Assessing the Impact of U.S.-China Technology Competition and Decoupling: Focusing on 5G
This blog post is the second in a series on U.S.-China technological competition. Click here to read the first post in this series, Managing U.S.-China Technology Competition and Decoupling.
A degree of technological decoupling between the United States and China is inevitable. The United States has already taken to begin this process like implementing export controls on Chinese semiconductors and semiconductor manufacturing inputs, as well as placing restrictions on the deployment of Chinese telecommunication equipment in the U.S. These actions were important and necessary initial steps towards improving U.S. economic and national security, but it is important for policymakers to understand the ways that the Chinese government may be able to overcome these obstacles, and how they may end up inadvertently damaging U.S. industries.
To avoid traveling down a path that may damage the United States’ economic security, a preliminary evaluation of the impact of these actions is necessary. Enough time has passed since these policies came into place to judge the impact they have had on businesses, and understand how various stakeholders have responded. However, it is important to note that due to the speed of innovation in these sectors and the difficulties of predicting how stakeholders may respond to new developments, these policies must be continuously evaluated to ensure that they remain the best possible response to the current situation. To this end, the following sections discuss the current impact of U.S. actions against China, with particular focus on the restrictions placed on Chinese 5G equipment providers.
Impact of restrictions on the use of Huawei and ZTE equipment for 5G telecommunication equipment(1) Policy Objectives
The primary objective of the restrictions on Huawei and ZTE in the National Defense Authorization Act (NDAA) 2019 is to protect U.S. information from being accessed or manipulated by the Chinese Communist Party. This risk has also been described by the FCC. In a cyber-physical integrated society, trust is essential for protecting our systems, and these actions by the United States help ensure that critical information infrastructure is only handled by trusted providers. This action also has the effect of promoting decoupling by reducing U.S. reliance on Chinese technology.
(2) Policy Impacts
The most obvious impact of the restrictions is that Huawei and ZTE lost the opportunity to participate in the U.S. 5G market. But it is important to also consider how the restrictions affect other actors, such as telecommunication companies, equipment vendors and other countries.
Other than Huawei and ZTE, the stakeholders most affected by vendor restrictions are telecommunication companies. In January 2020, BT, a UK telecom operator, released a statement saying that the government should consider potential costs and impacts before excluding Huawei, as the UK government was then considering. By BT’s estimation, 500 million pounds ($657 million) would be needed to replace Huawei equipment and use other vendors' equipment. U.S. telecommunications companies are less reliant on Chinese vendors than their UK equivalents, but nonetheless many have been forced to bear extra costs in order to remove Chinese equipment from their networks. According to the FCC, $1.618 billion could be needed to fully remove and replace Huawei and ZTE’s equipment. To help those telecommunication operators, in March 2020, the U.S. government decided to provide them with 1 billion in funding. Although it has not yet been allocated, nonetheless it must be calculated as part of the overall cost of replacing companies like Huawei.
Other telecommunications equipment vendors are also impacted by restrictions on Chinese firms. In the 4G era, telecommunications companies tended to become locked into their vendors. A lack of interoperability between equipment meant that telecom firms would typically pick a single company to build out their network in a region, and then not be able to switch or easily add equipment from other firms. The market for radio access network (RAN) equipment in particular became a kind of oligopoly.
The network architectures enabled by the switch to 5G, however, creates opportunities for vendors to compete across the supply chain. The move to Open RAN, for example, is helping to promote standardized interfaces in 5G radio access networks that will let operators source radio components and software from a wider array of smaller vendors. The restrictions on Huawei and ZTE provides an opportunity for other vendors to take advantage of this to expand their presence in markets that in the past may have been dominated by Chinese technologies. Although there are still some challenges like ensuring service reliability for large-scale networks, the ORAN concept has already been successfully deployed by companies like NTT Docomo and RAKUTEN mobile in Japan.
Finally, these policies also have effects on other nations. One major impact is on national security. Secure and trusted communications networks are needed for nations to feel comfortable transmitting sensitive intelligence information to one another. When certain countries take steps to keep untrusted vendors out of their networks, they are improving security outcomes for their military and intelligence partners. Another impact on nations is the way that restrictions on Chinese companies’ expansion can help reduce Chinese influence in nations around the world. This is one reason the U.S. Department of State began its clean network program to encourage other nations to invest in building trusted networks.
