UK disappoints; EU punts
The weekly trade report with L.C.
The US anti-Huawei effort to defend 5G networks from Chinese espionage is encountering split decisions abroad, with the UK disappointing and EU punting. This may lead to delays in a US-UK trade deal and more sparring in US-EU trade negotiations. They have made little progress for many months.
Countries around the world are being forced to choose between angering Washington or Beijing, between securing themselves from potential Chinese espionage (or worse) and developing 5G networks quickly and affordably. The situation may be seen as foreshadowing what will ensue if there is significant decoupling of the US and Chinese economies. Such a decoupling could be hastened by the impact of the Wuhan coronavirus, which could even impact Huawei,
A Huawei official told reporters this week that while “We want to continue with those relationships” with US companies, “we also… are willing to go our own way and rely on our own sources in China and also East Asia and Europe rather than the US.” He said Huawei already has in place a “Plan B” for when it is cut off from US tech. Another company official said they are also working on an alternative to Google’s Android operating system, currently only available to Huawei on a temporary license.
UK disappoints
In the UK, Prime Minister Boris Johnson announced on January 28th his decision on Huawei. It didn’t please the US, coming after several US officials had trekked to London to try to convince him to shun the company. Washington had threatened that a wrong decision would jeopardize not just intelligence sharing but also the prospects for a bilateral trade agreement. President Trump could also further increase his friendship with Neil Farage, head of the UKIP, the UK rival party to Johnson’s Tories. On Brexit Day, January 31st, Farage and his UKIP contingent made a famous Union-Jack-waving exit from the European Union’s Parliament that “went viral” on the internet.
Under Prime Minister Johnson’s plan, Huawei will be allowed to participate in Britain’s 5G infrastructure but only on the periphery. It will provide and service non-critical parts of the network but not the “core” centralized part of the network nor any part that serves sensitive government sites. It will be limited to a 35% market share of the system.
Johnson’s decision was a compromise, but one that was welcomed by Huawei because it will help Huawei overcome resistance elsewhere as to whether to purchase the company’s products.
Australian PM also finds UK disappointing
Former Australian Prime Minister Malcolm Turnbull, on the other hand, told reporters this week that the UK decision surprised him because “The ability to mitigate the risk is very, very questionable,” a point a number of analysts have been making. Indeed, the Huawei risk rose to the fore not only because intelligence services discovered possible cyber-espionage risks in its technology but because China’s 2017 National Intelligence Law requires companies to cooperate with state intelligence agencies.
The problem for the UK is that Huawei is already deeply embedded in its existing network, having been operating there for 15 years. Excluding it from the new one would add to expenses and drag out the implementation time. This, crucially, would hold back Britain’s goal of becoming an advanced technology and R&D powerhouse. It’s already facing severe productivity problems. One UK official told reporters that “in 10 years we want to be a high-tech Silicon Valley across the whole of the UK.” To do that requires working with Huawei, he said, and is more important for Britain’s future than a trade deal with Washington.
Also motivating London’s decision is that it is eager to enhance its trade relationship with China, one of the trading partners with which it wants to liberalize and expand trade and from which it wants to attract investment as it leaves the EU.
EU punts
This is reportedly an even bigger concern for the Germans. Whereas London does worry about its relationship with Washington and the future of the “Five Eyes” intelligence-sharing system, Berlin is more focused on avoiding the Chinese retaliation that would ensue following a negative decision on Huawei.
Yet Germany may not follow the UK’s lead. The German press reported on January 29th that Berlin has received “conclusive” intelligence proving that Huawei cooperates with Chinese security agencies. Thus, it can’t be seen as a reliable source for 5G networks. The source of the intelligence is the US, which suggests that it is likely that the information had been given to the UK before it made its decision. Chancellor Angela Merkel is under pressure from conservatives within her own party not to go soft on Huawei, but others in her government reportedly insist the risk can be mitigated.
Over the next few months, other countries will be making their decision on 5G. Thus far, Australia and Vietnam have already said they will ban Huawei. This is not so surprising given Australia’s recent uncovering of serious Chinese espionage and its membership in the “Five Eyes” system. Nor is Vietnam’s historical resistance to Chinese pressures and war experience. But most countries, including Canada and India, have yet to decide and may use the UK decision as a model.
Perceptions
So there is a perception that the US is losing the fight. Not because all these countries prefer to have improved ties with China over the US, but more because there’s no good alternative to Huawei. US companies have been largely out of the network business. Instead, they have focused more on the high-tech components such as advanced microchips. As for the non-Chinese foreign suppliers of networking equipment — Ericsson and Nokia – they are more expensive and less advanced.
