The rollout of speedy new cellular networks is a geopolitical turning point, but neither Trump nor the public yet recognizes this.
The rollout of fifth-generation cellular networks around the world will likely be a defining geopolitical dilemma of 2020. But American and European consumers could easily mistake 5G for just another marketing ploy for early adopters—to the detriment of democracies worldwide.
When the number in the corner of our smartphone screens changed from 3G to 4G, few of us even noticed. Ditto when LTE, another step in the evolution of cellular networks, appeared as an alternative to 4G. Still, for the better part of the past two years, wireless carriers on both sides of the Atlantic have been hyping 5G—which, they promise, will offer data speeds of up to 100 times faster than current connections. Tech futurists say fifth-generation networks will support a plethora of internet-connected sensors, vehicles, appliances, and other devices that will perform functions yet unimagined.
In Europe, the walls of nearly every major airport from Stockholm and Brussels to Lisbon and Madrid have been plastered with 5G-related ads. In the United States, network providers such as AT&T have even rolled out what they’re calling “5GE” networks—a pre-5G deployment that capitalizes on the vaguely futuristic branding of fifth-generation networks even before all the requisite new radios and chipsets have been installed. Still, 7 of 10 Americans tell PricewaterhouseCoopers they’ll wait patiently to receive a 5G device until they are eligible for an upgrade from their current provider.
Amid this much public indifference, 5G may seem like an unlikely battleground between China and the West. Yet the transition to 5G may mark the point, after decades of Chinese integration into a globalized economy, when Beijing’s interests diverge irreconcilably from those of the United States, the European Union, and their democratic peers. Because of a failure of imagination, Western powers risk capitulating in what has become a critical geopolitical arena. Simply put, neither the American nor the European public seems to view the networks that supply Snapchat clips and Uber cars as anything close to a security threat.
Some of the world’s leading telecom-equipment manufacturers, including Huawei and ZTE, are Chinese companies with murky ownership structures and close ties to China’s authoritarian one-party government. Many in the U.S. national-security establishment rightly fear that equipment made by these companies could allow Beijing to siphon off sensitive personal or corporate data. Or it could use well-concealed kill switches to cripple Western telecom systems during an active war. The mere threat of this activity would endow China’s leadership with geopolitical leverage at all times.
This is why Secretary of State Mike Pompeo recently exhorted EU allies not to “trust Chinese firms with critical networks.” China has fought back, threatening to scuttle a trade deal with Denmark’s Faroe Islands and, more recently, to retaliate against the German auto industry should European officials bar the use of Huawei equipment in 5G networks.
The framing of 5G primarily as a consumer-technology matter works to China’s benefit. “Choose 5G,” proclaimed one ad in the Brussels airport—part of a campaign that presents a false choice between Huawei and the 4G status quo. A focus on tech alone would also suit U.S. and EU telecom operators eager to deliver faster speeds while minimizing their own costs. The Huawei equipment they buy is typically cheaper than the gear produced by the three suppliers based in democratic countries—the European firms Ericsson and Nokia and South Korea’s Samsung.
Meanwhile, policymakers on both sides of the Atlantic, from European economics ministers to President Donald Trump, have viewed the 5G dispute first as a trade issue. Even as the Trump administration has taken steps, as The New York Times has described it, to “block China’s national telecommunications champion, Huawei, from operating in the United States and starve it of American technology as it builds networks around the globe,” the president has also hinted at a willingness to waive restrictions in exchange for economic concessions from China. In 2018, Trump backed down from national-security sanctions against ZTE as a sweetener in his trade negotiations with Xi Jinping.
Against these attitudes, Pompeo and others sounding alarms about Huawei can be perfunctorily dismissed as protectionists, xenophobes, or military hawks. The American secretary of state has become a particular target of criticism in China, where government officials and the media have described him as a font of “lies and fallacies” and a “Cold War warrior.”
Yet the West has ample reason for caution about Chinese 5G suppliers. For one, the recent Chinese National Intelligence Law requires these companies to comply with Communist Party demands to turn over data or otherwise engage in snooping or network-disruption activities. Party-backed actors in China’s public and private sectors also have a long record of cyberattacks on the West, including stealing intellectual property from companies and sensitive personal information on citizens.
The case against Huawei isn’t just guilt by association. The company itself is suspected of committing blatant corporate espionage: A Justice Department indictment from early 2019 cited highly specific demands by Huawei headquarters in China for information from engineers embedded in T-Mobile’s facility in Bellevue, Washington. An email exchange exposed Huawei’s pressure on employees in the field to steal even guarded equipment and trade secrets; according to the Justice Department, a bonus program offered rewards for the most valuable information stolen. One Huawei employee, the U.S. government alleges, literally walked out the door with a proprietary robotic arm in his bag.
