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US-China - the geopolitical conflict of our times

For more than a year, the US and China have been embroiled in a bitter trade war, which includes limitations on the export of sensitive technology to Chinese firms. Huawei, the world’s dominant telecommunication infrastructure firm faced a blacklisting by the Trump administration, spurring US technology companies to cut it off from vital supplies. But with Trump reversing his previous decision on an outright ban and loosening some of the restrictions, Gary Greenberg, Head of Emerging Markets, Hermes Investment Management, asks whether this is a tactic in protracted trade negotiations, or continuation of an economic war?

Trade policy may have been an instrument used to strike at Huawei, but the White House’s actions were not part of the US’s trade war with China. Its motives were driven by an entrenched distrust of Chinese technology firms on national security grounds and preventing the rise of Chinese technology in critical areas such as 5G. This, in turn, is a feature of its intensifying rivalry with an increasingly powerful and influential China.

We were sceptical that the temporary ban had anything to do with increasing US leverage in the trade talks – the US already has plenty of heft through tariffs. The motivation at the time of the ban seemed to be the distrust of many in the US government who have long felt Huawei to be a security concern due to its allegedly tight links with the People’s Liberation Army and Chinese intelligence services1.

However, after Trump’s meeting last week with Chinese President Xi Jinping, it looked like the US commercial interests in Huawei could still tip the balance. Trump announced that he would allow US tech companies to export less sensitive equipment to the company and that the issue of Huawei would be left until the end of the trade discussions. But for now, whilst some measures have been relaxed, Huawei tech on US networks remain banned.

Seeing Huawei as a strategic threat, the US has been successful in stifling its overseas ambitions and preventing it from installing networks in allied or friendly countries. Even with a partial lift on the ban in the US, full Huawei bans are in effect in Australia, New Zealand, Japan and Taiwan. In Europe, where Huawei already provides one-third of telecommunications systems, the UK has proposed excluding the firm as a supplier of core parts for its new 5G network and others such as Germany and France are increasing security regulations.

Despite the set-back for Huawei, the goals of Xi’s “new Long March” towards technology self-sufficiency remain abundantly clear.  Last week’s showcasing of China’s native 5G standards are sending a clear message – that China is set to further accelerate 5G deployment. At the same time, the national development funds are raising semiconductor development subsidies to stratospheric levels, unseen since the last IT bubble.

Although the Trump administration has relaxed the restrictions on Huawei, it is unlikely that Huawei or China will cease efforts in creating an alternate supply chain and it is possible that we will see Chinese designs begin to replace American vendors over the next few years. China is unlikely to leave vulnerabilities on the table as we are far from any permanent resolution on the trade front and strategic rivalry remains at the forefront.

Outside of China and the US, Xi’s Belt and Road initiative is gaining traction beyond Asia and Africa, with Italy becoming the first G7 country to join the programme, alongside fellow EU members, Portugal and Greece. In addition, China has reduced tariffs on competing products from other WTO countries to an average of c.6.7%2. This contrasts strongly with Trump, who is advancing a strongly protectionist agenda.

What will ultimately tip the balance for the US on Huawei / China remains to be seen. But what is clear, is that regardless of damage done to its star telecoms company, China shows no signs of relenting on its efforts to achieve its strategic aim of regaining economic, technological, political and cultural pre-eminence.

  1. 1 “What makes China telecom Huawei so scary?” by Sheridan Prasso. Published in Fortune on 28 July 2011.
  2. 2 https://www.cnbc.com/2019/06/19/china-lowers-trade-barriers-for-other-countries-amid-us-tensions.html

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