The UK’s decision to ban its mobile providers from buying new Huawei 5G equipment after December 2020 and removing all the company’s 5G kit from their networks by 2027 is a blow to Huawei and China, but it is one battle in a long war that the West is currently losing.
5G’s significance for the next generation of technology is indisputable and so is its critical role in helping countries achieve digital transformation and economic success. Not only does it offer faster and better connection speeds and greater capacity, it also transforms the way people interact with online services. And it will allow industry to automate and optimize processes that are not possible today.
Due to its transformative importance, what is in essence a technological issue has turned into a contest over global technological leadership that extends beyond the US-China rivalry and has created tensions between the US and its long-time allies. Yet 5G is just one key technology in a more expansive landscape that will underpin the future of the world’s critical infrastructure, including in areas such as quantum computing, biotechnology, artificial intelligence, the internet of things and big data.
To achieve technological leadership in these domains requires governments to invest in a long-term, strategic and agile vision that is able to encompass the interdependencies between these areas and then leverage the resulting technological advances for economic progress. It also requires governments working with each other and with the private sector to support research and development and to create companies with leading-edge technologies that can compete globally.
China understands this and has a national and international vision to establish itself as a technological superpower. Re-balancing from a hub of labour-intensive manufacturing to a global innovation powerhouse is the absolute priority of the ruling Chinese Communist Party.
China’s state-led approach
In the earlier part of this journey, commercial espionage and IP theft of western R&D were at the heart of the Chinese way of competing. Now, Beijing is cultivating national champions that can drive China’s technological innovation, with the goal of using domestic suppliers to reduce reliance on foreign technology at home as well as extending its international outreach.
In the 5G area, Beijing has introduced domestically the so-called ‘New Infrastructure Investments Fund’, which earmarks special loans to boost 5G technology applications in medical devices, electric vehicles and communication platforms. This Fund constitutes a major part of the stimulus package for China’s post-COVID economic recovery.
Apart from 5G, China's recent launch of a second state-funded semiconductor development fund valued at $29 billion, following an earlier $20 billion fund for the same purpose, shows the extent to which state financial resources are being utilized in China’s quest to become technologically self-sufficient.
It is too early to know if the Chinese government’s industrial policies will eventually achieve the technological self-sufficiency Beijing has long desired. But its growing national capabilities have stoked serious concerns across the West and led to the current US administration’s determined effort to dismantle Chinese high-tech companies.
China’s approach to macroeconomic management diverges significantly from that of the US and other market economies, particularly in its policy towards driving innovation. Due to the legacy of a state-planned economy, China is certain that simply relying on market forces is insufficient.
While Beijing financially supports government-controlled technological enterprises, Washington takes a laissez-faire, light-touch approach by the state to the business sector. The US believes that a politicized process of distributing public money is inherently susceptible to rent-seeking and corruption, and gets in the way of competitive innovation. In line with most liberal economists, many Western governments believe the government should refrain from market intervention. For its part, Beijing stresses a state-dominated economy as a necessary precondition both to the future growth of the Chinese economy and to the legitimization of one-party rule.
If the pro-market economists’ view is correct, the US should have little to fear from Chinese industrial innovation policy in the long-term. Let Beijing waste money and distort resource allocation, while Washington follows its private sector-led principles, conﬁdent that this approach will produce a more competitive economy in the long run.
Using the leverage of technical standards
But one area that should concern the US and that illustrates the Chinese vision for global technological dominance is technical standard setting. Technical standards determine how technologies work with each other, enabling their interoperability around the world, meaning they can function irrespective of where they are being used.
The Chinese leadership has long understood the relationship between technical standards and economic power. Standards help to monetize technological innovation and research and can help shape new technologies. China has therefore been playing an increasingly active role in international standards organizations to legitimize Chinese technologies, whereas the US, which historically has been highly influential in this area, has not been participating as much or as effectively.
China has also been using its Belt and Road Initiative (BRI) as an opportunity to internationalize the distribution of its standards to countries signed up to the BRI. The so-called Digital Silk Road, which has been described as China’s most important global governance initiative, acts as a route to accelerate this process. Later this year, China is expected to launch its new ‘China Standards 2035’ plan, which aims to shape how the next generation of technologies will work together.
China’s preferred model and its recent actions have given Western leaders much to worry about. But standing up to China’s growing global influence in high technology and re-establishing the West’s desired technological edge will take much more than achieving a common front on excluding China from their 5G networks. It requires a long-term vision built on the power of competitive markets, backed by solid investment in the next generation of technology. This will require, in turn, much greater cooperation between Western governments and between them and their private sectors.
And, whilst recent protective steps taken in Washington and other Western capitals may slow down China’s trailblazing in the technology sphere, it will only hasten China's determination to become tech self-sufficient in the long term. This will increase the probability of a splintered internet, which will have negative repercussions for all.