And recent revelations about how China’s ruling party exploits the full panoply of personal information it has amassed about its citizens—facial-recognition images, mandatory DNA samples, 24-hour GPS coordinates, and search-history and online-activity tracking, as well as plain old eavesdropping—to quash religious freedom and basic rights should give major pause to Western governments and wireless carriers alike.
While Pompeo’s State Department has been pressing its case at one international forum to the next, his message has been met with some skepticism in Europe. Simply to acknowledge 5G as a security threat invites headaches that EU governments and telecom carriers would rather not contemplate. Ripping out Chinese gear would be a massive financial and logistical undertaking.
European regulators are used to viewing the American tech industry as a rival, and they bristle today at taking direction from Washington. And despite the fact that two 5G suppliers are European, and EU officials have argued for “technological sovereignty”—a term most reasonably construed to mean technological independence from the United States—member nations have not yet settled on a joint policy.
On top of that, the EU single market prides itself on principles of fair competition and an unwillingness to favor or reject a company because of its national origin, especially when its products are competitive, as Huawei’s are, on metrics such as price. The irony in this approach, of course, is that the Chinese state has subsidized efforts by Huawei to undercut its European and South Korean competitors, not least because of the possibility of obtaining geopolitical leverage. The Wall Street Journal estimated recently that as much as $75 billion in state support fueled Huawei’s rise. The failure to see 5G beyond the consumer lens is also a failure to understand Chinese companies as implements of state power as much as private entities in their own right.
The dispute over 5G isn’t the first time in recent history that economic infrastructure matters have overlapped with geopolitics in unhealthy ways. Nor is it the first time that overlap has caused problems for the transatlantic relationship. The European energy sector has long relied on cheap natural gas piped in from Russia, and deregulation has allowed Russia’s state-owned gas company, Gazprom, to buy or build a large share of the infrastructure used to transport and distribute it. American policymakers have implored European leaders to diversify their energy sources, for fear of increased dependence on an authoritarian Russia. These warnings are often dismissed as self-serving, since American energy firms compete with Gazprom for European business.
The Trump administration’s mixed messaging on 5G lends credence to the cynical view that the United States is not serious about China as a national-security threat but regards it mostly as an economic competitor. (Never mind that U.S. telecom firms do not compete with Huawei on 5G equipment.) And the president’s trade threats against Europe—targeting products as varied as cheese, whiskey, and airplane fuselages—are not helping. Such positions prioritize trade conflicts over common security interests and alienate allies that the United States needs.
Even as Pompeo and others in the Trump administration warn against Huawei, European policymakers don’t know if Trump is serious about 5G as a national-security problem or planning to trade away the issue in exchange for the reduction in Chinese tariffs against U.S. farm products. But they do think he is serious about tariffs on them. They see trade as the one issue on which Trump has been consistent from the start of his presidential campaign.
The United States can work with its European partners to reduce geopolitical dependence on China and protect privacy and human rights in a data-centered age. But that will require Western policymakers and the public alike to conceive of 5G as something more than a consumer issue or a trade issue and devise a shared solution to protect the networks whose importance in our lives will only grow.
Two months ago, when Zooming In did a story on Huawei and global 5G deployment, Huawei was poised to take control of much of the world’s cyber domain. We talked about the national security implications of that prospect. And we observed the U.S. efforts to raise awareness of that risk. Two months later, when we did another story on this topic, we realized the world knows Huawei a lot better through these efforts, but Huawei’s momentum has not stopped. In fact, Huawei and China are playing a grander game. They have a brilliant strategy that is working well with the very nature of a crony capitalism. Can this battle still be won by the free world? And what does it take to win? Let’s find out in this edition of Zooming In.
Unlike the 2008 global financial crisis, which was mostly a large negative aggregate demand shock, the next recession is likely to be caused by permanent negative supply shocks from the Sino-American trade and technology war. And trying to undo the damage through never-ending monetary and fiscal stimulus will not be an option.
NEW YORK – There are three negative supply shocks that could trigger a global recession by 2020. All of them reflect political factors affecting international relations, two involve China, and the United States is at the center of each. Moreover, none of them is amenable to the traditional tools of countercyclical macroeconomic policy.
