own our own intellectual property and core technologies,” warned Xi in a speech following Trump’s executive order, “then can we produce products with core competitiveness and [we] won’t be beaten in intensifying competition.” Huawei is opening a science and technology research institute, in which it will invest $300 million for each of the next five to ten years, and the Chinese Ministry of Finance recently announced new tax breaks to support the semiconductor and software industries.
In the long run, the Huawei ban could disrupt telecommunications in Africa, Latin America, Europe, and Southeast Asia and delay the global rollout of 5G by several years. U.S. companies are sure to suffer. Huawei has said that some 1,200 U.S. firms play a role in its supply chain; the ban will prove especially painful for companies that produce semiconductors and the tools needed to design integrated circuits. An even larger swath of companies may fall victim if Beijing decides to retaliate. At the end of May, the Chinese government announced that it was putting together an “unreliable entities list” of foreign companies and individuals and would announce specific measures against them in the future. Such penalties on U.S. companies could spur other countries to build up their own industries in areas, such as semiconductors, where the United States currently leads.
The United States is rightly worried about China’s technological ambitions. But in order to successfully counter them, Washington must recognize that by adopting Huawei telecommunications technology, policymakers in Africa, Europe, and Latin America are making a reasonable calculation. For many countries, the benefits of fast, cheap 5G outweigh the security risk that Huawei poses. If Washington wants to change that calculus, it should provide friends and allies with a financially viable alternative, perhaps by using the U.S. International Development Finance Corporation to provide loans to finance Ericsson or Nokia equipment. And under the assumption that networks dominated by Chinese suppliers are vulnerable to cyberattacks, the United States should work with allies to strengthen their networks against cyberattacks from China and other countries and to develop shared standards for the inspection and deployment of 5G equipment similar to the joint statement issued by 30 countries in Prague in May 2019.
To complement its efforts abroad, the United States should invest in research and development at home. Congress should fund new 5G research and development centers at universities to focus on security, storage, and computation, areas where the United States has a competitive advantage. And it should encourage those centers to begin research into the 6G technologies that are likely supersede 5G some 15 years from now.
The Trump administration has chosen to counter China’s growing digital influence by swiftly disentangling the U.S. and Chinese economies. This decoupling may slow China’s progress in the short term, but ultimately it will likely strengthen Beijing’s hand. In a few years, Washington may look back and realize that its policies have not suppressed Chinese technological development but accelerated it.
Focus On Renewal, Not Protectionism