From Washington To Beijing: Inside The New Cold War On Tech

Warfare isn’t what it used to be anymore. We went from using physical weapons to economic sanctions such as tariffs and trade bans. But, although the face of the battlefield has changed, the ultimate goal remains the same: leading the World in what matters the most. And right now, that is technology. The phrase “tech is the new oil” now takes on its full meaning, in the context of data overtaking oil as the world’s most valuable resource. This new “tech cold war“ is best represented by the ongoing conflict between the US and China. In 2016, Donald Trump drew even more attention to China, as he aimed at making the country a scapegoat for his presidential campaign. This strategy ended up working and getting him elected, alongside other issues such as immigration. During his time in office and during his reelection campaign, President Trump has intensified his attacks on China, particularly on its tech sector.

The Trump administration quickly understood that technology had become a matter of national security. Indeed, ensuring that America’s tech ecosystem can resist cyberattacks and protect critical data from external threats has become an increasingly popular issue in the country’s political sphere. Although it intensified in recent years, the current Sino-American tech conflict takes its roots from a time when the mere idea that Donald Trump could one day become President of the United States was considered a joke. Starting in 2009, Chinese authorities banned the likes of Google, Facebook and Twitter from their network, to name just a few. To this day, these websites still remain blocked in the country. China’s continuous efforts to use its tech companies to serve its own interests has led President Trump to take serious action. In May 2019, he signed an executive order banning American companies from working with or buying equipment from firms such as Huawei, a company accused by the US Department of Justice of conspiring to steal intellectual property, and led other countries to ban its products within their mobile network. In the months prior to the 2020 election, he also issued an executive order prohibiting transactions related to TikTok and WeChat, citing national security concerns, which has in turn fueled additional retaliatory measures from the Chinese government. Most recently, Cisco’s CEO said the company was “uninvited to bid” and blocked from Chinese deals by state-owned companies. Thus, China appears to make it increasingly clear that some American companies are no longer welcome in the country.

The ongoing conflict between the two economic superpowers has led to an acceleration of their technological decoupling. This means that both countries aim on the long run to build two completely different, autonomous and competing tech ecosystems incorporating every step of the supply chain, leaving countries around the world the choice between the two systems. This has led to analogies with the Cold War, with terms such as “AI arms race” and “digital iron curtain” now part of the tech vocabulary. In this context, China has vastly increased its R&D spending, in an all-out effort to one day reach tech independence. And in 2019, the Asian economic powerhouse overtook the US as the world’s top filer of international patents. In order to be self-reliant, President Xi wants to create national champions in every segment of the tech supply chain. Also, the influence China gained on the global scale (especially in Africa) as part of the development of its “One Belt, One Road” initiative will help the country pressure other countries into buying Chinese tech. This technological decoupling (based on virtually unlimited funding of state-owned companies competing with privately-owned Western companies) and the Trump administration’s crackdown on Chinese flagship tech giants such as Huawei has the potential to significantly hinder American companies’ revenue, as they are dependent on the Chinese market (e.g., San Diego-based chipmaker Qualcomm derived about 2/3 of its revenue from China in 2020). Although American tech firms are years ahead of their Chinese counterparts in most technologies, one segment of the supply chain where the US is dwarfed by the Chinese is rare earths, which are essential in tech equipment manufacturing. Indeed, China has a disproportionate share of rare earths mining production, with about 63% of the world’s output, down from about 98% a decade ago. This could very well end up being a key factor in China’s favor in this conflict. Finally, in mid-2020, China completed its version of the GPS (called Beidou), as part of its goal to be self-reliant for its telecommunications and military, further enhancing its technological independence from America.

Another very important aspect of this “tech cold war” involves the race to 5G development, which has often been compared to the Space Race, as the latter defined the technological ambitions of two global superpowers for decades. Western countries’ reliance on Chinese companies for the development of their 5G networks has left them vulnerable. The West’s growing distrust in companies such as Huawei is also due to its belief of China’s hardening grip on its tech sector. Recent events and Chinese powerhouse (and 5G technology leader) Huawei being hit with a series of bans and restrictions have particularly improved European tech sector prospects, as European 5G champions Ericsson and Nokia look set to grow their market share. In the end, no matter how we look at it, President Xi’s greatest chance to come out on top in this tech conflict lies in the Greater Bay Area, which includes Guangdong, Hong Kong and Macau and has been dubbed the “Chinese Silicon Valley”. It is home to the likes of Huawei, ZTE and Tencent (WeChat’s mother company) and is the heart of the country’s technological innovation and startup ecosystem.

In the wake of current tensions and the growing importance of tech in every aspect of our lives, the winner of this conflict looks set to reap the many expected benefits and further enhance its worldwide presence. And there doesn’t necessarily need to be one single winner. India, for example, is expected to cash in on the current situation, as it is investing a lot of resources to build its own tech supply chain and promises foreign companies incentives to relocate their operations to the country. Vietnam and Taiwan have taken similar measures and are expected to benefit from this situation as well. The ongoing Covid-19 pandemic hasn’t stopped Western sanctions on China, on the contrary. Trump issued a ban on investment in over 30 Chinese firms last November and recently the New York Stock Exchange decided to delist three major Chinese telecom companies over Washington’s assumption that they are linked to the military, leading to China vowing to take “necessary countermeasures”. It looks like the probability that a Biden presidency will fundamentally modify current events is low, as the President-elect will be pressured to continue on a similar strategy as President Trump’s on trade with China and tech conflicts. The latest win for China to celebrate is the newly signed China-EU investment deal, which prohibits forced technology transfers and sets the terms for fairer competition on investments between the two markets, opening up new opportunities for further cooperation between Chinese and Europeans. The deal’s timing is critical, as it comes days before Biden’s inauguration as US President on January 20th in Washington. Whether the soon-to-be-President will follow through on such terms remains mere speculation, although it seems rather unlikely. In the meantime, all we can hope for is that the increased cooperation with Europe will lead China to change some of its practices and start negotiations with the US on a new and more comprehensive agreement and, of course, for the US to go in the same direction.

Written By Alessandro Cristofolini