The first potential shock stems from the Sino-American trade and currency war, which escalated earlier this month when US President Donald Trump’s administration threatened additional tariffs on Chinese exports, and formally labeled China a currency manipulator. The second concerns the slow-brewing cold war between the US and China over technology. In a rivalry that has all the hallmarks of a “Thucydides Trap,” China and America are vying for dominance over the industries of the future: artificial intelligence (AI), robotics, 5G, and so forth. The US has placed the Chinese telecom giant Huawei on an “entity list” reserved for foreign companies deemed to pose a national-security threat. And although Huawei has received temporary exemptions allowing it to continue using US components, the Trump administration this week announced that it was adding an additional 46 Huawei affiliates to the list.
The third major risk concerns oil supplies. Although oil prices have fallen in recent weeks, and a recession triggered by a trade, currency, and tech war would depress energy demand and drive prices lower, America’s confrontation with Iran could have the opposite effect. Should that conflict escalate into a military conflict, global oil prices could spike and bring on a recession, as happened during previous Middle East conflagrations in 1973, 1979, and 1990.
All three of these potential shocks would have a stagflationary effect, increasing the price of imported consumer goods, intermediate inputs, technological components, and energy, while reducing output by disrupting global supply chains. Worse, the Sino-American conflict is already fueling a broader process of deglobalization, because countries and firms can no longer count on the long-term stability of these integrated value chains. As trade in goods, services, capital, labor, information, data, and technology becomes increasingly balkanized, global production costs will rise across all industries.
Moreover, the trade and currency war and the competition over technology will amplify one another. Consider the case of Huawei, which is currently a global leader in 5G equipment. This technology will soon be the standard form of connectivity for most critical civilian and military infrastructure, not to mention basic consumer goods that are connected through the emerging Internet of Things. The presence of a 5G chip implies that anything from a toaster to a coffee maker could become a listening device. This means that if Huawei is widely perceived as a national-security threat, so would thousands of Chinese consumer-goods exports.
It is easy to imagine how today’s situation could lead to a full-scale implosion of the open global trading system. The question, then, is whether monetary and fiscal policymakers are prepared for a sustained – or even permanent – negative supply shock.
Following the stagflationary shocks of the 1970s, monetary policymakers responded by tightening monetary policy. Today, however, major central banks such as the US Federal Reserve are already pursuing monetary-policy easing, because inflation and inflation expectations remain low. Any inflationary pressure from an oil shock will be perceived by central banks as merely a price-level effect, rather than as a persistent increase in inflation.
Over time, negative supply shocks tend also to become temporary negative demand shocks that reduce both growth and inflation, by depressing consumption and capital expenditures. Indeed, under current conditions, US and global corporate capital spending is severely depressed, owing to uncertainties about the likelihood, severity, and persistence of the three potential shocks.
In fact, with firms in the US, Europe, China, and other parts of Asia having reined in capital expenditures, the global tech, manufacturing, and industrial sector is already in a recession. The only reason why that hasn’t yet translated into a global slump is that private consumption has remained strong. Should the price of imported goods rise further as a result of any of these negative supply shocks, real (inflation-adjusted) disposable household income growth would take a hit, as would consumer confidence, likely tipping the global economy into a recession.
Given the potential for a negative aggregate demand shock in the short run, central banks are right to ease policy rates. But fiscal policymakers should also be preparing a similar short-term response. A sharp decline in growth and aggregate demand would call for countercyclical fiscal easing to prevent the recession from becoming too severe.
In the medium term, though, the optimal response would not be to accommodate the negative supply shocks, but rather to adjust to them without further easing. After all, the negative supply shocks from a trade and technology war would be more or less permanent, as would the reduction in potential growth. The same applies to Brexit: leaving the European Union will saddle the United Kingdom with a permanent negative supply shock, and thus permanently lower potential growth.
Such shocks cannot be reversed through monetary or fiscal policymaking. Although they can be managed in the short term, attempts to accommodate them permanently would eventually lead to both inflation and inflation expectations rising well above central banks’ targets. In the 1970s, central banks accommodated two major oil shocks. The result was persistently rising inflation and inflation expectations, unsustainable fiscal deficits, and public-debt accumulation.
Finally, there is an important difference between the 2008 global financial crisis and the negative supply shocks that could hit the global economy today. Because the former was mostly a large negative aggregate demand shock that depressed growth and inflation, it was appropriately met with monetary and fiscal stimulus. But this time, the world would be confronting sustained negative supply shocks that would require a very different kind of policy response over the medium term. Trying to undo the damage through never-ending monetary and fiscal stimulus will not be a sensible option.