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Opinion

The US can't be walled off from Chinese tech companies

Global networks and innovations are too integrated to cut links

U.S. President Donald Trump signed off on a plan to impose new tariffs on Chinese high-tech goods on March 22.   © Reuters

U.S. President Donald Trump's much-heralded trade sanctions on China have triggered widespread alarm among business people and in the financial markets.

While the measures could hit many sectors, it is painfully clear that the White House has high tech in its sights. The administration said the tariffs were a response to years of Chinese companies stealing American technology. Said Trump, "We have a tremendous intellectual property theft situation going on."

In key sectors, identified in Beijing's "Made in China 2025" strategy as focal points for acquiring foreign technology, Trump ordered the U.S Treasury to draft new controls on Chinese investment within 60 days. The telecommunications sector is already witnessing the damage such measures could cause not only to global trade and investment but to the U.S. competitive position. The experience offers an early warning of what other high-tech companies could face.

Earlier this month, the administration barred Singapore-based chipmaker Broadcom from buying Qualcomm, the world's biggest mobile semiconductor company. The move came weeks after the leak of a White House memo advocating construction of a state-funded national next-generation wireless network as a bulwark against the growing expertise of Chinese companies in what is known as fifth-generation telecom technology.

Fears about Chinese telecom equipment companies Huawei Technologies and ZTE, and the worry that they could be stalking horses for Beijing, informed the Broadcom decision. However, 5G technology development takes place in a globally collaborative ecosystem, one in which Qualcomm itself participates. The more isolated Trump makes America's telecom technology industry, the less competitive it will be. The same applies to other high-tech industries, as will become clearer with the latest trade measures.

Trump quashed the Broadcom bid despite the company's intention of reincorporating in the U.S., where it has the bulk of its operations, in a move to preempt the concerns of the Committee on Foreign Investment in the U.S. CFIUS' concerns, as expressed in a letter to Broadcom's lawyers, lay more with its business model however than its headquarters' location. CFIUS claimed that Broadcom's track record of slashing research and development spending in the companies it has bought in favor of raising short-term profitability showed that it would likely weaken Qualcomm's long-term competitiveness -- to Huawei's benefit.

Qualcomm, which made most of its $22.3 billion in revenues last year from licensing intellectual property, is practically the only U.S. mobile technology company of any significant heft remaining in the industry and its standard-setting bodies.

Huawei and ZTE are already largely prohibited from selling network infrastructure in the U.S. Bills proposed by Republican members of Congress since January would further bar the U.S. government from buying or leasing equipment or services from either company.

Techno-paranoia even extends to phones themselves. AT&T and Verizon Communications recently were pressured into dropping plans to sell Huawei's latest Mate 10 Pro handset, which has been selling briskly elsewhere, particularly in Europe. Media reports have tied the carriers' decisions to pressure from members of the U.S. Congress, though in February, the heads of the Central Intelligence Agency and other U.S. intelligence agencies said they would advise Americans to avoid Huawei and ZTE products too. Now national electronics retailer Best Buy is reportedly planning to drop Huawei products as well.

The memo advocating a government-led 5G network has largely been dismissed as a draft by the administration, most likely because of the poor reception the notion has received from most corners of America's telecoms industry. But the administration's desire to construct such a network dovetails with its objective of rebuilding the country's crumbling infrastructure in addition to promising cybersecurity benefits.

U.S. mobile carriers are already years into 5G network trials of their own however and say there is no need to further stimulate domestic network development. Even Trump's own Federal Communications Commission chairman has questioned the notion of a government-led network as a wasteful reduplication of effort.

A national 5G network would signal government support for the U.S. mobile technology industry. Trump's instincts for state support, while running counter to the Republican Party's love of small government, may produce a leveling effect and give some boost to domestic players. Many companies in the sector in Europe, Japan, South Korea and of course China enjoy copious government funding and direction.

