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China–US telco wars

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In Brief

In the early 1960s, the National Security Agency (NSA) of the United States was able to intercept Cuban telephone signals with help from US telecommunications giant RCA International, who built Cuba’s telephone system in 1959.

The company provided the CIA and NSA with the schematics of the Cuban communication system and details about the operating parameters of the equipment

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, according to Matthew Aid’s book, The Secret Sentry: The Untold History of the National Security Agency.

More than half a century later, NSA contractor Edward Snowden revealed that the signal collection agency continues to rely on the cooperation of American telecommunication and internet companies to engage in systematic espionage against both enemy and ally.

Snowden’s revelation has cast doubt upon the reliability and integrity of American telecommunication companies. Sales revenues of big US companies in China such as CISCO and IBM have dropped in part due to the backlash. China Unicom, a Chinese state-owned telecommunications operator, has reportedly removed CISCO equipment from its backbone network in Jiangsu province.

The United States is equally concerned about the integrity of Chinese telecommunications technology. Chinese telco giants Huawei and ZTE have been barred from the United States over concerns that the Chinese government would use these companies as a ‘Trojan horse’. Snowden’s revelation highlights the importance of protecting critical telecommunication infrastructure from cyber intrusion not only from terrorists but also state actors.

These restrictions have big implications for international trade and investment. Governments around the world have a tendency to use national security or other public policy excuses such as anti-monopoly law to engage in implicit protectionism.

China’s National Development and Reform Commission (NDRC) has officially accused American mobile chip maker Qualcomm of price gouging and abusing its market position — allegations that could cost the US-based chip giant as much as US$1 billion.

The NDRC started anti-monopoly investigations against the American chip maker after Chinese mobile makers accused Qualcomm of price gouging. There are also media reports suggesting the NDRC is concerned about data security.

The NDRC’s probe is happening at the critical time when China is rolling out the world’s largest 4G mobile network. Qualcomm stands to profit handsomely from the anticipated demand for its 4G chips — nearly half of its US$25 billion revenue comes from China.

Some analysts suggest that the NDRC is using anti-monopoly investigations as a pretext to drive down the cost of mobile chips at a time when demand for 4G services is expected to increase strongly.

The timing of the NDRC’s investigation is suspicious — it needs to make the investigation as transparent as possible to avoid accusations of trade protectionism.

But the United States hardly sets a good example as far as transparency is concerned. The much-publicised report by the US House Intelligence Committee against Huawei and ZTE was heavily criticised for being strong on assertion and weak on evidence. The Economist describes it as having ‘been written for vegetarians’ — a dish without much meat.

The 18-month-long investigation by the White House into Huawei found no evidence to implicate the Chinese technology giant of any wrongdoing. Evidence of Huawei’s duplicity might exist but none of it has surfaced so far.

It seems that the United States has also indulged in protectionism using national security as a pretext. And like China’s anti-monopoly investigations, the timing of the US investigations into Huawei and ZTE appear somewhat suspicious. The ban comes at a time when Chinese domestic firms are increasingly confident in taking on their more established rivals not only in China but also abroad.

If Washington continues to use unconvincing national security reasons to block Chinese companies from competing in the United States, it has few reasons to complain about the Chinese using equally dubious pretexts to deny American companies access to the world’s largest consumer market.

Politicians around the world have a long, chequered history of using national security as an excuse to silence dissent and aid domestic companies. If this continues to grow unchecked, we can only expect tribalism in the global technology and telecommunication market, where companies are confined to operating within their own national borders; national borders which are in any case porous to product penetration through cross-national production networks.

Justin Li is Principal of the Institute of Chinese Economics.

One response to “China–US telco wars”

  1. Good story Justin Li. That World Bank study showing that for every 10 per cent increase in high-speed internet connections, there is a 1.3 per cent increase in economic growth. I think this is old research done a few years ago. My intuitive feeling is that it varies considerably across countries and could actually be much higher for countries with very low rates of broadband adoption and much much lower for the those with high rates of adoption.

    The main issue here is how to move telecommunication regulations and policy forward against a backdrop of obsessions with security and that telecommunications is now an integral part of security. Very difficult to argue with that context. In many ways it’s an issue of primary importance to the US and China, as global rivals, but for all the other countries maybe its a case of enjoying the ride, maybe a ‘free-ride’ as subsidized telcos seek for ways to generate extra revenue from here, there and everywhere … creating levels of access, affordability and acceptability not otherwise achievable.

    Another reason motivating protection is revenue and tax collections. Telcos generate enormous revenue and tax opportunities. Is more tax collected from domestically owned or controlled telcos than if they are foreign owned? That’s another question to examine.

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