Behind kerfuffle over a ‘nationalized 5G network,’ real US-China concerns
Putting it in perspective
Next-generation wireless technology is part of a larger economic competition in which China is pushing to leapfrog the US and other nations.
—The US, South Korea, and China are all racing to develop the next wireless communications technology, known as 5G.
The problem is that this competition is not shaping up as a race where the best technology wins but a clash of visions on how nations should develop. The long-held Western ideal of companies competing on a level playing field is squaring off against China’s single-minded drive to become the leader in key areas.
The immediate flashpoints are traditional industries – aluminum and steel – where China has threatened to retaliate if President Trump carries through with his threat to slap tariffs on those imports. The more difficult challenge will be reconciling Western economic ideals with China’s development strategy in cutting-edge technologies.
At stake are trillions of dollars of business in industries that entrepreneurs are just beginning to dream up using artificial intelligence, robotics, and other technologies. The consulting firm McKinsey estimates 5G alone will add anywhere from $2.7 trillion to $6.2 trillion to the global economy by 2025 as those next-generation wireless networks create the communications grid for self-driving cars, smart homes, and intelligent factories.
That’s plenty of money for many companies and countries to share in – if China and the West can reconcile their differences. What's keeping the two sides talking is the knowledge that everyone loses in a trade war.
“These are big, long-term competitive concerns,” says Doug Brake, director of telecommunications policy at the Information Technology and Innovation Foundation (ITIF), a Washington think tank. And they’re not just economic.
What if China is so successful in a key 5G technology that the US military becomes reliant on it as a supplier? he asks. “What sort of position does it put us in?”
It’s those same military concerns that are behind China’s “military-civilian fusion” strategy, which aims to create a strong modern military on key high-tech technologies made domestically. And China is using a full array of tactics – from massive subsidies to state-owned and private companies to the appropriation of foreign technology – to achieve its goals.
“The potential is certainly there and the determination of the Chinese is certainly there,” says Thomas Duesterberg, a senior fellow at the conservative Hudson Institute and coeditor of “U.S. Manufacturing: The Engine for Growth in a Global Economy.” “They’re putting a great deal of money and intellectual resources and mercantilist tools in the world trading order to try to achieve dominance.”
Mr. Trump campaigned on the idea of getting tougher with China on trade issues, and his administration has made some early moves aimed at confronting the Chinese challenge. In August, the president followed up on a campaign promise of “a zero tolerance policy on intellectual property theft and forced technology transfer” by asking United States Trade Representative Robert Lighthizer to consider launching an investigation into China’s practices.
A memo stirs the pot
Discussion about US-China rivalry over wireless networks flared early this week when a leaked memo and slide presentation from within the White House National Security Council suggested that the federal government, rather than the private sector, should possibly build America’s 5G network. The rationale: to avoid the potential security challenge of Chinese technology handling US wireless communications. The idea drew wide criticism as unrealistic or unnecessary and prompted avowals from White House sources that it is not official policy.
On Tuesday, in his State of the Union address, President Trump reiterated his get-tough policy without mentioning China: “We will protect American workers and American intellectual property, through strong enforcement of our trade rules.”
While various Asian nations – not just China – have used industrial policies and low-cost labor to take big chunks of market share in manufacturing industries, such as steel, autos, and memory chips, China’s 5G drive also includes a determined effort to appropriate Western intellectual property (IP). According to government officials and private experts, this effort involves everything from outright theft of trade secrets through industrial espionage to a policy of forcing companies wanting to sell in China to transfer their technology to Chinese joint-venture partners.
China poised to be largest 5G market
The pressure on companies is enormous because China is such a huge market to sell to. The pressure will be especially intense on companies with 5G-related technology if, as expected, China becomes the biggest market for 5G by 2025. China’s Huawei and ZTE Corp., racing to build a 5G network in China, are providing increasing competition for Europe’s Ericsson and Nokia and South Korea’s Samsung with key telecommunications equipment at extremely low prices.
On Wednesday, ZTE said it planned to sell $2.1 billion worth of stock privately to help fund development of its 5G mobile network technology.
More subtly, Beijing is pushing for a greater role in setting technical standards in the next-generation wireless arena. The more 5G patents Chinese companies hold, the more they can pressure Western patent holders to license their technology to Chinese companies at a cheap price.
“It is here – in its potential reshaping of norms for standards-essential IP – that China’s ascent poses a real challenge to American firms’ practices,” concluded a 2013 report for the U.S.-China Economic and Security Review Commission. “The Chinese approach emphasizes IP as another factor of production, not as a source of profit or unique competitive advantage. Accordingly, the aim is to lower its price to the minimum, which would (hopefully) increase the profit margin of equipment producers” at the expense of patent holders.
Few observers believe that Chinese President Xi Jinping will back down anytime soon.
President “Xi has really staked his future on the high-tech sectors in China,” says Mary Lovely, an economics professor at Syracuse University in New York.
At an October hearing by the office of the US Trade Representative, examining China’s intellectual-property practices, Chen Zhou of the China Chamber of International Commerce warned that any US penalties could “trigger a trade war.”
Outcome still uncertain
From China’s point of view, many Western norms of trade and IP are rules of the game that keep Western companies on top and China and other developing nations from catching up.
It’s not clear China will win the 5G competition. Its attempts to introduce a rival 4G standard failed to catch on. And 5G encompasses a big collection of technologies, only some of which China has proven good at, says Mr. Brake of ITIF.
“Technology … is being integrated within the existing network and changing very quickly,” he says. “It’s very easy to imagine the innovations that such a network could engender.” What's not clear is which specific technologies or products will succeed in the marketplace.
Government can streamline the permitting of all the new antennas the network will require, he adds. But the private sector is better placed to figure out what customers want.