Technological rivalry between the US and China over 5G and other sectors ramped up under the Trump administration. Image: iStock

US President Donald Trump’s administration has taken very aggressive action against TikTok, WeChat, Huawei and ZTE, but critics argue that such actions have failed to achieve the intended results as advertised while unnecessarily producing other collateral consequences.  

For example, the WeChat ban affects more than the relatively modest number of users in the US. It also impacts American companies that do business in China, which may no longer be able to accept payments from Chinese consumers via WeChat. Since WeChat is the primary payment platform for consumer purchases in China, this inevitably will have a serious adverse effect on the China business of these American companies.

Trump’s ban on TikTok came ready-made with a potential out – the White House would lift the ban if ByteDance spun off TikTok to US buyers. Trump has given his provisional blessing to the pending sale of a 20% stake in TikTok Global to Oracle and Walmart for a reported price of up to US$12 billion, which would value the spun-out company at up to $60 billion. 

The remaining shares will be held by ByteDance’s current shareholders, including US private equity investors with the others from China. 

In the end, Oracle, Walmart and the other US investors will hold a majority stake in TikTok Global. However, China is blocking transfer of the core ByteDance algorithms, so Oracle will have to develop a new set of algorithms and ringfence the technology to keep it separate from the Chinese side.  

All in all, the pending TikTok sale will be good for the existing US and Chinese investors in TikTok, and Oracle and Walmart will gain an important foothold in one of the hottest new social media platforms, but the question remains whether it necessary to go to all this trouble to protect Americans’ access to dance videos and memes.  

TikTok had already taken steps to segregate its US operations from China, and the US Central Intelligence Agency reportedly found no evidence that any US user data had been accessed by Chinese government officials. TikTok had also hired a former senior Disney executive Kevin Mayer as its new head, only to have him resign three months later to make way for the sale to Oracle and Walmart.  

Finally, TikTok had made it clear that it was willing to do more to satisfy the demands of the Trump administration. But Trump operates only in bold broad strokes. The intention appears to be primarily to send a message rather than achieve narrowly tailored objectives consistent with American values.

Creating a technological divide?

Similarly, the ban on chip sales to Huawei threatens to accelerate the trend toward a wider technological divide between the US and China generally. 

The Trump administration has already taken measures to block domestic telecom operators from deploying Huawei and ZTE equipment in order to advance a “clean network” strategy and further have engaged in a concerted campaign to persuade other countries to do the same in respect of the roll out of their 5G (fifth-generation) networks.  

There are signs that this campaign is starting to work. Under pressure from the US, the UK has backtracked on its earlier plans to invite Huawei to bid on 5G network equipment supply there, and now the House of Commons has called for all Huawei equipment to be removed from domestic networks by 2025, which may spur several European countries to follow suit. 

Some of the other countries reported to have taken concrete or tacit steps to exclude Huawei equipment from their 5G networks include Australia, India, Italy, Japan, New Zealand and Poland.

On the other hand, Austria, Bahrain, Belgium, Brazil, Canada, Germany, France, Malaysia, Norway, Thailand and Turkey, among others, have not yet ruled out Huawei on political grounds, and in some cases are already moving forward with the roll-out of Huawei equipment, while others still have the question under review. Of note, Belgium’s cybersecurity agency expressly found no security threat from Huawei equipment.  

As evidence of its 5G leadership, Huawei announced in June of last year that it had signed more than 50 contracts for 5G equipment, providing the network infrastructure for two-thirds of all commercially launched 5G networks outside of China at that time.  

So on the 5G front, we are already moving toward an unmistakable technological divide, which entails its own costs. For example, it has been estimated that if the European Union were to adopt a ban on buying telecom equipment from Huawei and ZTE, that would add about $62 billion to the price tag of 5G networks in Europe and delay the roll-out of the technology by about 18 months. Both of those estimates may be on the low side.  

In a related development, the US Department of Defense reportedly is evaluating whether in effect to nationalize 5G technology and networks by having the US government build and deploy a fifth-generation network and then act as a wholesaler to domestic operators. Such an isolationist approach, again so characteristic of the Trump modus operandi, would similarly add billions to the cost of the buildout and add years to the roll-out.  

Any such delays may result in the ceding of 5G technological leadership to China as a practical matter.

Ramifications of Huawei chip ban

The chip ban imposed on Huawei, which critics claim is intended to give the US time to catch up in this critical sector, may in fact backfire, pushing China (together with the other countries which depend on its technological leadership and its vast market) to develop alternatives to US technologies, driving China and the US further apart technologically.  

Some experts project that this chip ban could end up harming US technology companies as chipmakers in Taiwan, South Korea and Europe will want to maintain their market share in China, so the chip ban will induce them to them to remove all American inputs from their supply chains. Moreover, China will certainly accelerate their own semiconductor chip technology development to be self-sufficient.  

In other words, China still have access to semiconductor chips but American technology companies will be cut out of a key part of an export market that currently generates $20 billion in annual revenues for American technology players.  

According to Ajit Manocha, president of SEMI, a global industry association for the electronics manufacturing and design supply chain, that may serve as a disincentive for US firms to invest in further innovation at levels necessary to maintain their current competitive positioning, tilting the playing field even more in favor of the solutions that design-out US technology altogether.

The rise of the yuan

Another possible driver for greater separation is America’s aggressive assertion of extraterritorial jurisdiction over any payment transaction in US dollars that is processed through the US financial system.  

As a practical matter this means that certain US laws, such as the Iran sanctions law that triggered the prosecution of Huawei and its chief financial officer Meng Wanzhou, can apply to two foreign parties that engage in a transaction with no other nexus to the US.

To avoid this, China announced in late September that authorities would further remove barriers to use the renminbi for cross-border transactions.  

We may expect that China will continue to take steps to promote the use of the yuan for China-related international payments, but the Chinese yuan is not yet in a position to displace US dollars as currency of payment for transactions with no connection to China. 

The assertion of extraterritorial jurisdiction by US prosecutors against non-US persons and companies is not a new phenomenon under the Trump administration, and this practice has long been objected to by other countries as a form of US imperialism springing from a “vague sense of superiority or exceptionality” on the part of the US.  

These long-standing objections to US extraterritorial jurisdiction, even among US allies, have only been exacerbated by the increasingly unilateralist approach of the Trump administration, and combined with the systematic overreach of the current administration in respect of China, the assertion of extraterritorial jurisdiction by the US acts as a further wedge issue in the Sino-American relationship.  

This will, in turn, accelerate China’s plans to promote the yuan as an alternative currency for international settlements.

No winners in a new economic Cold War

The risk is that we end up with competing spheres of influence in a new economic Cold War. In this scenario, unlike the Cold War with the USSR, the world will not necessarily be carved up into two blocs, one bloc consisting of the leading industrialized nations led by the US (the high-value bloc) and a second bloc of undeveloped or emerging markets led by China (a lower-value bloc).  

China is economically too strong and growing too fast to be ignored by the leading industrial countries in the same way as the former Soviet Union was in terms of commercial activity and economic integration.  

In a new economic Cold War scenario in the current global environment, everybody loses.

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Robert Lewis

Robert Lewis is a lawyer licensed in California. He has worked in leading US, UK and Chinese law firms in China for nearly 30 years. He is a co-founder of the China Going Global think-tank, and is the author of the book The Rules of the Game of Global M&A: Why So Many Chinese Outbound Deals Fail. He is fluent in spoken Mandarin and written Chinese.