Following the Munich Security Conference, both President Donald Trump and Speaker Nancy Pelosi are urging U.S. allies to not work on 5G infrastructure with Chinese telecommunications giant Huawei.
The news follows a major defeat for the U.S. last month, when Britain, resisting U.S. pressure, opted not to ban Huawei from the British Market.
The United States has actively lobbied allies to prevent China from winning the rights to develop their 5G networks, citing potential security concerns but also alarmed at the prospect of China taking over an industry the U.S. used to dominate.
However, the current U.S. strategy is unlikely to succeed because it is based on two faulty premises: that allies will subordinate their economic interests to U.S. demands, and that the U.S. can out compete China through a strategy of market denial rather than superior value creation.
The setback in the campaign against Huawei recalls a similar effort during the Obama administration to stop the growth of another Chinese project, the Asian Infrastructure Investment Bank (AIIB).
The AIIB served as a Chinese led-competitor to the U.S. and Japanese-led Asian Development Bank, and Washington lobbied hard to prevent allies and partners from joining it. But numerous U.S. allies defied the pressure and joined the AIIB anyway, including Britain, Canada, Germany, Australia, and South Korea.
They saw an opportunity for their firms to benefit from AIIB’s development investments, and perceived that to outweigh any risk that China would use the institution to advance its political aims.
Nations around the world recognise China is a major economic hub that will likely only grow in importance. In a world that is trending toward multipolarity, they are wary of taking steps that would permanently sever access to the Chinese market, instead hoping to benefit by doing business with both China and the United States.
Many Countries, especially in Europe, are unlikely to choose one or the other, and forcing them to do so could set the stage for humiliating political defeats.
U.S. alliance relationships can foster political and military cooperation, but they can’t fundamentally reshape allies’ economic interests, which they will inevitably prioritise over allegiance to the United States.
Huawei’s cheap 5G hardware allows Britain, which has aspirations of becoming a tech hub post-Brexit, to build next generation communications infrastructure on the cheap. This and other interests overshadow espionage concerns and fears of potential U.S. reprisal.
With even the U.K. willing to defy the U.S. on such a sensitive issue, it is easy to imagine other nations will be far less cooperative. Depending on the nation and issue, the United States will at times find willing partners who are alarmed at China’s economic power, but will just as often find other states readily willing to piggyback off of China’s growth. Sound policy should promote cooperation where interests align, and seek to smooth tensions where they diverge.
There is a growing acknowledgement in Washington that China has moved beyond simply being “the world’s factory” to legitimately challenging U.S. firms in sectors higher up the value chain.
This has accelerated efforts to prepare for economic competition with China. Unfortunately, these efforts have hinged on a simplistic, heavy-handed strategy of denial that seeks to lock Chinese firms out of foreign markets, ignoring other nations’ interests, including those of allies. For the United States to thrive, it must instead regain its competitive edge in the industries of the future.
Seeking to undermine China’s economic development will engender hostility between the U.S. and China and make any cooperation more difficult, even where the two nations’ goals align. Delivering continued economic growth is a key plank of the Chinese Communist Party’s domestic legitimacy, and there is no doubt the Chinese government will lash out if its rule is threatened.
China is already taking steps to deter nations from banning Huawei, threatening Germany, which is currently undecided about allowing the Chinese company access to the 5G network with the expulsion of German automakers from the Chinese market.
Moreover, denying China market access can’t compensate for an inability to deliver goods and services customers want. It is a truism that you can’t beat something with nothing; in the case of 5G development, the U.S. currently has nothing to offer states that ban Huawei from their markets, recent efforts notwithstanding. U.S. companies play a negligible role in the wireless networking industry, and no U.S. firm currently produces alternatives to Huawei’s technology.
For this reason, despite the geopolitical blow-back, Huawei’s revenue hit a record high in 2019, and its European competitors Nokia and Ericsson have failed to capture any of its market share.
To preserve its economic dominance, the U.S. must prioritise policies that enable domestic revitalisation. This requires greater investment in domestic R&D, a favourable regulatory and tax climate, and education reform to produce more STEM talent. The United States should also aggressively confront Chinese theft of U.S. IP and attempts to exploit U.S. educational and research institutions.
Ultimately however, U.S. success will not hinge on denying the world access to Chinese products an approach that has failed to persuade even our closest ally but on the competitiveness of American products and the American economy. Fortunately, that is something we can control.