A Silicon Curtain Descends
Reason magazine|February 2021
Trump escalated America’s war against Huawei and China. Biden should beware burgeoning technonationalism.
By Eric Boehm

In a speech delivered almost exactly one year before the 2020 election, Vice President Mike Pence outlined the stakes of a potential tech cold war between the United States and China.

China had “smashed the barriers between civilian and military technological domains,” Pence said at the Woodrow Wilson International Center, just around the corner from the White House. “By law and presidential fiat, companies in China—whether private, state-owned, or foreign—must share their technologies with the Chinese military,” Pence said. Those technologies, in turn, were being weaponized by the Communist regime in Beijing to hone its authoritarian conduct at home—and, Pence added ominously, were being increasingly exported “to countries in Africa, Latin America, and the Middle East.”

Pence went on to say that America did not seek a technological “decoupling” from China. But other parts of that speech— and some of the actions taken by the Trump administration in the months since—conjure images of a silicon curtain descending across the world.

The Trump administration’s conflict with China was dominated by a trade war focused on industrial and agricultural goods, and by an unexpected pandemic that appears to have originated in the Chinese city of Wuhan. But the most lasting and significant aspect of how President Donald Trump has reshaped the U.S.-China relationship may prove to be the White House’s efforts to cut off China’s telecom industry from its global supply chains. At the center of that effort lies a single company, Huawei, which has become the boogeyman for Americans fearful of Chinese technological superiority—fears that are unlikely to subside when the Trump era passes.

China hawks and Trumpian nationalists see Huawei as a symbol of the rising threat posed by the Middle Kingdom or as evidence of America’s waning technological superiority. Having already banned Huawei equipment from being used in America’s next-generation cellphone networks, the Trump administration spent 2020 bullying allied nations to take similar steps. In September and again in November, the conflict escalated when the White House issued orders that effectively banned foreign companies from doing business with Huawei if they also want to do business with American firms.

Both Beijing and Washington are now pursuing what Evan Feigenbaum, vice president for Asian studies at the Carnegie Endowment for International Peace, calls “technonationalism.” That is, they view private-sector technological developments through the lens of national security. A cellphone isn’t just a cellphone; it’s a potential weakness that could be exploited by an enemy. The supply chains for semiconductors and other bits of equipment are sprawling and multinational, but governments on both sides of the Pacific are eyeing each other warily and threatening to choke off innovation for fear of losing the so-called “race to 5G.”

“Technonationalism everywhere threatens to disrupt flows of technology and talent that have enabled decades of innovation,” says Feigenbaum. “If every commercial technology is now viewed as central to national security, it will re-entrench past patterns of technonationalism that many believed to be relics in an era of supposedly ‘borderless’ innovation.”

Put more starkly, the rapid pace of global technological innovation that we have come to take for granted—which has made people all over the world healthier, longer-lived, more productive, and happier—could be brought to a halt by a combination of paranoia and cronyism. It could presage a more dramatic economic disruption that would be a crushing blow for American businesses, and not just those already doing business in China.

Trump may be on his way out of the Oval Office, but American anxiety about Huawei—and, more broadly, about the nation’s status as the world’s technological superpower—both predate and almost certainly will outlast him. President-elect Joe Biden has criticized Trump’s handling of the trade war with China, but he has also made clear that he plans to adjust Trump’s strategies rather than reverse them. Technonationalism could be here to stay.

WHEN SUBSIDIES FOR CHINESE EQUIPMENT BACKFIRE

The idea that Huawei tech is a sort of sleeper cell within America’s communications infrastructure is one that many in Washington take seriously. “Wherever Huawei poses a national security threat—which we believe is everywhere—that equipment comes out of our system,” says Brendan Carr, one of the five commissioners charged with setting policy for the Federal Communications Commission (FCC).