For these reasons, some countries such as Australia, Japan, and New Zealand have taken actions similar to the United States’ from the beginning. On the other hand, European nations have been more skeptical of hardline policies against China. Many European countries initially stated that there was a lack of clear evidence that Chinese companies posed security risks, and resisted calls to replace Chinese equipment due to how expensive it would be to replace the Huawei and ZTE gear already in use by European carriers. However, the situation has gradually changed as more information about the security risks of Chinese equipment has been shared, and as concerns have mounted over the Chinese response to Covid-19. In July 2020, the UK government announced that Huawei must be removed from UK 5G networks by 2027. Moreover, they recently introduced a new telecom security law to strengthen regulation for excluding Huawei. On October 20, Sweden announced that only carriers who use Huawei and ZTE's equipment would be excluded from 5G spectrum auctions, though this has been paused pending an appeal from Huawei. Also in October, the Italian government vetoed a 5G deal between Italy's telecommunication company, Fastweb, and Huawei.
Another major cause for this shift in the European approach to Huawei and ZTE has been the impact of other U.S. policies restricting Chinese companies’ access to high-end semiconductors and semiconductor manufacturing equipment. Due to these controls, companies like Huawei and ZTE can no longer guarantee that they will be able to continue producing high-end networking gear, making any long-term deals with those companies highly risky. When the UK announced that they would work to remove Huawei from their networks, they explicitly mentioned that one reason for their decision was the U.S. export controls targeting Huawei, which could cause a reconfiguration of Huawei's 5G base stations, which highly depend on US technology. These concerns have been echoed by other experts in Europe, such as Janka Oertel of the European Council on Foreign Relations, who stated that Huawei could only continue their 5G business for a few months with stockpiles they had. However, there are still a large number of countries, such as Brazil, who are still undecided over whether to exclude Chinese companies. For developing countries, this is a particularly difficult decision because of how much they rely on inexpensive Chinese gear and significant financial support from the Chinese government and Chinese financial institutions.
(3) China’s Reaction
Chinese companies and the government have been unified in denouncing these policies and arguing that the concerns motivating them are baseless. The Chinese argue that there is no evidence of security flaws, or of Chinese intelligence accessing any information from a company like Huawei. The government has been vocal in challenging many of these decisions around the world. For example, after Sweden’s announcement that they would exclude carriers using Chinese equipment from spectrum auctions, the Chinese Ministry of Foreign Affairs said that Sweden was violating the principle of a free, open, fair market economy, as well as international economic and trade law.
China has also responded to restrictions against its companies by doubling down on its policy of “dual circulation.” This policy works to ensure that China acts as a protected market for domestic companies, giving them stability even in the face of restrictions against who they can sell to abroad. For example, Ericson’s report indicated that 80% of total number of 5G subscription in the world at the end of 2020 are located in China. The Chinese claim that their own economy is robust enough to ensure a healthy domestic market for its firms. Even in the pandemic, their GDP has continued to steadily expand. In the 3rd quarter of 2020, Chinese GDP expanded 4.9 percent year-on-year.
Evaluating future possibilitiesAs China becomes more aggressive in leveraging its economic power to achieve its political and security goals, the United States must ensure that it is able to maintain its technological advantage to protect its economic and national security.
In some ways, U.S. restrictions on Chinese telecommunications vendors have been successful at protecting the nation’s national security. However, there are clear costs to this approach. For the policy to be sustainable, the U.S. and its allies must ensure that alternatives to Chinese vendors continue to exist, and are available at a competitive price. If developing nations are unable to afford the costs of sourcing their equipment exclusively from trusted suppliers, then the U.S.’ strategy will not be internationally sustainable.
Going forward, the United States and its allies will have to achieve strong consensus on the importance of trusted vendors in telecom networks, ensure that the international vendor landscape remains robust, and consider ways to support developing countries financially. Ultimately, these restrictions on their own are unlikely to create an existential threat for firms like Huawei and ZTE due to the size of the Chinese domestic market and the continued existence of other opportunities for international expansion.
The next blog in this series will evaluate the U.S.’ export control policies on semiconductors.
Akinori Kahata is a researcher with the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, DC.
The Technology Policy Blog is produced by the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).