There is agreement among many U.S high-tech companies that they have faced unfair competition from China. But business leaders question whether Trump's measures are the right response. They worry that such protectionism could actually hamper U.S technological aspirations rather than promote them. This is certainly true in the case of 5G.

Tech innovation rarely takes place in complete isolation, especially in telecommunications. "Networking technology" by definition involves a vast, interconnected system designed to process, send and receive data in mutually recognized signals and format. This requires companies to develop their technologies in accordance with accepted standards and in ways that promote interoperability with global systems and devices, even those of competitors.

As such, the way patents function in other industries -- by establishing a limited monopoly for an inventor and giving wide protection from imitation -- does not work so neatly in telecommunications. Here innovation is often incremental and most newly patented technologies are based on the past intellectual property of others, resulting in a global web of royalties and cross-payments which rewards innovators like Qualcomm.

For companies to be sustainably successful in telecom technology, they must cooperate with as many participants in the global ecosystem as possible to quickly establish and obtain access to common technologies so that what they sell works well with everything else is out in the world. This is particularly important when a new generation of standards such as 5G is being introduced and means those companies looking to succeed tend to ramp up collaborative R&D efforts and technological trials with their component suppliers, telecom operator clients and even out-and-out competitors.

Japan's experience with 5G development should be instructive for the U.S. Tokyo is keen to jump start a somewhat moribund information and communication technology sector, after years of techno-isolationism. Despite NTT DoCoMo being a global pioneer in the development of mobile internet services, "Japan Inc." focused far too much on the particular networking requirements of NTT and other local telecom operators rather than on technology embracing global standards and interoperability.

As a result, Japanese technology developers found it difficult to export their telecom infrastructure and devices, no matter how innovative. There are hundreds of millions of Samsung smartphones outside South Korea but barely any Fujitsu or NEC models to be found beyond Japan.

Japan is now enthusiastically collaborating with foreign companies to infuse innovation into its hermetically sealed telecom ecosystem. NTT DoCoMo and Huawei recently completed a 5G network trial in Tokyo at what is believed to be the world's fastest long-distance data transmission speed.

Tokyo is willing to do whatever it takes to get 5G systems ready ahead of the Tokyo Olympics in 2020 despite the government's strong security concerns regarding China in regard territorial and other disputes. Officials acknowledge that cooperation with Huawei and its ilk offers a better shot at achieving 5G readiness than depending on domestic companies alone because of the Chinese vendors' investments in new technologies.

Japan is not unique in its willingness to collaborate with China. Huawei and ZTE are engaged in dozens of 5G trials globally, particularly across Europe, another region keen to revitalize its telecom industry. All of this calls into question the logic of protectionist U.S. efforts, in telecommunications as well as other sectors. Washington would ignore the critical role of global cooperation at its peril.

The Trump administration's attempts to protect U.S. telecom networks from Chinese cyberincursion in a global telecommunications economy where Chinese vendors have supplied perhaps as much as 40% of the world's network infrastructure are bound to be futile. Not only is it pragmatically impossible to seal off America's 5G networks from Huawei and ZTE gear, it is clear that other countries see their fate tied up in working with China's technology industry.

Isolationism will only remove the U.S. from the ongoing global innovation conversation and further dampen the export potential of domestic players and the potential future international royalty streams of patent-heavy companies such as Qualcomm. Nor will blocking Chinese access to the U.S. mobile market materially help U.S. national security. China's telecom technology leaders are too embedded already in networks around the world and represent large, inextricable components of the global 5G development ecosystem, one in which America must participate if the Trump administration's goal of establishing U.S. leadership in 5G is to be achieved.

While every industry is different, sectors ranging from robotics to biopharmaceuticals could face the same kind of protectionist restrictions as telecommunications under Trump's China package. If telecommunicatons is any guide, the administration's move will damage not only its intended targets in China, but also U.S companies.

Ross O'Brien is based in Hong Kong as a principal consultant with Ovum, an IT and telecom research company. He has previously acted as a consultant to Huawei.

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