Under orders from Congress, the FCC is currently engaged in what Carr refers to as a “rip-and-replace” process that seeks to excise the Chinese-made equipment from cell towers all over the country. It’s the last and most difficult step in a process that kicked off last year when Trump signed an executive order that largely blacklisted Huawei gear from the U.S. (with some exceptions). In November 2019, the FCC followed up by passing a rule prohibiting American cellphone carriers from purchasing Huawei gear if they receive federal subsidies. In February, Congress escalated things with a new law requiring that all cellphone carriers rip out Huawei tech and replace it—and ordering the FCC to come up with $1 billion to help facilitate the process.

More interesting, however, is the story of how much of that Huawei gear got there in the first place. As it turns out, the federal government spent years subsidizing its purchase as part of an effort to expand cellphone service into the more remote parts of the country, even as other parts of the government warned about the possible risks. Huawei’s biggest selling point is that its equipment is cheap—thanks in part to heavy subsidies from the Chinese government. So purchasing it allowed carriers to make their federal subsidies stretch further.

Until the FCC banned the practice last November, cellphone carriers were free to buy Huawei equipment with the federal dollars they receive through the Universal Service Fund—an $8 billion-a-year program intended to bring cellphone service to poor and rural areas. Union Wireless, a small carrier that operates in Wyoming and Montana, for example, has spent more than $34 million on Huawei gear installed in 418 cell towers across a network that covers more than 90,000 square miles, according to FCC filings.

More than half the member companies of the Rural Wireless Association, a trade group that represents Union and other small carriers, have used Huawei tech in some capacity. That means equipment that was purchased, in many cases, using federal subsidies will now be removed at significant cost to both taxpayers and American businesses. Union Wireless told the FCC last year that it would cost $110 million to rebuild its network and replace the Huawei gear. In September, the FCC estimated that it would cost about $1.8 billion to complete the rip-and-replace effort.

Ordering American companies to stop using Huawei equipment—or even to remove what’s already in use—is one thing. But in summer 2020, the Trump administration turned its attention to disrupting Huawei’s supply chain as well.

Under pressure from the U.S. Department of Commerce, the Taiwan Semiconductor Manufacturing Corp. (TSMC), the world’s largest computer chip manufacturer, announced in May that it would stop fulfilling orders from Huawei. Shortly afterward, TSMC struck a deal to build a heavily subsidized new manufacturing center in Arizona. Previously, TSMC had been a major supplier to both Apple and Huawei, but the company has been effectively forced to pick sides by a combination of carrots and sticks from the U.S. federal government.

In August, the Commerce Department announced further plans to prohibit American companies from doing business with foreign manufacturers that supply semiconductors to Huawei. One of the primary targets of the new rules seems to be the Semiconductor Manufacturing International Corporation (SMIC), China’s largest semiconductor manufacturer, which currently uses American-made tools in its manufacturing process.

But banning American companies from selling chip-making equipment to SMIC is a self-inflicted wound. These new export restrictions will “ultimately undermine U.S. national security interests by harming the semiconductor industry in the U.S. and creating substantial uncertainty and disruption in the semiconductor supply chain,” Semiconductor Equipment and Materials International, an industry group with more than 2,400 members around the world (including SMCI), warned shortly after the new rules were announced. The Trump administration’s policies, the group said, would “fuel a perception that the supply of U.S. technology is unreliable” and would “further incentivize efforts to supplant these U.S. technologies.”

Indeed, China has responded to the latest American attempts to target Huawei’s supply chain by announcing that it would invest more heavily in developing its own chip-making technology so it would be less dependent on American tools that may be withheld in the future.

Companies that aren’t directly involved in the U.S.-China technology trade war are becoming collateral damage. ASML, a Dutch company that is one of the world’s only manufacturers of the powerful ultraviolet lithography equipment used to make advanced semiconductors, canceled a planned sale of heavy machinery to SMIC after the U.S. government intervened, Reuters reported in January 2020. Pete Hoekstra, a former Republican congressman who now serves as U.S. ambassador to the Netherlands, told a Dutch newspaper that ASML’s technology “doesn’t belong in certain places.”

Under Trump, the administration’s view seemed to be that any company doing business with Huawei—or even doing business with a company that does business with Huawei—is a fair target in an escalating economic and technological conflict. That should raise questions about the appropriateness of using American power against private companies in countries all around the world.

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