(What’s Left of) Our Economy: How a U.S.-China Huawei Tech Disaster Unfolded

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5G, antitrust, AT&T, Bell Labs, China, espionage, Huawei, Lucent, national security, networking, offshoring, privacy, semiconductors, surveillance, tech transfer, technology, telecommunications, {What's Left of) Our Economy

It’s hard to think of a worse mess that Washington has gotten the country into than the loss of global leadership in advanced telecommunications knowhow to China. With the world on the cusp of a transition into the so-called 5G standard, the United States boasts exactly zero companies capable of creating complete networks based on this technology, which will increase by orders of magnitude the speed with which individuals, organizations of all kinds, and governments can send and receive digital information, and thereby bring much closer all kinds of game-changing breakthroughs. In particular, 5G can enable the creation of truly “smart” electronic networks that will greatly boost the efficiency of public transportation and energy infrastructure, healthcare, manufacturing, and so much more. (Here’s a good primer.)

Even worse, the world’s pace-setter in terms of both quality and price is Huawei, and Chinese entity with unusually close ties with China’s dictatorial and belligerent government.  Moreover, its lead over its other two 5G competitors (Finland’s Nokia and Sweden’s Ericsson) is enormous. Huawei’s dominance matters a lot because the advent of an effectively networked world also means the advent of a world in which hacking becomes much more dangerous – and the power to hack will translate into decisive strategic and economic leverage. Just think of the possibilities of national security and economic spying alone, let alone the implications for everyone’s privacy. And because of Huawei’s 5G leadership, Beijing holds entirely too many of these cards.

All is by no means lost yet. In particular, Huawei and other Chinese technology entities still rely heavily on U.S.-based companies for state-of-the-art parts and components – especially semiconductors – along with software. But thanks to 5G’s vast potential alone, Americans can’t assume that, before too long, China won’t be able to use it to cut into their lead in these information technology manufacturing and services sectors.

So how did this dangerous U.S. failure come about? When I first briefly answered this question posed by a Twitter follower, I emphasized the U.S.’ reckless pre-Trump administration China policies. These both greatly incentivized Americans businesses to offshore production and jobs to the People’s Republic even in the advanced manufacturing sectors in the public was assured the United States would always maintain matchless superiority, and turned a blind eye to China’s practice of extorting cutting edge knowhow from these U.S.-based firms in exchange for access to China’s huge and potentially huge-er market.

But as the author of an article last year focusing on the weird – and arguably perverse – relationship between recent American trade policies like these, and recent American antitrust policies, I was especially grateful to this Financial Times article for reminding me that the latter helped create this disaster as well.

Here are the key passages explaining the lack of a US telecom equipment manufacturer capable of producing the full-range of 5G kit:

“To understand how this came about, it is necessary to go back to the mid-1990s when the US passed a Telecommunications Act that weakened US champions such as Lucent Technologies by enticing a flurry of new entrants into the market. With its profit margins under pressure at home, Lucent targeted sales in a fast-growing Chinese market to prop up a flagging share price.

“But Chinese authorities insisted that all foreign equipment makers would — as the price of admission — be obliged to hand over technology and knowhow to state research labs and business partners. One by one, the chief executives of the largest telecoms equipment companies trooped through Beijing in the early 2000s pledging to localise their technologies and production bases.”

Neither American Presidents nor Congresses displayed any serious interest in the consequences. Yet submitting to China’s blackmail failed even to save Lucent. In 2006, it found itself in desperate straits, “and was sold to a French rival, leaving North America without a heavyweight telecoms equipment player. The company that was once the technology champion behind Bell Labs is now part of Finland’s Nokia.”

My trade/antitrust article focused on the bizarre situation that had prevailed in the pre-Trump decades, during which the U.S. leaders from both major parties seemed hell-bent on maximizing the competition faced by U.S.-based businesses from foreign economies (via offshoring-friendly and similar one-way trade deals and policies) even as they seemed equally determined to reduce the domestic competition faced by U.S.-based businesses by greatly weakening antitrust enforcement.

The Financial Times article shows that exceptions periodically appeared to this indulgent antitrust policy. But more troubling, it indicates that no national security or even global economic competitiveness considerations (and of course the two are closely related) ever significantly affected antitrust policy. That’s an indictment just as serious as simple neglect or actual encouragement of ever greater levels of corporate concentration.

It’s important to point out, moreover, that this telecommunications disaster’s roots run much deeper. Specifically, the federal government began back in 1949 to pressure AT&T’s ancestor Bell Telephone, which had dominated American telecommunications from its 19th century beginnings, to divest it manufacturing and research and development activities on the one hand from its services activities. And this even though that research arm, Bell Labs, invented the world’s first semiconductor device – the transistor.

First AT&T and then Lucent made plenty of their own mistakes, too. It’s a really complicated story, though, and two good short accounts can be found here and here. Nonetheless, clearly the voices in Washington during these decades that might have been encouraging a more comprehensive strategy to preserve U.S. dominance – or even competitiveness – in this crucial technology were way too weak. And now, for the near-term future in any event, the nation is dependent for this knowhow on a distant regime whose benign intentions can by no means be assumed.

Our So-Called Foreign Policy: A Call for More Idiocy on China

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China, cyber-security, espionage, Huawei, legalism, Michael Hiltzik, national security, Our So-Called Foreign Policy, precautionary principle, rule of law, state capitalism, The Economist, transparency

Anyone still harboring doubts that China’s government and its allies in the American offshoring lobby have snookered otherwise smart reporters about the nature of the PRC’s economic system and how best to cope with it? If so, look no further than Michael Hiltzik’s new Los Angeles Times column about Huawei.

According to Hiltzik, the telecommunications giant has been largely shut out of the U.S. market by “commercial xenophobia.” The U.S. government, he writes, has not officially banned the sale of Huawei products.  But it’s accomplished this aim for all intents and purposes “through bureaucratic winks and hints” that are based on a Congressional committee report that was “long on innuendo and short on hard information.” As a result, Huawei has been unfairly forced to prove a negative – that it is not assisting Chinese government espionage efforts.

Here of course is the problem. Hiltzik – and other apologists for China, like The Economist magazine he seems to consider gospel on such matters – apparently believe that Chinese companies like Huawei are as transparent as private sector companies everywhere. In their view, non-Chinese authorities have ready access to corporate records at Huawei and other Chinese companies, and face no difficulties in determining these firms’ ties to Beijing, and even any spying they may be carrying out. So it’s manifestly unjust to base policy on observation’s like the Congressional report’s conclusion that “China has the means, opportunity, and motive to use telecommunications companies for malicious purposes.”

Even if China didn’t have a scary record of government-sponsored cyber-hacking, these views might be reasonable – if China had anything remotely like a free market economy where reasonably bright lines separate the public and private sectors, or if China’s legal and corporate governance systems were based on anything remotely like the free flow of knowledge and rule of law. But who possessing a working brain really believes any of those propositions?

In fact, because China (and many other countries run by opaque bureaucracies and lacking rule of law traditions) are so fundamentally different from the United States, dealing with it with American legal principles that are justly revered in U.S. domestic affairs too often turns policy into an idiot.

As I wrote shortly after the Congress’ Huawei report came out, “because China is so thoroughly different and troublesome, handling it conventionally could amount to waiting for potential intelligence or security debacles to become actual. So the only responsible approach is precautionary — placing a heavy burden on China’s state capitalist system to prove its innocence.” Two years later, a major problem with America’s China policy is that Washington’s approach to Huawei remains an all-too-exceptional example of rejecting policy idiocy and embracing common sense.