The US itself is not immune to these problems, and it too could be held back by a ban on transactions with Huawei. Nonetheless, for those within the government, on Capitol Hill, and in the private sector who are focused on the China threat, giving Huawei a pass would be giving an increasingly authoritarian Beijing a pass, and that’s unacceptable. Thus, there is talk of the government taking steps to stimulate US development of technology to overtake and replace that of Chinese companies and to give assistance to other countries that wish to ban Huawei. Concrete initiatives to accomplish this have not been unveiled, however, though a report released this week by the Center for a New American Security has suggestions.
Thus, the Trump Administration itself remains divided, with the Department of Defense opposed to Commerce’s proposed rule that would lower the allowable US-made content in semiconductors that are sold abroad to Huawei from 25% to 10%. The DoD expressed concern that this would harm the ability of US tech companies to invest in R&D and innovation.
The EU’s “5G Security Toolbox”
Brussels also didn’t satisfy the US with its “5G Security Toolbox” that was disclosed on January 29th. The European Commission released guidelines that left it up to each individual EU country to decide just how much participation it will allow companies based in non-democratic countries into its 5G network. Countries are to announce by end-April what measures outlined in the toolbox they will implement, but they were not directed by Brussels to ban Huawei. The measures include how to “assess the risk profile” of equipment suppliers and how steps might be taken to mitigate the risk. Thus, it would seem that EU countries may follow the UK model if they choose.
One China-focused analyst supported this, saying: “I think the EU was quite clever in setting out a framework that will likely cause a lot of restrictions on Huawei in 5G but without saying so directly.”
Huawei, noting it has been involved in Europe’s telecommunications networks for over 20 years, welcomed the EU decision. The EU guidelines should still result in a downsized presence for Huawei, but as in the UK case, the company evaded the outright EU-wide ban that Washington desired. As a Huawei source told reporters, “It’s better than we could’ve hoped for. Europe, after all, had to choose sides between China and the US.”
Other developments
Phase One and China’s coronavirus
The Wuhan coronavirus – a crisis that is shutting off China from the world of travel and trade – is also raising a huge question mark over the feasibility of trade commitments China made in signing the US-China Phase One trade deal that takes effect on February 14th. It is unclear at the moment how persistent and serious the virus outbreak will be, and how damaging to the Chinese and world economies. But it now looks impossible for China to meet its promised purchases of $200 bn in goods from the US and that won’t be a priority for Beijing in the immediate future anyway. The Chinese government is already preparing to increase its aid to companies hit by the coronavirus-induced slowdown and is issuing certificates declaring “force majeure” (uncontrollable circumstances) to enable commercial contracts to be broken without liability. This adds one more crisis facing the country’s embattled leadership this year.
The OECD digital services taxes
The OECD-sponsored negotiations to craft guidelines for digital services taxes made progress this week. On January 31st, the 137 participating governments released a statement saying they agreed to the scope of the talks and set a year-end deadline for concluding them. Allowing taxation of money made from consumers in a country where a company has no physical presence is a change to traditional practice and is prompted by the rise of the digital economy. The agreement would set rules for determining which non-local companies can be taxed and establish an agreed-upon minimum tax rate.
On scope, they agreed that the guidelines will cover not just the US tech giants – Google, Amazon, Facebook, Apple (the GAFA companies) – but also any multinational selling to consumers in countries where it isn’t located and therefore isn’t taxed under the current regime. That would include major luxury goods companies and auto companies, for example. Subjecting these other companies to the rules meets a US demand that the tax shouldn’t be shaped to only hit US-based corporations. China sided with the US on this, but the EU originally opposed the expansion of coverage.
Excluded from the new form of taxation will likely be some traditional service companies in the financial, shipping, professional, and commodities sectors. Also still to be worked out is a dispute settlement mechanism, given that disputes are sure to arise. In hailing the progress made this week, OECD director of tax administration Pascal Saint-Amans pointed out that “The prospect of trade wars triggered by tax disputes is clearly pushing countries to compromise.”
President fights fentanyl and fakes
President Trump signed an Executive Order on January 31st aimed at curtailing online piracy. This is intended to protect consumers and businesses from fake and sometimes dangerous merchandise (e.g., fentanyl). It meshes with the administration’s battle against unfair Chinese practices and intellectual property rights violations. It also seeks to rein in e-commerce companies like Amazon, which have been caught selling unsafe, counterfeit, and fraudulently advertised goods.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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